Item 1. Financial Statements

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
Other non-current assets			83,384						63,182
			$	4,996,508					$	4,676,663
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable			$	145,386					$	146,339
Accrued liabilities			160,689						158,558
Operating lease liabilities			10,653						11,060
Current income tax payable			22,485						2,466
Deferred revenue			682,422						632,914
Current portion of term loans			—						49,801
Total current liabilities			1,021,635						1,001,138
Convertible senior notes due 2026, net			597,502						596,206
Deferred revenue, long-term			—						291
Deferred income taxes			36,660						78,590
Operating lease liabilities, long-term			33,674						39,822
Other long-term liabilities			31,925						22,621
Total liabilities			1,721,396						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 September 30, 2024 and December 31, 2023			481						481
Additional paid-in capital			1,491,935						1,354,787
Accumulated other comprehensive loss, net of tax			(163)						(326)
Retained earnings			1,801,578						1,603,773
Treasury stock, at cost; 5,361,877 and 5,858,476 shares in 2024 and 2023, respectively			(18,719)						(20,720)
Total shareholders' equity			3,275,112						2,937,995
			$	4,996,508					$	4,676,663

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

						Nine Months Ended September 30,
						2024						2023
Cash flows from operating activities:
Net income						$	197,805					$	127,016
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization						108,766						114,198
(Gains) losses from sale of investments						(2)						1
Share-based compensation expense						88,460						80,905
Amortization of operating lease right-of-use assets						7,262						12,258
Deferred income tax benefit						(41,504)						(44,000)
Other						228						398
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable						(7,901)						(37,768)
Income tax payable						20,019						(51,300)
Prepaid expenses and other current assets						(28,157)						(11,594)
Accounts payable						(922)						27,848
Operating lease liabilities						(9,392)						(8,224)
Accrued liabilities						6,510						(10,607)
Deferred revenue						49,383						28,357
Other long-term liabilities						9,304						5,533
Net cash provided by operating activities						399,859						233,021
Cash flows from investing activities:
Additions to property and equipment						(16,734)						(12,506)
Purchase of marketable security investments						—						(10,617)
Proceeds and maturities from marketable security investments						7,700						45,452
Investment in software development						(24,412)						(27,447)
Cost of acquisitions, net of cash acquired						(1,395)						(35,540)
Other						168						48
Net cash used by investing activities						(34,673)						(40,610)
Cash flows from financing activities:
Payment on term loans						(50,000)						(255,000)
Payment of debt issuance costs						(2,637)						—
Proceeds from exercise of stock options, net of withheld shares for taxes upon equity award settlement						47,433						8,438
Contributions from employee stock purchase plan						12,821						11,780
Net cash provided (used) by financing activities						7,617						(234,782)
Net increase (decrease) in cash and cash equivalents						372,803						(42,371)
Cash and cash equivalents at beginning of period						165,493						173,857
Cash and cash equivalents at end of period						$	538,296					$	131,486

See accompanying notes.

			Nine Months Ended September 30,
			2024						2023
Supplemental cash flow information:
Cash paid for interest			$	2,860					$	16,820
Cash paid for income taxes, net			45,660						118,000
Non-cash investing and financing activities:
Non-cash additions to property and equipment			$	111					$	834

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 June 30, 2024			48,148						$	481					$	1,425,536					$	(218)					$	1,725,681					(5,524)						$	(19,372)					$	3,132,108
Net income			—						—						—						—						75,897						—						—						75,897
Other comprehensive income, net of tax			—						—						—						55						—						—						—						55
Exercise of stock options and vesting of restricted stock units			—						—						30,894						—						—						153						961						31,855
Employee taxes paid for withheld shares upon equity award settlement			—						—						—						—						—						(1)						(307)						(307)
Stock compensation			—						—						31,187						—						—						—						—						31,187
Issuance of shares pursuant to employee stock purchase plan			—						—						4,306						—						—						10						41						4,347
Reimbursement of shares from escrow			—						—						12						—						—						—						(42)						(30)
Balance at September 30, 2024			48,148						$	481					$	1,491,935					$	(163)					$	1,801,578					(5,362)						$	(18,719)					$	3,275,112

