Tyler Technologies(TYL) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Unaudited condensed consolidated financial statements and notes for Q1 2022 and 2021 are presented Condensed Consolidated Statements of Income The company reported significant revenue growth for the three months ended March 31, 2022, primarily driven by subscriptions, leading to an increase in net income and earnings per share compared to the prior year period Condensed Consolidated Statements of Income | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Total Revenues | $456,108 | $294,802 | | Gross Profit | $192,418 | $144,207 | | Operating Income | $55,868 | $38,208 | | Net Income | $39,984 | $36,976 | | Basic EPS | $0.97 | $0.91 | | Diluted EPS | $0.94 | $0.88 | - Subscriptions revenue increased by 139.5% from $102.48 million in 2021 to $245.44 million in 2022[8] Condensed Consolidated Statements of Comprehensive Income The company's comprehensive income for the three months ended March 31, 2022, was $39.3 million, including a net unrealized holding loss on available-for-sale securities, which resulted in an other comprehensive loss Condensed Consolidated Statements of Comprehensive Income | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :------------------------------------------------------------------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Net income | $39,984 | $36,976 | | Other comprehensive loss, net of tax | $(697) | — | | Comprehensive income | $39,287 | $36,976 | - The other comprehensive loss in Q1 2022 was primarily due to net unrealized holding losses on available-for-sale securities[9] Condensed Consolidated Balance Sheets As of March 31, 2022, total assets and liabilities slightly decreased, while shareholders' equity increased, reflecting changes in current assets and goodwill from acquisitions Condensed Consolidated Balance Sheets | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total Current Assets | $859,899 | $964,331 | | Total Assets | $4,723,806 | $4,732,161 | | Total Current Liabilities | $766,460 | $829,501 | | Total Liabilities | $2,336,072 | $2,408,129 | | Total Shareholders' Equity | $2,387,734 | $2,324,032 | - Goodwill increased from $2.36 billion at December 31, 2021, to $2.44 billion at March 31, 2022, reflecting recent acquisitions[12] - Cash and cash equivalents decreased from $309.17 million to $243.26 million[12] Condensed Consolidated Statements of Cash Flows For Q1 2022, the company experienced a net decrease in cash and cash equivalents, primarily due to significant cash used in investing activities for acquisitions Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | $53,541 | $71,703 | | Net cash used by investing activities | $(111,173) | $(39,694) | | Net cash (used) provided by financing activities | $(8,277) | $615,120 | | Net (decrease) increase in cash and cash equivalents | $(65,909) | $647,129 | | Cash and cash equivalents at end of period | $243,262 | $1,250,752 | - Investing activities included approximately $116.70 million for acquisitions, net of cash acquired, in Q1 2022[14] Consolidated Statements of Shareholders' Equity Shareholders' equity increased for Q1 2022, driven by net income and stock compensation, partially offset by unrealized losses on available-for-sale securities Total Shareholders' Equity | Metric | Balance at Dec 31, 2021 (in thousands) | Net Income (in thousands) | Unrealized Loss (in thousands) | Balance at Mar 31, 2022 (in thousands) | | :-------------------------------- | :------------------------------------- | :------------------------ | :----------------------------- | :------------------------------------- | | Total Shareholders' Equity | $2,324,032 | $39,984 | $(697) | $2,387,734 | - Stock compensation contributed $25.28 million to additional paid-in capital in Q1 2022[16] Notes to Condensed Consolidated Financial Statements Notes provide context for financial statements, detailing accounting policies, acquisitions, debt, financial instruments, and segment reporting (1) Basis of Presentation Financial statements are prepared under SEC and GAAP for interim reporting, with a $697 thousand other comprehensive loss in Q1 2022 - Interim financial statements are prepared under GAAP and SEC rules, with certain footnotes condensed or omitted[17] - Other comprehensive loss of approximately ($697) (net of taxes) was recorded in Q1 2022, primarily from