Tyler Technologies(TYL) - 2021 Q3 - Quarterly Report

Corporate Information Provides essential registration details for Tyler Technologies, Inc., including its incorporation, stock listing, and filing status Registrant Details Tyler Technologies, Inc., a Delaware-incorporated large accelerated filer, lists its common stock (TYL) on the NYSE - TYLER TECHNOLOGIES, INC. is a Delaware-incorporated registrant with Commission File Number 1-10485, headquartered in Plano, Texas[3] Stock Listing Information | Title of each class | Trading symbol | Name of each exchange on which registered | |---|---|---| | COMMON STOCK, $0.01 PAR VALUE | TYL | New York Stock Exchange | - Filing Status: Large accelerated filer, not a shell company[4][5] - 40,976,329 common shares outstanding as of October 29, 2021[5] PART I. FINANCIAL INFORMATION Presents Tyler Technologies, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis ITEM 1. Financial Statements Presents Tyler Technologies, Inc.'s unaudited condensed consolidated financial statements, including income, balance sheets, cash flows, and equity Condensed Consolidated Statements of Income Revenue grew significantly, but nine-month net income and diluted EPS declined due to increased costs and interest expenses Condensed Consolidated Statements of Income (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | |---|---|---| | Total revenues | $459,873 | $285,746 | | Gross profit | $196,216 | $143,509 | | Operating income | $56,184 | $49,656 | | Net income | $44,170 | $39,284 | | Diluted EPS | $1.04 | $0.94 | Condensed Consolidated Statements of Income (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | |---|---|---| | Total revenues | $1,158,750 | $833,378 | | Gross profit | $522,484 | $403,843 | | Operating income | $132,683 | $124,890 | | Net income | $106,676 | $140,726 | | Diluted EPS | $2.53 | $3.39 | - Total revenues increased by 60.9% for the three months and 39.0% for the nine months ended September 30, 2021[8] - Net income increased by 12.4% for the three months but decreased by 24.2% for the nine months ended September 30, 2021[8] Condensed Consolidated Balance Sheets Total assets and liabilities surged due to acquisitions, with goodwill and intangibles increasing, and cash decreasing Condensed Consolidated Balance Sheets (September 30, 2021 vs. December 31, 2020) | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Total assets | $4,682,938 | $2,607,274 | | Cash and cash equivalents | $234,128 | $603,623 | | Accounts receivable (net) | $538,119 | $382,319 | | Goodwill | $2,355,144 | $838,428 | | Other intangibles, net | $1,086,457 | $322,068 | | Total liabilities | $2,482,165 | $621,163 | | Term loans | $805,535 | — | | Convertible senior notes due 2026, net | $592,335 | — | | Total shareholders' equity | $2,200,773 | $1,986,111 | - Total assets increased by 79.6% from December 31, 2020, to September 30, 2021, largely due to acquisitions[11] - Goodwill increased by 180.9% and other intangibles by 237.3%, reflecting significant acquisition activity[11] - Cash and cash equivalents decreased by 61.2% from December 31, 2020, to September 30, 2021[11] Condensed Consolidated Statements of Cash Flows Operating cash flow slightly decreased, investing used $2.1 billion for acquisitions, funded by $1.5 billion in new debt Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Cash Flow Activity (in thousands) | 2021 | 2020 | |---|---|---| | Net cash provided by operating activities | $256,743 | $266,328 | | Net cash used by investing activities | $(2,084,788) | $(68,163) | | Net cash provided by financing activities | $1,458,550 | $87,838 | | Net (decrease) increase in cash and cash equivalents | $(369,495) | $286,003 | | Cash and cash equivalents at end of period | $234,128 | $518,685 | - Net cash used by investing activities increased dramatically from $68.2 million in 2020 to $2.08 billion in 2021, primarily due to the NIC acquisition[13][161] - Net cash provided by financing activities surged from $87.8 million in 2020 to $1.46 billion in 2021, driven by new debt to fund acquisitions[13][162] - Cash and cash equivalents decreased by $369.5 million in 2021, ending at $234.1 million[13] Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $2.2 billion, driven by net income, share-based compensation, and stock options Consolidated Shareholders' Equity (September 30, 2021 vs. December 31, 2020) | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Total Shareholders' Equity | $2,200,773 | $1,986,111 | | Additional Paid-in Capital | $1,010,212 | $905,332 | | Retained Earnings | $1,218,832 | $1,112,156 | | Treasury Stock (Amount) | $(28,706) | $(31,812) | - Total shareholders' equity increased by $214.7 million (10.8%) from December 31, 2020, to September 30, 2021[18] - Key contributors include $106.7 million in net income and $80.4 million in stock compensation[18] - Treasury stock purchases amounted to $13.0 million for the nine months ended September 30, 2021[18] Notes to Condensed Consolidated Financial Statements Detailed notes explain financial reporting, accounting policies, and the impact of acquisitions on revenue, goodwill, debt, and segments (1) Basis of Presentation Financial statements follow SEC and GAAP for interim reporting, including NIC, Inc. acquisition results from April 21, 2021 - Financial statements prepared under SEC and GAAP for interim reporting, with condensed footnotes[19] - NIC, Inc. acquired on April 21, 2021, with results included from the acquisition date[21] - No items of other comprehensive income (loss) for the three and nine months ended September 30, 2021, and 2020[20] (2) Accounting Standards and Significant Accounting Policies Adopted new ASUs for convertible instruments and income taxes; COVID-19 impacts revenue, but recurring revenues remain strong - Adopted ASU 2020-06 (Convertible Instruments) and ASU 2019-12 (Income Taxes) as of January 1, 2021[22][43][44] - COVID-19 continues to delay government procurement, impacting software licenses and services, but recurring revenues (subscriptions and maintenance) remain strong, comprising 79% of total consolidated revenue for the nine months ended September 30, 2021[23][24][26] - Revenue recognition involves identifying distinct performance obligations, determining transaction price, allocating it based on standalone selling price (SSP), and recognizing revenue upon transfer of control[29][30][31][32][33] - Goodwill is assessed for impairment annually (changed to October 1 in 2021) or more frequently if indicators arise; no impairment recorded as of September 30, 2021[39][40] (3) Acquisitions Tyler Technologies completed several acquisitions in 2021, notably NIC, Inc. for $2.0 billion, expanding digital government solutions - Acquired NIC, Inc. on April 21, 2021, for approximately $2.0 billion (net of cash acquired), adding digital government solutions and payment expertise; NIC's results are now a separate reportable segment[49][51][56] Preliminary Purchase Price Allocation for NIC Acquisition (in thousands) | Asset/Liability | Amount | |---|---| | Cash | $331,783 | | Identifiable intangible assets | $790,000 | | Goodwill | $1,438,603 | | Deferred tax liabilities, net | $(194,676) | | Total consideration | $2,320,492 | - Other 2021 acquisitions include Arx ($12.8 million), VendEngine ($83.1 million), ReadySub ($6.2 million), and DataSpec ($5.8 million)[45][46][54][55] Unaudited Pro Forma Consolidated Operating Results (Nine Months Ended September 30) | Metric | 2021 (Pro Forma) | 2020 (Pro Forma) | |---|---|---| | Revenues | $1,322,055 | $1,152,675 | | Net income | $103,330 | $130,555 | | Basic earnings per share | $2.53 | $3.26 | | Diluted earnings per share | $2.45 | $3.15 | (4) Shareholders' Equity Shareholders' equity activity included stock option exercises, employee stock plan purchases, and treasury share repurchases Shareholders' Equity Activity (Nine Months Ended September 30) | Activity | 2021 (Shares) | 2021 (Amount $) | 2020 (Shares) | 2020 (Amount $) | |---|---|---|---|---| | Purchases of treasury shares | (32) | $(12,975) | (59) | $(15,484) | | Stock option exercises | 313 | $46,433 | 989 | $100,732 | | Employee stock plan purchases | 26 | $9,757 | 31 | $8,209 | - As of September 30, 2021, the company is authorized to repurchase up to 2.4 million additional shares of common stock[58] (5) Deferred Commissions Deferred sales commissions, totaling $36.2 million, are amortized over three to seven years, with $9.6 million expense Deferred Commissions (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Deferred commissions | $36,200 | $32,300 | Amortization Expense Related to Deferred Commissions (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three months ended Sep 30 | $3,500 | $3,000 | | Nine months ended Sep 30 | $9,600 | $8,900 | - Deferred commissions are amortized over a period of three to seven years, commensurate with associated revenue recognition[59] (6) Other Assets The company holds $114.3 million in held-to-maturity bonds and a $10 million equity method investment in BFTR, LLC - As of September 30, 2021, $114.3 million in investment grade corporate and municipal bonds are held to maturity, with