Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The following documents are filed as part of this Annual Report:

(a)		(1	)		The financial statements are filed as part of this Annual Report.
							Page
					Reports of Independent Registered Public Accounting Firm		F-1
					Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017		F-4
					Consolidated Balance Sheets as of December 31, 2019 and 2018		F-5
					Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017		F-7
					Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017		F-6
					Notes to Consolidated Financial Statements		F-8
		(2	)		Financial statement schedules:
					There are no financial statement schedules filed as part of this Annual Report, since the required information is included in the financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.
		(3	)		Exhibits
					Certain of the exhibits to this Annual Report are hereby incorporated by reference, as specified:

Exhibit Number		Description
3.1		Restated Certificate of Incorporation of Tyler Three, as amended through May 14, 1990, and Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1990, and incorporated by reference herein).
3.2		Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated February 19, 1998, and incorporated by reference herein).
3.3		Amended and Restated By-Laws of Tyler Corporation, dated October 20, 2015 (filed as Exhibit 3.3 to our Form 10-Q for the quarter ended September 30, 2015, and incorporated by reference herein).
3.4		Certificate of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for the year ended December 31, 2000, and incorporated by reference herein).
4.1		Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our registration statement no. 33-33505 and incorporated by reference herein).
4.2		Credit Agreement dated September 30, 2019, among Tyler Technologies, Inc. and Wells Fargo Bank, N. A. as Administrative Agent and other lenders party hereto (filed as Exhibit 10.1 to our Form 8-K dated October 02, 2019, and incorporated by reference herein).
10.1		Employee Stock Purchase Plan (filed as Exhibit 10.1 to our registration statement 333-182318 dated June 25, 2012 and incorporated by reference herein).
10.2		Employment and Non-Competition Agreement between Tyler Technologies, Inc. and John S. Marr Jr. effective February 26, 2018 (filed as Exhibit 10.1 to our Form 8-K dated March 9, 2018 and incorporated by reference herein).

Exhibit Number		Description
10.3		Employment and Non-Competition Agreement between Tyler Technologies, Inc. and Brian K. Miller effective February 26, 2018 (filed as Exhibit 10.3 to our Form 8-K dated March 9, 2018 and incorporated by reference herein). .
10.4		Employment and Non-Competition Agreement between Tyler Technologies, Inc. and H. Lynn Moore, Jr effective February 26, 2018 (filed as Exhibit 10.2 to our Form 8-K dated March 9, 2018 and incorporated by reference herein).
10.5		Agreement and plan of merger by and among Tyler Technologies, Inc. TMP Subsidiary, Inc., MP Holding Parent, Inc. (filed as Exhibit 10.7 to our Form 10-K dated February 20, 2019 and incorporated by reference herein).
10.6		Tyler Technologies, Inc. 2018 Stock Option Plan effective as of May 9, 2018 (filed as Appendix A to the registrant's Proxy Statement filed with the Commission on March 28, 2018 and incorporated by reference herein).
*23		Consent of Independent Registered Public Accounting Firm.
*31.1		Rule 13a-14(a) Certification by Principal Executive Officer.
*31.2		Rule 13a-14(a) Certification by Principal Financial Officer.
*32		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
*101.INS		Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags, including Cover Page XBRL tags, are embedded within the Inline XBRL Document.
*101.SCH		Inline XBRL Taxonomy Extension Schema Document.
*101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
*101.LAB		Inline XBRL Extenstion Labels Linkbase Document.
*101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
*101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*	— Filed herewith.

A copy of each exhibit may be obtained at a price of 15 cents per page, with a $10.00 minimum order, by writing Investor Relations, 5101 Tennyson Parkway, Plano, Texas, 75024.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		TYLER TECHNOLOGIES, INC.
Date: February 19, 2020		By:		/s/ H. Lynn Moore, Jr.
				H. Lynn Moore, Jr.
				President and Chief Executive Officer
				(principal executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.

Date: February 19, 2020		By:		/s/ John S. Marr, Jr.
				John S. Marr, Jr.
				Executive Chairman of the Board
				Director
Date: February 19, 2020		By:		/s/ H. Lynn Moore, Jr.
				H. Lynn Moore, Jr.
				President and Chief Executive Officer
				(principal executive officer)
Date: February 19, 2020		By:		/s/ Brian K. Miller
				Brian K. Miller
				Executive Vice President and Chief Financial Officer
				(principal financial officer)
Date: February 19, 2020		By:		/s/ W. Michael Smith
				W. Michael Smith
				Chief Accounting Officer
				(principal accounting officer)
Date: February 19, 2020		By:		/s/ Donald R. Brattain
				Donald R. Brattain
				Director
Date: February 19, 2020		By:		/s/ Glenn A. Carter
				Glenn A. Carter
				Director
Date: February 19, 2020		By:		/s/ Brenda A. Cline
				Brenda A. Cline
				Director

Date: February 19, 2020		By:		/s/ J. Luther King
				J. Luther King
				Director
Date: February 19, 2020		By:		/s/ Daniel M. Pope
				Daniel M. Pope
				Director
Date: February 19, 2020		By:		/s/ Dustin R.Womble
				Dustin R. Womble
				Director

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Tyler Technologies, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

	Estimation of hours for certain progress-to-completion (POC) arrangements
Description of the Matter	As described in Note 1"Summary of Significant Accounting Policies" to the consolidated financial statements under "Revenue Recognition," many of the Company’s software arrangements involve "off-the-shelf" software. For arrangements that involve significant production, modification or customization of the software, or where software services are otherwise not considered distinct, the Company recognizes revenue over time based on a measurement of progress-to-completion (POC). The Company measures POC primarily using labor hours incurred, believing it best depicts the pattern of transfer of control to the customer, which occurs as the Company incurs costs on its contracts. Estimates of budgeted total hours for these arrangements requires management judgment. Auditing management’s estimates of total budgeted contract hours required additional audit effort due to the existence of management judgment required to make these estimates for arrangements that are completed over an extended period. These estimates require ongoing monitoring by management and may require revision over time.

F-1

How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to review contract progress-to-date and total budgeted hours, inclusive of executed contract amendments and change orders. To test the appropriateness of management’s assessment of contract progress-to-date, our audit procedures included, among others, obtaining an understanding of any increase or decrease to budgeted hours via contract amendments or change orders, observing quarterly POC meetings where the Company discussed contract progress-to-date and evaluated the appropriateness of contract estimated hours to complete, reviewing signed Company attestations as to the contracts’ progress toward completion, performing a sensitivity analysis to assess the impact of changes to the budgeted hours on the amount of revenue recognized, and performing an analysis of completed contracts to compare actual hours incurred upon completion to the original budget.
	Accounting for the acquisition of MP Holdings Parent, Inc.
Description of the Matter	As described in Note 2 "Acquisitions" to the consolidated financial statements, the Company completed three acquisitions during 2019 for net consideration of $226.5 million. The most significant of these was the acquisition of MP Holdings Parent, Inc. (MicroPact) for net consideration of $202.2 million. The transactions were accounted for as business combinations. Auditing the Company’s accounting for the MicroPact acquisition was more complex due to the significant estimations used by management in determining the fair values of assets acquired and liabilities assumed, in particular the fair values of identified intangible assets of $136.1 million, the most significant of which consisted of customer relationships and developed technology, both of which utilize prospective financial information. The Company valued customer relationships using the multi-period excess earnings model. The significant assumptions used in this model included the attrition rate, weighted average cost of capital and existing customer growth. The Company valued the developed technology using the relief-from-royalty method. The significant assumptions used in this method included the obsolescence rate and weighted average cost of capital. The significant assumptions used in the valuation of the intangible assets are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over its accounting for the MicroPact acquisition. For example, we tested controls over the recognition and measurement of consideration transferred, as well as management’s review of the valuation methods and significant underlying assumptions for each identified intangible asset. To test the estimated fair values of the acquired customer relationships and developed technology, we performed audit procedures that included, among others, evaluating the Company’s selection of the valuation methodology, evaluating the significant assumptions used in the Company’s valuation calculations and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. Additionally, we performed sensitivity analyses and compared significant assumptions to forecasts, the assumptions used to value similar assets in other acquisitions and to historical financial results of both the Company and the acquiree, among other procedures. We also evaluated the Company’s acquisition and related purchase accounting disclosures included in Note 2 "Acquisitions".

/s/ ERNST & YOUNG LLP

We have served as the Company’s auditor since 1966.

