Item 1. Financial Statements

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

						Three Months Ended March 31,
						2024						2023
Revenues:
Subscriptions						$	313,243					$	280,465
Maintenance						117,218						115,130
Professional services						64,806						60,929
Software licenses and royalties						8,734						10,130
Hardware and other						8,358						5,199
Total revenues						512,359						471,853
Cost of revenues:
Subscriptions, maintenance, and professional services						268,870						252,415
Software licenses and royalties						1,565						2,313
Amortization of software development						4,363						2,588
Amortization of acquired software						9,239						8,920
Hardware and other						4,656						5,780
Total cost of revenues						288,693						272,016
Gross profit						223,666						199,837
Sales and marketing expense						36,427						37,103
General and administrative expense						72,710						72,360
Research and development expense						29,433						26,987
Amortization of other intangibles						18,118						18,407
Operating income						66,978						44,980
Interest expense						(2,184)						(7,684)
Other income, net						1,845						1,246
Income before income taxes						66,639						38,542
Income tax provision						12,469						7,667
Net income						$	54,170					$	30,875
Earnings per common share:
Basic						$	1.28					$	0.74
Diluted						$	1.26					$	0.73

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

						Three Months Ended March 31,
						2024						2023
Net income						$	54,170					$	30,875
Other comprehensive income, net of tax:
Securities available-for-sale and transferred securities:
Change in net unrealized holding gain (loss) on available for sale securities during the period						53						94
Other comprehensive income, net of tax						53						94
Comprehensive income						$	54,223					$	30,969

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

			March 31, 2024 (unaudited)						December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents			$	188,237					$	165,493
Accounts receivable (less allowance for losses and sales adjustments of $20,198 in 2024 and $22,829 in 2023)			542,441						619,704
Short-term investments			8,707						10,385
Prepaid expenses			76,486						54,700
Other current assets			8,550						10,303
Total current assets			824,421						860,585
Accounts receivable, long-term			7,340						8,988
Operating lease right-of-use assets			37,874						39,039
Property and equipment, net			167,121						169,720
Other assets:
Software development costs, net			69,795						67,124
Goodwill			2,532,125						2,532,109
Other intangibles, net			901,434						928,870
Non-current investments			5,492						7,046
Other non-current assets			63,153						63,182
			$	4,608,755					$	4,676,663
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable			$	145,168					$	146,339
Accrued liabilities			106,446						158,558
Operating lease liabilities			11,147						11,060
Current income tax payable			38,293						2,466
Deferred revenue			571,871						632,914
Current portion of term loans			—						49,801
Total current liabilities			872,925						1,001,138
Convertible senior notes due 2026, net			596,638						596,206
Deferred revenue, long-term			—						291
Deferred income taxes			54,274						78,590
Operating lease liabilities, long-term			37,631						39,822
Other long-term liabilities			24,152						22,621
Total liabilities			1,585,620						1,738,668
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 March 31, 2024 and December 31, 2023			481						481
Additional paid-in capital			1,385,095						1,354,787
Accumulated other comprehensive loss, net of tax			(273)						(326)
Retained earnings			1,657,943						1,603,773
Treasury stock, at cost; 5,707,093 and 5,858,476 shares in 2024 and 2023, respectively			(20,111)						(20,720)
Total shareholders' equity			3,023,135						2,937,995
			$	4,608,755					$	4,676,663