available-for-sale investment holdings[18] (2) Accounting Standards and Significant Accounting Policies This section outlines key accounting policies, including ASU 2021-08 adoption, use of estimates, revenue recognition, goodwill, and intangible assets Summary of Significant Accounting Policies No material changes to significant accounting policies occurred, except for the adoption of ASU 2021-08 on January 1, 2022 - No material changes to significant accounting policies except for the adoption of ASU 2021-08 on January 1, 2022[19] Use of Estimates Financial statements require estimates and assumptions for revenue recognition, loss contingencies, goodwill, intangible assets, and share-based compensation - Financial statements require estimates and assumptions for revenue recognition, loss contingencies, goodwill, intangible assets, lease assets/liabilities, share-based compensation, and tax consequences[20] Revenue Recognition Revenue is earned from software licenses, subscriptions, services, maintenance, hardware, and appraisal services, recognized based on standalone selling price or over time - Revenue is earned from software licenses, royalties, subscription-based services, software services, post-contract customer support (maintenance), hardware, and appraisal services[21] - For contracts with multiple performance obligations, revenue is allocated based on relative standalone selling price (SSP) and recognized upon transfer of control[22][24] - For arrangements involving significant customization or non-distinct services, revenue is recognized over time using progress-to-completion methods (e.g., labor hours incurred or value added)[25] - Transaction-based revenues (e-filing, online payments) are recognized over time based on the amount billable to the customer[26] Contract Balances Contract balances include accounts receivable, unbilled receivables, and allowances for losses, with minimal credit losses due to the client base Contract Balances | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Total Accounts Receivable (net) | $515,900 | $535,000 | | Unbilled Receivables | $129,500 | $140,300 | | Allowance for losses and sales adjustments | $14,000 | $12,100 | - Unbilled receivables are recorded when revenue is recognized prior to invoicing, and deferred revenue when recognized subsequent to invoicing[28] - The company rarely incurs credit losses due to its client base of domestic governmental entities[30] Goodwill and Other Intangible Assets Goodwill is assessed for impairment annually or more frequently, with no impairment charge in Q4 2021 and no triggering events through March 31, 2022 - Goodwill is assessed for impairment annually (in Q4) or more frequently if circumstances indicate[31] - The annual assessment in Q4 2021 did not result in an impairment charge, and no triggering events occurred through March 31, 2022[33] Recently Adopted Accounting Pronouncements ASU 2021-08 was early adopted on January 1, 2022, with no adjustments to deferred revenue balances from the US eDirect acquisition - Early adopted ASU 2021-08 (Accounting for Contract Assets and Contract Liabilities from Contracts with Customers) on January 1, 2022[34] - The adoption of ASU 2021-08 resulted in no adjustments to the fair value of deferred revenue balances assumed in the US eDirect acquisition[34] (3) Acquisitions US eDirect Inc. was acquired for $116.7 million on February 8, 2022, impacting goodwill and intangible assets - Acquired US eDirect Inc. on February 8, 2022, for approximately $116.70 million (net of cash acquired)[35] - Recorded approximately $81.20 million in goodwill and $48.00 million in other identifiable intangible assets (customer relationships, acquired software, trade name) from the US eDirect acquisition[37] - Acquisition costs of approximately $1.00 million were expensed in Q1 2022[39] Pro Forma Consolidated Operating Results (as if US eDirect acquired Jan 1, 2021) | Metric | 3 Months Ended March 31, 2022 (Pro Forma, in thousands) | 3 Months Ended March 31, 2021 (Pro Forma, in thousands) | | :----------------------- | :------------------------------------------------------ | :------------------------------------------------------ | | Revenues | $457,329 | $298,412 | | Net income | $28,207 | $36,019 | | Basic earnings per share | $0.68 | $0.89 | | Diluted earnings per share | $0.66 | $0.86 | (4) Debt Outstanding