Item 1. Financial Statements

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

						Three Months Ended June 30,												Six Months Ended June 30,
						2023						2022						2023						2022
Revenues:
Subscriptions						$	297,789					$	255,816					$	578,254					$	501,259
Maintenance						116,539						116,815						231,670						233,844
Professional services						66,420						71,937						127,349						141,952
Software licenses and royalties						9,779						15,009						19,909						31,515
Hardware and other						13,752						9,108						18,951						16,222
Total revenues						504,279						468,685						976,133						924,792
Cost of revenues:
Subscriptions, maintenance, and professional services						255,789						250,168						508,204						493,000
Software licenses and royalties						2,432						1,547						4,745						2,992
Amortization of software development						2,896						1,322						5,485						2,486
Amortization of acquired software						8,924						14,039						17,844						27,260
Hardware and other						11,061						8,161						16,841						13,188
Total cost of revenues						281,102						275,237						553,119						538,926
Gross profit						223,177						193,448						423,014						385,866
Sales and marketing expense						37,103						31,881						74,206						67,087
General and administrative expense						77,681						67,820						150,041						130,509
Research and development expense						28,153						23,386						55,139						47,327
Amortization of other intangibles						18,366						13,604						36,774						28,318
Operating income						61,874						56,757						106,854						112,625
Interest expense						(6,387)						(6,214)						(14,071)						(11,018)
Other income, net						643						216						1,889						581
Income before income taxes						56,130						50,759						94,672						102,188
Income tax provision						7,000						10,813						14,667						22,258
Net income						$	49,130					$	39,946					$	80,005					$	79,930
Earnings per common share:
Basic						$	1.17					$	0.96					$	1.91					$	1.93
Diluted						$	1.15					$	0.94					$	1.87					$	1.88

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

						Three Months Ended June 30,												Six Months Ended June 30,
						2023						2022						2023						2022
Net income						$	49,130					$	39,946					$	80,005					$	79,930
Other comprehensive income (loss), net of tax:
Securities available-for-sale and transferred securities:
Change in net unrealized holding (loss) gain on available for sale securities during the period						(36)						(114)						58						(743)
Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity						—						—						—						(27)
Reclassification adjustment for net loss on sale of available for sale securities, included in net income						1						48						1						7
Other comprehensive (loss) income, net of tax						(35)						(66)						59						(763)
Comprehensive income						$	49,095					$	39,880					$	80,064					$	79,167

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

			June 30, 2023 (unaudited)						December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	118,764					$	173,857
Accounts receivable (less allowance for losses and sales adjustments of $19,643 in 2023 and $14,761 in 2022)			638,726						577,257
Short-term investments			19,100						37,030
Prepaid expenses			70,783						50,859
Other current assets			9,507						8,239
Total current assets			856,880						847,242
Accounts receivable, long-term			8,310						8,271
Operating lease right-of-use assets			46,824						50,989
Property and equipment, net			165,721						172,786
Other assets:
Software development costs, net			61,228						48,189
Goodwill			2,489,084						2,489,308
Other intangibles, net			948,990						1,002,164
Non-current investments			10,116						18,508
Other non-current assets			48,396						49,960
			$	4,635,549					$	4,687,417
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable			$	118,534					$	104,813
Accrued liabilities			126,557						131,941
Operating lease liabilities			11,381						10,736
Current income tax payable			1,905						43,667
Deferred revenue			565,840						568,538
Current portion of term loans			30,000						30,000
Total current liabilities			854,217						889,695
Term loans, net			243,729						362,905
Convertible senior notes due 2026, net			595,345						594,484
Deferred revenue, long-term			1,164						2,037
Deferred income taxes			109,247						148,891
Operating lease liabilities, long-term			44,483						48,049
Other long-term liabilities			19,113						16,967
Total liabilities			1,867,298						2,063,028
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 and outstanding as of June 30, 2023 and December 31, 2022			481						481
Additional paid-in capital			1,272,315						1,209,725
Accumulated other comprehensive loss, net of tax			(785)						(844)
Retained earnings			1,517,859						1,437,854
Treasury stock, at cost; 6,081,263 and 6,364,991 shares in 2023 and 2022, respectively			(21,619)						(22,827)
Total shareholders' equity			2,768,251						2,624,389
			$	4,635,549					$	4,687,417