Dallas, Texas

February 19, 2020

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Tyler Technologies, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Tyler Technologies, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Tyler Technologies, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of MP Holdings Parent, Inc. (MicroPact), which is included in the 2019 consolidated financial statements of the Company and constituted 11.5% of total assets as of December 31, 2019 and 5.8% of total revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of MicroPact.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 19, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ ERNST & YOUNG LLP

Dallas, Texas

February 19, 2020

F-3

Tyler Technologies, Inc.

Consolidated Statements of Comprehensive Income

For the years ended December 31

(In thousands, except per share amounts)

	2019				2018				2017
Revenues:
Software licenses and royalties	$	100,205			$	93,441			$	86,242
Subscriptions	296,352				220,547				172,176
Software services	213,061				191,269				180,460
Maintenance	430,318				384,521				359,319
Appraisal services	23,479				21,846				25,023
Hardware and other	23,012				23,658				17,679
Total revenues	1,086,427				935,282				840,899
Cost of revenues:
Software licenses and royalties	3,938				3,802				3,321
Acquired software	30,642				22,972				21,686
Software services, maintenance and subscriptions	502,138				438,923				387,634
Appraisal services	15,337				14,299				16,286
Hardware and other	17,472				15,708				12,595
Total cost of revenues	569,527				495,704				441,522
Gross profit	516,900				439,578				399,377
Selling, general and administrative expenses	257,746				207,605				175,914
Research and development expense	81,342				63,264				47,324
Amortization of customer and trade name intangibles	21,445				16,217				13,381
Operating income	156,367				152,492				162,758
Other income, net	3,471				3,378				698
Income before income taxes	159,838				155,870				163,456
Income tax provision (benefit)	13,311				8,408				(6,115		)
Net income	$	146,527			$	147,462			$	169,571
Earnings per common share:
Basic	$	3.79			$	3.84			$	4.55
Diluted	$	3.65			$	3.68			$	4.32

See accompanying notes.

F-4

Tyler Technologies, Inc.

Consolidated Balance Sheets

(In thousands, except par value and share amounts)

	12/31/2019				12/31/2018
ASSETS
Current assets:
Cash and cash equivalents	$	232,682			$	134,279
Accounts receivable (less allowance for losses and sales adjustments of $5,738 in 2019 and $4,647 in 2018)	374,089				298,912
Short-term investments	39,399				44,306
Prepaid expenses	24,717				33,258
Income tax receivable	6,482				4,697
Other current assets	2,328				3,406
Total current assets	679,697				518,858
Accounts receivable, long-term	22,432				16,020
Operating lease right-of-use assets	18,992				—
Property and equipment, net	171,861				155,177
Other assets:
Goodwill	840,117				753,718
Other intangibles, net	378,914				276,852
Non-current investments and other assets	79,601				70,338
	$	2,191,614			$	1,790,963
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	14,977			$	6,910
Accrued liabilities	75,234				66,480
Operating lease liabilities	6,387				—
Deferred revenue	412,495				350,512
Total current liabilities	509,093				423,902
Revolving line of credit	—				—
Deferred revenue, long-term	199				424
Deferred income taxes	48,442				41,791
Operating lease liabilities, long-term	16,822				—
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued	—				—
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2019 and 2018	481				481
Additional paid-in capital	739,478				731,435
Accumulated other comprehensive loss, net of tax	(46		)		(46		)
Retained earnings	917,336				771,925
Treasury stock, at cost; 8,839,352 and 9,872,505 shares in 2019 and 2018, respectively	(40,191		)		(178,949		)
Total shareholders' equity	1,617,058				1,324,846
	$	2,191,614			$	1,790,963

See accompanying notes.

F-5

Tyler Technologies, Inc.

Consolidated Statements of Cash Flows

For the years ended December 31

(In thousands)

	2019				2018				2017
Cash flows from operating activities:
Net income	$	146,527			$	147,462			$	169,571
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization	76,672				61,759				53,395
Share-based compensation expense	59,967				52,740				37,348
Provision for losses and sales adjustments - accounts receivable	1,636				(569		)		2,031
Operating lease right-of-use assets - non cash	5,397				—				—
Deferred income tax benefit	(6,088		)		(5,069		)		(33,664		)
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable	(65,738		)		(50,916		)		(33,091		)
Income tax receivable	(1,925		)		6,642				(8,444		)
Prepaid expenses and other current assets	(8,976		)		(588		)		(6,958		)
Accounts payable	7,403				(2,416		)		878
Operating lease liabilities	(6,113		)		—				—
Accrued liabilities	1,516				(2,445		)		6,050
Deferred revenue	44,442				43,603				8,639
Net cash provided by operating activities	254,720				250,203				195,755
Cash flows from investing activities:
Additions to property and equipment	(37,236		)		(27,424		)		(43,057		)
Purchase of marketable security investments	(54,742		)		(115,625		)		(59,779		)
Proceeds from marketable security investments	70,796				81,205				28,786
Capitalized software development costs	(4,804		)		—				—
Cost of acquisitions, net of cash acquired	(218,734		)		(178,093		)		(11,344		)
(Increase) decrease in other	(295		)		1,682				(1		)
Net cash used by investing activities	(245,015		)		(238,255		)		(85,395		)
Cash flows from financing activities:
Decrease in net borrowings on revolving line of credit	—				—				(10,000		)
Purchase of treasury shares	(17,786		)		(146,553		)		(7,474		)
Proceeds from exercise of stock options	96,908				74,907				49,845
Contributions from employee stock purchase plan	9,576				8,051				7,044
Net cash provided (used) by financing activities	88,698				(63,595		)		39,415
Net increase (decrease) in cash and cash equivalents	98,403				(51,647		)		149,775
Cash and cash equivalents at beginning of period	134,279				185,926				36,151
Cash and cash equivalents at end of period	$	232,682			$	134,279			$	185,926

See accompanying notes.

F-6

Tyler Technologies, Inc.

Consolidated Statements of Shareholders’ Equity

For the years ended December 31, 2019, 2018 and 2017

(In thousands)

	Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock							Total Shareholders' Equity
	Shares			Amount							Shares			Amount
Balance at December 31, 2016	48,148			$	481			$	556,663			$	(46	)		$	454,892			(11,382	)		$	(77,449	)		$	934,541
Net income	—			—				—				—				169,571				—			—				169,571
Issuance of shares pursuant to stock compensation plan	—			—				28,174				—				—				1,113			21,671				49,845
Stock compensation	—			—				37,348				—				—				—			—				37,348
Issuance of shares pursuant to employee stock purchase plan	—			—				4,682				—				—				51			2,362				7,044
Treasury stock purchases	—			—				—				—				—				(44	)		(6,613		)		(6,613		)
Balance at December 31, 2017	48,148			481				626,867				(46		)		624,463				(10,262	)		(60,029		)		1,191,736
Net income	—			—				—				—				147,462				—			—				147,462
Issuance of shares pursuant to stock compensation plan	—			—				44,458				—				—				1,126			30,449				74,907
Stock compensation	—			—				52,740				—				—				—			—				52,740
Issuance of shares pursuant to employee stock purchase plan	—			—				7,370				—				—				45			681				8,051
Treasury stock purchases	—			—				—				—				—				(781	)		(150,050		)		(150,050		)
Balance at December 31, 2018	48,148			481				731,435				(46		)		771,925				(9,872	)		(178,949		)		1,324,846
Net income	—			—				—				—				146,527				—			—				146,527
Retained earnings adjustment-adoption of Topic 842 Leases, net of taxes	—			—				—				—				(1,116		)		—			—				(1,116		)
Exercise of stock options and vesting of restricted stock units	—			—				(52,833		)		—				—				1,075			149,741				96,908
Employee taxes paid for withheld shares for taxes upon equity award	—			—				—				—				—				(23	)		(5,361		)		(5,361		)
Stock compensation	—			—				59,967				—				—				—			—				59,967
Issuance of shares pursuant to employee stock purchase plan	—			—				909				—				—				53			8,667				9,576
Treasury stock purchases	—			—				—				—				—				(72	)		(14,289		)		(14,289		)
Balance at December 31, 2019	48,148			$	481			$	739,478			$	(46	)		$	917,336			(8,839	)		$	(40,191	)		$	1,617,058

See accompanying notes.

F-7

Tyler Technologies, Inc.

Notes to Consolidated Financial Statements

(Tables in thousands, except per share data)

(1)	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

We provide integrated software systems and related services for the public sector, with a focus on local governments. We develop and market a broad line of software solutions and services to address the information technology (“IT”) needs primarily of cities, counties, schools and other local government entities. In addition, we provide professional IT services, including software and hardware installation, data conversion, training, and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide subscription-based services such as software as a service (“SaaS”) arrangements, which primarily utilize the Tyler private cloud, and electronic document filing solutions (“e-filing”). In addition, we provide property appraisal outsourcing services for taxing jurisdictions.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include our parent company and sixteen subsidiaries, which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). We had no items of other comprehensive income (loss) during the years ended December 31, 2019, 2018 and 2017.

