Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (2) disruption to our business and harm to our competitive position resulting from cyber-attacks and security vulnerabilities; (3) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (4) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (5) material portions of our business require the internet infrastructure to be adequately maintained; (6) 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; (7) general economic, political and market conditions, including continued inflation and rising interest rates; (8) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (9) 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; (10) 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 (11) 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. We provide subscription-based services such as software as a service (“SaaS”), transaction-based services primarily related to digital government services, payment processing, and electronic document filing solutions (“e-filing”), which simplify the filing and management of court related documents. In addition, we provide professional 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. Additionally, we provide property appraisal outsourcing services for taxing jurisdictions.

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.

See Note 3, "Segment and Related Information," in the notes to the financial statements for additional information.

Recent Acquisitions

On August 8, 2023, we acquired Computing System Innovations, LLC (CSI), a leading provider of artificial intelligence (AI) automation, redaction, and indexing solution for courts, recorders, attorneys, and others. CSI is operated as a part of the courts & justice business unit and the results of CSI from the dates of acquisition are included with the operating results of the ES segment.

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. On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a leading provider of technology solutions for campground and outdoor recreation management. US eDirect and Rapid are operated as a part of the digital solutions business unit and the results of US eDirect and Rapid from their respective dates of acquisition are included with the operating results of the PT segment.

Operating Result**s

For the three and nine months ended September 30, 2023, total revenues increased 4.5% and 5.2%, respectively, compared to the prior period. Revenues from recent acquisitions contributed $5.9 million or 1.2% and $16.8 million or 1.2% to the total revenues increases for the three and nine months ended September 30, 2023, respectively, compared to the prior period.

Subscriptions revenue grew 16.1% and 15.6% for the three and nine months ended September 30, 2023, respectively, compared to the prior period, primarily due to an ongoing shift toward SaaS arrangements, along with growth in our transaction-based revenues such as e-filing and payment services, offset by the decline in COVID pandemic related transaction-based revenue. Subscription revenues from recent acquisitions contributed $5.0 million or 2.0% and $15.8 million or 2.1% to the increases for the three and nine months ended September 30, 2023, respectively.

Our backlog as of September 30, 2023, was $1.95 billion, a 3.9% increase compared to September 30, 2022.

Our total employee count increased to 7,301 at September 30, 2023, including 66 employees who joined us through acquisitions completed since September 30, 2022, from 7,176 at September 30, 2022.

REGULATORY DEVELOPMENTS

Cybersecurity

In July 2023, the SEC adopted the Risk Management, Strategy, Governance, and Incident Disclosure Final Rule (the “Cybersecurity Final Rule”) enhancing disclosure requirements for registered companies covering cybersecurity risk and management. The Cybersecurity Final Rule generally requires companies to disclose material cybersecurity incidents on Form 8-K within four business days of a determination that a cybersecurity incident is material, and such materiality determination must be made without unreasonable delay. The Cybersecurity Final Rule also requires periodic disclosures of, among other things, details on the Company’s processes to assess, identify, and manage cybersecurity risks, cybersecurity governance, and management’s role in overseeing such a compliance program, including the board of directors’ oversight of cybersecurity risks. Certain reporting requirements under the Cybersecurity Final Rule become effective December 18, 2023. The Company will comply with the new requirement when it becomes effective.

Clawback Policy

On October 26, 2022, the SEC adopted final rules implementing the incentive-based compensation recovery (clawback) provisions mandated by Section 954 of the Dodd-Frank Act. The rules, which are set forth under new Rule 10D-1 of the Securities Exchange Act of 1934, as amended (“Rule 10D-1”), directed U.S. stock exchanges to establish listing standards requiring listed companies to adopt policies providing for the recovery (or clawback) of incentive-based compensation received by current or former executive officers where such compensation is based on the erroneously reported financial information which required an accounting restatement (a “Clawback Policy”). Under the rules, a company must recover erroneously awarded incentive compensation “reasonably promptly” after such obligation is incurred. Rule 10D-1 also requires that the listing standards include disclosure requirements related to clawbacks.

On June 9, 2023, the SEC approved the NYSE’s proposed clawback listing standards. Consistent with Rule 10D-1, the NYSE listing standards require NYSE-listed companies, to (i) adopt a compliant Clawback Policy, (ii) file the Clawback Policy as an exhibit to their annual reports, and (iii) provide certain disclosures relating to any compensation recovery triggered by the policy. Failure to comply with the NYSE listing standards could result in a suspension from trading on the NYSE and the commencement of delisting procedures. Listed companies are required to adopt a compliant Clawback Policy no later than December 1, 2023. The Company's board of directors is currently evaluating NYSE clawback policy requirements and will comply with the new requirements by December 1, 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations is 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, 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, 2022. 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, 2022.