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

						Six Months Ended June 30,
						2023						2022
Cash flows from operating activities:
Net income						$	80,005					$	79,930
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization						75,748						75,866
Losses (gains) from sale of investments						2						(53)
Share-based compensation expense						53,924						51,079
Amortization of operating lease right-of-use assets						6,569						5,104
Deferred income tax benefit						(39,665)						(19,136)
Other						445						—
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable						(51,508)						(73,396)
Income tax payable						(41,762)						15,586
Prepaid expenses and other current assets						(20,122)						(6,033)
Accounts payable						13,721						9,130
Operating lease liabilities						(5,324)						(6,522)
Accrued liabilities						(15,083)						(24,723)
Deferred revenue						(3,571)						17,474
Other long-term liabilities						2,146						5,914
Net cash provided by operating activities						55,525						130,220
Cash flows from investing activities:
Additions to property and equipment						(6,370)						(12,757)
Purchase of marketable security investments						(10,617)						(4,592)
Proceeds and maturities from marketable security investments						37,107						40,595
Investment in software development						(18,753)						(16,463)
Cost of acquisitions, net of cash acquired						(1,875)						(117,313)
Other						16						152
Net cash used by investing activities						(492)						(110,378)
Cash flows from financing activities:
Payment on term loans						(120,000)						(80,000)
Proceeds from exercise of stock options, net of withheld shares for taxes upon equity award settlement						2,123						(4,107)
Contributions from employee stock purchase plan						7,751						8,156
Net cash used by financing activities						(110,126)						(75,951)
Net decrease in cash and cash equivalents						(55,093)						(56,109)
Cash and cash equivalents at beginning of period						173,857						309,171
Cash and cash equivalents at end of period						$	118,764					$	253,062

See accompanying notes.

			Six Months Ended June 30,
			2023						2022
Supplemental cash flow information:
Cash paid for interest			$	12,286					$	5,716
Cash paid for income taxes, net			92,933						24,286
Non-cash investing and financing activities:
Non-cash additions to property and equipment			$	368					$	84

TYLER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

(Unaudited)

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Income (Loss)						Retained Earnings						Treasury Stock												Total Shareholders' Equity
			Shares						Amount															Shares						Amount
Balance at March 31, 2023			48,148						$	481					$	1,239,945					$	(750)					$	1,468,729					(6,244)						$	(22,272)					$	2,686,133
Net income			—						—						—						—						49,130						—						—						49,130
Other comprehensive loss, net of tax			—						—						—						(35)						—						—						—						(35)
Exercise of stock options and vesting of restricted stock units			—						—						1,692						—						—						173						11,042						12,734
Employee taxes paid for withheld shares upon equity award settlement			—						—						—						—						—						(26)						(10,452)						(10,452)
Stock compensation			—						—						26,028						—						—						—						—						26,028
Issuance of shares pursuant to employee stock purchase plan			—						—						4,650						—						—						16						63						4,713
Balance at June 30, 2023			48,148						$	481					$	1,272,315					$	(785)					$	1,517,859					(6,081)						$	(21,619)					$	2,768,251

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Income (Loss)						Retained Earnings						Treasury Stock												Total Shareholders' Equity
			Shares						Amount															Shares						Amount
Balance at March 31, 2022			48,148						$	481					$	1,098,933					$	(743)					$	1,313,598					(6,697)						$	(24,535)					$	2,387,734
Net income			—						—						—						—						39,946						—						—						39,946
Other comprehensive loss, net of tax			—						—						—						(66)						—						—						—						(66)
Exercise of stock options and vesting of restricted stock units			—						—						(288)						—						—						122						8,466						8,178
Employee taxes paid for withheld shares upon equity award settlement			—						—						—						—						—						(21)						(7,743)						(7,743)
Stock compensation			—						—						25,800						—						—						—						—						25,800
Issuance of shares pursuant to employee stock purchase plan			—						—						4,376						—						—						12						102						4,478
Balance at June 30, 2022			48,148						$	481					$	1,128,821					$	(809)					$	1,353,544					(6,584)						$	(23,710)					$	2,458,327

TYLER TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

(Unaudited)

			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, 2022			48,148						$	481					$	1,209,725					$	(844)					$	1,437,854					(6,365)						$	(22,827)					$	2,624,389
Net income			—						—						—						—						80,005						—						—						80,005
Other comprehensive gain, net of tax			—						—						—						59						—						—						—						59
Exercise of stock options and vesting of restricted stock units			—						—						1,023						—						—						309						19,844						20,867
Employee taxes paid for withheld shares for taxes upon equity award settlement			—						—						—						—						—						(52)						(18,744)						(18,744)
Stock compensation			—						—						53,924						—						—						—						—						53,924
Issuance of shares pursuant to employee stock purchase plan			—						—						7,643						—						—						27						108						7,751
Balance at June 30, 2023			48,148						$	481					$	1,272,315					$	(785)					$	1,517,859					(6,081)						$	(21,619)					$	2,768,251