CASH AND CASH EQUIVALENTS

Cash in excess of that necessary for operating requirements is invested in short-term, highly liquid, income-producing investments. Investments with original maturities of three months or less are classified as cash and cash equivalents, which primarily consist of cash on deposit with several banks and money market funds. Cash and cash equivalents are stated at cost, which approximates market value.

REVENUE RECOGNITION

Nature of Products and Services

We earn revenue from software licenses, royalties, subscription-based services, software services, post-contract customer support (“PCS” or “maintenance”), hardware, and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:

•	Identification of the contract, or contracts, with a customer

•	Identification of the performance obligations in the contract

•	Determination of the transaction price

•	Allocation of the transaction price to the performance obligations in the contract

•	Recognition of revenue when, or as, we satisfy a performance obligation

Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.

F-8

Software Arrangements:

Software Licenses and Royalties

Many of our software arrangements involve “off-the-shelf” software. We recognize the revenue allocable to "off-the-shelf" software licenses and specified upgrades at a point in time when control of the software license transfers to the customer, unless the software is not considered distinct. We consider off-the-shelf software to be distinct when it can be added to an arrangement with minor changes in the underlying code, it can be used by the customer for the customer’s purpose upon installation, and remaining services such as training are not considered highly interdependent or interrelated to the product's functionality.

For arrangements that involve significant production, modification or customization of the software, or where software services are otherwise not considered distinct, we recognize revenue over time by measuring progress-to-completion. We measure progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. These arrangements are often implemented over an extended period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.

Software license fees are billed in accordance with the contract terms. Typically, a majority of the fee is due when access to the software license is made available to the customer and the remainder of the fee due over a passage of time stipulated by the contract. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.

We recognize royalty revenue when the sale occurs under the terms of our third-party royalty arrangements. Currently, our third-party royalties are recognized on an estimated basis and are trued up when we receive notice of amounts we are entitled to receive. We typically receive notice of royalty revenues we are entitled to and billed on a quarterly basis in the quarter immediately following the royalty reporting period.

Software Services

As noted above, some of our software arrangements include services considered highly interdependent or highly interrelated or require significant customization to meet the customer's desired functionality. For these software arrangements, both the software licenses and related software services revenue are not distinct and are recognized over time using the progress-to-completion method. We measure progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Contract fees are typically billed on a milestone basis as defined within contract terms. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met. When software services are distinct, the fee allocable to the service element is recognized over the time we perform the services and is billed on a time and material basis.

Post-Contract Customer Support

Our customers generally enter into PCS agreements when they purchase our software licenses. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. PCS is considered distinct when purchased with our software licenses. Our PCS agreements are typically renewable annually. PCS is recognized over time on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred.

Computer Hardware Equipment

Revenue allocable to computer hardware equipment is recognized at a point in time when control of the equipment is transferred to the customer.

Subscription-Based Services:

Subscription-based services consist primarily of revenues derived from SaaS arrangements, typically utilizing the Tyler private cloud, and electronic filing transactions. Revenue from subscription-based services is generally recognized over time on a ratable basis over the contract term, beginning on the date that our service is made available to the customer. Our subscription contracts are generally three to five years or longer in length, billed annually in advance, and non-cancelable.

F-9

For SaaS arrangements, we evaluate whether the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third-party to host the software. We allocate contract value to each performance obligation of the arrangement that qualifies for treatment as a distinct element based on estimated SSP. We recognize SaaS arrangements services ratably over the term of the arrangement, which range from one to ten years, but are typically for a period of three to five years. For software services associated with certain SaaS arrangements, we have concluded that the services are not distinct, and we recognize the revenue ratably over the remaining contractual period once we have provided the customer access to the software. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.

Electronic filing transaction fees primarily pertain to documents filed with the courts by attorneys and other third-parties via our e-filing services and retrieval of filed documents via our access services. For each document filed with a court, the filer generally pays a transaction fee and a court filing fee to us and we remit a portion of the transaction fee and the filing fee to the court. We record as revenue the transaction fee, while the portion of the transaction fee remitted to the courts is recorded as cost of revenues as we are acting as a principal in the arrangement. Court filing fees collected on behalf of the courts and remitted to the courts are recorded on a net basis and thus do not affect the statement of comprehensive income.

Other transaction-based fees primary relate to online payment services, which are offered with the assistance of third-party vendors. In general, when we are the principal in a transaction based on the factors identified in ASC 606-10-55-36 through 55-40, we record the revenue and related costs on a gross basis. Otherwise, we net the cost of revenue associated with the service against the gross revenue (amount billed to the customer) and record the net amount as revenue.

For e-filing transaction fees and other transaction-based revenues, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period.

Costs of performing services under subscription-based arrangements are expensed as incurred, except for certain direct and incremental contract origination and set-up costs associated with SaaS arrangements. Such direct and incremental costs are capitalized and amortized ratably over the useful life.

Appraisal Services:

For our property appraisal projects, we recognize revenue using the progress-to-completion method since many of these projects are executed over one to three-year periods and consist of various unique activities. Appraisal services require a significant level of integration and interdependency with various individual service components; therefore, the service components are not considered distinct. Appraisal services are recognized over time by measuring progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. These arrangements are often executed over an extended period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent. Contract fees are typically billed on a milestone basis as defined within contract terms. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.

Significant Judgments:

Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software services and recognized over time.

The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.

F-10

For arrangements that involve significant production, modification or customization of the software, or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.

Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.

Refer to Note 15 - "Disaggregation of Revenue" for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.

Contract Balances:

Accounts receivable and allowance for doubtful accounts and sales adjustments

Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

We maintain allowances for doubtful accounts, which are provided at the time the revenue is recognized. Since most of our customers are domestic governmental entities, we rarely incur a loss resulting from credit risk associated with the inability of a customer to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for doubtful accounts may require revision include, but are not limited to, deterioration of a customer’s financial condition, failure to manage our customer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products.

The following table summarizes the changes in the allowances for doubtful accounts and sales adjustments (in thousands):

	Years Ended December 31,
	2019				2018				2017
Balance at beginning of year	$	4,647			$	5,427			$	3,396
Provisions for losses and sales adjustments - accounts receivable	1,636				(569		)		2,031
Collection of accounts previously written off	(545		)		(211		)		—
Balance at end of year	$	5,738			$	4,647			$	5,427

The allowance for doubtful accounts and sales adjustments reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

F-11

In connection with our appraisal services contracts and certain software services contracts, we may perform work prior to when the software and services are billable and/or payable pursuant to the contract. Unbilled revenue is not billable at the balance sheet date but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the value of products delivered or services performed in the event of early termination. We have historically recorded such unbilled receivables (costs and estimated profit in excess of billings) in connection with (1) property appraisal services contracts accounted for using progress-to-completion method of revenue recognition using labor hours as a measure of progress towards completion in which the services are performed in one accounting period but the billing normally occurs subsequently and may span another accounting period; (2) software services contracts accounted for using progress-to-completion method of revenue recognition using labor hours as a measure of progress towards completion in which the services are performed in one accounting period but the billing for the software element of the arrangement may be based upon the specific phase of the implementation; (3) software revenue for which we have recognized revenue at the point in time when the software is made available to the customer but the billing has not yet been submitted to the customer; (4) some of our contracts which provide for an amount to be withheld from a progress billing (generally between 5% and 20% retention) until final and satisfactory project completion is achieved; and (5) in a limited number of cases, extended payment terms, which may be granted to customers with whom we generally have a long-term relationship and favorable collection history.

As of December 31, 2019, and December 31, 2018, total current and long-term accounts receivable, net of allowance for doubtful accounts, was $396.5 million and $314.9 million, respectively. We have recorded unbilled receivables of $134.0 million and $104.2 million at December 31, 2019, and December 31, 2018, respectively. Included in unbilled receivables are retention receivables of $13.1 million and $12.2 million at December 31, 2019, and December 31, 2018, respectively, which become payable upon the completion of the contract or completion of our fieldwork and formal hearings. Unbilled receivables expected to be collected within one year have been included with accounts receivable, current portion in the accompanying consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with accounts receivable, long-term portion in the accompanying consolidated balance sheets.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises term licenses that are invoiced annually with revenue recognized upfront.

