Tyler Technologies(TYL) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's analysis of financial performance ITEM 1. Financial Statements This section presents Tyler Technologies' unaudited condensed consolidated financial statements and notes for Q2 2023 and FY2022 Condensed Consolidated Statements of Income Presents the company's revenues, gross profit, operating income, net income, and EPS for the reported periods Condensed Consolidated Statements of Income (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues: | | | | | | Subscriptions | $297,789 | $255,816 | $578,254 | $501,259 | | Total revenues | $504,279 | $468,685 | $976,133 | $924,792 | | Gross profit | $223,177 | $193,448 | $423,014 | $385,866 | | Operating income | $61,874 | $56,757 | $106,854 | $112,625 | | Net income | $49,130 | $39,946 | $80,005 | $79,930 | | Basic EPS | $1.17 | $0.96 | $1.91 | $1.93 | | Diluted EPS | $1.15 | $0.94 | $1.87 | $1.88 | Condensed Consolidated Statements of Comprehensive Income Details net income and other comprehensive income (loss) components, leading to total comprehensive income for the periods Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $49,130 | $39,946 | $80,005 | $79,930 | | Other comprehensive (loss) income, net of tax | $(35) | $(66) | $59 | $(763) | | Comprehensive income | $49,095 | $39,880 | $80,064 | $79,167 | Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | ASSETS: | | | | Cash and cash equivalents | $118,764 | $173,857 | | Accounts receivable, net | $638,726 | $577,257 | | Total current assets | $856,880 | $847,242 | | Goodwill | $2,489,084 | $2,489,308 | | Total assets | $4,635,549 | $4,687,417 | | LIABILITIES: | | | | Deferred revenue | $565,840 | $568,538 | | Term loans, net | $243,729 | $362,905 | | Convertible senior notes due 2026, net | $595,345 | $594,484 | | Total liabilities | $1,867,298 | $2,063,028 | | SHAREHOLDERS' EQUITY: | | | | Total shareholders' equity | $2,768,251 | $2,624,389 | Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the periods Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $55,525 | $130,220 | | Net cash used by investing activities | $(492) | $(110,378) | | Net cash used by financing activities | $(110,126) | $(75,951) | | Net decrease in cash and cash equivalents | $(55,093) | $(56,109) | | Cash and cash equivalents at end of period | $118,764 | $253,062 | Supplemental Cash Flow Information (in thousands) | Supplemental Cash Flow Information (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Cash paid for interest | $12,286 | $5,716 | | Cash paid for income taxes, net | $92,933 | $24,286 | Consolidated Statements of Shareholders' Equity Details changes in shareholders' equity, including net income and stock compensation, over the reporting periods - Total shareholders' equity increased from $2.62 billion at December 31, 2022, to $2.77 billion at June 30, 2023, primarily driven by net income of $80.01 million and stock compensation of $53.92 million[21] Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements (1) Basis of Presentation Outlines the accounting principles and reclassifications used in preparing the interim financial statements - The financial statements are prepared in accordance with GAAP for interim reporting, with certain footnotes condensed or omitted. Appraisal services revenue and related costs have been reclassified and combined with professional services categories as of January 1, 2023, due to reduced significance[22] (2) Accounting Standards and Significant Accounting Policies Confirms no material changes to significant accounting policies and details revenue recognition principles - There have been no material changes to the Company's significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2022[24] - Revenue is recognized in accordance with ASC 606, primarily from subscription-based services (SaaS, transaction-based fees like e-filing and payment processing) and post-contract customer support (maintenance). Other revenue sources include professional services, software licenses, and hardware[25][27] (3) Segment and Related Information Describes the company's two reportable segments, Enterprise Software and Platform Technologies, and their operating income - Tyler Technologies operates in two reportable segments: Enterprise Software (ES) focusing on 'back-office' functions, and Platform Technologies (PT) providing transaction processing and workflow solutions[34] Segment Operating Income (in thousands) | Segment Operating Income (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Enterprise Software (ES) | $111,185 | $102,090 | $211,165 | $208,619 | | Platform Technologies (PT) | $38,797 | $36,301 | $68,335 | $67,034 | | Corporate | $(60,818) | $(53,991) | $(118,028) | $(107,450) | | Total segment operating income | $89,164 | $84,400 | $161,472 | $168,203 | (4) Disaggregation of Revenue Breaks down total revenue by timing of transfer and categorizes it into recurring versus non-recurring streams Revenue by Timing (in thousands) | Revenue by Timing (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Products and services transferred at a point in time | $22,545 | $21,791 | $37,025 | $42,974 | | Products and services transferred over time | $481,734 | $446,894 | $939,108 | $881,818 | | Total revenues | $504,279 | $468,685 | $976,133 | $924,792 | Recurring vs Non-Recurring Revenue (in thousands) | Recurring vs Non-Recurring Revenue (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Recurring revenues | $414,328 | $372,631 | $809,924 | $735,103 | | Non-recurring revenues | $89,951 | $96,054 | $166,209 | $189,689 | (5) Deferred Revenue and Performance Obligations Details deferred revenue balances by segment and the total backlog of remaining performance obligations Deferred Revenue (in thousands) | Deferred Revenue (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------ | :------------ | :---------------- | | Enterprise Software | $536,663 | $533,902 | | Platform Technologies | $28,591 | $33,691 | | Corporate | $1,750 | $2,982 | | Totals | $567,004 | $570,575 | - Total backlog (transaction price allocated to remaining performance obligations) as of June 30, 2023, was $1.90 billion, with approximately 46% expected to be recognized as revenue over the next 12 months[46] (6) Deferred Commissions Reports the balance of deferred commissions and the associated amortization expense for the periods Deferred Commissions (in thousands) | Deferred Commissions (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Deferred commissions balance | $44,900 | $43,800 | | Amortization expense (3 months) | $4,300 | $3,700 | | Amortization expense (6 months) | $8,600 | $7,200 | (7) Acquisitions Summarizes recent acquisition details, including purchase price, goodwill, and intangible assets recognized - On October 31, 2022, Tyler Technologies acquired Rapid Financial Solutions, LLC for approximately $67.40 million (net of cash acquired), resulting in $40.00 million in goodwill and $27.60 million in other identifiable intangible assets[48][49] - The operating results of Rapid are included in the Platform Technologies segment since the acquisition date, with the purchase price allocation still preliminary as of June 30, 2023[50][51] (8) Debt Details outstanding borrowings, credit agreement terms, convertible senior notes, and interest expense Outstanding Borrowings (in thousands) | Outstanding Borrowings (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Term Loan A-1 | $250,000 | $290,000 | | Term Loan A-2 | $25,000 | $105,000 | | Convertible Senior Notes due 2026 | $600,000 | $600,000 | | Total borrowings | $875,000 | $995,000 | | Total borrowings, net | $869,074 | $987,389 | - The 2021 Credit Agreement, maturing April 20, 2026, includes a $500 million revolving credit facility, a $600 million Term Loan A-1, and a $300 million Term Loan A-2. The LIBOR reference rate was replaced with SOFR on January 28, 2023[53][54] - The Convertible Senior Notes due 2026 have an aggregate principal amount of $600.0 million, accrue interest at 0.25% per annum, and mature on March 15, 2026. Conversion rights are subject to certain events, none of which have been met as of June 30, 2023[58][60][62] Interest Expense (in thousands) | Interest Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Contractual interest expense - Term Loans | $(4,565) | $(4,375) | $(10,206) | $(7,369) | | Amortization of debt discount and debt issuance costs | $(822) | $(1,149) | $(2,178) | $(2,271) | | Total interest expense | $(6,387) | $(6,214) | $(14,071) | $(11,018) | (9) Financial Instruments Lists cash, investments, and equity holdings, describing their nature and valuation methods Financial Instruments (in thousands) | Financial Instruments (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $118,764 | $173,857 | | Available-for-sale investments | $29,216 | $55,538 | | Equity investments | $10,000 | $10,000 | | Total | $157,980 | $239,395 | - Available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities, presented at fair value. Equity investments include an 18% interest in BFTR, LLC, carried at cost[69][72] (10) Other Comprehensive Income (Loss) Reports changes in accumulated other comprehensive loss, primarily from unrealized gains on available-for-sale securities - Accumulated other comprehensive loss, net of tax, was $(785) thousand as of June 30, 2023, compared to $(844) thousand at December 31, 2022. The change reflects other comprehensive income of $59 thousand for the six months ended June 30, 2023[73][75] (11) Fair Value Categorizes financial instrument fair value measurements into a three-level hierarchy based on input observability Financial Instruments at Fair Value (in thousands) | Financial Instruments at Fair Value (in thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------------------------------------------- | :------ | :-------- | :-------- | :-------- | | Available-for-sale investments | $29,216 | $— | $— | $29,216 | | Equity investments | $— | $— | $10,000 | $10,000 | | Term Loan A-1 | $— | $248,788 | $— | $248,788 | | Term Loan A-2 | $— | $24,942 | $— | $24,942 | | Convertible Senior Notes due 2026 | $— | $615,564 | $— | $615,564 | - Fair value measurements are categorized into a three-level hierarchy. Available-for-sale investments are Level 1, while Term Loans and Convertible Senior