Reclassifications

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.

ANALYSIS OF RESULTS OF OPERATIONS


	Percent of Total Revenues
	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Subscriptions	59.7	%	53.8	%	59.4	%	54.0	%
Maintenance	23.7		24.8		23.6		25.1
Professional services	12.4		15.2		12.8		15.3
Software licenses and royalties	2.1		4.3		2.1		3.7
Hardware and other	2.1		1.9		2.1		1.9
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Subscriptions, maintenance, and professional services	50.1		51.9		51.4		52.9
Software licenses, royalties, and amortization of acquired software	2.5		3.2		2.4		3.2
Amortization of software development	0.6		0.3		0.6		0.3
Hardware and other	1.3		1.3		1.6		1.4
Sales and marketing expense	7.3		7.1		7.5		7.2
General and administrative expense	15.9		14.8		15.5		14.3
Research and development expense	5.7		5.3		5.7		5.2
Amortization of other intangibles	3.7		3.2		3.7		3.1
Operating income	12.9		12.9		11.6		12.4
Interest expense	(1.2)		(2.0)		(1.4)		(1.5)
Other income, net	0.2		—		0.2		0.1
Income before income taxes	11.9		10.9		10.4		11.0
Income tax provision (benefit)	2.4		(0.2)		1.8		1.5
Net income	9.5	%	11.1	%	8.6	%	9.5	%

Revenues

Subscriptions

The following table sets forth a comparison of our subscriptions revenue for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
ES	$	165,923	$	135,336	$	30,587	23	%	$	468,889	$	384,346	$	84,543	22	%
PT	129,267		119,010		10,257		9		404,555		371,258		33,297		9
Total subscriptions revenue	$	295,190	$	254,346	$	40,844	16	%	$	873,444	$	755,604	$	117,840	16	%

Subscriptions revenue consists of revenue derived from our 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.

Subscriptions revenue grew 16.1% and 15.6% for the three and nine months ended September 30, 2023, respectively, compared to the prior period, primarily due to an ongoing shift toward SaaS arrangements, along with growth in our transaction-based revenues. Subscription revenues from recent acquisitions contributed $5.0 million or 2.0% and $15.8 million or 2.1% to the increases for the three and nine months ended September 30, 2023, respectively.

Total subscriptions revenue derived from SaaS arrangements fees was $138.5 million and $387.0 million for the three and nine months ended September 30, 2023, respectively, compared to $109.9 million and $312.7 million for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2023, respectively, SaaS fees grew $28.6 million, or 26.0% and $74.3 million, or 23.8% compared to prior period. New SaaS clients as well as existing on-premises clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and nine months ended September 30, 2023, respectively, we added 161 and 476 new SaaS clients and 79 and 246 on-premises existing clients elected to convert to our SaaS model. Since September 30, 2022, we have added 616 new SaaS clients while 328 existing on-premises clients converted to our SaaS offerings. Our mix of new software contract mix for the nine months ended September 30, 2023, was approximately 19% perpetual software license arrangements and approximately 81% subscription-based arrangements compared to total new contract mix for the nine months ended September 30, 2022, of approximately 22% perpetual software license arrangements and approximately 78% subscription-based arrangements.

Total subscriptions revenue derived from transaction-based fees was $156.7 million and $486.4 million for the three and nine months ended September 30, 2023, respectively, compared to $144.4 million and $442.9 million for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2023, respectively, transaction-based fees grew $12.2 million, or 8.5% and $43.6 million, or 9.8% compared to prior period. Contributing to the growth in transaction-based fees for the three and nine months ended September 30, 2023, respectively, are the increase of $7.1 million and $19.1 million, respectively, from online payments and e-filing services, and the impact of transaction-based fees from recent acquisitions of $5.0 million and $15.8 million, respectively, compared to prior period. The remainder of the increases for the three and nine months ended September 30, 2023, are primarily attributable to the growth in transaction-based fees from our state enterprise contracts related to our digital solutions business unit. The increase for the nine months ended September 30, 2023, in transaction-based fees was offset by the decline of $10.8 million, in COVID pandemic related transaction-based revenues compared to prior period.