Deferred Revenue

The majority of deferred revenue consists of deferred maintenance revenue that has been billed based on contractual terms in the underlying arrangement, with the remaining balance consisting of payments received in advance of revenue being earned under software licensing, subscription-based services, software and appraisal services and hardware installation. Refer to Note 16 - "Deferred Revenue and Performance Obligations" for further information, including deferred revenue by segment and changes in deferred revenue during the period.

Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three to seven years. We utilized the "portfolio approach" practical expedient in ASC 606-10-10-4, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics because the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. Using the 'portfolio approach', we determined the period of benefit by taking into consideration our customer contracts, our technology life-cycle and other factors. Sales commissions for renewal contracts are generally not paid in connection with the renewal of a contract. In the small number of instances where a commission is paid on a renewal, it is not commensurate with the commission paid on the initial sale and is recognized over the term of renewal, which is generally one year. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying consolidated statements of income. Refer to Note 17 - "Deferred Commissions" for further information.

Prepaid expenses and other current assets include direct and incremental costs such as commissions associated with arrangements for which revenue recognition has been deferred. Such costs are expensed at the time the related revenue is recognized.

F-12

USE OF ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue recognition, determining the nature and timing of satisfaction of performance obligations, determining the SSP of performance obligations, variable consideration, and other obligations such as returns and refunds; loss contingencies; the estimated useful life of deferred commissions; the carrying amount and estimated useful lives of intangible assets; the carrying amount of operating lease right-of-use assets and operating lease liabilities; determining share-based compensation expense; the valuation allowance for receivables; and determining the potential outcome of future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Actual results could differ from estimates.

PROPERTY AND EQUIPMENT, NET

Property, equipment and purchased software are recorded at original cost and increased by the cost of any significant improvements after purchase. We expense maintenance and repairs when incurred. Depreciation and amortization is calculated using the straight-line method over the shorter of the asset’s estimated useful life or the term of the lease in the case of leasehold improvements. For income tax purposes, we use accelerated depreciation methods as allowed by tax laws.

RESEARCH AND DEVELOPMENT COSTS

We expensed research and development expense of $81.3 million in 2019, $63.3 million in 2018, and $47.3 million in 2017.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as “temporary differences". We record the tax effect of these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in the future periods) and “deferred tax liabilities” (generally items that we received a tax deduction for, which have not yet been recorded in the income statement). The deferred tax assets and liabilities are measured using enacted tax rules and laws that are expected to be in effect when the temporary differences are expected to be recovered or settled. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be "realized." On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate U.S. federal tax rate from a maximum of 35% to a flat 21% rate and transitions from a worldwide tax system to a territorial tax system. Under ASC 740 Income Taxes, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.

SHARE-BASED COMPENSATION

We have a share-based award plan that provides for the grant of stock options, restricted stock units, and performance share units to key employees, directors and non-employee consultants. Stock options generally vest after three to six years of continuous service from the date of grant and have a contractual term of 10 years. Restricted stock unit grants generally vest ratably over three to five years of continuous service from the date of grant. Each performance share unit represents the right to receive one share of our common stock based on our achievement of certain financial performance targets during applicable performance periods. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718, Stock Compensation. See Note 9 – “Share-Based Compensation” for further information.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including identifiable intangible assets, in connection with our business combinations. Upon acquisition, goodwill is assigned to the reporting unit that is expected to benefit from the synergies of the business combination, which is the reporting unit to which the related acquired technology is assigned. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by executive management.

F-13

We assess goodwill for impairment annually as of April 1st, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the quantitative assessment described below. If it is determined through the evaluation of events or circumstances that the carrying value may not be recoverable, we perform a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the estimated fair value of that reporting unit, the carrying value of the reporting unit's goodwill is reduced to its fair value through an adjustment to the goodwill balance, resulting in an impairment charge. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions. The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We evaluate the reasonableness of the fair value calculations of our reporting units by comparing the total of the fair value of all of our reporting units to our total market capitalization. Our annual goodwill impairment analysis, which we performed qualitatively during the second quarter of 2019, did not result in an impairment charge.

There have been no impairments of intangible assets in any of the periods presented. See Note 4 - "Goodwill and Other Intangible Assets" for additional information.

Other Intangible Assets

We make judgments about the recoverability of purchased intangible assets other than goodwill whenever events or changes in circumstances indicate that an impairment may exist. Customer base and acquired software each comprise approximately half of our purchased intangible assets other than goodwill. We review our customer turnover each year for indications of impairment. Our customer turnover has historically been very low. If indications of impairment are determined to exist, we measure the recoverability of assets by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the assets exceeds their estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets. There have been no impairments of intangible assets in any of the periods presented.

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate whether current facts or circumstances indicate that the carrying value of our property and equipment or other long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, we measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset or appropriate grouping of assets and the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of the assets exceeds their estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and would no longer be depreciated. The assets and liabilities of a disposed group or classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. There have been no significant impairments of long-lived assets in any of the periods presented.

COSTS OF COMPUTER SOFTWARE

We capitalize software development costs upon the establishment of technological feasibility and prior to the availability of the product for general release to customers. Software development costs primarily consist of personnel costs and rent for related office space. We capitalized approximately $4.8 million of software development costs in 2019. We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the product’s remaining estimated economic life of, generally, five years. Amortization of software development costs was approximately $296,000 in 2019, and is included in cost of software license revenue in the accompanying consolidated statements of comprehensive income. We have not capitalized any internal use software development costs in any of the periods presented.

CONTINGENT PURCHASE CONSIDERATION

Contingent future cash payments related to acquisitions are recognized at fair value as of the acquisition date and included in the determination of the acquisition date purchase price. Subsequent changes in the fair value of the contingent future cash payments are recognized in earnings in the period that the change occurs.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivables, accounts payables, short-term obligations and certain other assets at cost approximate fair value because of the short maturity of these instruments. The fair value of our revolving line of credit would approximate book value as of December 31, 2019, because our interest rates reset approximately every 30 days or less. See Note 6 – “Revolving Line of Credit” for further discussion.

F-14

As of December 31, 2019, we have $81.6 million in investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates ranging from 2020 through 2023. We intend to hold these bonds to maturity and have classified them as such. We believe cost approximates fair value. The fair values of these securities are considered Level II as they are based on inputs from quoted prices in markets that are not active or from other observable market data. These investments are included in short-term investments and non-current investments and other assets.

As of December 31, 2019, we have $15.0 million invested in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in convertible preferred stock is accounted under the cost method because we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values. Our investment is carried at cost less any impairment write-downs. Our cost method investments are assessed annually for impairment. We do not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. There has been no impairment of our cost method investment for the periods presented. This investment is included in non-current investments and other assets in the accompanying consolidated balance sheets.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable from trade customers, and investments in marketable securities. Our cash and cash equivalents primarily consist of operating account balances and money market funds, which are maintained at several major domestic financial institutions and the balances often exceed insured amounts. As of December 31, 2019, we had cash and cash equivalents of $232.7 million. We perform periodic evaluations of the credit standing of these financial institutions.

Concentrations of credit risk with respect to receivables are limited due to the size and geographical diversity of our customer base. Historically, our credit losses have not been significant. As a result, we do not believe we have any significant concentrations of credit risk as of December 31, 2019.

We maintain allowances for doubtful accounts, which are provided at the time the revenue is recognized. Since most of our customers are domestic governmental entities, we rarely incur a loss resulting from the inability of a customer to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for doubtful accounts may require revision include, but are not limited to, deterioration of a customer’s financial condition, failure to manage our customer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products.

LEASES

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, and operating lease liabilities, current and long-term, on our consolidated balance sheets. We currently do not have any finance lease arrangements.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

INDEMNIFICATION

Most of our software license agreements indemnify our customers in the event that the software sold infringes upon the intellectual property rights of a third-party. These agreements typically provide that in such event we will either modify or replace the software so that it becomes non-infringing or procure for the customer the right to use the software. We have recorded no liability associated with these indemnifications, as we are not aware of any pending or threatened infringement actions that are possible losses. We believe the estimated fair value of these intellectual property indemnification clauses is minimal.

We have also agreed to indemnify our officers and board members if they are named or threatened to be named as a party to any proceeding by reason of the fact that they acted in such capacity. We maintain directors’ and officers’ liability insurance coverage to protect against any such losses. We have recorded no liability associated with these indemnifications. Because of our insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.

F-15

RECLASSIFICATIONS

Certain amounts for previous years have been reclassified to conform to the current year presentation.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Leases. We adopted ASU No. 2016-02, Leases ("Topic 842") using the transition method that allows us to initially apply the guidance at the adoption date of January 1, 2019, and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We used the package of practical expedients that allows us to not reassess: (1) lease classification for any expired or existing leases and (2) initial direct costs for any expired or existing leases. We did not elect to use the hindsight application for evaluating the life of the lease arrangement. The impact of adoption is reflected in the financial information herein. For additional details, see Note 11 to our consolidated financial statements.