			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, 2021			48,148						$	481					$	1,075,650					$	(46)					$	1,273,614					(6,833)						$	(25,667)					$	2,324,032
Net income			—						—						—						—						79,930						—						—						79,930
Other comprehensive loss, net of tax			—						—						—						(763)						—						—						—						(763)
Exercise of stock options and vesting of restricted stock units			—						—						(5,897)						—						—						279						22,120						16,223
Employee taxes paid for withheld shares for taxes upon equity award settlement			—						—						—						—						—						(50)						(20,330)						(20,330)
Stock compensation			—						—						51,079						—						—						—						—						51,079
Issuance of shares pursuant to employee stock purchase plan			—						—						7,989						—						—						20						167						8,156
Balance at June 30, 2022			48,148						$	481					$	1,128,821					$	(809)					$	1,353,544					(6,584)						$	(23,710)					$	2,458,327

Tyler Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Tables in thousands, except per share data)

(1) Basis of Presentation

We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of June 30, 2023, and December 31, 2022, and operating result amounts are for the three and six months ended June 30, 2023, and 2022, respectively, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2022. Revenues, expenses, assets, and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. Certain amounts for the previous year have been reclassified to conform to the current year presentation. As of January 1, 2023, we have elected to no longer report the appraisal services revenue and related costs as separate categories in the statement of income due to less significance on our overall operating results. Therefore, we have combined the appraisal services revenue category with the professional services revenue category; and the related cost of revenue category for appraisal services is now combined with the cost of revenue category related to subscriptions, maintenance and professional services on the condensed consolidated statements of income for all reporting periods presented.

Comprehensive income (loss) 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). During the three and six months ended June 30, 2023, we had approximately $35,000 of other comprehensive loss and $59,000 of other comprehensive income, net of taxes, from our available-for-sale investment holdings and $66,000 and $763,000 of other comprehensive loss during the three and six months ended June 30, 2022.

(2) Accounting Standards and Significant Accounting Policies

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023, that have had a material impact on our condensed consolidated financial statements and related notes. See Recently Adopted Accounting Pronouncements below.

REVENUE RECOGNITION

Nature of Products and Services

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. We earn the majority of our revenues from subscription-based services and post-contract customer support (“PCS” or “maintenance”). Other sources of revenue are professional services, software licenses and royalties, and hardware and other. 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

Subscriptions revenue consists of revenue derived from our software as a service ("SaaS") arrangements and 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. For transaction-based fees, 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. 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.

Other 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 professional 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. For arrangements that involve significant production, modification, or customization of the software, or where professional 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. 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.

Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Refer to Note 4, “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 losses 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 invoicing occurs prior to revenue recognition. 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.

At June 30, 2023, and December 31, 2022, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $647.0 million and $585.5 million, respectively. We have recorded unbilled receivables of $127.1 million and $135.4 million at June 30, 2023 and December 31, 2022, respectively. Included in unbilled receivables are retention receivables of $9.2 million and $8.6 million at June 30, 2023 and December 31, 2022, 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 condensed 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 condensed consolidated balance sheets.

We maintain allowances for losses and sales adjustments, which are recorded against revenue at the time the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a credit loss resulting from the inability of a client to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to, managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or enhancements of our software products. Our allowance for losses and sales adjustments of $19.6 million and $14.8 million at June 30, 2023 and December 31, 2022, respectively, does not include provisions for credit losses. Because we rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

There were no new not yet adopted accounting pronouncements currently issued that would affect the Company or have a material impact on its consolidated financial position or results of operations in future periods.

(3) Segment and Related Information

We provide integrated information management solutions and services for the public sector.

We provide our software systems and related professional 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 software solutions;

• courts and justice and public safety software solutions;

• property and recording solutions;

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

• digital solutions including payments and government services.

In accordance with ASC 280-10, Segment Reporting, we report our results in two reportable segments. The Enterprise Software ("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; planning, regulatory and maintenance; courts and justice; public safety; and property and recording solutions. The Platform Technologies ("PT") reportable segment provides public sector entities with software solutions to perform transaction processing, streamline data processing, and improve operations and workflows such as platform solutions and digital solutions.

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 non-cash amortization of intangible assets associated with their acquisitions, 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. Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company. Corporate segment operating loss also includes revenues and expenses related to a company-wide user conference.

For the three months ended June 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	115,877					$	15,579					$	—					$	131,456
Transaction-based fees						38,677						127,656						—						166,333
Maintenance						109,953						6,586						—						116,539
Professional services						55,256						11,164						—						66,420
Software licenses and royalties						9,479						300						—						9,779
Hardware and other						6,381						—						7,371						13,752
Intercompany						6,852						—						(6,852)						—
Total revenues						$	342,475					$	161,285					$	519					$	504,279
Segment operating income (loss)						$	111,185					$	38,797					$	(60,818)					$	89,164

For the three months ended June 30, 2022						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	97,703					$	11,802					$	—					$	109,505
Transaction-based fees						30,991						115,320						—						146,311
Maintenance						110,760						6,055						—						116,815
Professional services						50,653						21,284						—						71,937
Software licenses and royalties						14,623						386						—						15,009
Hardware and other						5,498						—						3,610						9,108
Intercompany						5,342						—						(5,342)						—
Total revenues						$	315,570					$	154,847					$	(1,732)					$	468,685
Segment operating income (loss)						$	102,090					$	36,301					$	(53,991)					$	84,400