Maintenance

The following table sets forth a comparison of our maintenance revenue for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
ES	$	111,574	$	111,486	$	88	—	%	$	331,609	$	332,941	$	(1,332)	—	%
PT	5,910		5,852		58		1		17,545		18,241		(696)		(4)
Total maintenance revenue	$	117,484	$	117,338	$	146	—	%	$	349,154	$	351,182	$	(2,028)	(1)	%

We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue remained flat for the three months ended September 30, 2023, and decreased 1% for the nine months ended September 30, 2023, respectively, compared to the prior period. For the nine months ended September 30, 2023, maintenance revenue slightly declined mainly due to the impact of clients converting from on-premises license arrangements to SaaS, partially offset by annual maintenance rate increases and maintenance associated with new software license sales.

Annualized Recurring Revenues

Subscriptions and maintenance are considered recurring revenue sources. Annualized recurring revenues (ARR) are calculated by annualizing the current quarter's recurring revenues from maintenance and subscriptions as reported in our statement of operations. Management believes ARR is an indicator of the annual run rate of our recurring revenues, as well as a measure of the effectiveness of the strategies we deploy to drive revenue growth over time. ARR is a metric we believe is widely used by companies in the technology sector and by investors, which we believe offers insight to the stability of our maintenance and subscription revenues to be recognized within the year, which are considered recurring in nature, with some seasonality.

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. These revenues are considered recurring because revenues from these sources are expected to re-occur in similar annual amounts for the term of our relationship with the client. Transaction-based fees are generally the result of multi-year contracts with our clients that result in fees generated by payment transactions and digital government services and are collected on a recurring basis during the contract term. Transaction-based fees are historically highest in the second quarter, which coincides with peak outdoor recreation seasons and statutory filing deadlines in many jurisdictions, and lowest in the fourth quarter due to fewer business days and lower transaction volumes around holidays. Because ARR is an annualized revenue amount, the metric can fluctuate from quarter to quarter due to this seasonality.

ARR was $1.65 billion and $1.49 billion as of September 30, 2023, and 2022, respectively. ARR increased 11.0% compared to the prior period primarily due to an increase in subscriptions revenue resulting from an ongoing shift toward SaaS arrangements.

Professional services

The following table sets forth a comparison of our professional services revenue for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
ES	$	52,413	$	51,079	$	1,334	3	%	$	159,168	$	152,899	$	6,269	4	%
PT	8,713		20,739		(12,026)		(58)		29,307		60,871		(31,564)		(52)
Total professional services revenue	$	61,126	$	71,818	$	(10,692)	(15)	%	$	188,475	$	213,770	$	(25,295)	(12)	%

Professional services revenue primarily consists of professional services billed in connection with implementing our software, converting client data, training client personnel, custom development activities, consulting and property appraisal outsourcing services. New clients who purchase our proprietary software licenses or subscriptions 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 decreased 15% and 12% for the three and nine months ended September 30, 2023, respectively, compared to the prior period, primarily attributed to lower revenues generated by the COVID pandemic-related rent relief services, which declined $11.7 million and $36.7 million, respectively, compared to prior period. The decline is partially offset by increased billable travel revenue as onsite services have increased post-pandemic.

Software licenses and royalties

The following table sets forth a comparison of our software licenses and royalties revenue for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
ES	$	7,531	$	17,166	$	(9,635)	(56)	%	$	25,078	$	47,893	$	(22,815)	(48)	%
PT	3,023		3,103		(80)		(3)		5,385		3,891		1,494		38
Total software licenses and royalties revenue	$	10,554	$	20,269	$	(9,715)	(48)	%	$	30,463	$	51,784	$	(21,321)	(41)	%

Software licenses and royalties revenue decreased 48% and 41% for the three and nine months ended September 30, 2023, respectively, compared to the prior period. The decrease is primarily attributed to the shift in the mix of new software contracts toward more subscription-based agreements compared to the prior period.

Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect the decline in software license revenues will accelerate as we continue to shift our model away from perpetual licenses to SaaS. Subscription-based arrangements result in lower software license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract.

