Tyler Technologies 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2022

OR

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

(972) 713-3700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of shares of common stock of registrant outstanding on October 25, 2022 was 41,639,898.

PART I. FINANCIAL INFORMATION

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; (2) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (3) disruption to our business and harm to our competitive position resulting from cyber-attacks and security vulnerabilities (4) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (5) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (6) material portions of our business require the internet infrastructure to be adequately maintained; (7) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (8) general economic, political and market conditions, including inflation and changes in interest rates; (9) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (10) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (11) the ability to attract and retain qualified personnel and dealing with the loss or retirement of key members of management or other key personnel; and (12) costs of compliance and any failure to comply with government and stock exchange regulations. A detailed discussion of these factors and other risks that affect our business are described in Item 1A, “Risk Factors”. We expressly disclaim any obligation to publicly update or revise our forward-looking statements.

GENERAL

We provide integrated information management solutions and services for the public sector. We develop and market a broad line of software products and services to address the IT needs of public sector entities. In addition, we provide professional IT services to our clients, including software and hardware installation, data conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. We also provide subscription-based services such as software as a service (“SaaS”), transaction-based fees primarily related to digital government services and online payment processing, and electronic document filing solutions (“e-filing”), which simplify the filing and management of court related documents. Additionally, we provide property appraisal outsourcing services for taxing jurisdictions.

We provide our software systems and related professional services and appraisal services through seven 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 software solutions;

• courts and justice and public safety software solutions;

• data and insights solutions;

• appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services;

• development platform solutions including case management and business process management; and

• NIC digital government and payments solutions.

We report our results in two reportable segments. The ES reportable segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management and education; courts and justice; public safety; planning, regulatory and maintenance; data and insights; appraisal and tax software solutions; land and vital records management software solutions; and property appraisal services. The PT reportable segment provides public sector entities with software solutions to perform transaction processing, streamline data processing, and improve operations and workflows such as the NIC digital government and payments solutions and development platform solutions.

As of January 1, 2022, the appraisal and tax software solutions, land and vital records management software solutions, and property appraisal service business unit, which was previously reported in the Appraisal & Tax ("A&T") reportable segment, was moved to the ES reportable segment and the NIC digital government and payments solutions and development platform solutions moved to the PT reportable segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. As the result of the changes in our reportable segments, the former A&T and NIC reportable segments are no longer considered separate segments. Prior year amounts for the ES and PT reportable segments have been adjusted to reflect the segment change.

Our total employee count increased to 7,176 at September 30, 2022, including 44 employees who joined us through acquisitions completed since September 30, 2021, from 6,718 at September 30, 2021.

On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.6 million, consisting of $117.9 million paid in cash, and approximately $5.0 million related to indemnity holdbacks, subject to certain post-closing adjustments.

For the three and nine months ended September 30, 2022, total revenues increased 2.9% and 20.6%, respectively, compared to the prior year period. Excluding the impact of 2021 and 2022 acquisitions, revenues increased 1.2% and 4.6% for the three and nine months ended September 30, 2022, respectively, compared to the prior year periods.

Subscriptions revenue grew 0.6% and 36.2% for the three and nine months ended September 30, 2022, respectively, compared to the prior year period, primarily due to the impact of the NIC acquisition, as well as an ongoing shift toward SaaS arrangements, along with growth in our transaction-based revenues such as e-filing and online payment services. Excluding the impact of 2021 and 2022 acquisitions, subscriptions revenue decreased 2.4% and increased 5.9% for the three and nine months ended September 30, 2022, respectively, compared to the prior year period. Subscriptions revenue from acquisitions completed in 2021 and 2022 contributed 3.0% and 30.2% for the three and nine months ended September 30, 2022, respectively.

Our backlog as of September 30, 2022, was $1.88 billion, a 6.3% increase from last year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of GAAP for the interim period and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, amortization and potential impairment of intangible assets and goodwill, and share-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-K for the year ended December 31, 2021. Except for the accounting policies for business combinations as a result of adopting Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”), there have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2021.

ANALYSIS OF RESULTS OF OPERATIONS

Revenues

Acquisitions

On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a leading provider of technology solutions for campground and outdoor recreation management. The impact of the US eDirect acquisition on our operating results is not considered material. US eDirect is operated as a part of the NIC division and the results of NIC and US eDirect, from their respective dates of acquisition, are included with the operating results of the PT segment.

On April 21, 2021, we acquired NIC, which became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries of the Company. NIC is a leading digital government solutions and payment company that serves federal, state and local government agencies.