For the six months ended June 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	226,919					$	31,132					$	—					$	258,051
Transaction-based fees						76,049						244,154						—						320,203
Maintenance						220,035						11,635						—						231,670
Professional services						106,755						20,594						—						127,349
Software licenses and royalties						17,547						2,362						—						19,909
Hardware and other						11,580						—						7,371						18,951
Intercompany						11,935						—						(11,935)						—
Total revenues						$	670,820					$	309,877					$	(4,564)					$	976,133
Segment operating income (loss)						$	211,165					$	68,335					$	(118,028)					$	161,472

For the six months ended June 30, 2022						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	188,474					$	22,813					$	—					$	211,287
Transaction-based fees						60,536						229,436						—						289,972
Maintenance						221,455						12,389						—						233,844
Professional services						101,820						40,132						—						141,952
Software licenses and royalties						30,728						787						—						31,515
Hardware and other						12,612						—						3,610						16,222
Intercompany						10,931						—						(10,931)						—
Total revenues						$	626,556					$	305,557					$	(7,321)					$	924,792
Segment operating income (loss)						$	208,619					$	67,034					$	(107,450)					$	168,203

						Three Months Ended June 30,												Six Months Ended June 30,
Reconciliation of reportable segment operating income to the Company's consolidated totals:						2023						2022						2023						2022
Total segment operating income						$	89,164					$	84,400					$	161,472					$	168,203
Amortization of acquired software						(8,924)						(14,039)						(17,844)						(27,260)
Amortization of other intangibles						(18,366)						(13,604)						(36,774)						(28,318)
Interest expense						(6,387)						(6,214)						(14,071)						(11,018)
Other income, net						643						216						1,889						581
Income before income taxes						$	56,130					$	50,759					$	94,672					$	102,188

(4) 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 revenues and cash flows.

Timing of Revenue Recognition

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

For the three months ended June 30, 2023						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	131,456					$	131,456
Transaction-based fees						—						166,333						166,333
Maintenance						—						116,539						116,539
Professional services						—						66,420						66,420
Software licenses and royalties						8,793						986						9,779
Hardware and other						13,752						—						13,752
Total						$	22,545					$	481,734					$	504,279

For the three months ended June 30, 2022						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	109,505					$	109,505
Transaction-based fees						—						146,311						146,311
Maintenance						—						116,815						116,815
Professional services						—						71,937						71,937
Software licenses and royalties						12,683						2,326						15,009
Hardware and other						9,108						—						9,108
Total						$	21,791					$	446,894					$	468,685

For the six months ended June 30, 2023						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	258,051					$	258,051
Transaction-based fees						—						320,203						320,203
Maintenance						—						231,670						231,670
Professional services						—						127,349						127,349
Software licenses and royalties						18,074						1,835						19,909
Hardware and other						18,951						—						18,951
Total						$	37,025					$	939,108					$	976,133

For the six months ended June 30, 2022						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	211,287					$	211,287
Transaction-based fees						—						289,972						289,972
Maintenance						—						233,844						233,844
Professional services						—						141,952						141,952
Software licenses and royalties						26,752						4,763						31,515
Hardware and other						16,222						—						16,222
Total						$	42,974					$	881,818					$	924,792

Recurring Revenues

The majority of our revenue is comprised of revenues from subscriptions and maintenance, which we consider to be recurring revenues. Subscriptions revenue primarily consists of revenues derived from our SaaS arrangements and transaction-based fees, which relate to digital government services, e-filing transactions, and payment processing. The contract terms for subscription arrangements range from one to 10 years but are typically contracted for initial periods of three to five years. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenues. That maintenance and support is generally provided under annual, or in some cases, multi-year contracts. We consider all other revenue categories to be non-recurring revenues.

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

For the three months ended June 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	264,507					$	149,821					$	—					$	414,328
Non-recurring revenues						71,116						11,464						7,371						89,951
Intercompany						6,852						—						(6,852)						—
Total revenues						$	342,475					$	161,285					$	519					$	504,279

For the three months ended June 30, 2022						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	239,454					$	133,177					$	—					$	372,631
Non-recurring revenues						70,774						21,670						3,610						96,054
Intercompany						5,342						—						(5,342)						—
Total revenues						$	315,570					$	154,847					$	(1,732)					$	468,685

For the six months ended June 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	523,003					$	286,921					$	—					$	809,924
Non-recurring revenues						135,882						22,956						7,371						166,209
Intercompany						11,935						—						(11,935)						—
Total revenues						$	670,820					$	309,877					$	(4,564)					$	976,133

