Tyler Technologies 10-Q 2024-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒			QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2024

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware						75-2303920
(State or other jurisdiction of incorporation or organization)						(I.R.S. employer identification no.)

5101 TENNYSON PARKWAY			PLANO			Texas			75024
(Address of principal executive offices)			(City)			(State)			(Zip code)

(972) 713-3700

(Registrant’s telephone number, including area code)

Title of each class			Trading symbol			Name of each exchange on which registered
COMMON STOCK, $0.01 PAR VALUE			TYL			New York Stock Exchange

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

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

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

Large accelerated filer						☒						Accelerated filer						☐
Non-accelerated filer						☐						Smaller reporting company						☐
												Emerging growth company						☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares of common stock of registrant outstanding on October 21, 2024 was 42,798,585.

PART I. FINANCIAL INFORMATION

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2024						2023						2024						2023
Revenues:
Subscriptions						$	347,170					$	295,190					$	994,095					$	873,444
Maintenance						115,587						117,484						348,114						349,154
Professional services						64,462						61,126						201,196						188,475
Software licenses and royalties						6,188						10,554						20,251						30,463
Hardware and other						9,930						10,330						33,016						29,281
Total revenues						543,337						494,684						1,596,672						1,470,817
Cost of revenues:
Subscriptions, maintenance, and professional services						283,750						247,781						829,765						755,985
Software licenses and royalties						1,870						3,120						4,995						7,865
Amortization of software development						4,961						3,083						13,808						8,568
Amortization of acquired software						9,244						9,035						27,723						26,879
Hardware and other						6,052						6,505						21,439						23,346
Total cost of revenues						305,877						269,524						897,730						822,643
Gross profit						237,460						225,160						698,942						648,174
Sales and marketing expense						38,203						35,898						116,195						110,104
General and administrative expense						72,460						78,519						220,590						228,560
Research and development expense						30,120						28,282						88,504						83,421
Amortization of other intangibles						13,850						18,526						45,813						55,300
Operating income						82,827						63,935						227,840						170,789
Interest expense						(1,235)						(5,808)						(4,672)						(19,879)
Other income, net						4,504						787						8,232						2,676
Income before income taxes						86,096						58,914						231,400						153,586
Income tax provision						10,199						11,903						33,595						26,570
Net income						$	75,897					$	47,011					$	197,805					$	127,016
Earnings per common share:
Basic						$	1.78					$	1.12					$	4.64					$	3.02
Diluted						$	1.74					$	1.10					$	4.56					$	2.97

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2024						2023						2024						2023
Net income						$	75,897					$	47,011					$	197,805					$	127,016
Other comprehensive income, net of tax:
Securities available-for-sale and transferred securities:
Change in net unrealized holding gain on available for sale securities during the period						56						263						164						321
Reclassification adjustment for net income (loss) on sale of available for sale securities, included in net income						(1)						—						(1)						1
Other comprehensive income, net of tax						55						263						163						322
Comprehensive income						$	75,952					$	47,274					$	197,968					$	127,338

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

			September 30, 2024 (unaudited)						December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents			$	538,296					$	165,493
Accounts receivable (less allowance for losses and sales adjustments of $18,404 in 2024 and $22,829 in 2023)			619,508						619,704
Short-term investments			5,985						10,385
Prepaid expenses			68,352						54,700
Other current assets			6,423						10,303
Total current assets			1,238,564						860,585
Accounts receivable, long-term			7,331						8,988
Operating lease right-of-use assets			34,741						39,039
Property and equipment, net			165,272						169,720
Other assets:
Software development costs, net			76,580						67,124
Goodwill			2,531,653						2,532,109
Other intangibles, net			855,099						928,870
Non-current investments			3,884						7,046

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) 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, security vulnerabilities and software updates; (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 rising labor costs, 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. 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”) and transaction-based services primarily related to digital government services and payment processing. In addition, we provide professional IT services to our clients, including software and hardware installation, data conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. Additionally, we provide property appraisal services for taxing jurisdictions.

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 platform and transformative solutions including digital solutions, payment processing, streamlined data processing, and improved operations and workflows.

We evaluate performance based on several factors. 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 our intercompany transactions relate to contracts involving more than one business 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

2024

We did not complete any acquisitions during the nine months ended September 30, 2024.