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

						Three Months Ended March 31,
						2024						2023
Cash flows from operating activities:
Net income						$	54,170					$	30,875
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization						40,097						38,112
Share-based compensation expense						26,866						27,896
Amortization of operating lease right-of-use assets						2,522						3,804
Deferred income tax benefit						(24,334)						(18,556)
Other						(35)						499
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable						69,376						77,563
Income tax payable						35,827						25,670
Prepaid expenses and other current assets						(20,240)						(18,381)
Accounts payable						(1,140)						17,547
Operating lease liabilities						(3,461)						(2,246)
Accrued liabilities						(48,006)						(36,951)
Deferred revenue						(61,334)						(71,579)
Other long-term liabilities						1,531						456
Net cash provided by operating activities						71,839						74,709
Cash flows from investing activities:
Additions to property and equipment						(7,282)						(2,020)
Purchase of marketable security investments						—						(10,617)
Proceeds and maturities from marketable security investments						3,271						22,975
Investment in software development						(7,386)						(9,079)
Cost of acquisitions, net of cash acquired						(1,302)						(1,875)
Other						18						16
Net cash used by investing activities						(12,681)						(600)
Cash flows from financing activities:
Payment on term loans						(50,000)						(120,000)
Proceeds from exercise of stock options, net of withheld shares for taxes upon equity award settlement						10,033						(158)
Contributions from employee stock purchase plan						3,553						3,037
Net cash used by financing activities						(36,414)						(117,121)
Net increase (decrease) in cash and cash equivalents						22,744						(43,012)
Cash and cash equivalents at beginning of period						165,493						173,857
Cash and cash equivalents at end of period						$	188,237					$	130,845

See accompanying notes.

			Three Months Ended March 31,
			2024						2023
Supplemental cash flow information:
Cash paid for interest			$	1,741					$	6,784
Cash received for income taxes, net			(680)						(548)
Non-cash investing and financing activities:
Non-cash additions to property and equipment			$	277					$	201

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, 2023			48,148						$	481					$	1,354,787					$	(326)					$	1,603,773					(5,858)						$	(20,720)					$	2,937,995
Net income			—						—						—						—						54,170						—						—						54,170
Other comprehensive income, net of tax			—						—						—						53						—						—						—						53
Exercise of stock options and vesting of restricted stock units			—						—						(1,738)						—						—						195						22,978						21,240
Employee taxes paid for withheld shares upon equity award settlement			—						—						—						—						—						(26)						(11,207)						(11,207)
Stock compensation			—						—						26,866						—						—						—						—						26,866
Issuance of shares pursuant to employee stock purchase plan			—						—						3,513						—						—						10						40						3,553
Reimbursement of shares from escrow			—						—						1,667						—						—						(28)						(11,202)						(9,535)
Balance at March 31, 2024			48,148						$	481					$	1,385,095					$	(273)					$	1,657,943					(5,707)						$	(20,111)					$	3,023,135

			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			—						—						—						—						30,875						—						—						30,875
Other comprehensive income, net of tax			—						—						—						94						—						—						—						94
Exercise of stock options and vesting of restricted stock units			—						—						(668)						—						—						136						8,802						8,134
Employee taxes paid for withheld shares upon equity award settlement			—						—						—						—						—						(26)						(8,292)						(8,292)
Stock compensation			—						—						27,896						—						—						—						—						27,896
Issuance of shares pursuant to employee stock purchase plan			—						—						2,992						—						—						11						45						3,037
Balance at March 31, 2023			48,148						$	481					$	1,239,945					$	(750)					$	1,468,729					(6,244)						$	(22,272)					$	2,686,133

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 March 31, 2024, and December 31, 2023, and operating result amounts are for the three months ended March 31, 2024, and 2023, 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, 2023. 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 previous years have been reclassified to conform to the current year presentation.

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 months ended March 31, 2024 and 2023, we had approximately $53,000 and $94,000 of other comprehensive income, net of taxes, from our available-for-sale investment holdings during the three months ended March 31, 2023.

(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, 2023, filed with the SEC on February 21, 2024, 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

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

Subscription-based services consist primarily of revenues derived from software as a service ("SaaS") arrangements and transactions from digital government services; payment processing; and electronic filing (‘‘e-filing”). We recognize SaaS arrangements ratably over the terms of the arrangements, which range from one to 10 years, but are typically for periods of three to five years. For professional services associated with certain SaaS arrangements, we have concluded that the services are not distinct, and we recognize the revenue ratably over the remaining contractual period once we have provided the customer access to the software. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.