The impact of Topic 842 on our consolidated balance sheet beginning January 1, 2019, included the recognition of ROU assets and operating lease liabilities, while our accounting for finance leases remained substantially unchanged. We had no finance leases prior to the adoption of Topic 842 and continue to have none as of December 31, 2019.

Amounts recognized at January 1, 2019, for operating leases were as follow (in thousands):

Operating lease right-of-use assets		$	15,633
Operating lease liabilities		(4,344		)
Operating lease liabilities, long-term		(12,405		)
Retained earnings		$	(1,116	)

NEW ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We will adopt the new standard in the first quarter of 2020. We have evaluated the impact of this standard on our consolidated financial statements, including accounting policies, processes and systems. Based on the nature of the Company's customer base and historical nature of losses, we do not expect the impact to be material upon adoption.

(2)	ACQUISITIONS

2019

On October 30, 2019, we acquired certain assets of Courthouse Technologies, Ltd ("CHT"), an industry-leading provider of jury management systems that offers a fully integrated, end-to-end SaaS solution to manage all facets of juror management, from source list generation to juror processing and payment. The total purchase price was approximately $20.5 million of which $19.1 million was paid in cash and approximately $1.4 million was accrued for working capital and indemnity holdbacks, subject to certain post-closing adjustments.

On February 28, 2019, we acquired all of the capital stock of MP Holdings Parent, Inc. dba MicroPact ("MicroPact"), a leading provider of commercial off-the-shelf ("COTS") solutions, including entellitrak®, a low-code application development platform for case management and business process management used extensively in the public sector. The total purchase price, net of cash acquired of $2.0 million, was approximately $202.2 million consisting of $198.2 million paid in cash and accrued consideration of $6.0 million contingent upon the achievement of certain financial performance objectives.

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

F-16

(In thousands)
Cash		$	1,983
Accounts receivable		10,535
Other current assets		8,979
Other noncurrent assets		10,417
Identifiable intangible assets		136,143
Goodwill		76,319
Accounts payable		(602		)
Accrued expenses		(4,092		)
Other noncurrent liabilities		(8,879		)
Deferred revenue		(13,510		)
Deferred tax liabilities, net		(13,125		)
Total consideration		$	204,168

In connection with this transaction, we acquired total tangible assets of $31.9 million and assumed liabilities of approximately $27.1 million. We recorded goodwill of $76.3 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $136.1 million. The $136.1 million of intangible assets are attributable to customer relationships, acquired software, trade name and favorable fair value of an operating lease and will be amortized over a weighted average period of approximately 11 years. We recorded deferred tax liabilities of $13.1 million related to estimated fair value allocations.

The acquisition of MicroPact augments our product solutions, positions us in new practice areas such as health and human services, and presents opportunities to expand our business across new and complementary markets. We intend to expand our total addressable market through MicroPact's strong presence in the federal market. Therefore, the goodwill of $76.3 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base. In 2019, we recorded adjustments to the preliminary opening balance sheet attributed to changes in accounts receivable, deferred revenue, customer relationships, accrued expenses, working capital holdback and related deferred taxes resulting in a net decrease to goodwill of approximately $5.7 million.

The following unaudited pro forma consolidated operating results information has been prepared as if the MicroPact acquisition had occurred at January 1, 2018, after giving effect to certain adjustments, including amortization of intangibles, interest, transaction costs and tax effects.

		Twelve Months Ended December 31,(unaudited)
		2019				2018
Revenues		$	1,098,226			$	1,009,427
Net income		146,200				146,998
Basic earnings per share		$	3.78			$	3.82
Diluted earnings per share		$	3.65			$	3.66

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

On February 1, 2019, we acquired all the assets of Civic, LLC ("MyCivic"), a company that provides software solutions to connect communities. The total purchase price was $3.7 million in cash.

As of December 31, 2019, the purchase price allocations for MicroPact and MyCivic are complete. As of December 31, 2019, the purchase price allocation for CHT is not yet complete; therefore, the preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables and deferred revenue and related deferred taxes are subject to change as valuations are finalized.

The operating results of all 2019 acquisitions are included with the operating results of the Enterprise Software segment since their date of acquisition. Revenues from MicroPact included in Tyler's results of operations totaled approximately $63.0 million and the net loss was approximately $98,000 from the date of acquisition through December 31, 2019. The impact of the MyCivic and CHT

F-17

acquisitions, individually and in the aggregate, on our operating results, assets and liabilities is not material. In 2019, we incurred fees of approximately $1.1 million for financial advisory, legal, accounting, due diligence, valuation and other various services necessary to complete these acquisitions. These fees were expensed in 2019 and are included in selling, general and administrative expenses on the consolidated statement of comprehensive income.

Our balance sheet as of December 31, 2019, reflects the allocation of the purchase price to the assets acquired based on their fair value at the date of each acquisition. The fair value of the assets and liabilities acquired are based on valuations using Level III, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

At December 31, 2019, the maximum aggregate amount of remaining contingent cash payments associated with our acquisitions is $6.0 million and are payable in fiscal year 2020.

2018

On December 7, 2018, we acquired certain assets and intellectual property of SceneDoc, Inc., a company that provides mobile-first, SaaS field reporting for law enforcement agencies. The total purchase price was approximately $6.2 million in cash.

On October 1, 2018, we acquired all of the equity interests of TradeMaster, Inc. dba MobileEyes, a company that develops SaaS software to improve public safety by supporting fire prevention and suppression, emergency response, and structural safety. The total purchase price was approximately $5.3 million in cash.

On August 31, 2018, we acquired all of the assets of CaseloadPRO, L. P., a company that provides a fully featured SaaS probation case management system. The purchase price of $9.3 million was paid in cash.

On April 30, 2018, we acquired all of the capital stock of Socrata, Inc.("Socrata"), a company that provides open data and data-as-a-service solutions including cloud-based data integration, visualization, analysis, and reporting solutions for state and local government agencies. The purchase price, net of cash acquired of $1.7 million, was $147.6 million paid in cash.

On April 30, 2018, we acquired all of the equity interests of Sage Data Security, LLC, a cybersecurity company offering a suite of services that supports an entire cybersecurity lifecycle, including program development, education and training, technical testing, advisory services, and digital forensics. The total purchase price was $11.6 million paid in cash.

The operating results of these acquisition are included in our results of operations of the Enterprise Software segment from their respective dates of acquisition.

2017

On November 29, 2017, we acquired audio and digital two-way radio communications technology and related assets from Radio 10-33, LLC. The total purchase price was $1.4 million, all of which was paid in cash.

On August 2, 2017, we acquired substantially all of the assets and assumed certain liabilities of Digital Health Department, Inc., a company that provides environmental health software, offering a SaaS solution for public health compliance and inspections processes. The total purchase price, net of debt assumed, was $3.9 million, all of which was paid in cash.

On May 30, 2017, we acquired all of the capital stock of Modria.com, Inc., a company that specializes in online dispute resolution for government and commercial entities. The total purchase price, net of debt assumed, was $6.1 million, all of which was paid in cash.

The operating results of these acquisition are included in our results of operations of the Enterprise Software segment from their respective dates of acquisition.

F-18

(3)PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following at December 31:

	Useful Lives (years)			2019				2018
Land	—			$	18,653			$	9,958
Building and leasehold improvements	5-39			137,448				122,241
Computer equipment and purchased software	3-5			99,435				84,649
Furniture and fixtures	5			28,506				27,238
Transportation equipment	5			402				438
				284,444				244,524
Accumulated depreciation and amortization				(112,583		)		(89,347		)
Property and equipment, net				$	171,861			$	155,177

Depreciation expense was $23.4 million in 2019, $21.2 million in 2018, and $17.3 million in 2017.

We paid $20.8 million and $2.2 million for real estate and the expansion of existing buildings in 2019 and 2018, respectively.

In 2017, we purchased an office building in Latham, New York for approximately $2.9 million and paid $2.1 million for improvements to that building. We also paid $19.4 million for construction to expand our office building in Yarmouth, Maine.