varying maturity dates through 2027[61] - An investment of $10 million (18% interest) in BFTR, LLC is accounted for under the equity method, specializing in digitizing spoken word in court and legal proceedings[62] - No credit losses recorded for accrued interest receivables during the three and nine months ended September 30, 2021[61] (7) Debt Tyler Technologies entered a $1.4 billion Credit Agreement and issued $600 million Convertible Senior Notes in 2021 to fund the NIC acquisition - Entered into a new $1.4 billion Credit Agreement on April 21, 2021, including a $500 million revolving credit facility and $900 million in term loans[63] Outstanding Borrowings under 2021 Credit Agreement (in thousands) | Loan Type | Sep 30, 2021 | Maturity Date | |---|---|---| | Revolving Credit Facility | $0 | April 20, 2026 | | Term Loan A-1 | $592,500 | April 20, 2026 | | Term Loan A-2 | $250,000 | April 20, 2024 | | Total borrowings, net | $835,535 | | - Issued $600 million aggregate principal amount of 0.25% Convertible Senior Notes due 2026 on March 9, 2021, with net proceeds of $591.4 million[70] Convertible Senior Notes Carrying Value (in thousands) | Metric | Sep 30, 2021 | |---|---| | Convertible Senior Notes due 2026 | $600,000 | | Less: unamortized debt discount and debt issuance costs | $(7,665) | | Carrying value | $592,335 | - The effective interest rate for the 2021 Credit Agreement borrowings was 3.25% as of September 30, 2021, and for the Convertible Senior Notes was 1.19%[67][79] (8) Income Tax Provision Effective income tax rates fluctuated to 13.8% (three months) and 7.7% (nine months), driven by excess tax benefits from stock awards Effective Income Tax Rate | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | 13.8% | 21.3% | | Nine Months Ended Sep 30 | 7.7% | (11.1)% | - Decrease in effective tax rate for three months due to increased excess tax benefits from stock incentive awards; increase for nine months due to decreased excess tax benefits[80] Excess Tax Benefits Related to Stock Incentive Awards (in millions) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $6.3 | $2.5 | | Nine Months Ended Sep 30 | $21.5 | $48.0 | (9) Earnings Per Share Diluted EPS increased to $1.04 for three months but decreased to $2.53 for nine months, with Convertible Senior Notes anti-dilutive Earnings Per Common Share | Period | 2021 (Basic) | 2021 (Diluted) | 2020 (Basic) | 2020 (Diluted) | |---|---|---|---|---| | Three Months Ended Sep 30 | $1.08 | $1.04 | $0.98 | $0.94 | | Nine Months Ended Sep 30 | $2.61 | $2.53 | $3.52 | $3.39 | - Approximately 1.2 million common shares related to Convertible Senior Notes were not included in diluted EPS calculation as their effect would be anti-dilutive[84] (10) Leases Operating lease costs significantly increased, with a weighted-average remaining lease term of 6 years and a 1.91% discount rate Operating Lease Costs (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $5,269 | $2,506 | | Nine Months Ended Sep 30 | $13,518 | $7,647 | Operating Lease Liabilities (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Operating lease right-of-use assets | $40,449 | $18,734 | | Total lease liabilities | $47,473 | $22,183 | - Weighted average remaining lease term is 6 years, and weighted average discount rate is 1.91% as of September 30, 2021[86] Rental Income from Third Parties (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $301 | $284 | | Nine Months Ended Sep 30 | $891 | $850 | (11) Share-Based Compensation Total share-based compensation expense increased significantly due to higher awards and an increased stock price Total Share-Based Compensation Expense (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $29,461 | $18,424 | | Nine Months Ended Sep 30 | $80,360 | $54,112 | - Share-based compensation expense increased by 59.9% for the three months and 48.5% for the nine months ended September 30, 2021[90] (12) Segment and Related Information Tyler Technologies operates in three segments: Enterprise Software (ES), Appraisal and Tax (A&T), and the new NIC segment - Three reportable segments: Enterprise Software (ES), Appraisal and Tax (A&T), and NIC (newly formed after April 2021 acquisition)[91] - ES segment includes financial management, education, courts and justice, public safety, planning, regulatory, maintenance, data and insights, and platform technologies solutions[91][95] - A&T segment provides systems for property appraisal and assessment, land and vital records management, and appraisal outsourcing services[91][95] Total Revenues by Segment (Three Months Ended September 