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. 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 as invoiced based on the amount billable to the customer. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period.

Transaction-based fees primarily relate to digital government services and online payment services, which are sometimes offered with the assistance of third-party vendors. In general, when we are the principal in a transaction, we record the revenue and related costs on a gross basis. Otherwise, we net the cost of revenue associated with the service against the gross revenue (amount billed to the customer) and record the net amount as revenue.

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 revenues 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.

As of March 31, 2024, and December 31, 2023, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $549.8 million and $628.7 million, respectively. We have recorded unbilled receivables of $121.1 million and $119.2 million at March 31, 2024, and December 31, 2023, respectively. Included in unbilled receivables are retention receivables of $10.7 million and $9.8 million at March 31, 2024, and December 31, 2023, 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 losses 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. Consequently, we have not recorded a reserve for credit losses. 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 allowances for losses and sales adjustments are $20.2 million and $22.8 million at March 31, 2024, and December 31, 2023, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of the likelihood of impairment of each reporting unit. If the conclusion of this assessment is that it is more likely than not that a reporting unit's fair value is more than its carrying value, we are not required to perform a quantitative impairment test. When testing goodwill for impairment quantitatively, we first compare the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds the fair value of that reporting unit, an impairment loss is recognized. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.

Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty, such as weighted average cost of capital and revenue growth rates which are forward looking and affected by expectations about future market or economic conditions. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge.

For the three months ended March 31, 2024, no triggering event or changes to circumstances indicated that a potential impairment had occurred.

RECENTLY PRONOUNCED ACCOUNTING STANDARDS

In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07 - Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. ASU 2023-07 enhances the disclosures required for reportable segments in annual and interim consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 – Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We do not expect that this guidance will have a material impact upon our financial position and results of operations.

(3) Segment and Related Information

We report our results in two reportable segments. Business units that have met the aggregation criteria have been combined into our 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: public administration solutions; courts and public safety solutions; education solutions, and property and recording solutions. The Platform Technologies ("PT") reportable segment provides public sector entities with software solutions to platform and transformative solutions including digital solutions, payment processing, streamlined data processing, and improve operations and workflows.

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 March 31, 2024						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	128,142					$	20,642					$	—					$	148,784
Transaction-based fees						51,884						112,575						—						164,459
Maintenance						111,182						6,036						—						117,218
Professional services						54,893						9,913						—						64,806
Software licenses and royalties						8,571						163						—						8,734
Hardware and other						8,358						—						—						8,358
Intercompany						6,171						—						(6,171)						—
Total revenues						$	369,201					$	149,329					$	(6,171)					$	512,359
Segment operating income (loss)						$	130,699					$	28,255					$	(64,619)					$	94,335

For the three months ended March 31, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	106,362					$	15,553					$	—					$	121,915
Transaction-based fees						42,052						116,498						—						158,550
Maintenance						110,081						5,049						—						115,130
Professional services						51,499						9,430						—						60,929
Software licenses and royalties						8,068						2,062						—						10,130
Hardware and other						5,199						—						—						5,199
Intercompany						5,083						—						(5,083)						—
Total revenues						$	328,344					$	148,592					$	(5,083)					$	471,853
Segment operating income (loss)						$	99,980					$	29,537					$	(57,210)					$	72,307

						Three Months Ended March 31,
Reconciliation of reportable segment operating income to the Company's consolidated totals:						2024						2023
Total segment operating income						$	94,335					$	72,307
Amortization of acquired software						(9,239)						(8,920)
Amortization of other intangibles						(18,118)						(18,407)
Interest expense						(2,184)						(7,684)
Other income, net						1,845						1,246
Income before income taxes						$	66,639					$	38,542

(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 March 31, 2024						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	148,784					$	148,784
Transaction-based fees						—						164,459						164,459
Maintenance						—						117,218						117,218
Professional services						—						64,806						64,806
Software licenses and royalties						8,100						634						8,734
Hardware and other						8,358						—						8,358
Total						$	16,458					$	495,901					$	512,359