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Income (Loss)						Retained Earnings						Treasury Stock												Total Shareholders' Equity
			Shares						Amount															Shares						Amount
Balance at June 30, 2023			48,148						$	481					$	1,272,315					$	(785)					$	1,517,859					(6,081)						$	(21,619)					$	2,768,251
Net income			—						—						—						—						47,011						—						—						47,011
Other comprehensive income, net of tax			—						—						—						263						—						—						—						263
Exercise of stock options and vesting of restricted stock units			—						—						6,200						—						—						29						398						6,598
Employee taxes paid for withheld shares upon equity award settlement			—						—						—						—						—						(1)						(282)						(282)
Stock compensation			—						—						26,981						—						—						—						—						26,981
Issuance of shares pursuant to employee stock purchase plan			—						—						3,983						—						—						11						46						4,029
Balance at September 30, 2023			48,148						$	481					$	1,309,479					$	(522)					$	1,564,870					(6,042)						$	(21,457)					$	2,852,851

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			—						—						—						—						197,805						—						—						197,805
Other comprehensive income, net of tax			—						—						—						163						—						—						—						163
Exercise of stock options and vesting of restricted stock units			—						—						34,324						—						—						542						36,872						71,196
Employee taxes paid for withheld shares for taxes upon equity award settlement			—						—						—						—						—						(52)						(23,763)						(23,763)
Stock compensation			—						—						88,460						—						—						—						—						88,460
Issuance of shares pursuant to employee stock purchase plan			—						—						12,685						—						—						34						136						12,821
Reimbursement of shares from escrow			—						—						1,679						—						—						(28)						(11,244)						(9,565)
Balance at September 30, 2024			48,148						$	481					$	1,491,935					$	(163)					$	1,801,578					(5,362)						$	(18,719)					$	3,275,112

			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			—						—						—						—						127,016						—						—						127,016
Other comprehensive income, net of tax			—						—						—						322						—						—						—						322
Exercise of stock options and vesting of restricted stock units			—						—						7,223						—						—						338						20,242						27,465
Employee taxes paid for withheld shares for taxes upon equity award settlement			—						—						—						—						—						(53)						(19,026)						(19,026)
Stock compensation			—						—						80,905						—						—						—						—						80,905
Issuance of shares pursuant to employee stock purchase plan			—						—						11,626						—						—						38						154						11,780
Balance at September 30, 2023			48,148						$	481					$	1,309,479					$	(522)					$	1,564,870					(6,042)						$	(21,457)					$	2,852,851

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 September 30, 2024, and December 31, 2023, and operating result amounts are for the three and nine months ended September 30, 2024, and 2023, 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 and nine months ended September 30, 2024 and 2023, we had approximately $55,000 and $163,000 and $263,000 and $322,000, respectively, of other comprehensive income, net of taxes, from our available-for-sale investment holdings.

(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 generally one to three years. In certain cases, we have concluded that some services with SaaS arrangements are not distinct and therefore we recognize the revenue ratably of the remaining contractual period once we have provided the customer assess to the SaaS deliverable. 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 where 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; services such as installation, training, consulting, software modification and customization to meet specific customer needs; 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 September 30, 2024, and December 31, 2023, total current and long-term accounts receivable, net of allowance for losses and sales adjustments was $626.8 million and $628.7 million, respectively. We have recorded unbilled receivables of $114.3 million and $119.2 million as of September 30, 2024, and December 31, 2023, respectively. Included in unbilled receivables are retention receivables of $11.1 million and $9.8 million as of September 30, 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 the current portion of accounts receivable in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with long-term portion of accounts receivable 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. Because 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 $18.4 million and $22.8 million as of September 30, 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 historic 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 and nine months ended September 30, 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. 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. Early adoption is permitted. This guidance will not 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 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.