(4)GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the two years ended December 31, 2019 are as follows:

	Enterprise Software				Appraisal and Tax				Total
Balance as of 12/31/2017	$	651,430			$	6,557			$	657,987
Goodwill acquired related to the purchase of Socrata	75,657				—				75,657
Goodwill acquired related to other acquisitions	20,074				—				20,074
Balance as of 12/31/2018	747,161				6,557				753,718
Goodwill acquired related to the purchase of MicroPact	76,319				—				76,319
Goodwill acquired related to other acquisitions	10,080				—				10,080
Balance as of 12/31/2019	$	833,560			$	6,557			$	840,117

F-19

Other intangible assets and related accumulated amortization consists of the following at December 31:

	2019				2018
Gross carrying amount of other intangibles:
Customer related intangibles	$	321,019			$	238,219
Acquired software	262,286				202,416
Trade names	22,905				16,905
Capitalized software development costs	4,804				—
Leases acquired	5,037				3,694
	616,051				461,234
Accumulated amortization	(237,137		)		(184,382		)
Total other intangibles, net	$	378,914			$	276,852

Amortization expense for acquired software and capitalized software development costs are recorded to cost of revenues. Amortization expense for customer relationships and trade names are recorded to selling, general and administrative expenses. Total amortization expense for other intangibles was $52.8 million in 2019, $39.6 million in 2018, and $35.5 million in 2017.

The amortization periods of other intangible assets is summarized in the following table:

	December 31, 2019											December 31, 2018
	Gross Carrying Amount				Weighted Average Amortization Period			Accumulated Amortization				Gross Carrying Amount				Weighted Average Amortization Period			Accumulated Amortization
Non-amortizable intangibles:
Goodwill	$	840,117			—			$	—			$	753,718			—			$	—
Amortizable intangibles:
Customer related intangibles	321,019				16 years			97,320				238,219				15 years			78,120
Acquired software	262,286				7 years			130,416				202,416				7 years			99,772
Trade names	22,905				11 years			7,205				16,905				11 years			5,139
Capitalized software development costs	$	4,804			5 years			$	296			$	—			—			$	—
Leases acquired	5,037				9 years			1,900				3,694				10 years			1,351

Estimated annual amortization expense related to acquired leases will be recorded as a reduction to hardware and other revenue and is expected to be $525,000 in 2020, $525,000 in 2021, $525,000 in 2022, $525,000 in 2023, $525,000 in 2024, and $512,000 thereafter.

Estimated annual amortization expense related to other intangibles, including customer relationships, acquired software, trade names and capitalized software development costs is as follows:

2020	$	54,045
2021	53,687
2022	49,989
2023	31,838
2024	31,213
Thereafter	$	155,005

F-20

(5)ACCRUED LIABILITIES

Accrued liabilities consist of the following at December 31:

	2019				2018
Accrued wages, bonuses and commissions	$	49,126			$	40,100
Other accrued liabilities	26,108				26,380
	$	75,234			$	66,480

(6)REVOLVING LINE OF CREDIT

On September 30, 2019, we entered into a $400 million credit agreement (the “Credit Facility”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. The Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of up to $400.0 million, including a $25.0 million sublimit for letters of credit. The Credit Facility matures on September 30, 2024. Borrowings under the Credit Facility may be used for general corporate purposes, including working capital requirements, acquisitions and share repurchases.

Borrowings under the Credit Facility bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.125% to 0.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a margin of 1.125% to 1.75%. As of December 31, 2019, our interest rate was 4.88% under the prime rate option or approximately 2.89% under the 30-day LIBOR option. The Credit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of December 31, 2019, we were in compliance with those covenants.

As of December 31, 2019, we had no outstanding borrowings and had unused borrowing capacity of $400 million under the Credit Facility*.* In addition, as of December 31, 2019, we had no outstanding letter of credit.

We paid interest of $1,750,000 in 2019, $770,000 in 2018, and $804,000 in 2017.

(7)INCOME TAX

The Income tax provision (benefit) on income from operations consists of the following:

	Years Ended December 31,
	2019				2018				2017
Current:
Federal	$	12,814			$	9,110			$	22,883
State	6,585				4,367				4,666
	19,399				13,477				27,549
Deferred	(6,088		)		(5,069		)		(33,664		)
	$	13,311			$	8,408			$	(6,115	)

F-21

Reconciliation of the U.S. statutory income tax rate to our effective income tax expense rate for operations follows:

	Years Ended December 31,
	2019				2018				2017
Federal income tax expense at statutory rate	$	33,566			$	32,733			$	57,209
State income tax, net of federal income tax benefit	6,999				7,953				4,754
Domestic production activities deduction	—				—				(2,617		)
Excess tax benefits related to stock option exercises	(29,819		)		(32,487		)		(40,624		)
Tax Act adjustments	—				(1,750		)		(25,992		)
Tax credits	(3,446		)		(3,715		)		(3,578		)
Non-deductible business expenses	6,011				5,655				4,573
Other, net	—				19				160
	$	13,311			$	8,408			$	(6,115	)

The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are:

	2019				2018
Deferred income tax assets:
Operating expenses not currently deductible	$	10,214			$	8,989
Stock option and other employee benefit plans	19,308				19,496
Loss and credit carryforwards	23,841				17,999
Total deferred income tax assets	53,363				46,484
Valuation allowance	(1,923		)		(1,049		)
Total deferred income tax assets, net of valuation allowance	51,440				45,435
Deferred income tax liabilities:
Intangible assets	(84,019		)		(70,752		)
Property and equipment	(9,265		)		(8,455		)
Prepaid expenses	(4,922		)		(4,079		)
Deferred revenue	(1,676		)		(3,940		)
Total deferred income tax liabilities	(99,882		)		(87,226		)
Net deferred income tax liabilities	$	(48,442	)		$	(41,791	)

As of December 31, 2019, we had federal net operating loss carryforwards of approximately $85.2 million, after-tax state net operating loss carryforwards of approximately $3.1 million, and tax credit carryforwards of approximately $4.8 million. The federal net operating loss carryforward will begin to expire in 2032 if not utilized, and a portion of the state net operating loss and tax credit carryforwards begin expiring in 2020 if not utilized.

The acquired carryforwards are subject to an annual limitation but are expected to be realized with the exception of certain state net operating loss and tax credit carryforwards. The valuation allowance disclosed in the table above relates to state net operating losses and tax credit carryforwards that are likely to expire before utilization. We believe it is more likely than not that all other deferred tax assets will be realized. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of reversing taxable temporary differences are revised.

In connection with the acquisition of Socrata in 2018, we recorded a $1.9 million liability for an uncertain tax position associated with acquired tax credit carryforwards. The unrecognized tax benefits are included in deferred income taxes in our consolidated balance sheets. The entire amount, if recognized, would affect the effective tax rate. There was no change in the balance of unrecognized tax benefits during 2019. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues for the next 12 months.

F-22

We are subject to U.S. federal income tax, as well as income tax of multiple state, local and foreign jurisdictions. We are routinely subject to income tax examinations by these taxing jurisdictions, but we do not have a history of, nor do we expect any material adjustments as a result of these examinations. With few exceptions, major U.S. federal, state, local and foreign jurisdictions are no longer subject to examination for years before 2015. As of February 19, 2020, no significant adjustments have been proposed by any taxing jurisdiction.

We paid income taxes, net of refunds received, of $21.3 million in 2019, $6.8 million in 2018, and $36.0 million in 2017.

(8)SHAREHOLDERS’ EQUITY

The following table details activity in our common stock:

	Years Ended December 31,
	2019							2018							2017
	Shares			Amount				Shares			Amount				Shares			Amount
Stock option exercises	999			$	96,908			1,126			$	74,907			1,113			$	49,845
Purchases of common stock	(72	)		(14,289		)		(781	)		(150,050		)		(44	)		(6,613		)
Employee stock plan purchases	53			9,576				45			8,051				51			7,044
Restricted stock units vested, net of withheld shares upon award settlement	53			(5,361		)		—			—				—			—

As of February 19, 2020, we had authorization from our board of directors to repurchase up to 2.6 million additional shares of our common stock.

(9)SHARE-BASED COMPENSATION

Share-Based Compensation Plan

In May 2018, stockholders approved the Tyler Technologies, Inc. 2018 Stock Incentive Plan ("the 2018 Plan") which amended and restated the existing Tyler Technologies, Inc. 2010 Stock Option Plan ("the 2010 Plan"). Upon stockholder approval of the 2018 Plan, the remaining shares available for grant under the 2010 Plan were added to the shares authorized for grant under the 2018 Plan. Additionally, any awards previously granted under the 2010 Plan that expire unexercised or are forfeited are added to the shares authorized for grant under the 2018 Plan.

During fiscal year 2019, we granted stock awards under the 2018 Plan in the form of stock options, restricted stock units and performance share units. Stock options generally vest after three to six years of continuous service from the date of grant and have a contractual term of 10 years. Once options become exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. Restricted stock unit grants generally vest ratably over three to five years of continuous service from the date of grant. Each performance share unit represents the right to receive one share of our common stock based on our achievement of certain financial performance targets during applicable performance periods. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718, Stock Compensation.