For the three months ended March 31, 2023						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	121,915					$	121,915
Transaction-based fees						—						158,550						158,550
Maintenance						—						115,130						115,130
Professional services						—						60,929						60,929
Software licenses and royalties						9,281						849						10,130
Hardware and other						5,199						—						5,199
Total						$	14,480					$	457,373					$	471,853

Recurring Revenues

The majority of our revenues are 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 and payment processing. These revenues are considered recurring because revenues from these sources are expected to recur 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. 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. 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 March 31, 2024						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	291,208					$	139,253					$	—					$	430,461
Non-recurring revenues						71,822						10,076						—						81,898
Intercompany						6,171						—						(6,171)						—
Total revenues						$	369,201					$	149,329					$	(6,171)					$	512,359

For the three months ended March 31, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	258,495					$	137,100					$	—					$	395,595
Non-recurring revenues						64,766						11,492						—						76,258
Intercompany						5,083						—						(5,083)						—
Total revenues						$	328,344					$	148,592					$	(5,083)					$	471,853

(5) Deferred Revenue and Performance Obligations

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

						March 31, 2024						December 31, 2023
Enterprise Software						$	531,212					$	589,295
Platform Technologies						32,690						39,597
Corporate						7,969						4,313
Totals						$	571,871					$	633,205

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

						Three months ended March 31, 2024
Balance as of December 31, 2023						$	633,205
Deferral of revenue						274,562
Recognition of deferred revenue						(335,896)
Balance as of March 31, 2024						$	571,871

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 March 31, 2024, was $2.02 billion, of which we expect to recognize approximately 45% as revenue over the next 12 months and the remainder thereafter.

(6) Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be generally three to seven years. Deferred commissions were $49.0 million and $49.2 million as of March 31, 2024, and December 31, 2023, respectively. Amortization expense was $4.8 million and $4.3 million for the three months ended March 31, 2024, and 2023, 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

2024

We did not complete any new acquisitions during the three months ended March 31, 2024.

During the three months ended March 31, 2024, we settled litigation that was assumed with the 2022 purchase of Rapid Financial Solutions, LLC. Our purchase agreement included an escrow that fully indemnified and reimbursed Tyler under the terms of the purchase agreement by the return of 27,702 shares of our common stock, with the approximate value of $9.5 million ,that was issued to an escrow account at the time of the purchase.

(8) Debt

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

			Rate						Maturity Date						March 31, 2024						December 31, 2023
2021 Credit Agreement
Revolving credit facility			S + 1.125%						April 2026						$	—					$	—
Term Loan A-1			S + 1.125%						April 2026						—						50,000
Convertible Senior Notes due 2026			0.25%						March 2026						600,000						600,000
Total borrowings															600,000						650,000
Less: unamortized debt discount and debt issuance costs															(3,362)						(3,993)
Total borrowings, net															596,638						646,007
Less: current portion of debt															—						(49,801)
Carrying value															$	596,638					$	596,206

Amended 2021 Credit Agreement

In connection with the completion of the acquisition of NIC, Inc. on April 21, 2021, we, as borrower, entered into a $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”). 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. The amended 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. The Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, currently 0.15% 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.

For the three months ended March 31, 2024, we repaid $50.0 million of the Term Loans and have fully repaid amounts due under the amended 2021 Credit Agreement. Also as of March 31, 2024, we were in compliance with our covenants.

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 March 31, 2024, 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 Rate

The weighted average interest rates for the borrowings under Convertible Senior Notes due 2026 were 0.25%, as of March 31, 2024. For the three months ended March 31, 2024, the effective interest rate was 8.66% for our term loan borrowings under the amended 2021 Credit Agreement and 0.54% for the Convertible Senior Notes, respectively. The following sets forth the interest expense recognized related to the borrowings under the amended 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:

			Three Months Ended March 31,
			2024						2023
Contractual interest expense - Revolving Credit Facility			$	(230)					$	(313)
Contractual interest expense - Term Loans			(761)						(5,641)
Contractual interest expense - Convertible Senior Notes			(375)						(375)
Amortization of debt discount and debt issuance costs			(818)						(1,355)
Total			$	(2,184)					$	(7,684)

As of March 31, 2024, we had one outstanding standalone letter of credit totaling $750,000. 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.