borrowings, including the 2021 Credit Agreement and Convertible Senior Notes, totaled $1.34 billion as of March 31, 2022 Total Outstanding Borrowings | Debt Instrument | Rate | Maturity Date | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revolving credit facility | L + 1.50% | April 2026 | $0 | $0 | | Term Loan A-1 | L + 1.50% | April 2026 | $577,500 | $585,000 | | Term Loan A-2 | L + 1.25% | April 2024 | $157,500 | $170,000 | | Convertible Senior Notes due 2026 | 0.25% | March 2026 | $600,000 | $600,000 | | Total borrowings | | | $1,335,000 | $1,355,000 | - The 2021 Credit Agreement includes a $500 million Revolving Credit Facility (unused as of March 31, 2022), a $600 million Term Loan A-1, and a $300 million Term Loan A-2[45][48] - Convertible Senior Notes due 2026 have an aggregate principal amount of $600.00 million, accrue interest at 0.25% per annum, and are convertible under certain events[49][51][52] Interest Expense | Interest Expense Component | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Contractual interest expense - Term Loans | $(2,994) | $0 | | Contractual interest expense - Convertible Senior Notes | $(375) | $(83) | | Amortization of debt discount and debt issuance costs | $(1,122) | $(95) | | Total Interest Expense | $(4,804) | $(178) | (5) Financial Instruments Financial instruments include cash, equivalents, and investments, with the portfolio reclassified to available-for-sale in Q4 2021 for enhanced liquidity and flexibility Financial Instruments | Instrument | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Cash and cash equivalents | $243,262 | $309,171 | | Held-to-maturity investments | $0 | $98,653 | | Available-for-sale investments | $79,315 | $0 | | Equity investments | $10,000 | $10,000 | | Total | $332,577 | $417,824 | - The investment portfolio was reclassified from held-to-maturity to available-for-sale in Q4 2021 for increased flexibility and liquidity[60] - Available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities[60] (6) Other Comprehensive Income This section details changes in accumulated other comprehensive loss, net of tax, primarily showing an increase in unrealized losses on available-for-sale securities during Q1 2022 Changes in Accumulated Other Comprehensive Loss | Component | Balance as of Dec 31, 2021 (in thousands) | Other comprehensive loss before reclassifications (in thousands) | Reclassification adjustments (in thousands) | Balance as of Mar 31, 2022 (in thousands) | | :------------------------------------------------------------------------------------------------ | :------------------------------------------ | :------------------------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Unrealized Loss On Available-For-Sales Securities | $(46) | $(629) | $(68) | $(743) | | Total Accumulated Other Comprehensive Loss | $(46) | $(629) | $(68) | $(743) | (7) Fair Value Financial instruments are categorized by fair value hierarchy (Level 1, 2, 3 inputs), with most available-for-sale investments and debt instruments classified as Level 2 - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable market data), and Level 3 (unobservable inputs)[68] Fair Values of Financial and Debt Instruments (March 31, 2022) | Instrument | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :-------------------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Available-for-sale investments | $0 | $79,315 | $0 | $79,315 | | Equity investments | $0 | $0 | $10,000 | $10,000 | | Term Loan A-1 | $0 | $573,274 | $0 | $573,274 | | Term Loan A-2 | $0 | $155,714 | $0 | $155,714 | | Convertible Senior Notes due 2026 | $0 | $662,148 | $0 | $662,148 | - The fair value of the 2021 Credit Agreement approximates book value due to frequent interest rate resets[71] (8) Income Tax Provision The effective income tax rate significantly increased to 22.3% in Q1 2022 from 3.4% in Q1 2021, primarily due to decreased excess tax benefits and increased state income tax reserves Income Tax Provision | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Income tax provision | $11,444 | $1,320 | | Effective income tax rate | 22.3% | 3.4% | - The increase in effective tax rate was driven by a decrease in excess tax benefits from stock incentive awards ($3.00 million in 2022 vs. $8.80 million in 2021) and increased state income tax reserves[75][76] (9) Shareholders' Equity This section