Cost of revenues and overall gross margin

The following table sets forth a comparison of the key components of our cost of revenues for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
Subscriptions, maintenance, and professional services	$	247,781	$	245,711	$	2,070	1	%	$	755,985	$	738,712	$	17,273	2	%
Software licenses and royalties	3,120		1,655		1,465		89		7,865		4,647		3,218		69
Amortization of software development	3,083		1,507		1,576		105		8,568		3,993		4,575		115
Amortization of acquired software	9,035		13,622		(4,587)		(34)		26,879		40,882		(14,003)		(34)
Hardware and other	6,505		6,033		472		8		23,346		19,219		4,127		21
Total cost of revenues	$	269,524	$	268,528	$	996	—	%	$	822,643	$	807,453	$	15,190	2	%

Subscriptions, maintenance, and professional services. Cost of subscriptions, maintenance and professional services primarily consist of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities, including enhancing existing solutions, and various other services such as custom client development, on-going operation of SaaS, property appraisal outsourcing activities, digital government services, and other transaction-based services such as e-filing. Other costs included are interchange fees required to process credit/debit card transactions and bank fees to process automated clearinghouse transactions related to our payments business.

The cost of subscriptions, maintenance, and professional services for the three and nine months ended September 30, 2023, increased $2.1 million or 1%, and $17.3 million or 2%, respectively, compared to the prior period. The impact from recent acquisitions was $3.4 million and $10.5 million, respectively, for the three and nine months ended September 30, 2023. The remaining of subscriptions, maintenance and professional services expenses remained flat and increased 1%, for the three and nine months ended September 30, 2023, respectively. Excluding employees from recent acquisitions, our professional services staff grew by 105 employees since September 30, 2022, as we increased hiring to ensure that we are well-positioned to deliver our current backlog and anticipated new business.

Software licenses and royalties. Costs of software licenses and royalties primarily consist of direct third party software costs. We do not have any direct costs associated with royalties.

The cost of software licenses and royalties for the three and nine months ended September 30, 2023, increased $1.5 million or 89% and increased $3.2 million or 69%, respectively, compared to the prior period due to higher third party software costs.

Amortization of software development. Software development costs included in cost of revenues primarily consist of personnel costs. We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the software’s remaining estimated economic life of, generally, three to five years.

For the three and nine months ended September 30, 2023, amortization of software development costs increased $1.6 million or 105% and increased $4.6 million or 115%, respectively, compared to the prior period and is attributable to new capitalized software development projects going into service in the past year.

Amortization of acquired software. Amortization expense related to acquired software attributed to business combinations is included with cost of revenues. The estimated useful lives of other intangibles range from five to 10 years.

For the three and nine months ended September 30, 2023, amortization of acquired software declined $4.6 million or 34% and $14.0 million or 34%, respectively, compared to the prior period due to assets becoming fully amortized in the fourth quarter 2022, offset by amortization of newly acquired software from recent acquisitions completed in fiscal year 2023 and late 2022.

The following table sets forth a comparison of overall gross margin for the periods presented as of September 30:


	Three Months Ended						Nine Months Ended
	2023		2022		Change		2023		2022		Change
Overall gross margin	45.5	%	43.3	%	2.2	%	44.1	%	42.2	%	1.9	%

Overall Gross Margin. For the three and nine months ended September 30, 2023, our overall gross margin increased 2.2% and 1.9%, respectively, compared to the prior period. The increases in overall gross margin compared to the prior period is due to growth in subscription revenues and the decline in low margin COVID-related revenues and related costs. Also contributing to the increases in overall gross margin is the decline in amortization of acquired software expense compared to the prior period. The margin increases are partially offset by lower revenue from software licenses and maintenance, duplicate hosting costs as we transition from our proprietary data centers to the public cloud, and higher personnel costs.

Sales and marketing expense

Sales and marketing expense (“S&M”) consists primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for sales and marketing employees, as well as professional fees, trade show activities, advertising costs and other marketing costs. The following table sets forth a comparison of our S&M expense for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
Sales and marketing expense	$	35,898	$	33,688	$	2,210	7	%	$	110,104	$	100,776	$	9,328	9	%

S&M as a percentage of revenues was 7.3% and 7.5% for the three and nine months ended September 30, 2023, respectively, compared to 7.1% and 7.2% for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2023, S&M expense increased approximately 7% and 9%, respectively, compared to the prior period. Increases for the three and nine months ended September 30, 2023, are primarily attributed to higher commission expense and bonus expense resulting from improved operating results and increased share-based compensation expense.