(9) Financial Instruments

The following table presents our financial instruments:

						March 31, 2024						December 31, 2023
Cash and cash equivalents						$	188,237					$	165,493
Available-for-sale investments						14,199						17,431
Equity investments						10,000						10,000
Total						$	212,436					$	192,924

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 investment portfolio is classified as available-for-sale in order to have the flexibility to buy and sell investments and maximize cash liquidity for potential acquisitions or for debt repayments. 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 March 31, 2024, we have an accrued interest receivable balance of approximately $59,000 which is included in accounts receivable, net. 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 reductions to interest income in the period of the loss. During the three months ended March 31, 2024, we have recorded no 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:

			March 31, 2024						December 31, 2023
Amortized cost			$	14,563					$	17,866
Unrealized gains			—						—
Unrealized losses			(364)						(435)
Estimated fair value			$	14,199					$	17,431

As of March 31, 2024, we have $8.7 million of available-for-sale debt securities with contractual maturities of one year or less and $5.5 million with contractual maturities greater than one year. As of March 31, 2024, no available-for-sale debt securities has been in a loss position for one year or less and 16 securities with a fair value of $13.8 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 March 31,
			2024						2023
Proceeds from sales and maturities			$	3,271					$	22,975
Realized losses on sales, net of tax			—						—

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 December 31, 2023			$	(326)					$	—					$	(326)
Other comprehensive income			53						—						53
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			—						—						—
Other comprehensive income			53						—						53
Balance as of March 31, 2024			$	(273)					$	—					$	(273)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of December 31, 2022			$	(844)					$	—					$	(844)
Other comprehensive income			94						—						94
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			—						—						—
Other comprehensive income			94						—						94
Balance as of March 31, 2023			$	(750)					$	—					$	(750)

(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 March 31, 2024:

			Level 1						Level 2						Level 3						Total
Cash and cash equivalents			$	188,237					$	—					$	—					$	188,237
Available-for-sale investments			—						14,199						—						14,199
Equity investments			—						—						10,000						10,000
Convertible Senior Notes due 2026			—						604,920						—						604,920

The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of December 31, 2023:

			Level 1						Level 2						Level 3						Total
Cash and cash equivalents			$	165,493					$	—					$	—					$	165,493
Available-for-sale investments			—						17,431						—						17,431
Equity investments			—						—						10,000						10,000
2021 Credit Agreement
Term Loan A-1			—						49,801						—						49,801
Convertible Senior Notes due 2026			—						609,168						—						609,168

Assets that are measured at fair value on a recurring basis

Accounts receivables, accounts payables, short-term obligations and certain other assets carrying value approximate fair value because of the short maturity of these instruments.

As of March 31, 2024, we have $14.2 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 2 as they are based on inputs from quoted prices in markets that are not active or other observable market data.

Assets that are measured at fair value on a nonrecurring basis

As of March 31, 2024, 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 indicate fair value of the investment or indicate impairment. 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.

As described in Note 2 "Summary of Significant Accounting Policies", 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 2023, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, we identified no indicators of impairment to goodwill, property and equipment, and other intangibles and therefore, no impairment was recorded as of and for the three months ended March 31, 2024.