summarizes common stock activity for Q1 2022 and 2021, including stock option exercises, employee stock plan purchases, and restricted stock unit vesting, and notes the remaining share repurchase authorization Common Stock Activity | Activity | 3 Months Ended March 31, 2022 (Shares) | 3 Months Ended March 31, 2022 (Amount, in thousands) | 3 Months Ended March 31, 2021 (Shares) | 3 Months Ended March 31, 2021 (Amount, in thousands) | | :------------------------------------------------ | :--------------------------------------- | :------------------------------------------- | :--------------------------------------- | :------------------------------------------- | | Stock option exercises | 50 | $8,045 | 120 | $18,102 | | Employee stock plan purchases | 8 | $3,678 | 8 | $3,038 | | Restricted stock units vested, net of withheld shares | 78 | $(12,587) | 56 | $(8,958) | - The company has authorization from its board of directors to repurchase up to 2.40 million additional shares of common stock[78] (10) Share-Based Compensation Share-based compensation expense totaled $25.3 million in Q1 2022, slightly down from $25.7 million in Q1 2021, primarily allocated to selling, general and administrative expenses Share-Based Compensation Expense | Expense Category | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Subscriptions, software services and maintenance | $6,772 | $5,000 | | Selling, general and administrative expenses | $18,507 | $20,724 | | Total share-based compensation expense | $25,279 | $25,724 | (11) Earnings Per Share This section reconciles basic to diluted earnings per share, detailing weighted-average shares outstanding and the impact of dilutive securities, noting that Convertible Senior Notes were anti-dilutive in Q1 2022 Earnings Per Common Share Reconciliation | Metric | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (Numerator) | $39,984 | $36,976 | | Weighted-average basic common shares outstanding | 41,364 | 40,611 | | Assumed conversion of dilutive securities: Stock awards | 1,079 | 1,445 | | Assumed conversion of dilutive securities: Convertible Senior Notes | 0 | 0 | | Denominator for diluted EPS - Adjusted weighted-average shares | 42,443 | 42,056 | | Basic EPS | $0.97 | $0.91 | | Diluted EPS | $0.94 | $0.88 | - Convertible Senior Notes were not included in the diluted EPS calculation for Q1 2022 as their effect would be anti-dilutive[81] (12) Leases The company leases office facilities and equipment under non-cancelable operating lease agreements, with total net lease costs of $4.3 million in Q1 2022 - The company primarily uses non-cancelable operating lease agreements for office facilities and equipment, with maturities between one to ten years[82] Lease Costs | Lease Costs | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Operating lease cost | $3,422 | $1,722 | | Short-term lease cost | $506 | $481 | | Variable lease cost | $370 | $431 | | Net lease cost | $4,298 | $2,634 | - Weighted average remaining lease term was 5.4 years and weighted average discount rate was 1.72% as of March 31, 2022[83] - Rental income from third-party tenants was $305 thousand in Q1 2022, with future minimum operating rental income of $6.99 million[85] (13) Commitments and Contingencies No material legal proceedings are pending against the company, beyond routine litigation incidental to its business - No material legal proceedings are pending against the company[86] (14) Segment and Related Information The company operates in two reorganized segments, Enterprise Software (ES) and Platform Technologies (PT), providing public sector solutions - The company operates in two reportable segments: Enterprise Software (ES) and Platform Technologies (PT)[86] - Effective January 1, 2022, the Appraisal & Tax business unit moved to ES, and NIC digital government and payments solutions moved to PT, reflecting changes in management's operating decisions[88] Segment Revenues (3 Months Ended March 31, 2022) | Revenue Category | Enterprise Software (in thousands) | Platform Technologies (in thousands) | Corporate (in thousands) | Totals (in thousands) | | :-------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------- | :-------------------- | | Software licenses and royalties | $16,105 | $401 | $0 | $16,506 | | Subscriptions | $120,316 | $125,127 | $0 | $245,443 | | Software services | $42,649 | $18,848 | $0 | $61,497 | | Maintenance | $110,695 | $6,334 | $0 | $117,029 | | Appraisal services | $8,518 | $0 | $0 | $8,518 | | Hardware and other | $7,115 | $0 | $0 | $7,115 | | Total revenues | $310,987 | $150,710 | $(5,589) | $456,108 | Segment Operating Income (Loss) | Segment | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Enterprise Software | $106,529 | $98,854 | | Platform Technologies | $30,733 | $3,223 | | Corporate | $(53,459) | $(50,493) | | Total segment operating income | $83,803 | $51,584 | (15) Disaggregation of Revenue Revenue is disaggregated by timing of recognition and recurring vs. non-recurring categories, with the majority being recurring from maintenance and subscriptions Timing of Revenue Recognition Revenue is disaggregated by timing of recognition: point in time versus over time Revenue by Timing of Recognition (3 Months Ended March 31, 2022) | Revenue Category | Products and services transferred at a point in time (in thousands) | Products and services transferred over time (in thousands) | Total (in thousands) | | :-------------------------------- | :---------------------------------------------------------------- | :------------------------------------------------------- | :-------------------- | | Software licenses and royalties | $14,069 | $2,437 | $16,506 | | Subscriptions | $0 | $245,443 | $245,443 | | Software services | $0 | $61,497 | $61,497 | | Maintenance | $0 | $117,029 | $117,029 | | Appraisal services | $0 | $8,518 | $8,518 | | Hardware and other | $7,115 | $0 | $7,115 | | Total | $21,184 | $434,924 | $456,108 | Recurring Revenue Recurring versus non-recurring revenues are detailed, with maintenance and subscriptions forming the majority - The majority of revenue is comprised of maintenance and subscriptions, which are considered recurring revenue[92] Recurring vs. Non-Recurring Revenues (3 Months Ended March 31, 2022) | Revenue Type | Enterprise Software (in thousands) | Platform Technologies (in thousands) | Corporate (in thousands) | Totals (in thousands) | | :-------------------------------- | :--------------------------------- | :----------------------------------- | :----------------------- | :-------------------- | | Recurring revenues | $231,011 | $131,461 | $0 | $362,472 | | Non-recurring revenues | $74,387 | $19,249 | $0 | $93,636 | | Total revenues | $310,987 | $150,710 | $(5,589) | $456,108 | (16) Deferred Revenue and Performance Obligations Deferred revenue balances and $1.76 billion backlog are detailed, with 46% expected within 12 months Total Deferred Revenue by Segment | Segment | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Enterprise Software | $420,830 | $479,048 | | Platform Technologies | $28,054 | $29,705 | | Corporate | $5,794 | $1,814 | | Totals | $454,678 | $510,567 | - Backlog as of March 31, 2022, was $1.76 billion, with approximately 46% expected to be recognized as revenue over the next 12 months[95] (17) Deferred Commissions Sales commissions are deferred and amortized over three to seven years, totaling $37.8 million as of March 31, 2022 Deferred Commissions | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Deferred commissions | $37,800 | $38,100 | | Amortization expense (3 months ended Mar 31) | $3,500 | $3,000 | - Sales commissions for initial contracts are deferred and amortized over a period of benefit of generally three to seven years[96] (18) Subsequent Events No material events or transactions occurred subsequent to March 31, 2022 - No material subsequent events occurred after March 31, 2022[97] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial performance, liquidity, revenue drivers, cost trends, acquisitions, and SaaS transition Cautionary Note Concerning Forward-Looking Statements The document contains forward-looking statements subject to risks and uncertainties, including COVID-19, client budgets, cyber-attacks, and integration of acquired businesses - The document contains forward-looking statements that are inherently subject to risks and uncertainties, and actual results could differ materially from expectations[99] - Key risk factors include the effects of the COVID-19 pandemic, changes in client budgets, cyber-attacks, and the ability to integrate acquired businesses[99] General Tyler Technologies provides integrated information management solutions for the public sector, with increased employee count and significant revenue growth