2023

On October 31, 2023, we acquired Resource Exploration, Inc. (“ResourceX”), a leading provider of budgeting software to the public sector. Also on October 31, 2023, we acquired ARInspect, Inc. (“ARInspect”), a leading provider of AI-powered machine learning solutions for public sector field operations. On August 8, 2023, we acquired Computing System Innovations, LLC (“CSI”), a leading provider of artificial intelligence automation, redaction, and indexing solution for courts, recorders, attorneys, and others.

The actual operating results of CSI and ResourceX are included in the operating results of the ES segment from their respective dates of acquisition. The operating results of ARInspect are included in the operating results of the PT segment since the date of acquisition.

Operating Result**s

For the three and nine months ended September 30, 2024, total revenues increased 10% and 9%, respectively, compared to the prior period primarily due to an increase in subscription revenue. Revenues from recent acquisitions contributed $3.0 million, or 1%, and $9.8 million, or 1%, to the total revenue increase for the three and nine months ended September 30, 2024, respectively, compared to the prior period.

Subscriptions revenue grew 18% and 14% for the three and nine months ended September 30, 2024, respectively, compared to the prior period, primarily due to an ongoing shift toward SaaS arrangements for both new and existing clients, along with growth in certain transaction-based revenues.

Our backlog as of September 30, 2024, was $2.13 billion, a 9% increase compared to September 30, 2023.

Our total employee count increased to 7,386 as of September 30, 2024, including 50 employees who joined us through acquisitions completed since September 30, 2023, from 7,301 as of September 30, 2023.

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 income. 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 revenues primarily consist of revenues derived from our SaaS arrangements and transaction-based fees. 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 revenues 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 $1.85 billion and $1.65 billion as of September 30, 2024, and 2023, respectively. ARR increased 12% compared to the prior period primarily due to an increase in subscriptions revenue resulting from an ongoing shift toward SaaS arrangements for both new and existing clients and expansion in transaction-based fees.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our 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, 2023. 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, 2023.

ANALYSIS OF RESULTS OF OPERATIONS

			Percent of Total Revenues
			Three Months Ended September 30,												Nine Months Ended September 30,
			2024						2023						2024						2023
Revenues:
Subscriptions			63.9		%				59.7		%				62.2		%				59.4		%
Maintenance			21.3						23.7						21.8						23.6
Professional services			11.9						12.4						12.6						12.8
Software licenses and royalties			1.1						2.1						1.3						2.1
Hardware and other			1.8						2.1						2.1						2.1
Total revenues			100.0						100.0						100.0						100.0
Cost of revenues:
Subscriptions, maintenance, and professional services			52.2						50.1						52.0						51.4
Software licenses, royalties, and amortization of acquired software			2.0						2.5						2.0						2.4
Amortization of software development			0.9						0.6						0.9						0.6
Hardware and other			1.1						1.3						1.3						1.6
Sales and marketing expense			7.0						7.3						7.3						7.5
General and administrative expense			13.3						15.9						13.8						15.5
Research and development expense			5.5						5.7						5.5						5.7
Amortization of other intangibles			2.5						3.7						2.9						3.7
Operating income			15.5						12.9						14.3						11.6
Interest expense			(0.2)						(1.2)						(0.3)						(1.4)
Other income, net			0.8						0.2						0.5						0.2
Income before income taxes			16.1						11.9						14.5						10.4
Income tax provision			1.9						2.4						2.1						1.8
Net income			14.2		%				9.5		%				12.4		%				8.6		%

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
						2024						2023						$						%						2024						2023						$						%
ES						$206,006						$165,923						$40,083						24%						$577,778						$468,889						$108,889						23%
PT						141,164						129,267						11,897						9						416,317						404,555						11,762						3
Total subscriptions revenue						$347,170						$295,190						$51,980						18%						$994,095						$873,444						$120,651						14%

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 ("e-filing") solutions for which revenue is derived from transaction fees and fixed-fee arrangements.

Subscriptions revenue grew 18% and 14% for the three and nine months ended September 30, 2024, respectively, compared to the prior period, primarily due to an ongoing shift toward SaaS arrangements, along with growth in certain transaction-based revenues. Subscription revenues from recent acquisitions contributed $1.3 million, or 0.4%, and $3.8 million, or 0.4%, to the increase for the three and nine months ended September 30, 2024, respectively.