Financial instruments measured at fair value only for disclosure purposes

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 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 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 amended 2021 Credit Agreement and our Convertible Notes due 2026:

			Fair Value at												Carrying Value at
			March 31, 2024						December 31, 2023						March 31, 2024						December 31, 2023
2021 Credit Agreement
Revolving Credit Facility			$	—					$	—					$	—					$	—
Term Loan A-1			—						49,801						—						49,801
Convertible Senior Notes due 2026			604,920						609,168						596,638						596,206
			$	604,920					$	658,969					$	596,638					$	646,007

(12) Income Tax Provision

We had an effective income tax rate of 18.7% for the three months ended March 31, 2024, compared to 19.9% for the three months ended March 31, 2023. The decrease in the effective tax rate for the three months ended March 31, 2024, as compared to the prior period, is due to the increase in research tax credits and excess tax benefits related to stock incentive awards in the current year, offset by liabilities for uncertain tax positions, an increase in state income taxes, and an increase in non-deductible business expenses.

The effective income tax rates for the periods presented are 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.

We received income tax refunds, net of taxes paid of $680,000 and $548,000 in the three months ended March 31, 2024, and 2023, respectively.

(13) Share-Based Compensation Plan

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

						Three Months Ended March 31,
						2024						2023
Subscriptions, maintenance, and professional services						$	7,390					$	6,342
Sales and marketing expense						2,983						2,393
General and administrative expense						16,493						19,161
Total share-based compensation expense						$	26,866					$	27,896

(14) Earnings Per Share

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

			Three Months Ended March 31,
			2024						2023
Numerator for basic and diluted earnings per share:
Net income			$	54,170					$	30,875
Denominator:
Weighted-average basic common shares outstanding			42,332						41,832
Assumed conversion of dilutive securities:
Stock awards			768						674
Convertible Senior Notes			—						—
Denominator for diluted earnings per share - Adjusted weighted-average shares			43,100						42,506
Earnings per common share:
Basic			$	1.28					$	0.74
Diluted			$	1.26					$	0.73

For the three months ended March 31, 2024, and 2023, stock awards, representing the right to purchase common stock of approximately 162,000 and 501,000 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 months ended March 31, 2024, and 2023, 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 remaining terms of 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 March 31, 2024. Right-of-use lease assets and lease liabilities for our operating leases are recorded in the condensed consolidated balance sheets. During the three months ended March 31, 2024, we had no lease restructuring costs, and during the three months ended March 31, 2023, we incurred lease restructuring costs resulting in an additional $1.4 million of operating lease costs.

The components of operating lease expense were as follows:

Lease Costs						Three Months Ended March 31,
						2024						2023
Operating lease cost						$	2,165					$	4,391
Short-term lease cost						551						523
Variable lease cost						238						320
Net lease cost						$	2,954					$	5,234

Supplemental information related to leases is as follows:

Other Information						Three Months Ended March 31,
						2024						2023
Cash flows:
Cash paid amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases						$	3,185					$	2,510
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases						$	1,389					$	1,406
Lease term and discount rate:
Weighted average remaining lease term (years)						6.6						7.1
Weighted average discount rate						1.67		%				1.59		%

Rental income from third parties

We own office buildings in Bangor, Falmouth, and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; Moraine, Ohio; and Kingston Springs, Tennessee. 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 2024 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 months ended March 31, 2024, totaled $761,000, and for the three months ended March 31, 2023, totaled $466,000. Rental income is included in hardware and other revenue on the consolidated statements of income. As of March 31, 2024, future minimum operating rental income based on contractual agreements is as follows:

Year ending December 31,						Amount
2024 (Remaining)						$	2,418
2025						2,450
2026						1,171
2027						913
2028						734
Thereafter						—
Total						$	7,686

(16) Related Party Transactions

In April 2023, we entered into an arm's length lessor agreement under which we lease 25,000 square feet of office space in our Lubbock, Texas facility to a company co-owned by a member of the board of directors. Such member no longer serves on the board of directors. 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 $181,000 under this lease for the three months ended March 31, 2024.

(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. At the client's invitation, we then engaged directly with the client on payment resolution. The engagement was not successful. On March 20, 2024, reinitiated our lawsuit. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We 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 March 31, 2024, the remaining aggregate minimum purchase commitment under these arrangements was approximately $699.1 million through 2031.

(18) Subsequent Events

There have been no material events or transactions that occurred subsequent to March 31, 2024.