in Q1 2022 - Tyler Technologies provides integrated information management solutions and services for the public sector, covering nine major functional areas[100][101] - Employee count increased to 6,959 at March 31, 2022, including 1,103 employees from 2021 acquisitions, up from 5,579 at March 31, 2021[103] - Total revenues increased 54.7% year-over-year for Q1 2022; excluding the impact of 2021 and 2022 acquisitions, revenue increased 7.3%[105] - Subscriptions revenue grew 139.5% year-over-year, primarily due to the NIC acquisition and an ongoing shift toward SaaS arrangements[106] - Backlog as of March 31, 2022, was $1.76 billion, a 13.8% increase from the prior year[107] Critical Accounting Policies and Estimates No material changes to critical accounting policies and estimates from the 2021 Form 10-K, except for business combinations due to ASU 2021-08 adoption - No material changes to critical accounting policies and estimates from the 2021 Form 10-K, except for the accounting policies for business combinations as a result of adopting ASU 2021-08[108] Analysis of Results of Operations This section analyzes the company's revenues, cost of revenues, gross margins, and operating expenses for the period, highlighting key drivers and changes Percent of Total Revenues and Expenses | Metric | 3 Months Ended March 31, 2022 (%) | 3 Months Ended March 31, 2021 (%) | | :-------------------------------- | :---------------------------------- | :---------------------------------- | | Revenues: Software licenses and royalties | 3.6% | 5.1% | | Revenues: Subscriptions | 53.8% | 34.7% | | Revenues: Software services | 13.5% | 16.2% | | Revenues: Maintenance | 25.7% | 40.4% | | Operating income | 12.2% | 13.0% | | Net income | 8.8% | 12.6% | Revenues Revenue growth was significantly impacted by the US eDirect and NIC acquisitions, with detailed breakdowns by software licenses, subscriptions, and services - The US eDirect acquisition (February 8, 2022) and NIC acquisition (April 21, 2021) significantly impacted revenue growth[112][113] NIC Revenue (3 Months Ended March 31, 2022) | Revenue Category | NIC Revenue (in thousands) | | :-------------------------------- | :------------------------- | | Subscriptions | $121,382 | | Software services | $13,109 | | Maintenance | $202 | | Total revenues | $134,693 | Software licenses and royalties Software licenses and royalties revenue increased 11%, driven by large on-premise sales but partially offset by a shift towards SaaS offerings Software Licenses and Royalties Revenue | Segment | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | ES | $16,105 | $14,372 | $1,733 | 12% | | PT | $401 | $561 | $(160) | (29)% | | Total | $16,506 | $14,933 | $1,573 | 11% | - The 11% increase was attributed to several large on-premise sales, partially offset by more clients choosing SaaS offerings. New client mix shifted from approximately 45% perpetual/55% subscription in Q1 2021 to 23% perpetual/77% subscription in Q1 2022[118] Subscriptions Subscriptions revenue grew 140%, primarily due to the NIC acquisition and new SaaS clients, with a 16.7% increase excluding acquisitions Subscriptions Revenue | Segment | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | ES | $120,316 | $99,329 | $20,987 | 21% | | PT | $125,127 | $3,150 | $121,977 | 3,872% | | Total | $245,443 | $102,479 | $142,964 | 140% | - Subscriptions revenue grew 140%, primarily due to the inclusion of NIC's revenues. Excluding acquisitions, subscriptions revenue increased 16.7% due to 149 new SaaS clients and 88 existing on-premises client conversions[122] Software services Software services revenue increased 29%, with a 1.2% increase excluding acquisitions, driven by improved professional services staff utilization Software Services Revenue | Segment | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | ES | $42,649 | $42,417 | $232 | 1% | | PT | $18,848 | $5,223 | $13,625 | 261% | | Total | $61,497 | $47,640 | $13,857 | 29% | - Software services revenue increased 29%, with a 1.2% increase excluding acquisitions, attributed to improved utilization of professional services staff due to virtual delivery, partially offset by clients selecting cloud solutions[124] Maintenance Maintenance revenue decreased 2% due to attrition from a legacy solution and client conversions to SaaS, partially offset by rate increases and new sales Maintenance