The following table details revenues for NIC for the three and nine months ended September 30, 2022 and 2021, which are presented in our condensed consolidated statements of income from the date of acquisition and included in the operating results of the PT reportable segment.

Software licenses and royalties

The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of September 30:

Software licenses and royalties revenue decreased 11% and 6% for the three and nine months ended September 30, 2022, respectively, compared to the prior year periods. The decrease in software licenses and royalties revenue for the three months ended September 30, 2022, is attributed to more clients choosing our SaaS offering rather than purchasing the software under a traditional perpetual software arrangement. Our total new client mix for the nine months ended September 30, 2022, was approximately 22% perpetual software license arrangements and approximately 78% subscription-based arrangements, compared to total new client mix for the nine months ended September 30, 2021, of approximately 34% perpetual software license arrangements and approximately 66% subscription-based arrangements.

Although the mix of new contracts between SaaS-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our software licenses revenue will continue to decline as a growing percentage of clients choose our SaaS-based options, rather than purchasing the software under a traditional perpetual software license arrangement and the Company transitions to cloud-based only offerings. SaaS-based arrangements generally do not result in licenses revenue in the initial year as compared to perpetual software license arrangements but do generate higher overall revenue over the term of the contract.

Subscriptions

The following table sets forth a comparison of our subscriptions revenue for the periods presented as of September 30:

Subscriptions revenue primarily consists of revenues derived from our SaaS arrangements. Other sources of subscriptions revenue are derived from transaction-based fees primarily related to digital government services and payment processing. We also provide electronic document filing solutions (“e-filing”) that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements.

Subscriptions revenue grew 1% and 36% for the three and nine months ending September 30, 2022, respectively, compared to the prior period. Excluding the impact of revenue from late 2021 and 2022 acquisitions of $7.5 million and $167.8 million for the three and nine months ended September 30, 2022, respectively, subscriptions revenue decreased 2% and increased 6% for the three and nine months ended September 30, 2022, respectively. The decline in subscriptions revenue for the three months ended September 30, 2022, compared to prior period is attributable to a $37.2 million decline in COVID-related transaction-based revenues offset by a higher new SaaS client mix compared to prior period. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase for the nine months ended September 30, 2022. In the three and nine months ending September 30, 2022, respectively, we added 153 and 469 new SaaS clients and 70 and 254 existing on-premises clients converted to our SaaS model. Since September 30, 2021, we have added 604 new SaaS clients while 325 existing on-premises clients converted to our SaaS offerings.

Total subscriptions revenue derived from transaction-based fees was $148.9 million and $454.3 million for the three and nine months ended September 30, 2022, respectively, and $171.2 million and $317.7 million for the three and nine months ended September 30, 2021, respectively. The 13% decline for the three months ended September 30, 2022, compared to the prior period, is attributable to the decline in the COVID-related transaction-based revenues. The 43% increase for the nine months ended September 30, 2022, compared to the prior period, is due to the inclusion of NIC. Transaction-based revenue from acquisitions made in 2021 and 2022 were $360.1 million for the nine months ended September 30, 2022; if those are excluded, transaction-based revenue increased 15% compared to the prior period as a result of a $12.1 million increase in transaction-based fees related to payment processing.

Professional services

The following table sets forth a comparison of our professional services revenue for the periods presented as of September 30:

Professional services revenue primarily consists of services delivered in connection with implementing our software, converting client data, training client personnel, custom development activities, and consulting. New clients who acquire our software generally also contract with us to provide the related professional services. Existing clients also periodically purchase additional training, consulting, and minor programming services. Professional services revenue increased 16% and 21% for the three and nine months ended September 30, 2022, respectively, compared to the prior year period. Excluding the impact of revenue from 2021 and 2022 acquisitions of $67,000 and $16.8 million for the three and nine months ended September 30, 2022, respectively, professional services revenue increased 16% and 10% for the three and nine months ended September 30, 2022, respectively. The increase for the three and nine months ended September 30, 2022, in professional services revenue is primarily attributed to higher revenues generated by the continued COVID pandemic-related rent relief services and the return of billable travel revenue as onsite services have increased since prior periods. The increases are partially offset by more clients selecting our cloud solutions instead of our on-premises license arrangements which typically require more professional services.

Maintenance

The following table sets forth a comparison of our maintenance revenue for the periods presented as of September 30:

We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue remained flat and decreased 2% for the three and nine months ended September 30, 2022, respectively, compared to the prior year period. Maintenance revenue declined mainly due to attrition related to a legacy case management solution and clients converting from on-premises license arrangements to SaaS, partially offset by annual maintenance rate increases and maintenance associated with new software license sales.