For the six months ended June 30, 2022						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	470,465					$	264,638					$	—					$	735,103
Non-recurring revenues						145,160						40,919						3,610						189,689
Intercompany						10,931						—						(10,931)						—
Total revenues						$	626,556					$	305,557					$	(7,321)					$	924,792

(5) Deferred Revenue and Performance Obligations

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

						June 30, 2023						December 31, 2022
Enterprise Software						$	536,663					$	533,902
Platform Technologies						28,591						33,691
Corporate						1,750						2,982
Totals						$	567,004					$	570,575

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

						Six months ended June 30, 2023
Balance as of December 31, 2022						$	570,575
Deferral of revenue						662,311
Recognition of deferred revenue						(665,882)
Balance as of June 30, 2023						$	567,004

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 June 30, 2023, was $1.90 billion, of which we expect to recognize approximately 46% as revenue over the next 12 months and the remainder thereafter.

(6) Deferred Commissions

Sales commissions earned by our salesforce 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 generally three to seven years. Deferred commissions were $44.9 million and $43.8 million as of June 30, 2023, and December 31, 2022, respectively. Amortization expense was $4.3 million and $8.6 million for the three and six months ended June 30, 2023, respectively, and $3.7 million and $7.2 million for the three and six months ended 2022, 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 for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in sales and marketing expense in the accompanying condensed consolidated statements of income.

(7) Acquisitions

On October 31, 2022, we acquired Rapid Financial Solutions, LLC (Rapid), a provider of reliable, scalable, and secure payments with best-in-class card issuance and digital disbursement capabilities. The total purchase price, net of cash acquired of $2.2 million, was approximately $67.4 million, consisting of $51.5 million paid in cash and $18.2 million of common stock.

We have performed a preliminary valuation analysis of the fair market value of Rapid’s assets and liabilities. In connection with this transaction, we acquired total tangible assets of $12.9 million and assumed liabilities of approximately $10.6 million. In the first quarter of 2023, we recorded $10.0 million for assumed liabilities related to litigation outstanding at the time of acquisition as the amount became probable and estimable and a related $10.0 million indemnification receivable from escrowed amounts established at acquisition. We recorded goodwill of approximately $40.0 million, all of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $27.6 million. The goodwill 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. The $27.6 million of intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted average period of approximately 10 years.

The operating results of Rapid are included with the operating results of the Platform Technologies segment since its date of acquisition and the impact of this acquisition on our operating results, assets, and liabilities is not material.

As of June 30, 2023, the purchase price allocation for Rapid is not final; therefore, certain preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables, and related deferred taxes are subject to change as valuations are finalized. Our balance sheet as of June 30, 2023, reflects the allocation of the purchase price to the net assets acquired based on their estimated fair value at the date of the acquisition. The fair value of the assets and liabilities acquired are based on valuations using Level 3 unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. For the six months ended June 30, 2023, we incurred fees of approximately $72,000 for financial advisory, legal, accounting, due diligence, valuation, and other various services necessary to complete acquisitions.

(8) Debt

The following table summarizes our total outstanding borrowings related to the 2021 Credit Agreement and Convertible Senior Notes:

			Rate						Maturity Date						June 30, 2023						December 31, 2022
2021 Credit Agreement
Revolving credit facility			S + 1.50%						April 2026						$	—					$	—
Term Loan A-1			S + 1.50%						April 2026						250,000						290,000
Term Loan A-2			S + 1.25%						April 2024						25,000						105,000
Convertible Senior Notes due 2026			0.25%						March 2026						600,000						600,000
Total borrowings															875,000						995,000
Less: unamortized debt discount and debt issuance costs															(5,926)						(7,611)
Total borrowings, net															869,074						987,389
Less: current portion of debt															(30,000)						(30,000)
Carrying value															$	839,074					$	957,389

2021 Credit Agreement

In connection with the completion of the acquisition of NIC, Inc. on April 21, 2021, we, as borrower, entered into a new $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any breakage costs. In addition to the required amortization payments on the Term Loan A-1 of 5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility will be required (i) upon the issuance or incurrence of additional debt not otherwise permitted under the 2021 Credit Agreement and (ii) upon the occurrence of certain asset sales and insurance and condemnation recoveries, subject to certain thresholds, baskets, and reinvestment provisions as provided in the 2021 Credit Agreement.

On January 28, 2023, we amended our 2021 Credit Agreement to replace the LIBOR reference rate with the Secured Overnight Financing Rate (“SOFR”) reference rate.

In accordance with our amended 2021 Credit Agreement, the 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 SOFR 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 SOFR rate plus a margin of 0.875% to 1.5%. The margin in each case is based upon the Company’s total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. In addition to paying interest on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, currently 0.25% per annum, ranging from 0.15% to 0.3% based upon the Company’s total net leverage ratio.