Revenue | Segment | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | ES | $110,695 | $109,469 | $1,226 | 1% | | PT | $6,334 | $9,643 | $(3,309) | (34)% | | Total | $117,029 | $119,112 | $(2,083) | (2)% | - Maintenance revenue decreased 2% due to attrition related to a legacy case management solution and client conversions to SaaS, partially offset by annual maintenance rate increases and new software license sales[126] Appraisal services Appraisal services revenue increased 32% due to the ramp-up of services for several new revaluation contracts Appraisal Services Revenue | Segment | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | ES | $8,518 | $6,465 | $2,053 | 32% | | PT | $0 | $0 | $0 | 0% | | Total | $8,518 | $6,465 | $2,053 | 32% | - Appraisal services revenue increased 32% due to the ramp-up of services for several new revaluation contracts[128] Cost of Revenues and Gross Margins Overall gross margin decreased 6.7% primarily due to NIC's lower margins and increased amortization expense related to acquired software Cost of Revenues | Cost Component | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | Software licenses and royalties | $2,609 | $1,236 | $1,373 | 111% | | Acquired software | $13,221 | $7,964 | $5,257 | 66% | | Subscriptions, software services, and maintenance | $236,896 | $134,320 | $102,576 | 76% | | Appraisal services | $5,936 | $4,617 | $1,319 | 29% | | Hardware and other | $5,028 | $2,458 | $2,570 | 105% | | Total cost of revenues | $263,690 | $150,595 | $113,095 | 75% | Gross Margin Percentage by Revenue Type | Revenue Type | 3 Months Ended March 31, 2022 (%) | 3 Months Ended March 31, 2021 (%) | Change (%) | | :-------------------------------- | :---------------------------------- | :---------------------------------- | :--------- | | Software licenses, royalties and acquired software | 4.1% | 38.4% | (34.3)% | | Subscriptions, software services and maintenance | 44.1% | 50.1% | (6.0)% | | Appraisal services | 30.3% | 28.6% | 1.7% | | Hardware and other | 29.3% | 41.1% | (11.8)% | | Overall gross margin | 42.2% | 48.9% | (6.7)% | - Overall gross margin decreased 6.7% primarily due to the inclusion of NIC's revenues, which historically have lower margins than Tyler, and increased amortization expense related to acquired software[130][133] - Subscriptions, software services, and maintenance gross margin decreased 6.0% due to NIC's lower margins, lower maintenance revenue, higher employee headcount, and cloud transition costs[131] Selling, General and Administrative Expenses SG&A expenses increased 24% but decreased as a percentage of revenues to 21.5%, with a 1.8% increase excluding acquisitions SG&A Expenses | Expense | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | Selling, general and administrative expenses | $97,895 | $78,774 | $19,121 | 24% | - SG&A as a percentage of revenues decreased to 21.5% from 26.7%. Excluding acquisitions, SG&A increased 1.8% due to higher commission expense, partially offset by lower stock compensation and travel expenses[134] Research and Development Expense R&D expense increased 10%, or 5.7% excluding acquisitions, driven by new product development initiatives R&D Expense | Expense | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | Research and development expense | $23,941 | $21,813 | $2,128 | 10% | - R&D expense increased 10%, or 5.7% excluding acquisitions, due to new product development initiatives, partially offset by a shift of some development resources to capitalized projects[136] Amortization of Other Intangibles Amortization expense for other intangibles increased 172% due to acquisitions completed in 2021 and 2022 Amortization of Other Intangibles | Expense | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | Amortization of other intangibles | $14,714 | $5,412 | $9,302 | 172% | - Amortization expense increased 172% due to acquisitions completed in 2021 and 2022[138] Interest Expense Interest expense increased significantly by 905% due to higher borrowing levels from the 2021 Credit Agreement and Convertible Senior Notes, and increased interest rates Interest Expense | Expense | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | Interest expense | $(4,804) | $(478) | $(4,326) | 905% | - Interest expense increased significantly (905%) due to higher borrowing levels from the 2021 Credit Agreement and Convertible Senior Notes, and