For the three months ended September 30, 2024						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	144,445					$	22,179					$	—					$	166,624
Transaction-based fees						61,561						118,985						—						180,546
Maintenance						109,346						6,241						—						115,587
Professional services						53,947						10,515						—						64,462
Software licenses and royalties						5,424						764						—						6,188
Hardware and other						9,025						905						—						9,930
Intercompany						6,983						4,765						(11,748)						—
Total revenues						$	390,731					$	164,354					$	(11,748)					$	543,337
Segment operating income (loss)						$	139,874					$	32,866					$	(66,819)					$	105,921

For the three months ended September 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	120,747					$	17,762					$	—					$	138,509
Transaction-based fees						45,176						111,505						—						156,681
Maintenance						111,574						5,910						—						117,484
Professional services						52,413						8,713						—						61,126
Software licenses and royalties						7,531						3,023						—						10,554
Hardware and other						10,371						—						(41)						10,330
Intercompany						5,943						—						(5,943)						—
Total revenues						$	353,755					$	146,913					$	(5,984)					$	494,684
Segment operating income (loss)						$	121,560					$	31,411					$	(61,475)					$	91,496

For the nine months ended September 30, 2024						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	408,632					$	62,754					$	—					$	471,386
Transaction-based fees						169,146						353,563						—						522,709
Maintenance						329,724						18,390						—						348,114
Professional services						167,571						33,625						—						201,196
Software licenses and royalties						19,314						937						—						20,251
Hardware and other						25,198						905						6,913						33,016
Intercompany						19,665						5,229						(24,894)						—
Total revenues						$	1,139,250					$	475,403					$	(17,981)					$	1,596,672
Segment operating income (loss)						$	404,159					$	96,030					$	(198,813)					$	301,376

For the nine months ended September 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Revenues
Subscriptions:
SaaS						$	338,128					$	48,894					$	—					$	387,022
Transaction-based fees						130,761						355,661						—						486,422
Maintenance						331,609						17,545						—						349,154
Professional services						159,168						29,307						—						188,475
Software licenses and royalties						25,078						5,385						—						30,463
Hardware and other						21,951						—						7,330						29,281
Intercompany						17,878						—						(17,878)						—
Total revenues						$	1,024,573					$	456,792					$	(10,548)					$	1,470,817
Segment operating income (loss)						$	332,725					$	99,746					$	(179,503)					$	252,968

						Three Months Ended September 30,												Nine Months Ended September 30,
Reconciliation of reportable segment operating income to the Company's consolidated totals:						2024						2023						2024						2023
Total segment operating income						$	105,921					$	91,496					$	301,376					$	252,968
Amortization of acquired software						(9,244)						(9,035)						(27,723)						(26,879)
Amortization of other intangibles						(13,850)						(18,526)						(45,813)						(55,300)
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

(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 September 30, 2024						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	166,624					$	166,624
Transaction-based fees						—						180,546						180,546
Maintenance						—						115,587						115,587
Professional services						—						64,462						64,462
Software licenses and royalties						5,346						842						6,188
Hardware and other						9,930						—						9,930
Total						$	15,276					$	528,061					$	543,337

For the three months ended September 30, 2023						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	138,509					$	138,509
Transaction-based fees						—						156,681						156,681
Maintenance						—						117,484						117,484
Professional services						—						61,126						61,126
Software licenses and royalties						9,946						608						10,554
Hardware and other						10,330						—						10,330
Total						$	20,276					$	474,408					$	494,684

For the nine months ended September 30, 2024						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	471,386					$	471,386
Transaction-based fees						—						522,709						522,709
Maintenance						—						348,114						348,114
Professional services						—						201,196						201,196
Software licenses and royalties						17,997						2,254						20,251
Hardware and other						33,016						—						33,016
Total						$	51,013					$	1,545,659					$	1,596,672

For the nine months ended September 30, 2023						Products and services transferred at a point in time						Products and services transferred over time						Total
Revenues
Subscriptions:
SaaS						$	—					$	387,022					$	387,022
Transaction-based fees						—						486,422						486,422
Maintenance						—						349,154						349,154
Professional services						—						188,475						188,475
Software licenses and royalties						28,020						2,443						30,463
Hardware and other						29,281						—						29,281
Total						$	57,301					$	1,413,516					$	1,470,817