As of December 31, 2019, there were 3.1 million shares available for future grants under the plan from the 22.9 million shares previously approved by the shareholders.

Determining Fair Value of Stock Compensation

Valuation and Amortization Method. We estimate the fair value of stock option awards granted using the Black-Scholes option valuation model. For restricted stock unit and performance stock unit awards, we amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The expected life represents the weighted-average period the stock options are expected to be outstanding based primarily on the options’ vesting terms, remaining contractual life and the employees’ expected exercise based on historical patterns.

F-23

Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock.

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield. We have not paid any cash dividends on our common stock in more than ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record share-based compensation only for those awards that are expected to vest.

The following weighted average assumptions were used for options granted:

	Years Ended December 31,
	2019			2018			2017
Expected life (in years)	6.0			6.0			6.0
Expected volatility	26.6	%		26.7	%		28.1	%
Risk-free interest rate	1.8	%		2.7	%		2.0	%
Expected forfeiture rate	—	%		—	%		—	%

Share-Based Award Activity

The following table summarizes restricted stock unit and performance stock unit activity during fiscal year 2019 (shares in thousands):

		Number of Shares			Weighted Average Grant Date Fair Value per Share
Unvested at January 1, 2018		—			$	—
Granted		336			221.29
Vested		—			—
Forfeited		(2	)		229.75
Unvested at December 31, 2018		334			221.25
Granted		256			241.19
Vested		(76	)		221.15
Forfeited		(14	)		229.75
Unvested at December 31, 2019		500			$	231.57

F-24

Options granted, exercised, forfeited and expired are summarized as follows:

	Number of Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016	5,156			$	83.64
Granted	824			176.26
Exercised	(1,113	)		44.80
Forfeited	(50	)		134.83
Outstanding at December 31, 2017	4,817			107.91
Granted	432			208.21
Exercised	(1,126	)		66.53
Forfeited	(31	)		158.80
Outstanding at December 31, 2018	4,092			129.51
Granted	162			251.58
Exercised	(999	)		96.92
Forfeited	(29	)		174.54
Outstanding at December 31, 2019	3,226			$	145.27			6		$	499,124
Exercisable at December 31, 2019	2,067			$	121.07			6		$	369,938

We had unvested options to purchase 1.2 million shares with a weighted average grant date exercise price of $188.48 as of December 31, 2019, and unvested options to purchase 1.7 million shares with a weighted average grant date exercise price of $169.24 as of December 31, 2018.

Other information pertaining to option activity was as follows during the twelve months ended December 31:

	2019				2018				2017
Weighted average grant-date fair value of stock options granted	$	74.54			$	66.52			$	55.56
Total intrinsic value of stock options exercised	$	155,899			$	176,716			$	137,699

Share-Based Compensation Expense

The following table summarizes share-based compensation expense related to share-based awards which is recorded in the consolidated statements of comprehensive income:

	Years Ended December 31,
	2019				2018				2017
Cost of software services, maintenance and subscriptions	$	15,002			$	13,588			$	9,415
Selling, general and administrative expenses	44,965				39,152				27,933
Total share-based compensation expenses	59,967				52,740				37,348
Excess tax benefit	(29,819		)		(32,487		)		(40,624		)
Net decrease (increase) in net income	$	30,148			$	20,253			$	(3,276	)

As of December 31, 2019, we had $148.7 million of total unrecognized compensation cost related to unvested options and restricted stock units, net of expected forfeitures, which is expected to be amortized over a weighted average amortization period of 2.5 years.

Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on the last day of each quarterly offering period. As of December 31, 2019, there were 702,000 shares available for future issuances the ESPP from the 2.0 million shares previously approved by the stockholders.

F-25

(10)EARNINGS PER SHARE

Basic earnings and diluted earnings per share data were computed as follows:

	Years Ended December 31,
	2019				2018				2017
Numerator for basic and diluted earnings per share:
Net income	$	146,527			$	147,462			$	169,571
Denominator:
Weighted-average basic common shares outstanding	38,640				38,445				37,273
Assumed conversion of dilutive securities:
Stock options	1,465				1,678				1,973
Denominator for diluted earnings per share - Adjusted weighted-average shares	40,105				40,123				39,246
Earnings per common share:
Basic	$	3.79			$	3.84			$	4.55
Diluted	$	3.65			$	3.68			$	4.32

Share-based awards representing the right to purchase common stock of 633,000 shares in 2019, 888,000 shares in 2018, and 1,343,000 shares in 2017 were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

(11) LEASES

We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements and they expire in one year to eight years. Some of these leases include options to extend for up to 10 years. We had no finance leases and no related party lease agreements as of December 31, 2019. Operating lease costs were approximately $9.9 million in 2019, $7.4 million in 2018, and $6.9 million in 2017.

The components of operating lease expense were as follows (in thousands):

Lease Costs		Financial Statement Classification		For the year ended
				2019
Operating lease cost		Selling, general and administrative expenses		$	6,379
Short-term lease cost		Selling, general and administrative expenses		2,269
Variable lease cost		Selling, general and administrative expenses		1,274
Net lease cost				$	9,922

F-26

As of December 31, 2019, ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheet as follows (in thousands):

		December 31, 2019
Assets:
Operating lease right-of-use assets		$	18,992
Liabilities:
Operating leases, short-term		6,387
Operating leases, long-term		16,822
Total lease liabilities		$	23,209

Supplemental information related to leases was as follows:

Other Information		For the year ended
		2019
Cash Flows (in thousands):
Cash paid amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases		$	7,267
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases		$	3,466
Lease Term and Discount Rate:
Weighted average remaining lease term (years)		4
Weighted average discount rate		4.00		%

As of December 31, 2019, maturities of lease liabilities were as follows (in thousands):

Year ending December 31,		Amount
2020		$	7,684
2021		6,246
2022		3,960
2023		2,923
2024		2,478
Thereafter		2,042
Total lease payments		25,333
Less: Interest		(2,124		)
Present value of operating lease liabilities		$	23,209

F-27

As of December 31, 2018, the future minimum lease commitments related to lease agreements under Topic 840, the predecessor of Topic 842, were as follows (in thousands):

Year ending December 31,		Amount
2019		$	5,994
2020		5,146
2021		3,976
2022		1,925
2023		1,164
Thereafter		2,132
Total		$	20,337

Rental Income from third parties

We own office buildings in Bangor, Falmouth and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2020 and 2025, some of which have options to extend the lease for up to five years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.

Rental income from third-party tenants was $1.1 million in 2019, $1.2 million in 2018, and $1.5 million in 2017. Rental income is included in Hardware and other revenue on the consolidated statements of comprehensive income. Future minimum operating rental income based on contractual agreements is as follows (in thousands):

Year ending December 31,		Amount
2020		$	1,341
2021		1,372
2022		1,402
2023		1,432
2024		1,462
Thereafter		857
Total		$	7,866

As of December 31, 2019, we had no additional significant operating or finance leases that had not yet commenced.

(12)EMPLOYEE BENEFIT PLANS

We provide a defined contribution plan for the majority of our employees meeting minimum service requirements. Eligible employees can contribute up to 30% of their current compensation to the plan subject to certain statutory limitations. We contribute up to a maximum of 3% of an employee’s compensation to the plan. We made contributions to the plan and charged operating results $11.5 million in 2019, $9.3 million in 2018, and $7.9 million in 2017.

(13)COMMITMENTS AND CONTINGENCIES

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

F-28

(14)SEGMENT AND RELATED INFORMATION

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

We provide our software systems and services and appraisal services through six business units, which focus on the following products:

•	financial management, education and planning, regulatory and maintenance software solutions;

•	financial management, municipal courts, planning, regulatory and maintenance, and land and vital records management software solutions;

•	courts and justice and public safety software solutions;

•	data and insights solutions;

•	case management and business management solutions; and

•	appraisal and tax software solutions and property appraisal services.

In accordance with ASC 280-10, Segment Reporting, the financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts, planning, regulatory and maintenance, and land and vital records management software solutions unit; courts and justice and public safety software solutions unit; the data and insights solutions unit; and case management and business management solutions unit meet the criteria for aggregation and are presented in one reportable segment, Enterprise Software (“ES”). The ES segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, land and vital records management, data and insights and case management and business management processes. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.

We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before noncash amortization of intangible assets associated with their acquisition, interest expense and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Segment operating income for corporate primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference. The accounting policies of the reportable segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”

Segment assets include net accounts receivable, prepaid expenses and other current assets and net property and equipment. Corporate assets consist of cash and investments, prepaid insurance, intangibles associated with acquisitions, capitalized software development costs, deferred income taxes and net property and equipment mainly related to unallocated information and technology assets.