The amended 2021 Credit Agreement 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 June 30, 2023, we were in compliance with those covenants.

The carrying amount is the par value of the Revolving Credit Facility and Term Loans less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is included in the accompanying condensed consolidated statements of income.

Convertible Senior Notes due 2026

On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 in the aggregate principal amount of $600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million.

The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.

The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased, redeemed, or converted.

Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only upon the occurrence of certain events. Under the terms of the Indenture, the Convertible Senior Notes are convertible into common stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances:

• during any calendar quarter commencing after the calendar quarter ended June 30, 2021, if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

• during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the Indenture, for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;

• upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a “Fundamental Change” (as defined in the Indenture);

• upon the occurrence of specified corporate events; or

• on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, March 15, 2026.

With certain exceptions, upon a change of control or other fundamental change (both as defined in the Indenture governing the Convertible Senior Notes), the holders of the Convertible Senior Notes may require us to repurchase all or part of the principal amount of the Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest to, but excluding, the redemption date.

As of June 30, 2023, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.

From and including September 15, 2025, holders of the Convertible Senior Notes may convert their Convertible Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of our common stock, at our election. However, upon conversion of any Convertible Senior Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted.

The initial conversion rate is 2.0266 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which represents an initial conversion price of approximately $493.44 per share of common stock. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Convertible Senior Notes are redeemable, in whole or in part, at our option at any time, and from time to time, on or after March 15, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price of the Notes on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. In addition, calling any Note for redemption constitutes a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.

Effective Interest

The weighted average interest rates for the borrowings under the 2021 Credit Agreement and Convertible Senior Notes due 2026 were 6.68% and 0.25%, as of June 30, 2023, respectively. During the six months ended June 30, 2023, the effective interest rates for our borrowings were 7.04% and 0.54% for the 2021 Credit Agreement and the Convertible Senior Notes, respectively. The following sets forth the interest expense recognized related to the borrowings under the 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
Contractual interest expense - Revolving Credit Facility			$	(625)					$	(315)					$	(937)					$	(628)
Contractual interest expense - Term Loans			(4,565)						(4,375)						(10,206)						(7,369)
Contractual interest expense - Convertible Senior Notes			(375)						(375)						(750)						(750)
Amortization of debt discount and debt issuance costs			(822)						(1,149)						(2,178)						(2,271)
Total			$	(6,387)					$	(6,214)					$	(14,071)					$	(11,018)

As of June 30, 2023, 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 six months ended June 30, 2023, we repaid $120.0 million of the Term Loans under the 2021 Credit Agreement.

(9) Financial Instruments

The following table presents our financial instruments:

						June 30, 2023						December 31, 2022
Cash and cash equivalents						$	118,764					$	173,857
Available-for-sale investments						29,216						55,538
Equity investments						10,000						10,000
Total						$	157,980					$	239,395

Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we determine fair value through quoted market prices.

Our available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities with maturity dates through 2027. These investments are presented at fair value and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. Unrealized gains or losses associated with the investments are included in accumulated other comprehensive loss, net of tax in the accompanying condensed consolidated balance sheets and statements of comprehensive income. For our available-for-sale investments, we do not have the intent to sell, nor is it more likely than not that we would be required to sell before recovery of their cost basis.

As of June 30, 2023, we have an accrued interest receivable balance of approximately $102,000 which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period or at the time of sale of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the three and six months ended June 30, 2023, we have recorded no credit losses for accrued interest receivables. Interest income and amortization of discounts and premiums are included in other income, net in the accompanying condensed consolidated statements of income.

The following table presents the components of our available-for-sale investments:

			June 30, 2023						December 31, 2022
Amortized cost			$	30,269					$	56,670
Unrealized gains			—						16
Unrealized losses			(1,053)						(1,148)
Estimated fair value			$	29,216					$	55,538

As of June 30, 2023, we have $19.1 million of available-for-sale debt securities with contractual maturities of one year or less and $10.1 million with contractual maturities great than one year. As of June 30, 2023, six available-for-sale debt securities with a fair value of $6.1 million have been in a loss position for one year or less and 27 securities with a fair value of $20.9 million have been in a loss position for greater than one year.

The following table presents the activity on our available-for-sale investments:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
Proceeds from sales and maturities			$	14,132					$	17,923					$	37,107					$	40,595
Realized losses on sales, net of tax			(1)						(48)						(1)						(7)

Our equity investments consist of an 18% interest in BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC is a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is carried at cost less any impairment write-downs because we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values.