Notes are Level 2. Equity investments are Level 3, carried at cost due to lack of significant influence and readily determinable fair values[76][79][80][84] (12) Income Tax Provision Reports the income tax provision and effective tax rate, explaining factors influencing changes, including TCJA impacts Income Tax Provision (in thousands) | Income Tax Provision (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax provision | $7,000 | $10,813 | $14,667 | $22,258 | | Effective income tax rate | 12.5% | 21.3% | 15.5% | 21.8% | - The decrease in the effective tax rate for the three and six months ended June 30, 2023, was primarily due to increased research tax credit benefits and excess tax benefits from stock incentive awards, partially offset by higher liabilities for uncertain tax positions[87] - The Tax Cuts and Jobs Act of 2017 (TCJA) requires capitalization and amortization of R&D expenses, which temporarily increases U.S. federal and state cash tax payments and reduces cash flows in fiscal year 2023 and future years[89] (13) Share-Based Compensation Details share-based compensation expense allocated across various functional categories for the periods Share-Based Compensation Expense (in thousands) | Share-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscriptions, maintenance, and professional services | $6,437 | $6,867 | $12,779 | $13,639 | | Sales and marketing expense | $2,367 | $2,224 | $4,760 | $4,364 | | General and administrative expense | $17,224 | $16,709 | $36,385 | $33,076 | | Total share-based compensation expense | $26,028 | $25,800 | $53,924 | $51,079 | (14) Earnings Per Share Presents basic and diluted earnings per common share, noting factors affecting diluted EPS calculations Earnings Per Common Share | Earnings Per Common Share | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | $1.17 | $0.96 | $1.91 | $1.93 | | Diluted | $1.15 | $0.94 | $1.87 | $1.88 | - Stock awards and Convertible Senior Notes were not included in diluted EPS calculations as their effect would be antidilutive, with no conversion features triggered[93][94] (15) Leases Describes operating lease agreements for facilities and equipment, including associated costs and future minimum rental income - The Company leases office facilities and equipment under non-cancelable operating lease agreements with maturities between one to 11 years, incurring $7.51 million in operating lease costs and $5.87 million in cash outflows for the six months ended June 30, 2023[95][96][97] Future Minimum Operating Rental Income (in thousands) | Future Minimum Operating Rental Income (in thousands) | Amount | | :------------------------------------ | :----- | | Year ending December 31, 2023 (Remaining) | $1,133 | | 2024 | $3,049 | | 2025 | $2,317 | | 2026 | $1,171 | | 2027 | $913 | | Thereafter | $733 | | Total | $9,316 | (16) Related Party Transactions Reports an arm's length lessor agreement with a company co-owned by a board member, generating rental income - In April 2023, the Company entered into an arm's length lessor agreement for office space with a company co-owned by a board member, recognizing $75 thousand in rental income for the six months ended June 30, 2023[100] (17) Commitments and Contingencies Details ongoing legal proceedings, including a lawsuit for contract termination, and future purchase commitments - The Company is involved in a lawsuit with a state government client regarding a contract termination for convenience, seeking approximately $15.00 million in owed fees, with the matter remaining unresolved[101][102] - As of June 30, 2023, the Company had remaining aggregate minimum purchase commitments of approximately $244.00 million through 2031 for third-party technology and other services[103] (18) Subsequent Events Confirms no material events or transactions occurred after the reporting period ended June 30, 2023 - There have been no material events or transactions that occurred subsequent to June 30, 2023[104] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operating results, business segments, acquisitions, and accounting policies CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS Highlights that the document contains forward-looking statements subject to various business and economic risks - The document contains forward-looking statements subject to risks and uncertainties, including changes in client budgets, cyber-attacks, integration of acquisitions, internet infrastructure reliance, ability to meet forecasts, economic conditions, technological risks, competition, personnel retention, and regulatory compliance[106] GENERAL Provides an overview of Tyler Technologies' business, offering integrated information management solutions for the public sector - Tyler Technologies provides integrated information management solutions and services for the public sector, offering subscription-based services (SaaS, transaction-based fees), professional services, and continuing maintenance and support. The Company operates through two reportable segments: Enterprise Software (ES) and Platform Technologies (PT)[107][108] Recent Acquisitions Summarizes recent acquisitions, including Rapid Financial