Total subscriptions revenue derived from SaaS fees was $166.6 million and $471.4 million for the three and nine months ended September 30, 2024, respectively, compared to $138.5 million and $387.0 million for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2024, SaaS fees grew 20%, or $28.1 million, and 22%, or $84.4 million, respectively, 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, 2024, we added 181 and 584 new SaaS clients, respectively, and 108 and 309 existing on-premises clients, respectively, elected to convert to our SaaS model. Since September 30, 2023, we have added 740 new SaaS clients, while 401 existing on-premises clients have converted to our SaaS offerings. Our new software contract mix for the nine months ended September 30, 2024, was approximately 11% perpetual software license arrangements and approximately 89% subscription-based arrangements, compared to approximately 19% perpetual software license arrangements and approximately 81% subscription-based arrangements for the nine months ended September 30, 2023.

Total subscriptions revenue derived from transaction-based fees was $180.6 million and $522.7 million for the three and nine months ended September 30, 2024, respectively, compared to $156.7 million and $486.4 million for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2024, transaction-based fees for both periods grew 15%, or $23.9 million, and 7%, or $36.3 million, respectively, compared to prior period. Contributing to the growth in transaction-based fees for the three and nine months ended September 30, 2024, are the new transaction customers and volume increases from online payments and e-filing services, as well as the impact of transaction-based fees from recent acquisitions of $1.3 million and $3.8 million, respectively, compared to prior period. These increases compared to prior period are partially offset by a change from the gross revenue model to the net revenue model for payments revenue under one of our state enterprise agreements that results in merchant fees recorded as a reduction in revenue rather than as cost of revenues.

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
						2024						2023						$						%						2024						2023						$						%
ES						$	109,346					$	111,574					$	(2,228)					(2)		%				$	329,724					$	331,609					$	(1,885)					(1)		%
PT						6,241						5,910						331						6						18,390						17,545						845						5
Total maintenance revenue						$	115,587					$	117,484					$	(1,897)					(2)		%				$	348,114					$	349,154					$	(1,040)					—		%

We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue decreased 2% for the three months ended September 30, 2024, and was flat for the nine months ended September 30, 2024, compared to the prior period. For the three and nine months ended September 30, 2024, maintenance revenue declined primarily due to the impact of clients converting from on-premises license arrangements to SaaS, partially offset by maintenance price increases.

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
						2024						2023						$						%						2024						2023						$						%
ES						$	53,947					$	52,413					$	1,534					3		%				$	167,571					$	159,168					$	8,403					5		%
PT						10,515						8,713						1,802						21						33,625						29,307						4,318						15
Total professional services revenue						$	64,462					$	61,126					$	3,336					5		%				$	201,196					$	188,475					$	12,721					7		%

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 services. New clients who implement our software generally contract with us to provide the related professional services. Existing clients also periodically purchase additional training, consulting and minor programming services.

Professional services revenue increased 5% and 7% for the three and nine months ended September 30, 2024, respectively, compared to the prior period. The increase is primarily attributable to higher new contract volume along with increased billing rates.

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
						2024						2023						$						%						2024						2023						$						%
ES						$	5,424					$	7,531					$	(2,107)					(28)		%				$	19,314					$	25,078					$	(5,764)					(23)		%
PT						764						3,023						(2,259)						(75)						937						5,385						(4,448)						(83)
Total software licenses and royalties revenue						$	6,188					$	10,554					$	(4,366)					(41)		%				$	20,251					$	30,463					$	(10,212)					(34)		%

Software licenses and royalties revenue decreased 41% and 34% for the three and nine months ended September 30, 2024, respectively, compared to the prior period. The decrease is primarily attributed to the shift in the mix of new software contracts toward more SaaS.

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 that software license revenues will continue to decline as we 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
						2024						2023						$						%						2024						2023						$						%
Subscriptions, maintenance, and professional services						$	283,750					$	247,781					$	35,969					15		%				$	829,765					$	755,985					$	73,780					10		%
Software licenses and royalties						1,870						3,120						(1,250)						(40)						4,995						7,865						(2,870)						(36)
Amortization of software development						4,961						3,083						1,878						61						13,808						8,568						5,240						61
Amortization of acquired software						9,244						9,035						209						2						27,723						26,879						844						3
Hardware and other						6,052						6,505						(453)						(7)						21,439						23,346						(1,907)						(8)
Total cost of revenues						$	305,877					$	269,524					$	36,353					13		%				$	897,730					$	822,643					$	75,087					9		%