ES segment capital expenditures included $12.6 million in 2019 and $2.2 million in 2018 for the expansion of existing buildings and purchases of buildings and land. A&T segment capital expenditures included $8.2 million in 2019 for the expansion of existing buildings.

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For the year ended December 31, 2019	Enterprise Software				Appraisal and Tax				Corporate				Totals
Revenues
Software licenses and royalties	$	92,567			$	7,638			$	—			$	100,205
Subscriptions	285,092				11,260				—				296,352
Software services	185,892				27,169				—				213,061
Maintenance	405,063				25,255				—				430,318
Appraisal services	—				23,479				—				23,479
Hardware and other	16,735				21				6,256				23,012
Intercompany	15,496				—				(15,496		)		—
Total revenues	$	1,000,845			$	94,822			$	(9,240	)		$	1,086,427
Depreciation and amortization expense	64,289				926				11,457				76,672
Segment operating income	261,494				20,789				(73,829		)		208,454
Capital expenditures	19,335				8,384				10,379				38,098
Segment assets	$	834,010			$	90,536			$	1,267,068			$	2,191,614

For the year ended December 31, 2018	Enterprise Software				Appraisal and Tax				Corporate				Totals
Revenues
Software licenses and royalties	$	83,735			$	9,706			$	—			$	93,441
Subscriptions	210,740				9,807				—				220,547
Software services	166,921				24,348				—				191,269
Maintenance	359,904				24,617				—				384,521
Appraisal services	—				21,846				—				21,846
Hardware and other	18,745				32				4,881				23,658
Intercompany	13,155				—				(13,155		)		—
Total revenues	$	853,200			$	90,356			$	(8,274	)		$	935,282
Depreciation and amortization expense	50,130				914				10,715				61,759
Segment operating income	237,159				23,094				(68,572		)		191,681
Capital expenditures	13,973				782				10,377				25,132
Segment assets	$	556,100			$	63,670			$	1,171,193			$	1,790,963

For the year ended December 31, 2017	Enterprise Software				Appraisal and Tax				Corporate				Totals
Revenues
Software licenses and royalties	$	78,388			$	7,854			$	—			$	86,242
Subscriptions	164,317				7,859				—				172,176
Software services	161,245				19,215				—				180,460
Maintenance	337,701				21,618				—				359,319
Appraisal services	—				25,023				—				25,023
Hardware and other	13,057				10				4,612				17,679
Intercompany	10,425				—				(10,425		)		—
Total revenues	$	765,133			$	81,579			$	(5,813	)		$	840,899
Depreciation and amortization expense	43,987				760				8,648				53,395
Segment operating income	229,001				20,788				(51,964		)		197,825
Capital expenditures	28,096				1,181				16,341				45,618
Segment assets	$	365,736			$	46,279			$	1,199,336			$	1,611,351

F-30

Reconciliation of reportable segment operating		Years Ended December 31,
income to the Company's consolidated totals:		2019				2018				2017
Total segment operating income		$	208,454			$	191,681			$	197,825
Amortization of acquired software		(30,642		)		(22,972		)		(21,686		)
Amortization of customer and trade name intangibles		(21,445		)		(16,217		)		(13,381		)
Other income (expense), net		3,471				3,378				698
Income before income taxes		$	159,838			$	155,870			$	163,456

(15)	DISAGGREGATION OF REVENUE

The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.

Timing of Revenue Recognition

Timing of revenue recognition by revenue category during the period is as follows:

For the year ended December 31, 2019		Products and services transferred at a point in time				Products and services transferred over time				Total
Revenues:
Software licenses and royalties		$	84,900			$	15,305			$	100,205
Subscriptions		—				296,352				296,352
Software services		—				213,061				213,061
Maintenance		—				430,318				430,318
Appraisal services		—				23,479				23,479
Hardware and other		23,012				—				23,012
Total		$	107,912			$	978,515			$	1,086,427

For the year ended December 31, 2018		Products and services transferred at a point in time				Products and services transferred over time				Total
Revenues:
Software licenses and royalties		$	75,188			$	18,253			$	93,441
Subscriptions		—				220,547				220,547
Software services		—				191,269				191,269
Maintenance		—				384,521				384,521
Appraisal services		—				21,846				21,846
Hardware and other		23,658				—				23,658
Total		$	98,846			$	836,436			$	935,282

F-31

For the year ended December 31, 2017		Products and services transferred at a point in time				Products and services transferred over time				Total
Revenues:
Software licenses and royalties		$	69,167			$	17,075			$	86,242
Subscriptions		—				172,176				172,176
Software services		—				180,460				180,460
Maintenance		—				359,319				359,319
Appraisal services		—				25,023				25,023
Hardware and other		17,679				—				17,679
Total		$	86,846			$	754,053			$	840,899

Recurring Revenue

The majority of our revenue is comprised of recurring revenues from maintenance and subscriptions. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenue. We generally provide maintenance and support for our on-premises clients under annual, or in some cases, multi-year contracts. The contract terms for subscription arrangements range from one to 10 years but are typically contracted for initial periods of three to five years. Non-recurring revenues are derived from all other revenue categories.

Recurring revenues and non-recurring revenues recognized during the period are as follows:

For the year ended December 31, 2019		Enterprise Software				Appraisal and Tax				Corporate				Totals
Recurring revenues		$	690,156			$	36,514			$	—			$	726,670
Non-recurring revenues		295,193				58,308				6,256				359,757
Intercompany		15,496				—				(15,496		)		—
Total revenues		$	1,000,845			$	94,822			$	(9,240	)		$	1,086,427

For the year ended December 31, 2018		Enterprise Software				Appraisal and Tax				Corporate				Totals
Recurring revenues		$	570,645			$	34,424			$	—			$	605,069
Non-recurring revenues		269,400				55,932				4,881				330,213
Intercompany		13,155				—				(13,155		)		—
Total revenues		$	853,200			$	90,356			$	(8,274	)		$	935,282

For the year ended December 31, 2017		Enterprise Software				Appraisal and Tax				Corporate				Totals
Recurring revenues		$	502,018			$	29,477			$	—			$	531,495
Non-recurring revenues		252,690				52,102				4,612				309,404
Intercompany		10,425				—				(10,425		)		—
Total revenues		$	765,133			$	81,579			$	(5,813	)		$	840,899

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(16)	DEFERRED REVENUE AND PERFORMANCE OBLIGATIONS

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

		December 31, 2019				December 31, 2018
Enterprise Software		$	386,115			$	327,521
Appraisal and Tax		25,210				20,018
Corporate		1,369				3,397
Totals		$	412,694			$	350,936

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

		2019
Balance at beginning of year		$	350,936
Deferral of revenue		993,109
Recognition of deferred revenue		(931,351		)
Balance at end of year		$	412,694

Transaction Price Allocated to the Remaining Performance Obligations

The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized ("Backlog"), which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of December 31, 2019 was $1.46 billion, of which we expect to recognize approximately 49% as revenue over the next 12 months and the remainder thereafter.

(17) DEFERRED COMMISSIONS

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to seven years. Deferred commissions were $29.8 million, $21.9 million, as of December 31, 2019, and 2018 respectively. Amortization expense was $17.8 million $15.6 million, $11.2 million for the twelve months ended December 31, 2019, 2018, and 2017, respectively. There were no indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses in the accompanying consolidated balance sheets. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive income.

(18) SUBSEQUENT EVENTS

There are no material events or transactions that have occurred subsequent to December 31, 2019.

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(19) QUARTERLY FINANCIAL INFORMATION (unaudited)

The following table contains selected financial information from unaudited statements of income for each quarter of 2019 and 2018:

	Quarters Ended
	2019																2018
	Dec. 31				Sept. 30				June 30				Mar. 31				Dec. 31				Sept. 30				June 30				Mar. 31
Revenues	$	288,837			$	275,400			$	275,124			$	247,066			$	241,981			$	236,067			$	236,060			$	221,174
Gross profit	142,275				130,717				127,860				116,048				115,871				111,626				109,276				102,805
Income before income taxes	47,790				40,552				36,419				35,077				40,107				38,626				37,700				39,437
Net income	46,790				40,390				31,999				27,348				31,552				38,924				39,161				37,825
Earnings per diluted share	$	1.15			$	1.00			$	0.80			$	0.69			$	0.79			$	0.96			$	0.97			$	0.95
Shares used in computing diluted earnings per share	40,736				40,280				39,813				39,585				39,891				40,528				40,224				39,836

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