(10) Other Comprehensive Income (Loss)

The following table presents the changes in the balances of accumulated other comprehensive loss, net of tax by component:

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of March 31, 2023			$	(750)					$	—					$	(750)
Other comprehensive loss before reclassifications			(36)						—						(36)
Reclassification adjustment of unrealized gains (losses) on securities transferred from held-to-maturity			—						—						—
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income			1						—						1
Other comprehensive loss			(35)						—						(35)
Balance as of June 30, 2023			$	(785)					$	—					$	(785)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of March 31, 2022			$	(743)					$	—					$	(743)
Other comprehensive loss before reclassifications			(114)						—						(114)
Reclassification adjustment of unrealized gains (losses) on securities transferred from held-to-maturity			—						—						—
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income			48						—						48
Other comprehensive loss			(66)						—						(66)
Balance as of June 30, 2022			$	(809)					$	—					$	(809)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of December 31, 2022			$	(844)					$	—					$	(844)
Other comprehensive income before reclassifications			58						—						58
Reclassification adjustment of unrealized gains (losses) on securities transferred from held-to-maturity			—						—						—
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income			1						—						1
Other comprehensive income			59						—						59
Balance as of June 30, 2023			$	(785)					$	—					$	(785)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of December 31, 2021			$	(46)					$	—					$	(46)
Other comprehensive loss before reclassifications			(743)						—						(743)
Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity			(27)						—						(27)
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income			7						—						7
Other comprehensive loss			(763)						—						(763)
Balance as of June 30, 2022			$	(809)					$	—					$	(809)

(11) Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:

• Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.

• Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.

• Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.

The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.

The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of June 30, 2023:

			Level 1						Level 2						Level 3						Total
Available-for-sale investments			$	29,216					$	—					$	—					$	29,216
Equity investments			—						—						10,000						10,000
2021 Credit Agreement
Revolving Credit Facility			—						—						—						—
Term Loan A-1			—						248,788						—						248,788
Term Loan A-2			—						24,942						—						24,942
Convertible Senior Notes due 2026			—						615,564						—						615,564

Assets that are Measured at Fair Value on a Recurring Basis

Cash and cash equivalents, accounts receivable, accounts payable, short-term obligations and certain other assets at cost approximate fair value because of the short maturity of these instruments.

As of June 30, 2023, we have $29.2 million in investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates through 2027. The fair values of these securities are considered Level 1 as they are based on inputs from unadjusted quoted prices that are available in active markets for identical assets or liabilities.

Assets that are Measured at Fair Value on a Nonrecurring Basis

As of June 30, 2023, we have an 18% interest in BFTR, LLC. As 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. Periodically, our investment is assessed for impairment. We do not reassess the fair value of the 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. No events or changes in circumstances have occurred during the period that require reassessment. There has been no impairment of this investment for the periods presented. This investment is included in other non-current assets in the accompanying condensed consolidated balance sheets.

We assess goodwill for impairment annually on October 1. In addition, we review goodwill, property and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. During the fourth quarter of 2022, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, we identified no indicators of impairment to long-lived and other assets and therefore, no impairment was recorded as of and for the period ended June 30, 2023.

Financial instruments measured at fair value only for disclosure purposes

The fair value of our borrowing under our amended 2021 Credit Agreement would approximate book value as of June 30, 2023, because our interest rates reset approximately every 30 days or less.

The carrying amount of the Revolving Credit Facility and Term Loans is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is included in the accompanying condensed consolidated statements of income.

The fair value of our Convertible Senior Notes due 2026 is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. See Note 8, “Debt,” for further discussion.

The carrying amount of the Convertible Senior Notes due 2026 is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in the accompanying condensed consolidated statements of income.

The following table presents the fair value and carrying value, net, of the 2021 Credit Agreement and our Convertible Notes due 2026):

			Fair Value at												Carrying Value at
			June 30, 2023						December 31, 2022						June 30, 2023						December 31, 2022
2021 Credit Agreement
Revolving Credit Facility			$	—					$	—					$	—					$	—
Term Loan A-1			248,788						288,302						248,788						288,302
Term Loan A-2			24,942						104,603						24,942						104,603
Convertible Senior Notes due 2026			615,564						560,910						595,344						594,484
			$	889,294					$	953,815					$	869,074					$	987,389

(12) Income Tax Provision

We had an effective income tax rate of 12.5% and 15.5% for the three and six months ended June 30, 2023, respectively, compared to 21.3% and 21.8% for the three and six months ended June 30, 2022, respectively. The decrease in the effective tax rate for the three and six months ended June 30, 2023, as compared to the prior periods, was principally driven by an increase in research tax credit benefits and excess tax benefits related to stock incentive awards, partially offset by an increase in liabilities for uncertain tax positions.

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 research tax credits and excess tax benefits related to stock incentive awards, offset by state income taxes, liabilities for uncertain tax positions, and non-deductible business expenses.

For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to currently deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC Section 174. The requirement temporarily increases our U.S. federal and state cash tax payments and reduces cash flows in fiscal year 2023 and future years until the amortization deduction normalizes.

We made income tax payments of $92.9 million and $24.3 million in the six months ended June 30, 2023, and 2022, respectively.