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 development, ongoing 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, 2024, increased $36.0 million, or 15%, and $73.8 million, or 10%, respectively, compared to the prior period. The impact from recent acquisitions was $1.3 million and $5.0 million for the three and nine months ended September 30, 2024, respectively. The remaining subscriptions, maintenance and professional services expenses increased 14% and 9% for the three and nine months ended September 30, 2024, respectively, due to increased hosting costs as we expand our SaaS client base and transition from our proprietary data centers to the public cloud, together with higher personnel costs. Our professional services staff grew by 127 employees since September 30, 2023, as we increased hiring to ensure that we are well-positioned to deliver our current backlog and anticipated new business. The increases were partially offset by a reduction in merchant fees associated with the change from the gross model to the net model for payments revenue under one of our state enterprise agreements.

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, 2024, decreased $1.3 million, or 40%, and $2.9 million, or 36%, respectively, compared to the prior period due to lower 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, 2024, amortization of software development costs increased $1.9 million, or 61%, and $5.2 million, or 61%, 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, 2024, amortization of acquired software increased 2%, or $0.2 million, and 3%, or $0.8 million, respectively, compared to the prior period, due to amortization of newly acquired software from recent acquisitions completed in fiscal year 2023, partially offset by assets becoming fully amortized in the fourth quarter 2023.

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
						2024						2023						Change						2024						2023						Change
Overall gross margin						43.7		%				45.5		%				(1.8)		%				43.8		%				44.1		%				(0.3)		%

Overall Gross Margin. For the three and nine months ended September 30, 2024, our overall gross margin decreased 1.8% and 0.3%, respectively, compared to the prior period. For the three and nine months ended September 30, 2024, respectively, the decline in the overall gross margin compared to prior period is attributed to lower revenue from software licenses and maintenance, higher software development amortization expense, and higher personnel costs. The decline in overall gross margin compared to the prior period was partially offset by a higher revenue mix for subscription revenues compared to the prior period, resulting in an increase in incremental margin related to software services, maintenance and subscriptions.

Sales and marketing expense

Sales and marketing (“S&M”) expense 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
						2024						2023						$						%						2024						2023						$						%
Sales and marketing expense						$	38,203					$	35,898					$	2,305					6		%				$	116,195					$	110,104					$	6,091					6		%

S&M expense as a percentage of revenues was 7.0% and 7.3%, respectively, for the three and nine months ended September 30, 2024, compared to 7.3% and 7.5%, for the three and nine months ended September 30, 2023, respectively. For both the three and nine months ended September 30, 2024, S&M expense increased approximately 6%, compared to the prior period. The increase in S&M expense is primarily attributed to higher bonus, commission, and trade show expenses, offset by lower professional fees related to marketing and advertising.

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
						2024						2023						$						%						2024						2023						$						%
General and administrative expense						$	72,460					$	78,519					$	(6,059)					(8)		%				$	220,590					$	228,560					$	(7,970)					(3)		%

G&A expense as a percentage of revenue was 13.3% and 13.8%, respectively, for the three and nine months ended September 30, 2024, compared to 15.9% and 15.5% for the three and nine months ended September 30, 2023. G&A expense decreased 8% and 3% for the three and nine months ended September 30, 2024, respectively, compared to the prior period. For the three months ended September 30, 2024, the decrease in G&A expense, compared to prior period, is primarily attributed to lower facilities costs resulting from lease restructurings, along with lower depreciation expense. For the nine months ended September 30, 2024, the decline in G&A expense is primarily attributed to lower facilities costs resulting from lease restructurings, partially offset by higher share-based compensation costs and an increase in software and other IT support costs.

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.

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
						2024						2023						$						%						2024						2023						$						%
Research and development expense						$	30,120					$	28,282					$	1,838					6		%				$	88,504					$	83,421					$	5,083					6		%

Research and development expense increased 6%, for both the three and nine months ended September 30, 2024, compared to the prior period, mainly due to a number of product development initiatives shifting from capitalized development projects to projects that are expensed to research and development.