Solutions and US eDirect, integrated into the PT segment - Recent acquisitions include Rapid Financial Solutions, LLC (October 2022) and US eDirect Inc. (February 2022), both integrated into the digital solutions business unit within the PT segment[111] Operating Results Summarizes key financial performance metrics, including revenue growth, subscription revenue, backlog, and employee count - Total revenues increased 7.6% and 5.6% for the three and six months ended June 30, 2023, respectively. Subscriptions revenue grew 16.4% and 15.4% for the same periods, driven by SaaS adoption and transaction-based revenue growth[112][113] - Backlog as of June 30, 2023, increased 2.8% to $1.90 billion. Employee count increased to 7,247 at June 30, 2023, from 7,143 at June 30, 2022[114] CRITICAL ACCOUNTING POLICIES AND ESTIMATES Confirms no material changes to critical accounting policies and estimates from the prior annual report - There have been no material changes to the Company's critical accounting policies and estimates from those provided in the Form 10-K for the year ended December 31, 2022[115] Reclassifications Details the reclassification of appraisal services revenue and costs into professional services categories - Effective January 1, 2023, appraisal services revenue and related costs are no longer reported as separate categories and have been combined with professional services revenue and cost of subscriptions, maintenance, and professional services, respectively[116] ANALYSIS OF RESULTS OF OPERATIONS Provides a detailed breakdown and analysis of the company's revenue and expense trends across various categories Revenues Presents a breakdown of total revenues by category and their percentage contribution for the periods Revenue Category | Revenue Category | Three Months Ended June 30, 2023 (% of Total) | Three Months Ended June 30, 2022 (% of Total) | Six Months Ended June 30, 2023 (% of Total) | Six Months Ended June 30, 2022 (% of Total) | | :--------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Subscriptions | 59.1 % | 54.6 % | 59.2 % | 54.2 % | | Maintenance | 23.1 % | 24.9 % | 23.7 % | 25.3 % | | Professional services | 13.2 % | 15.4 % | 13.0 % | 15.3 % | | Software licenses and royalties | 1.9 % | 3.2 % | 2.0 % | 3.4 % | | Hardware and other | 2.7 % | 1.9 % | 2.1 % | 1.8 % | | Total revenues | 100.0 % | 100.0 % | 100.0 % | 100.0 % | Subscriptions Analyzes subscription revenue growth, driven by new SaaS clients, conversions, and transaction-based fees Subscriptions Revenue (in thousands) | Subscriptions Revenue (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :----------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total subscriptions revenue | $297,789 | $255,816 | $41,973 | 16 % | $578,254 | $501,259 | $76,995 | 15 % | | Total subscriptions revenue excluding acquisitions | $293,182 | $255,816 | $37,366 | 15 % | $567,397 | $501,259 | $66,138 | 13 % | - Subscriptions revenue growth was primarily driven by new SaaS clients (170 in Q2 2023, 315 in H1 2023) and existing on-premises clients converting to SaaS (94 in Q2 2023, 167 in H1 2023). The mix of new software contract value shifted to approximately 85% subscription-based arrangements in H1 2023, up from 76% in H1 2022[121] - Transaction-based fees within subscriptions revenue grew by $20.00 million (13.7%) and $30.20 million (10.4%) for the three and six months ended June 30, 2023, respectively, largely due to online payments and e-filing services, and recent acquisitions, partially offset by a decline in COVID pandemic-related revenues[122] Maintenance Examines maintenance revenue trends, impacted by SaaS conversions, and reports Annualized Recurring Revenue (ARR) Maintenance Revenue (in thousands) | Maintenance Revenue (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :--------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total maintenance revenue | $116,539 | $116,815 | $(276) | — % | $231,670 | $233,844 | $(2,174) | (1)% | - Maintenance revenue remained flat for the three months and decreased 1% for the six months ended June 30, 2023, primarily due to clients converting from on-premises licenses to SaaS, partially offset by annual rate increases and new software license sales[123] - Annualized Recurring Revenue (ARR) was $1.66 billion as of June 30, 2023, an 11.2% increase compared to $1.49 billion at June 30, 2022, mainly due to increased subscriptions revenue from the shift to SaaS[124] Professional services Analyzes the decrease in professional services revenue, mainly due to a decline in COVID pandemic-related services Professional Services Revenue (in thousands) | Professional Services Revenue (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total professional services revenue | $66,420 | $71,937 | $(5,517) | (8)% | $127,349 | $141,952 | $(14,603) | (10)% | - Professional services revenue decreased 8% and 10% for the three and six months ended June 30, 2023, respectively, primarily due to a $13.10 million and $25.00 million decline in COVID pandemic-related rent relief services, partially offset by increased billable travel revenue from more onsite services[127] Software licenses and