(13) Share-Based Compensation

The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to ASC 718, Stock Compensation:

						Three Months Ended June 30,												Six Months Ended June 30,
						2023						2022						2023						2022
Subscriptions, maintenance, and professional services						$	6,437					$	6,867					$	12,779					$	13,639
Sales and marketing expense						2,367						2,224						4,760						4,364
General and administrative expense						17,224						16,709						36,385						33,076
Total share-based compensation expense						$	26,028					$	25,800					$	53,924					$	51,079

(14) Earnings Per Share

The following table details the reconciliation of basic earnings per share to diluted earnings per share:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
Numerator for basic and diluted earnings per share:
Net income			$	49,130					$	39,946					$	80,005					$	79,930
Denominator:
Weighted-average basic common shares outstanding			41,980						41,500						41,987						41,499
Assumed conversion of dilutive securities:
Stock awards			771						821						723						950
Convertible Senior Notes			—						—						—						—
Denominator for diluted earnings per share - Adjusted weighted-average shares			42,751						42,321						42,710						42,449
Earnings per common share:
Basic			$	1.17					$	0.96					$	1.91					$	1.93
Diluted			$	1.15					$	0.94					$	1.87					$	1.88

For the three and six months ended June 30, 2023, and 2022, stock awards, representing the right to purchase common stock of approximately 344,000 and 423,000 shares and 486,000 and 350,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

We have used the if-converted method for calculating any potential dilutive effect of the Convertible Senior Notes due 2026 on our diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period being presented and interest expense, net of tax, recorded in connection with the Convertible Senior Notes is not added back to the numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million remaining resulting common shares related to the Notes are not included in the dilutive weighted-average common shares outstanding calculation for the three and six months ended June 30, 2023, and 2022, as their effect would be antidilutive given none of the conversion features have been triggered. See Note 8, “Debt,” for discussion on the conversion features related to the Convertible Senior Notes.

(15) 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 with maturities between one to 11 years. Some of these leases include options to extend for up to six years. We have no finance leases and one related party lessor agreement (see Note 16, "Related party transactions") as of June 30, 2023. Right-of-use lease assets and lease liabilities for our operating leases are recorded in the condensed consolidated balance sheets. During the three and six months ended June 30, 2023, we incurred lease restructuring costs, resulting in zero and $1.4 million of operating lease costs. During the three and six months ended June 30, 2022, we incurred lease restructuring costs of zero and $1.0 million of operating lease costs.

The components of operating lease expense were as follows:

Lease Costs						Three Months Ended June 30,												Six Months Ended June 30,
						2023						2022						2023						2022
Operating lease cost						$	3,119					$	2,586					$	7,510					$	6,008
Short-term lease cost						513						488						1,036						994
Variable lease cost						216						204						536						574
Net lease cost						$	3,848					$	3,278					$	9,082					$	7,576

Supplemental information related to leases is as follows:

Other Information						Six Months Ended June 30,
						2023						2022
Cash flows:
Cash paid amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases						$	5,873					$	7,238
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases						$	2,391					$	6,606
Lease term and discount rate:
Weighted average remaining lease term (years)						6.9						5.8
Weighted average discount rate						1.60		%				1.64		%

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 2023 and 2028, and some have options to extend the lease for up to 10 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 for the three and six months ended June 30, 2023 totaled $545,000 and $1.0 million, respectively, and for the three and six months ended June 30, 2022 totaled $493,000 and $798,000, respectively. As of June 30, 2023, future minimum operating rental income based on contractual agreements is as follows:

Year ending December 31,						Amount
2023 (Remaining)						$	1,133
2024						3,049
2025						2,317
2026						1,171
2027						913
Thereafter						733
Total						$	9,316

(16) Related Party Transactions

In April 2023, we entered into an arm's length lessor agreement with a company co-owned by a member of the Company’s board of directors for 25,000 square feet of office space in our Lubbock, Texas, facility. The lease agreement, which commenced on April 1, 2023, has an initial term of five years with a pro-rata base rent of $25,000 per month until December 1, 2023, and a base rent of $60,000 per month thereafter. We recognized rental income of $75,000 under this lease for the six months ended June 30, 2023.

(17) Commitments and Contingencies

Litigation

During the first quarter of 2022, we received a notice of termination for convenience under a contractual arrangement with a state government 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.

The client was unresponsive to our outreach for several months. On August 23, 2022, we filed a lawsuit to enforce our rights and remedies under the applicable contractual arrangement, and since then have been engaged directly with the client on payment resolution. 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 can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.

Purchase Commitments

We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of June 30, 2023, the remaining aggregate minimum purchase commitment under these arrangements was approximately $244 million through 2031.

(18) Subsequent Events

There have been no material events or transactions that occurred subsequent to June 30, 2023.