Amortization of other intangibles

Other intangibles represents the portion of purchase price allocated to the identified intangible assets for customer-related intangibles, trade names and leases acquired. 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 other 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
						2024						2023						$						%						2024						2023						$						%
Amortization of other intangibles						$	13,850					$	18,526					$	(4,676)					(25)		%				$	45,813					$	55,300					$	(9,487)					(17)		%

For the three and nine months ended September 30, 2024, amortization of other intangibles decreased compared to the prior period due to the impact of certain trade name intangible assets becoming fully amortized as a result of accelerated amortization expense in the fourth quarter of 2023 and partially in 2024.

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
						2024						2023						$						%						2024						2023						$						%
Interest expense						$	(1,235)					$	(5,808)					$	4,573					(79)		%				$	(4,672)					$	(19,879)					$	15,207					(76)		%

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, 2024, compared to the prior period is primarily attributable to lower interest incurred as a result of our repayment of the Term Loans.

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
						2024						2023						$						%						2024						2023						$						%
Other income, net						$	4,504					$	787					$	3,717					472		%				$	8,232					$	2,676					$	5,556					208		%

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, 2024, compared to the prior period is due to increased interest income generated from higher invested cash balances and higher interest rates in 2024 compared to 2023.

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
						2024						2023						$						%						2024						2023						$						%
Income tax provision						$	10,199					$	11,903					$	(1,704)					(14)		%				$	33,595					$	26,570					$	7,025					26%
Effective income tax rate						11.8		%				20.2		%																14.5		%				17.3		%

The decrease in the effective tax rate for the three and nine months ended September 30, 2024, as compared to the prior period, is due to an increase in excess tax benefits related to stock incentive awards in the current year and lower non-deductible business expenses and liabilities for uncertain tax positions, partially offset by an increase in state taxes and lower research tax credit benefits.

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.

FINANCIAL CONDITION AND LIQUIDITY

As of September 30, 2024, we had cash and cash equivalents of $538.3 million, compared to $165.5 million as of December 31, 2023. We also had $9.9 million invested in investment grade corporate bonds, municipal bonds and asset-backed securities as of September 30, 2024. These investments have varying maturity dates through 2027 and are held as available-for-sale. 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:

						2024						2023
Cash flows provided (used) by:
Operating activities						$	399,859					$	233,021
Investing activities						(34,673)						(40,610)
Financing activities						7,617						(234,782)
Net increase (decrease) in cash and cash equivalents						$	372,803					$	(42,371)

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

For the nine months ended September 30, 2024, operating activities provided cash of $399.9 million. Operating activities that provided cash were primarily comprised of net income of $197.8 million, non-cash depreciation and amortization charges of $108.8 million, non-cash share-based compensation expense of $88.5 million, and non-cash amortization of operating lease right-of-use assets of $7.3 million. Changes in working capital, excluding cash, decreased cash provided by operating activities by approximately $2.7 million, mainly due to higher accounts receivable, timing of prepaid expenses, timing of payments for operating leases, and deferred taxes associated with stock option activity during the period. These decreases were offset by an increase in deferred revenue during the period and an increase of income tax payable due to the timing of payments. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance and subscription renewal billings. Our renewal dates occur throughout the year, but our largest maintenance billing cycles occur in the second and fourth quarters. Subscription renewals are billed throughout the year.

Investing activities used cash of approximately $34.7 million in the nine months ended September 30, 2024. We received $7.7 million in proceeds from investment grade corporate bonds, municipal bonds and asset-backed securities. Approximately $24.4 million of software development costs were capitalized. Approximately $16.7 million was invested in property and equipment, including $7.5 million related to real estate. The remaining additions were for computer equipment and furniture and fixtures in support of growth. We also paid $1.4 million for working capital holdbacks related to acquisitions completed in 2023.

Financing activities used cash of $7.6 million in the nine months ended September 30, 2024, which is attributable to repayment of $50.0 million of term debt, partially offset by $47.4 million in payments received from stock option exercises, net of withheld shares for taxes upon equity awards settlement and $12.8 million in contributions from 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 October 23, 2024, we have authorization from our board of directors to repurchase up to 2.2 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.

On September 25, 2024, the Company entered into a $700.0 million credit agreement with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender (the “2024 Credit Agreement”). The 2024 Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of up to $700.0 million including subfacilities for standby letters of credit and swingline loans. The 2024 Credit Agreement matures on September 25, 2029, and loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any SOFR breakage costs. The Company incurred issuance fees of $2.6 million in connection with the 2024 Credit Agreement. The 2024 Credit Agreement replaces Tyler’s existing $500.0 million unsecured credit facility under the credit agreement dated April 21, 2021, among the Company and various lenders party thereto (the “2021 Credit Agreement”), which was scheduled to mature in April 2026.