royalties Explains the decrease in software licenses and royalties revenue due to the shift towards subscription-based agreements Software Licenses and Royalties Revenue (in thousands) | Software Licenses and Royalties Revenue (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :----------------------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total software licenses and royalties revenue | $9,779 | $15,009 | $(5,230) | (35)% | $19,909 | $31,515 | $(11,606) | (37)% | - The decrease in software licenses and royalties revenue is primarily attributed to the ongoing shift in new software contracts towards subscription-based agreements, which generate lower initial revenue compared to perpetual licenses but higher overall revenue over the contract term[128][129] Cost of revenues and overall gross margin Analyzes cost of revenues and gross margin changes, influenced by subscription growth, COVID-related revenues, and personnel costs Cost of Revenues (in thousands) | Cost of Revenues (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------ | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Subscriptions, maintenance, and professional services | $255,789 | $250,168 | $5,621 | 2 % | $508,204 | $493,000 | $15,204 | 3 % | | Amortization of software development | $2,896 | $1,322 | $1,574 | 119 % | $5,485 | $2,486 | $2,999 | 121 % | | Amortization of acquired software | $8,924 | $14,039 | $(5,115) | (36)% | $17,844 | $27,260 | $(9,416) | (35)% | | Total cost of revenues | $281,102 | $275,237 | $5,865 | 2 % | $553,119 | $538,926 | $14,193 | 3 % | - Overall gross margin increased by 3.0% and 1.6% for the three and six months ended June 30, 2023, respectively, primarily due to growth in subscription revenues and a decline in low-margin COVID-related revenues, along with a decrease in amortization of acquired software expense. This was partially offset by higher personnel costs and duplicate hosting costs during the transition to the public cloud[138] Sales and marketing expense Examines the increase in sales and marketing expense, mainly driven by higher commission and bonus expenses Sales and Marketing Expense (in thousands) | Sales and Marketing Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :----------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Sales and marketing expense | $37,103 | $31,881 | $5,222 | 16 % | $74,206 | $67,087 | $7,119 | 11 % | - Sales and marketing expense increased by 16% and 11% for the three and six months ended June 30, 2023, respectively, mainly due to higher commission and bonus expenses resulting from improved operating results[139] General and administrative expense Analyzes the increase in general and administrative expense due to amortization, personnel costs, and lease restructuring General and Administrative Expense (in thousands) | General and Administrative Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | General and administrative expense | $77,681 | $67,820 | $9,861 | 15 % | $150,041 | $130,509 | $19,532 | 15 % | - General and administrative expense increased by 15% for both the three and six months ended June 30, 2023, driven by higher amortization of internal-use software development, increased travel, personnel costs, health benefits, bonus expenses, and $1.40 million related to lease restructuring and asset write-offs in the six-month period[140] Research and development expense Examines the increase in research and development expense, attributed to new product initiatives and acquired businesses Research and Development Expense (in thousands) | Research and Development Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Research and development expense | $28,153 | $23,386 | $4,767 | 20 % | $55,139 | $47,327 | $7,812 | 17 % | - Research and development expense increased by 20% and 17% for the three and six months ended June 30, 2023, respectively, primarily due to new product development initiatives across product suites and increased investments in R&D at recently acquired businesses[141] Amortization of other intangibles Analyzes the increase in amortization of other intangibles due to recent acquisitions and branding changes Amortization of Other Intangibles (in thousands) | Amortization of Other Intangibles (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :----------------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Amortization of other intangibles | $18,366 | $13,604 | $4,762 | 35 % | $36,774 | $28,318 | $8,456 | 30 % | - Amortization of other intangibles increased by 35% and 30% for the three and six months ended June 30, 2023, respectively, due to intangibles added from recent acquisitions and accelerated amortization of certain trade name intangibles from 2023 branding changes[142] Interest expense Examines the increase in interest expense, primarily due to accelerated debt repayments and higher interest rates Interest Expense (in thousands) | Interest Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------ | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Interest expense | $(6,387) | $(6,214) | $(173) | 3 % | $(14,071) | $(11,018) | $(3,053) | 28 % | - Interest expense increased by 3% and 28% for