Appraisal services

The following table sets forth a comparison of our appraisal services revenue for the periods presented as of September 30:

Appraisal services revenue was approximately 1.8% and 1.9% of total revenues for the three and nine months ended September 30, 2022, respectively. Appraisal services revenue for the three and nine months ended September 30, 2022, increased by 21% and 31%, respectively, compared to the prior year primarily due to the ramp-up of appraisal services for several new revaluation contracts which started in recent quarters. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.

Annualized Recurring Revenues

The majority of our revenues are comprised of revenues from maintenance and subscriptions, which we consider to be recurring revenues. Annualized recurring revenues ("ARR") is calculated based on quarter-to-date end total recurring revenues multiplied by four. As of September 30, 2022, ARR was $1.49 billion. ARR remained flat compared to the prior year period, due to the decline in COVID-related revenues and maintenance, offset by an increase in subscriptions revenue due to an ongoing shift toward SaaS arrangements.

Cost of Revenues and Gross Margins

The following table sets forth a comparison of the key components of our cost of revenues for the periods presented as of September 30:

The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of September 30:

Software licenses, royalties and acquired software. Amortization expense for acquired software comprises the majority of costs of software licenses, royalties, and acquired software. We do not have any direct costs associated with royalties. The gross margin for software licenses, royalties and acquired software is 17.2% and 4.4% for the three and nine months ended September 30, 2022, respectively, and 36.3% and 33.3% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of amortization expense of acquired software, the margin is 84.4% and 83.3% for the three and nine months ended September 30, 2022, respectively, and 93.2% and 92.5% for three and nine months ended September 30, 2021, respectively. The decline in software licenses, royalties and acquired software gross margin compared to prior year periods is due to lower revenue from software licenses and increased amortization expense related to acquired software from recent acquisitions.

Subscriptions, professional services and maintenance. Cost of subscriptions, professional services and maintenance primarily consists of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities, and various other services such as custom client development and ongoing operation of SaaS and e-filing arrangements. The subscriptions, professional services, and maintenance gross margin for the three and nine months ended September 30, 2022, increased 1.7% and decreased 1.7%, respectively, from the comparable prior year period.

Excluding the impact of 2021 and 2022 acquisitions, the gross margins were 45.0% and 45.7% for the three and nine months ended September 30, 2022, respectively, as compared to 43.1% and 46.0% for the three and nine months ended September 30, 2021, respectively. The increase of 1.9% for the three months ended September 30, 2022, is attributed to the decline in low margin COVID-related transaction-based revenues compared to prior year period. The decrease of 0.3% for the nine months ended September 30, 2022, respectively, from the comparable prior period is due to several factors, including lower maintenance revenue resulting from attrition related to a legacy case management solution; a post-COVID return of low-margin revenues such as billable travel; higher personnel costs related to inflation, as well as costs related to onboarding new professional services employees who are not yet billable; and higher hosting costs related to our accelerated shift to the cloud. Excluding employees added through acquisitions, our implementation and support staff has grown by 216 employees since September 30, 2021.

Appraisal services. The appraisal services gross margin for the three and nine months ended September 30, 2022, decreased 3.8% and increased 0.1%, respectively, compared to the same period in 2021. The decrease in margin is primarily due to higher personnel costs related to inflation, as well as increased low margin billable travel revenue. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.

Overall Gross Margin. For the three and nine months ended September 30, 2022, our overall gross margin increased 0.6% and decreased 2.9%, respectively, compared to the prior year period. Excluding the impact of 2021 and 2022 acquisitions, overall gross margins were 43.6% and 44.0% for the three and nine months ended September 30, 2022, respectively, as compared to 42.7% and 45.1% for the three and nine months ended September 30, 2021, respectively. The increase of 0.9% for the three months ended September 30, 2022 is attributed to decline in lower margin COVID-related transaction-based revenues compared to prior year period. For the nine months ended September 30, 2022, the 1.1% decrease in overall gross margin compared to the prior year period is due to lower revenue from software licenses and maintenance, higher personnel costs related to inflation, and "bubble costs" related to the transition from our proprietary data centers to Amazon Web Services ("AWS").

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based compensation expense, commissions, and related overhead costs for administrative and sales and marketing employees, as well as professional fees, trade show activities, advertising costs, and other marketing related costs.