We repaid all amounts due under the Term Loans under the 2021 Credit Agreement and have no outstanding borrowings under the 2024 Credit Agreement, with an available borrowing capacity of $700.0 million as of September 30, 2024.

As of September 30, 2024, we had $600.0 million in outstanding principal for the Convertible Senior Notes due 2026.

In the nine months ended September 30, 2024, and 2023, we paid interest of $2.9 million and $16.8 million, respectively. See Note 8, “Debt,” to the condensed consolidated financial statements for discussions of the Convertible Senior Notes and the 2024 Credit Agreement.

We made income tax payments, net of refunds, of $45.7 million and $118.0 million in the nine months ended September 30, 2024, and 2023, respectively. In the nine months ended September 30, 2024, stock option exercise activity generated net tax benefits of $17.2 million and reduced tax payments accordingly, as compared to $5.6 million in the same period in 2023.

We anticipate that 2024 capital spending will be between $47.0 million and $49.0 million, including approximately $7.6 million related to real estate and approximately $31.0 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. Capital spending and cash tax payments are expected to be funded from existing cash balances and cash flows from operations.

We lease office facilities, transportation, and other equipment for use in our operations. Most of our leases are non-cancelable operating lease agreements with remaining terms of one to 10 years. Some of these leases include options to extend for up to six years.

Other than the accelerated repayment of $50.0 million of the Term Loans under the 2021 Credit Agreement, there were no material changes to our future minimum contractual obligations since December 31, 2023, as previously disclosed in our Annual Report on Form 10-K filed with the SEC on February 21, 2024. Our estimated future obligations consist of debt, uncertain tax positions, leases, and purchase commitments as of September 30, 2024. 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.

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

In accordance with the 2024 Credit Agreement, the borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) plus a margin of 0.125% to 0.75% or (2) the one-, three-, or six-month SOFR rate plus a margin of 1.125% to 1.75%.

As of September 30, 2024, we had no outstanding borrowings under the 2024 Credit Agreement and therefore are not subject to any interest risk.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures. Management, with the participation of the chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. Based on this evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2024.

Changes in Internal Control over Financial Reporting

The Company completed its second phase implementation for our new accounting and financial management software effective July 1, 2024, which is expected to improve the efficiency of certain financial and related business processes. The second phase implementation was not made in response to any identified deficiency or weakness in our internal controls over financial reporting. The second phase implementation was subject to various testing and review procedures prior to and after execution. We have updated our internal controls over financial reporting, as necessary, to accommodate any modifications to our business processes or accounting procedures due to the implementation. Management will continue to monitor, test and evaluate the operating effectiveness of internal controls related to the new accounting and financial management software during the post-implementation period to ensure that effective controls over financial reporting continue to be maintained.

Other than as described in the preceding paragraph, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

ITEM 1. Legal Proceedings

During the first quarter 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, and on August 23, 2022, we filed a lawsuit to enforce our rights and remedies under the applicable contractual arrangement. The client subsequently asked us to negotiate directly with the client to attempt to resolve the dispute. The negotiations were not successful, and on March 20, 2024, we 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.

In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 2023 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the nine months ended September 30, 2024, there were no material changes in the information regarding risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2023.

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

None

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

None

(c) Trading Plans

None

Exhibit 31.1						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1						Certifications Pursuant Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 10.1						Credit Agreement dated September 25, 2024, among Tyler Technologies, Inc. and Wells Fargo Bank, N. A. as Administrative Agent and other lenders party hereto (filed as Exhibit 10.1 to our Form 8-K dated September 30, 2024, and incorporated by reference herein)
Exhibit 101.INS						Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags, including Cover Page XBRL tags, are embedded within the Inline XBRL Document.
Exhibit 101.SCH						Inline XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB						Inline XBRL Extension Labels Linkbase Document.
Exhibit 101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*File herewith

SIGNATURES

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

			TYLER TECHNOLOGIES, INC.
By:			/s/ Brian K. Miller
			Brian K. Miller
			Executive Vice President and Chief Financial Officer
			(principal financial officer and an authorized signatory)

Date: October 23, 2024