General and administrative expense

General and administrative (“G&A”) expense consists primarily of personnel salaries and share-based compensation expense for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development as well as third party professional fees, travel-related expenses, insurance, allocation of depreciation, facilities and IT support costs, amortization of software development for internal use, acquisition-related expenses and other administrative expenses. The following table sets forth a comparison of our G&A expense for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
General and administrative expense	$	78,519	$	69,931	$	8,588	12	%	$	228,560	$	200,440	$	28,120	14	%

G&A as a percentage of revenue was 15.9% and 15.5% for the three and nine months ended September 30, 2023, respectively, compared to 14.8% and 14.3% for the three and nine months ended September 30, 2022, respectively. G&A expense increased approximately 12% and 14% for the three and nine month ended September 30, 2023, respectively, compared to the prior period. The increases in G&A are primarily attributed to increases in amortization of software development for internal use, increases in travel-related expenses and other administrative costs, higher personnel costs from increased employee headcount, increased costs of health benefits, higher bonus expense due to improved operating results, and increased share-based compensation expense. Our administrative staff grew by 36 employees since September 30, 2022. For the three and nine months ended September 30, 2023, respectively, G&A expense also included $3.1 million and $4.5 million related to lease restructuring and other asset write-offs.

Research and development expense

Research and development expense consists primarily of salaries, employee benefits and related overhead costs associated with new product development. Research and development expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue.

The following table sets forth a comparison of our research and development expense for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
Research and development expense	$	28,282	$	25,190	$	3,092	12	%	$	83,421	$	72,517	$	10,904	15	%

Research and development expense increased 12% and 15% for the three and nine months ended September 30, 2023, respectively, compared to the prior period, mainly due to a number of new Tyler product development initiatives across our product suites, including increased investments in research and development.

Amortization of other intangibles

Other 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 related, trade name, and leases acquired 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 related, trade name, and leases acquired intangibles is recorded as operating expense. The estimated useful lives of other intangibles range from one to 25 years. The following table sets forth a comparison of amortization of other intangibles for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
Amortization of other intangibles	$	18,526	$	14,941	$	3,585	24	%	$	55,300	$	43,259	$	12,041	28	%

For the three and nine months ended September 30, 2023, respectively, amortization of other intangibles increased compared to the prior period due to the impact of intangibles added with recent acquisitions and the accelerated amortization of certain trade name intangibles due to branding changes in 2023.

Interest expense

The following table sets forth a comparison of our interest expense for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
Interest expense	$	(5,808)	$	(9,258)	$	3,450	(37)	%	$	(19,879)	$	(20,276)	$	397	(2)	%

Interest expense is 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, 2023, compared to the prior period is primarily attributable to lower interest incurred as a result of our accelerated repayment of the term loans, offset by accelerated amortization expense related to debt issuance costs and an increase in interest rates in 2023 compared to 2022.

Other income, net

The following table sets forth a comparison of our other income, net, for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended				Change				Nine Months Ended				Change
	2023		2022		$		%		2023		2022		$		%
Other income, net	$	787	$	131	$	656	501	%	$	2,676	$	712	$	1,964	276	%

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, 2023, compared to the prior period is due to increased interest income generated from invested cash as a result of higher interest rates in 2023 compared to 2022.

Income tax provision

The following table sets forth a comparison of our income tax provision for the three and nine months ended September 30 ($ in thousands):


	Three Months Ended						Change				Nine Months Ended						Change
	2023			2022			$		%		2023			2022			$		%
Income tax (benefit) provision	$	11,903		$	(1,447)		$	13,350	(923)	%	$	26,570		$	20,811		$	5,759	28%

Effective income tax rate	20.2		%	(2.8)		%					17.3		%	13.5		%

The increase in the effective tax rate for the three and nine months ended September 30, 2023, as compared to the prior periods, was due to a favorable true-up adjustment associated with research tax credits recorded in the third quarter of 2022, offset by liabilities for uncertain tax positions, and a decrease in state income taxes and excess tax benefits related to stock incentive awards in the current year.

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.

FINANCIAL CONDITION AND LIQUIDITY

As of September 30, 2023, we had cash and cash equivalents of $131.5 million compared to $173.9 million at December 31, 2022. We also had $21.2 million invested in investment grade corporate bonds, municipal bonds and asset-backed securities as of September 30, 2023. These investments have varying maturity dates through 2027, and are held as available-for-sale. As of September 30, 2023, we had $140.0 million outstanding borrowings under our 2021 Credit Agreement and one outstanding letter of credit totaling $750,000 in favor of a client contract. We believe our cash on hand, cash from operating activities, availability under our revolving line of credit, and access to the capital markets provide 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:


	2023		2022
Cash flows provided (used) by:
Operating activities	$	233,021	$	259,598
Investing activities	(40,610)		(125,754)
Financing activities	(234,782)		(257,088)
Net decrease in cash and cash equivalents	$	(42,371)	$	(123,244)

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. We currently believe that our cash on hand, cash provided by operating activities, and available credit are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, and share repurchases for at least the next twelve months.