The following table sets forth a comparison of our SG&A expenses for the periods presented as of September 30:

SG&A as a percentage of revenues was 21.9% and 21.5% for the three and nine months ended September 30, 2022, respectively, compared to 22.1% and 25.0% for the three and nine months ended September 30, 2021, respectively. Excluding the impact on SG&A expense from 2021 and 2022 acquisitions of $1.2 million and $25.0 million for the three and nine months ended September 30, 2022, respectively, SG&A remained flat and decreased 5% for the three and nine months ended September 30, 2022, respectively, compared to the prior year period. The decrease in SG&A as a percentage of revenues is primarily attributed to lower transaction expense related to acquisitions completed in 2022 compared to those completed in 2021 and a decline in stock compensation expense due to the lower fair value of each share-based award issued in connection with our stock compensation plan. The decline in SG&A is partially offset by increased staff levels and other administrative expenses compared to prior periods.

Research and Development Expense

The following table sets forth a comparison of our research and development expense for the periods presented as of September 30:

Research and development ("R&D") expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue. R&D expense increased 5% for both the three and nine months ended September 30, 2022, compared to the prior period. The increase in R&D expense for the three and nine months ended September 30, 2022, is mainly due to new Tyler product development initiatives across our product suites somewhat offset by a shift of some development resources to certain projects which meet the criteria for capitalization.

Amortization of Other Intangibles

The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of September 30:

Acquisition intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired that are allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as operating expense. For the three and nine months ended September 30, 2022, amortization expense increased compared to the prior period due to acquisitions completed in 2021 and 2022.

Interest Expense

The following table sets forth a comparison of our interest expense for the periods presented as of September 30:

Interest expense is primarily comprised of interest expense and non-usage and other fees associated with our borrowings. The change in interest expense in the three and nine months ended September 30, 2022, compared to the prior period is attributable to an increase in amortization expense related to debt issuance costs, resulting from our accelerated pay down of the term loans coupled with an increase in interest rates compared to prior year periods.

Other Income, Net

The following table sets forth a comparison of our other income, net, for the periods presented as of September 30:

Other income, net, is primarily comprised of interest income from invested cash. The change in other income, net, in the three and nine months ended September 30, 2022, compared to the prior period is attributed to lower levels of invested cash due to the prepayment of debt.

Income Tax Provision

The following table sets forth a comparison of our income tax provision for the periods presented as of September 30:

The changes in the effective tax rate for the three and nine months ended September 30, 2022, as compared to the same period in 2021, were principally driven by the increase in research tax credit benefits, offset by a corresponding liability for uncertain tax positions and the decrease in the excess tax benefits related to stock incentive awards.

The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards and the tax benefits of research tax credits, offset by an increase in liabilities for uncertain tax positions related to research tax credits, state income taxes, and non-deductible expenses. The excess tax benefits related to stock incentive awards realized were $1.3 million and $6.0 million for the three and nine months ended September 30, 2022, respectively, as compared to $6.3 million and $21.5 million for the three and nine months ended September 30, 2021, respectively. The tax benefits of research tax credits were $21.7 million and $24.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $1.4 million and $3.3 million for the three and nine months ended September 30, 2021, respectively. The changes in net liabilities for uncertain tax positions were $6.1 million and $6.9 million for the three and nine months ended September 30, 2022, respectively, as compared to negative $1.2 million for both the three and nine months ended September 30, 2021. Excluding the excess tax benefits related to stock incentive awards, research tax credit benefits, and net liabilities for uncertain tax positions, the effective tax rate was 29.8% and 28.8% for the three and nine months ended September 30, 2022, respectively, compared to 31.1% and 30.2% for the three and nine months ended September 30, 2021, respectively.

FINANCIAL CONDITION AND LIQUIDITY

As of September 30, 2022, we had cash and cash equivalents of $185.9 million compared to $309.2 million at December 31, 2021. We also had $62.0 million invested in investment grade corporate and municipal bonds as of September 30, 2022. These investments have varying maturity dates through 2027 and are held as available-for-sale. As of September 30, 2022, we believe our cash from operating activities, revolving credit facility, cash on hand, and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.

The following table sets forth a summary of cash flows for the nine months ended September 30:

Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other potential capital resources include cash on hand, public and private issuances of debt or equity securities, and bank borrowings. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors.

For the nine months ended September 30, 2022, operating activities provided cash of $259.6 million. Operating activities that provided cash were primarily comprised of net income of $133.2 million, non-cash depreciation and amortization charges of $117.0 million, non-cash share-based compensation expense of $78.0 million and a non-cash decrease in operating lease right-of-use assets of $9.2 million. Working capital, excluding cash, increased approximately $77.8 million mainly due to higher accounts receivable because of an increase in unbilled receivables attributed to revenues recognized prior to billings, timing of payments to and receipts from our government partners and end-user consumers, higher deferred commissions, the timing of bonuses payments, the timing of payments of payroll expenses, and deferred taxes associated with stock option activity during the period. These increases were offset by an increase in deferred revenue during the period and the timing of income tax payments. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings, which occur throughout the year, but our largest renewal billing cycles occur in the second and fourth quarters. Subscription renewals are billed throughout the year.