increased interest rates[140] Other Income, Net Other income, net, decreased by 36% due to lower levels of invested cash Other Income, Net | Income | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :--------- | :--------- | | Other income, net | $364 | $566 | $(202) | (36)% | - Other income, net, decreased due to lower levels of invested cash[142] Income Tax Provision The effective income tax rate increased from 3.4% to 22.3% primarily due to decreased excess tax benefits from stock incentive awards and increased state income tax reserves Income Tax Provision | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Income tax provision | $11,444 | $1,320 | | Effective income tax rate | 22.3% | 3.4% | - The effective tax rate increased from 3.4% to 22.3% primarily due to decreased excess tax benefits from stock incentive awards and increased state income tax reserves[144] Financial Condition and Liquidity Cash and cash equivalents decreased to $243.3 million at March 31, 2022, with investing activities for acquisitions being the primary cash outflow - Cash and cash equivalents were $243.30 million at March 31, 2022, down from $309.20 million at December 31, 2021[145] - The company believes its cash from operating activities, revolving credit facility, cash on hand, and access to capital markets provide sufficient long-term financial flexibility[145] Summary of Cash Flows | Cash Flow Activity | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | | Operating activities | $53,541 | $71,703 | | Investing activities | $(111,173) | $(39,694) | | Financing activities | $(8,277) | $615,120 | | Net (decrease) increase in cash and cash equivalents | $(65,909) | $647,129 | - Investing activities used $111.20 million, primarily for the US eDirect acquisition ($116.70 million net of cash acquired) and capitalized software development ($7.90 million)[149] - Anticipated 2022 capital spending is between $62 million and $67 million, including approximately $36 million of capitalized software development[154] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on variable-rate debt, impacting annual interest expense by $1.8 million per quarter-point change - Market risk primarily relates to interest rate changes on variable-rate debt under the 2021 Credit Agreement[156][157] - As of March 31, 2022, with $735.00 million outstanding under the 2021 Credit Agreement, each quarter-point change in interest rates would result in a $1.80 million change in annual interest expense[158] ITEM 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022 - Management, with the participation of the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2022[160] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended March 31, 2022 - There were no material changes in internal control over financial reporting during the three months ended March 31, 2022[161] Part II. OTHER INFORMATION ITEM 1. Legal Proceedings No material legal proceedings are pending against the company, beyond routine litigation incidental to its business - No material legal proceedings are pending to which the company is a party or to which any of its properties are subject, other than routine litigation incidental to its business[163] ITEM 1A. Risk Factors No material changes in risk factors occurred during Q1 2022, referring to the 2021 Form 10-K for detailed discussion - No material changes in risk factors were identified during the three months ended March 31, 2022, referring to the 2021 Annual Report on Form 10-K for detailed discussion[164] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during the period - None to report[165] ITEM 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None to report[165] ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the period - None to report[165] ITEM 5. Other Information No other information was disclosed for the period - None to report[165] ITEM 6. Exhibits This section lists the exhibits filed with the report, including certifications pursuant to the Sarbanes-Oxley Act and Inline XBRL documents - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and Inline XBRL documents[165] SIGNATURES The report is signed by Brian K. Miller, Executive Vice President and Chief Financial Officer, for Tyler Technologies, Inc. - The report was signed by Brian K. Miller, Executive Vice President and Chief Financial Officer, on April 27, 2022[168]