30, 2021, in thousands) | Segment | Total Revenues | |---|---| | Enterprise Software | $285,420 | | Appraisal and Tax | $28,923 | | NIC | $150,585 | | Corporate | $(5,055) | | Totals | $459,873 | Total Revenues by Segment (Nine Months Ended September 30, 2021, in thousands) | Segment | Total Revenues | |---|---| | Enterprise Software | $832,529 | | Appraisal and Tax | $89,570 | | NIC | $249,664 | | Corporate | $(13,013) | | Totals | $1,158,750 | (13) Disaggregation of Revenue Majority of revenue is recurring (79% for nine months), primarily from subscriptions and maintenance, driven by acquisitions and SaaS adoption Revenue by Timing of Recognition (Three Months Ended September 30, 2021, in thousands) | Category | Products/Services Transferred at a Point in Time | Products/Services Transferred Over Time | Total | |---|---|---|---| | Software licenses and royalties | $19,170 | $3,503 | $22,673 | | Subscriptions | — | $252,942 | $252,942 | | Software services | — | $54,624 | $54,624 | | Maintenance | — | $117,833 | $117,833 | | Appraisal services | — | $7,146 | $7,146 | | Hardware and other | $4,655 | — | $4,655 | | Total | $23,825 | $436,048 | $459,873 | Revenue by Timing of Recognition (Nine Months Ended September 30, 2021, in thousands) | Category | Products/Services Transferred at a Point in Time | Products/Services Transferred Over Time | Total | |---|---|---|---| | Software licenses and royalties | $45,983 | $9,227 | $55,210 | | Subscriptions | — | $554,979 | $554,979 | | Software services | — | $155,601 | $155,601 | | Maintenance | — | $356,566 | $356,566 | | Appraisal services | — | $19,876 | $19,876 | | Hardware and other | $16,518 | — | $16,518 | | Total | $62,501 | $1,096,249 | $1,158,750 | - Recurring revenues (subscriptions and maintenance) comprised 79% of total consolidated revenue for the nine months ended September 30, 2021[102] Recurring vs. Non-Recurring Revenue (Nine Months Ended September 30, 2021, in thousands) | Revenue Type | Enterprise Software | Appraisal and Tax | NIC | Corporate | Totals | |---|---|---|---|---|---| | Recurring revenues | $625,548 | $50,012 | $235,985 | — | $911,545 | | Non-recurring revenues | $190,992 | $39,507 | $13,679 | $3,027 | $247,205 | | Total Revenues | $832,529 | $89,570 | $249,664 | $(13,013) | $1,158,750 | (14) Deferred Revenue and Performance Obligations Total deferred revenue increased to $495.3 million, with a backlog of $1.77 billion in performance obligations Total Deferred Revenue by Segment (in thousands) | Segment | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Enterprise Software | $452,435 | $422,742 | | Appraisal and Tax | $31,300 | $36,945 | | NIC | $9,525 | — | | Corporate | $2,043 | $1,691 | | Totals | $495,303 | $461,378 | - Backlog (transaction price allocated to remaining performance obligations) was $1.77 billion as of September 30, 2021, a 14.3% increase from the prior year[105][122] - Approximately 47% of the backlog is expected to be recognized as revenue over the next 12 months[105] (15) Commitments and Contingencies A September 2020 ransomware incident was remediated, incurring $410,000 in costs, partially offset by insurance - A security incident (ransomware) in September 2020 has been contained and remediated[106] - Costs for the security incident were $410,000 for the nine months ended September 30, 2021, with $755,000 in insurance recoveries received[106] - No material legal proceedings pending other than routine litigation[107] (16) Subsequent Events No material subsequent events or transactions occurred after September 30, 2021 - No material subsequent events or transactions after September 30, 2021[108] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A reviews financial performance, revenue growth from acquisitions and SaaS, COVID-19 impacts, and liquidity, emphasizing increased debt Cautionary Note Concerning Forward-Looking Statements Warns that forward-looking statements are subject to risks, including COVID-19 impacts, client budgets, cybersecurity, and integration challenges - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially[110] - Key risk factors include COVID-19 impacts, changes in client budgets/regulations, cyber-attacks, integration of acquired businesses, and market competition[110] General Business Overview Tyler Technologies provides integrated information management solutions for the public sector across three segments - Provides integrated information management solutions and services for the public sector, including software, professional IT services, and subscription-based services[111] - Products