For the nine months ended September 30, 2023, operating activities provided cash of $233.0 million. Operating activities that provided cash were primarily comprised of net income of $127.0 million, non-cash depreciation and amortization charges of $114.2 million, non-cash share-based compensation expense of $80.9 million and non-cash amortization of operating lease right-of-use assets of $12.3 million. Working capital, excluding cash, decreased approximately $101.8 million mainly due to the timing of higher tax payments and deferred taxes associated with IRC Section 174, higher accounts receivable from seasonally high maintenance billings, the timing of prepaid expenses, the timing of payroll expenses, and deferred taxes associated with stock option activity during the period. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings. Our renewal dates occur throughout the year, but our largest renewal billing cycles occur in the second and fourth quarters. In addition, subscription renewals are billed throughout the year.

Days sales outstanding (“DSO”) in accounts receivable were 112 days at September 30, 2023, compared to 115 days at December 31, 2022, and 107 days at September 30, 2022. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days. The decrease in DSO compared to December 31, 2022 is attributed to improved collection efforts. The increase in DSO compared to September 30, 2022, is attributed to the timing of payments from certain large clients and receipts from our state government partners.

Investing activities used cash of approximately $40.6 million in the nine months ended September 30, 2023. We invested $10.6 million and received $45.5 million in proceeds from investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates ranging from 2023 through 2027. Approximately $27.4 million of software development costs were capitalized. Approximately $12.5 million was invested in property and equipment, including $7.9 million related to real estate. The remaining additions were for computer equipment and furniture and fixtures in support of growth, particularly as we transition from our proprietary data centers to the public cloud. On August 8, 2023, we acquired CSI for the total purchase price of approximately $36.3 million, net of cash acquired of $415,000, consisting of $33.4 million paid in cash and $3.3 million related to related to indemnity holdbacks, subject to certain post-closing adjustments. We also paid $2.6 million primarily related to a small acquisition completed during first quarter 2023 and holdbacks related other acquisitions completed in 2022.

Financing activities used cash of $234.8 million in the nine months ended September 30, 2023, primarily attributable to repayment of $255.0 million of term debt, partially offset by payments received from stock option exercises, net of withheld shares for taxes upon vesting of equity awards and employee stock purchase plan activity.

In February 2019, our board of directors authorized the repurchase of 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 November 1, 2023, we have authorization from our board of directors to repurchase up to 2.3 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.

As of September 30, 2023, we had $600 million in outstanding principal for the Convertible Senior Notes due 2026.

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.

Under our amended 2021 Credit Agreement, we had $140 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, 2023. As of September 30, 2023, we had one outstanding letter of credit totaling $750,000. The letter of credit, which guarantees our performance under a client contract, renews annually and expires in the third quarter of 2026.

In the nine months ended September 30, 2023, and 2022, respectively, we paid interest of $16.8 million and $14.7 million. See Note 8, "Debt," to the condensed consolidated financial statements for discussions of the Convertible Senior Notes and the 2021 Credit Agreement.

We paid income taxes, net of refunds received, of $118.0 million and $35.3 million in the nine months ended September 30, 2023 and 2022, respectively. In the nine months ended September 30, 2023, stock option exercise activity generated net tax benefits of $5.6 million and reduced tax payments accordingly, as compared to $6.0 million in the same period in 2022.

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 anticipate that 2023 capital spending will be between $58 million and $60 million, including approximately $35 million of software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. We also expect cash tax payments to be higher as a result of IRC Section 174. Capital spending and cash tax payments are expected to be funded from existing cash balances and cash flows from operations.

On October 31, 2023, we completed two acquisitions for the total consideration of approximately $38 million, paid in all cash for one transaction and a mix of cash and stock for the other transaction. 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 lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements and they expire from one and 11 years. Some of these leases include options to extend for up to six years.

Other than the accelerated repayment of $255.0 million of the Term Loans under the amended 2021 Credit Agreement, there were no material changes to our future minimum contractual obligations since December 31, 2022, as previously disclosed in our Annual Report on Form 10-K filed with the SEC on February 22, 2023. Our estimated future obligations consist of debt, uncertain tax positions, leases, and purchase commitments as of September 30, 2023. Refer to Note 8, “Debt,” Note 12, “Income Tax,” Note 15, “Leases,” and Note 17, “Commitment and Contingencies,” to the condensed consolidated financial statements for related discussions.

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