the three and six months ended June 30, 2023, respectively, primarily due to increased amortization expense related to debt issuance costs from accelerated term loan repayments and higher interest rates[143] Other income, net Analyzes the significant increase in other income, net, primarily driven by higher interest income from invested cash Other Income, Net (in thousands) | Other Income, Net (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Other income, net | $643 | $216 | $427 | 198 % | $1,889 | $581 | $1,308 | 225 % | - Other income, net, significantly increased by 198% and 225% for the three and six months ended June 30, 2023, respectively, primarily due to higher interest income generated from invested cash as a result of rising interest rates[144] Income tax provision Reports the income tax provision and effective tax rate, explaining the decrease due to tax credits and stock awards Income Tax Provision (in thousands) | Income Tax Provision (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :---------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Income tax provision | $7,000 | $10,813 | $(3,813) | (35)% | $14,667 | $22,258 | $(7,591) | (34)% | | Effective income tax rate | 12.5 % | 21.3 % | | | 15.5 % | 21.8 % | | | - The effective tax rate decreased due to increased research tax credit benefits and excess tax benefits from stock incentive awards, partially offset by higher liabilities for uncertain tax positions[145] FINANCIAL CONDITION AND LIQUIDITY Assesses the company's cash position, cash flow activities, accounts receivable, and anticipated capital spending - As of June 30, 2023, cash and cash equivalents were $118.76 million, down from $173.86 million at December 31, 2022. The Company also held $29.22 million in investment grade securities[147] Cash Flows (in thousands) | Cash Flows (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------ | :----------------------------- | :----------------------------- | | Operating activities | $55,525 | $130,220 | | Investing activities | $(492) | $(110,378) | | Financing activities | $(110,126) | $(75,951) | - Operating cash flow decreased primarily due to higher tax payments (including IRC Section 174 impact), increased accounts receivable, and timing of bonus payments[149][151][152] - Days sales outstanding (DSO) in accounts receivable improved to 112 days at June 30, 2023, from 115 days at December 31, 2022. The Company anticipates 2023 capital spending between $63.00 million and $65.00 million, including $37.00 million for software development[150][159] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Discusses the company's exposure to market risks, particularly interest rate risk from variable-rate debt - As of June 30, 2023, the Company had $275.00 million in outstanding borrowings under its amended 2021 Credit Agreement, which bears interest at variable rates tied to SOFR. A quarter-point change in interest rates would result in a $687.50 thousand change in annual interest expense[163][164][165] ITEM 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control over financial reporting - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2023. There were no material changes in internal control over financial reporting during the three months ended June 30, 2023[166][167] Part II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, security holder votes, and exhibits ITEM 1. Legal Proceedings Details ongoing legal proceedings, specifically a lawsuit concerning a terminated state government contract - The Company filed a lawsuit on August 23, 2022, against a state government client to enforce contractual rights and remedies after a termination for convenience, seeking approximately $15.00 million in owed fees. The matter remains unresolved[169][170] ITEM 1A. Risk Factors Refers to the comprehensive discussion of risk factors in the latest Annual Report on Form 10-K - There were no material changes in the risk factors discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, during the six months ended June 30, 2023[171] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds States no unregistered sales of equity securities or use of proceeds to report - None[172] ITEM 3. Defaults Upon Senior Securities Indicates no defaults upon senior securities - None[172] ITEM 4. Submission of Matters to a Vote of Security Holders Reports on the outcome of the advisory vote on executive compensation frequency - Stockholders voted to hold an annual advisory vote on executive compensation at the 2023 annual meeting, aligning with the board's recommendation[172] ITEM 5. Other Information Includes information on trading plans - No trading plans to report[173] ITEM 6. Exhibits Lists all exhibits filed with the Form 10-Q - The exhibits include Amended and Restated By-Laws, Revised Insider Trading Policy, Certifications pursuant to Sarbanes-Oxley Act (Sections 302 and 906), and Inline XBRL documents[174] SIGNATURES Contains the required signatures for the Form 10-Q filing - The report was signed on behalf of Tyler Technologies, Inc. by Brian K. Miller, Executive Vice President and Chief Financial Officer, on July 26, 2023[176][177]