automate nine major functional areas: financial management, courts and justice, public safety, property appraisal and tax, and NIC digital government and payments[112] - Operates in three segments: Enterprise Software (ES), Appraisal and Tax (A&T), and NIC (newly formed after April 2021 acquisition)[112] - Total employee count increased to 6,718 at September 30, 2021, including 1,046 employees from 2021 acquisitions[115] Impacts of the COVID-19 Pandemic COVID-19 delays government procurement and impacts software licenses and services, but cost savings and virtual delivery partially offset effects - COVID-19 continues to delay government procurement processes, negatively impacting software licenses and services revenue[123][124] - Software services revenue affected by decline in billable travel, with most services now delivered virtually[124] - Cost savings from reduced travel, user conferences, and trade show expenses partially offset lower revenues[124] - COVID-related revenues from NIC's TourHealth and pandemic unemployment services totaled $43.3 million (three months) and $58.4 million (nine months) for 2021, but are expected to decrease significantly in Q4 2021 and wind down in H1 2022[125] Critical Accounting Policies and Estimates Financial statements rely on estimates for revenue recognition, intangible asset impairment, and share-based compensation - Significant estimates and judgments are made for revenue recognition, amortization and potential impairment of intangible assets and goodwill, and share-based compensation expense[128] - Accounting policies for convertible senior notes were updated due to the adoption of ASU 2020-06[128] Analysis of Results of Operations Operations show substantial revenue growth from acquisitions and SaaS, but gross margins declined, with rising SG&A, R&D, and interest expenses Key Financial Metrics as % of Total Revenues | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | Total revenues | 100.0% | 100.0% | 100.0% | 100.0% | | Subscriptions | 55.0% | 31.2% | 47.9% | 30.8% | | Maintenance | 25.6% | 41.3% | 30.8% | 41.9% | | Operating income | 12.2% | 17.4% | 11.5% | 15.0% | | Net income | 9.6% | 13.8% | 9.2% | 16.9% | - Total revenues increased 60.9% (three months) and 39.0% (nine months) compared to prior year, with 2021 acquisitions contributing 53.4% and 30.7% respectively[120] - Subscriptions revenue grew 183.3% (three months) and 116.2% (nine months), primarily due to the NIC acquisition and a shift to SaaS[121] - Overall gross margin decreased by 7.5% (three months) and 3.4% (nine months) primarily due to NIC's lower margins and increased amortization of acquired software[147] - SG&A expenses increased 52% (three months) and 47% (nine months), driven by acquisition costs, higher stock compensation, and increased staff levels[149] - Interest expense increased significantly due to higher borrowings from the 2021 Credit Agreement and Convertible Senior Notes[153] Revenues Total revenues increased significantly due to the NIC acquisition and SaaS shift, with subscriptions surging NIC Revenue Contribution (in thousands) | Revenue Type | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | |---|---|---| | Subscriptions | $142,346 | $235,627 | | Software services | $8,035 | $13,679 | | Maintenance | $202 | $358 | | Total revenues | $150,583 | $249,664 | Software Licenses and Royalties Revenue (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | ES | $21,238 | $17,798 | $50,064 | $48,432 | | A&T | $1,435 | $2,139 | $5,146 | $7,267 | | NIC | — | — | — | — | | Total | $22,673 | $19,937 | $55,210 | $55,699 | - Software licenses and royalties revenue increased 14% for three months but decreased 1% for nine months, reflecting a shift from on-premise licenses to SaaS offerings[136] Subscriptions Revenue (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | ES | $102,285 | $82,972 | $295,523 | $238,744 | | A&T | $8,311 | $6,318 | $23,829 | $17,907 | | NIC | $142,346 | — | $235,627 | — | | Total | $252,942 | $89,290 | $554,979 | $256,651 | - Subscriptions revenue grew 183% (three months) and 116% (nine months), primarily due to NIC acquisition and new SaaS clients[139] Software Services Revenue (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | ES | $41,985 | $42,640 | $127,517 | $126,488 | | A&T | $4,603 | $5,306 | $14,405 | $17,245 | | NIC | $8,036 | — | $13,679 | — | | Total | $54,624 | $47,946 | $155,601 | $143,733 | - Software services revenue increased 14% (three months) and 8% (nine months), but declined organically due to reduced billable travel[140] Maintenance Revenue (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | ES | $110,231 | $108,270 | $330,024 | $320,447 | | A&T | $7,399 | $9,709 | $26,184 | $28,657 | | NIC | $203 | — | $358 | — | | Total | $117,833 | $117,979 | $356,566 | $349,104 | - Maintenance revenue was essentially flat (three months) and grew 2% (nine months), driven by annual rate increases and growth in installed customer base[141] Appraisal Services Revenue (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | A&T | $7,146 | $5,394 | $19,876 | $15,853 | | Total | $7,146 | $5,394 | $19,876 | $15,853 | - Appraisal services revenue increased 32% (three months) and 25% (nine months) due to relaxed travel restrictions and new revaluation contracts[142] Cost of Revenues and Gross Margins Total cost of revenues increased significantly, leading to a decrease in overall gross margin due to NIC and increased amortization Total Cost of Revenues (in thousands) | Cost Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | Software licenses and royalties | $1,547 | $1,177 | $4,151 | $3,047 | | Acquired software | $12,896 | $7,965 | $32,683 | $23,998 | | Subscriptions, software services and maintenance | $241,944 | $125,881 | $576,035 | $381,947 | | Appraisal services | $4,506 | $3,434 | $13,552 | $11,795 | | Hardware and other | $2,764 | $3,780 | $9,845 | $8,748 | | Total cost of revenues | $263,657 | $142,237 | $636,266 | $429,535 | Gross Margin Percentage by Revenue Type | Revenue Type | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | |---|---|---|---|---| | Software licenses, royalties and acquired software | 36.3% | 54.1% | 33.3% | 51.4% | | Subscriptions, software services and maintenance | 43.1% | 50.7% | 46.0% | 49.0% | | Appraisal services | 36.9% | 36.3% | 31.8% | 25.6% | | Hardware and other | 40.6% | 27.3% | 40.4% | 29.1% | | Overall gross margin | 42.7% | 50.2% | 45.1% | 48.5% | - Overall gross margin decreased by 7.5% (three months) and 3.4% (nine months) primarily due to NIC's lower margins and increased amortization expense from acquired software[147] Selling, General and Administrative Expenses SG&A expenses increased by 52% (three months) and 47% (nine months), driven by acquisition costs, stock compensation, and staff increases Selling, General and Administrative Expenses (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $101,847 | $66,819 | | Nine Months Ended Sep 30 | $289,543 | $196,825 | - SG&A as a percentage of revenues was 22.1% (three months) and 25.0% (nine months) in 2021[149] - Increases attributed to acquisition costs ($2.9 million for three months, $22.7 million for nine months), higher stock compensation ($9.3 million for three months, $22.2 million for nine months), and $1.6 million for NIC CEO separation agreement[149] Research and Development Expense R&D expense increased by 11% (three months) and 5% (nine months), driven by new product development initiatives Research and Development Expense (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $24,002 | $21,642 | | Nine Months Ended Sep 30 | $69,243 | $65,952 | - R&D expense increased 11% (three months) and 5% (nine months), driven by new product development initiatives[150] Amortization of Other Intangibles Amortization expense for customer and trade name intangibles significantly increased by 163% (three months) and 92% (nine months) Amortization of Customer and Trade Name Intangibles (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $14,183 | $5,392 | | Nine Months Ended Sep 30 | $31,015 | $16,176 | - Amortization expense increased significantly due to acquisitions completed in fiscal year 2021[151] Interest Expense Interest expense dramatically increased due to higher borrowings from the 2021 Credit Agreement and Convertible Senior Notes Interest Expense (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $(5,396) | $(254) | | Nine Months Ended Sep 30 | $(18,311) | $(757) | - Interest expense increased significantly due to higher borrowings related to the 2021 Credit Agreement and Convertible Senior Notes[153] Other Income, Net Other income, net, decreased for both periods due to lower invested cash and reduced interest rates Other Income, Net (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $445 | $534 | | Nine Months Ended Sep 30 | $1,249 | $2,497 | - Decrease in other income, net, attributed to lower invested cash and lower interest rates[154] Income Tax Provision Income tax provision was $7.1 million (13.8% effective rate) for three months and $8.9 million (7.7% effective rate) for nine months Income Tax Provision (in thousands) | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | $7,063 | $10,652 | | Nine Months Ended Sep 30 | $8,945 | $(14,096) | Effective Income Tax Rate | Period | 2021 | 2020 | |---|---|---| | Three Months Ended Sep 30 | 13.8% | 21.3% | | Nine Months Ended Sep 30 | 7.7% | (11.1)% | - Changes in effective tax rate primarily driven by excess tax benefits related to stock incentive awards[155] Financial Condition and Liquidity Cash and cash equivalents decreased to $234.1 million due to acquisitions funded by new debt, while operating activities provided $256.7 million Cash and Cash Equivalents (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Cash and cash equivalents | $234.1 | $603.6 | - Operating activities provided $256.7 million in cash for the nine months ended September 30, 2021[159] - Investing activities used $2.1 billion, primarily for acquisitions (NIC, Arx, VendEngine, ReadySub, DataSpec)[161] - Financing activities provided $1.5 billion, mainly from $600 million Convertible Senior Notes and $1.1 billion from the 2021 Credit Agreement[162] - Days Sales Outstanding (DSO) improved to 105 days at September 30, 2021, from 121 days at December 31, 2020[160] - Anticipated 2021 capital spending: $47 million to $49 million, including $21 million capitalized software development[166] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on $842.5 million variable-rate debt; a quarter-point change impacts annual interest by $2.1 million - Primary market risk is interest rate risk on variable-rate indebtedness[167][180] - As of September 30, 2021, $842.5 million principal outstanding borrowings under the 2021 Credit Agreement[168] - Effective average interest rate for borrowings was 3.25% for the nine months ended September 30, 2021[170] - Each quarter point change in interest rates would result in a $2.1 million change in annual interest expense[170][180] ITEM 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were effective as of September 30, 2021[171] - No material changes in internal control over financial reporting during the three months ended September 30, 2021[172] PART II. OTHER INFORMATION Presents other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits ITEM 1. Legal Proceedings Tyler Technologies is not involved in any material legal proceedings, other than routine litigation - No material legal proceedings pending, other than routine litigation incidental to the business[173] ITEM 1A. Risk Factors Risk factors include increased indebtedness, covenant restrictions, interest rate risk, and potential dilution from Convertible Senior Notes - Material changes in risk factors during the quarter relate to increased indebtedness[174][175] - Servicing $600 million Convertible Senior Notes and $842.5 million under the 2021 Credit Agreement requires significant cash flow, with potential for additional debt up to $1.4 billion[175][176] - Covenant restrictions under the 2021 Credit Agreement and Indenture may limit ability to incur additional debt, permit liens, make investments/acquisitions, or make restricted payments[179] - Variable rate indebtedness exposes the company to interest rate risk; a quarter-point change in interest rates would result in a $2.1 million change in annual interest expense[180] - Conditional conversion feature of Convertible Senior Notes, if triggered, could require cash payments, affecting liquidity, or lead to reclassification as a current liability[181] - Conversion of Convertible Senior Notes could result in significant dilution to existing shareholders[182] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report for the period - None[183] ITEM 3. Defaults Upon Senior Securities No defaults upon senior securities to report for the period - None[183] ITEM 4. Submission of Matters to a Vote of Security Holders No matters submitted to a vote of security holders during the period - None[183] ITEM 5. Other Information No other information to report for the period - None[183] ITEM 6. Exhibits Lists exhibits filed with Form 10-Q, including Sarbanes-Oxley certifications, the 2021 Credit Agreement, and XBRL documents - Includes Certifications Pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002 (Exhibits 31.1, 31.2, 32.1)[184] - Credit Agreement dated April 21, 2021, filed as Exhibit 4.1[184] - Various Inline XBRL documents (Instance, Schema, Calculation, Labels, Definition, Presentation Linkbase Documents) are included[184] Signatures The report is signed by Brian K. Miller, EVP and CFO, on November 1, 2021 - Signed by Brian K. Miller, Executive Vice President and Chief Financial Officer, on November 1, 2021[185]