Our days sales outstanding (“DSO”) was 107 days at September 30, 2022, compared to 108 days at December 31, 2021, and 105 days at September 30, 2021. The decrease in DSO compared to December 31, 2021, is primarily attributable to our maintenance billing cycle which typically peaks at its highest level in June and second highest level in December of each year, followed by collections in the subsequent quarter. The increase in DSO compared to September 30, 2021, is primarily due to an increase in unbilled receivables attributable to an increase in professional services contracts accounted for using progress-to-completion method of revenue recognition in which the services are performed in one accounting period, but the billing normally occurs subsequently in another accounting period. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.

Investing activities used cash of $125.8 million in the nine months ending September 30, 2022. On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.6 million, consisting of $117.9 million paid in cash, and approximately $5.0 million related to indemnity holdbacks, subject to certain post-closing adjustments. In addition, approximately $25.6 million of software development costs were capitalized. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings.

Financing activities used cash of $257.1 million in the nine months ended September 30, 2022, primarily attributable to repayment of $270.0 million of the unsecured term loans, partially offset by payments received from stock option exercises and employee stock purchase plan activity, net of withheld shares for taxes upon equity award.

In February 2019, our board of directors authorized the repurchase of an additional 1.5 million shares of our common stock. The repurchase program, which was approved by our board of directors, was originally announced in October 2002 and was amended at various times from 2003 through 2019. As of September 30, 2022, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions influence the timing of the buybacks and the number of shares repurchased, as well as the volume of employee stock option exercises. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization, and we intend to repurchase stock under the plan from time to time.

We made tax payments of $35.3 million and $1.7 million in the nine months ended September 30, 2022, and 2021, respectively.

As of September 30, 2022, we had $600 million in outstanding principal for the Convertible Senior Notes due 2026. Under our 2021 Credit Agreement, we had $485 million in outstanding principal for the Term Loans, no outstanding borrowings under the 2021 Revolving Credit Facility, and an available borrowing capacity of $500 million as of September 30, 2022. As of September 30, 2022, we had one outstanding standalone letter of credit totaling $1.5 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing and expires in the third quarter of 2026. For the nine months ended September 30, 2022, we repaid $270.0 million of the Term Loans under 2021 Credit Agreement.

In the nine months ended September 30, 2022, and 2021, respectively, we made interest payments of $14.7 million and $14.2 million, associated with the 2021 Credit Agreement and the Convertible Senior Notes, including payment of a $6.4 million commitment fee related to the senior unsecured bridge loan facility paid in 2021.

See Note 4, "Debt", to the Condensed Consolidated Financial Statements for discussions of the 2021 Credit Agreement and Convertible Senior Notes.

From time to time we engage in discussions with potential acquisition candidates. In order to pursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisition opportunities and how such opportunities will be financed.

We anticipate that 2022 capital spending will be between $58 million and $62 million, including approximately $34 million of capitalized software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending is expected to be funded from existing cash balances and cash flows from operations.

We lease office facilities, as well as transportation and other equipment used in our operations, under non-cancelable operating lease agreements expiring at various dates through 2027.

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates.

As of September 30, 2022, we had $485.0 million of outstanding borrowings under our 2021 Credit Agreement and available borrowing capacity under the 2021 Credit Agreement was $500.0 million.

Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%.

During the nine months ended September 30, 2022, the effective interest rate for our borrowings was 3.28%. Based on the aggregate outstanding principal balance under the 2021 Credit Agreement as of September 30, 2022, of $485.0 million, each quarter point change in interest rates would result in a $1.2 million change in annual interest expense.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

ITEM 1. Legal Proceedings

During the first quarter 2022, the Company received a notice of termination for convenience for professional services under a contractual arrangement with the state client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience. As of September 30, the total exposure in our financial statements included the remaining balance of net billed accounts receivable for licenses and services rendered under the contract of approximately $12 million.

The client was unresponsive to company outreach for several months. On August 23, 2022, the Company filed a lawsuit to enforce our rights and remedies under the applicable contractual arrangement. The client has not filed responsive pleadings and no other significant activity has occurred in the lawsuit. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We are unable to estimate the probability of a favorable or unfavorable outcome with respect to the dispute or estimate the amount of potential loss, if any, related to this matter. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.

In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the three months ended September 30, 2022, there were no material changes in the information regarding risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

None

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 27, 2022