Recurring Revenues

The majority of our revenues are comprised of revenues from subscriptions and maintenance, which we consider to be recurring revenues. 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. The contract terms for subscription arrangements range from one to 10 years but are typically contracted for initial periods of generally one to three years. Nearly all of our on-premises software clients contract with us for maintenance and support. Maintenance and support are generally provided under auto-renewing annual contracts or 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 September 30, 2024						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	315,352					$	147,405					$	—					$	462,757
Non-recurring revenues						68,396						12,184						—						80,580
Intercompany						6,983						4,765						(11,748)						—
Total revenues						$	390,731					$	164,354					$	(11,748)					$	543,337

For the three months ended September 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	277,497					$	135,177					$	—					$	412,674
Non-recurring revenues						70,315						11,736						(41)						82,010
Intercompany						5,943						—						(5,943)						—
Total revenues						$	353,755					$	146,913					$	(5,984)					$	494,684

For the nine months ended September 30, 2024						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	907,502					$	434,707					$	—					$	1,342,209
Non-recurring revenues						212,083						35,467						6,913						254,463
Intercompany						19,665						5,229						(24,894)						—
Total revenues						$	1,139,250					$	475,403					$	(17,981)					$	1,596,672

For the nine months ended September 30, 2023						Enterprise Software						Platform Technologies						Corporate						Totals
Recurring revenues						$	800,498					$	422,100					$	—					$	1,222,598
Non-recurring revenues						206,197						34,692						7,330						248,219
Intercompany						17,878						—						(17,878)						—
Total revenues						$	1,024,573					$	456,792					$	(10,548)					$	1,470,817

(5) Deferred Revenue and Performance Obligations

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

						September 30, 2024						December 31, 2023
Enterprise Software						$	641,616					$	589,295
Platform Technologies						38,478						39,597
Corporate						2,328						4,313
Totals						$	682,422					$	633,205

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

						Nine months ended September 30, 2024
Balance as of December 31, 2023						$	633,205
Deferral of revenue						1,110,313
Recognition of deferred revenue						(1,061,096)
Balance as of September 30, 2024						$	682,422

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 September 30, 2024, was $2.13 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 $53.1 million and $49.2 million as of September 30, 2024, and December 31, 2023, respectively. Amortization expense was $4.8 million and $14.5 million for the three and nine months ended September 30, 2024, respectively, and $5.0 million and $13.6 million for the three and nine months ended September 30, 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

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

During the nine months ended September 30, 2024, the Company resolved an outstanding matter related to the acquisition of Resource Exploration, Inc. (“ResourceX”) for $60,000. The matter was fully indemnified and reimbursed using a combination of cash from acquisition date holdback and return of shares of our common stock from escrow.

During the nine months ended September 30, 2024, the Company settled litigation for $9.5 million related to a case 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.

(8) Debt

The following table summarizes our outstanding borrowings:

			Rate						Maturity Date						September 30, 2024						December 31, 2023
2024 Credit Agreement
Revolving credit facility			S + 1.125%						September 2029						$	—					$	—
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															(2,498)						(3,993)
Total borrowings, net															597,502						646,007
Less: current portion of debt															—						(49,801)
Carrying value															$	597,502					$	596,206

2024 Credit Agreement

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.

The 2024 Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of defaults. The 2024 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and limits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens.

Loans under the revolving credit facility will 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%. The margin in each case is based upon Tyler’s total net leverage ratio, as determined pursuant to the 2024 Credit Agreement. In addition to paying interest on the outstanding principal of loans under the revolving credit facility, the Company is required to pay a commitment fee initially in the amount of 0.125% per annum, ranging from 0.125% to 0.25% based upon the Company’s total net leverage ratio. Borrowings under the 2024 Credit Agreement may be used for general corporate purposes, including working capital requirements, acquisitions and capital expenditures.

As of September 30, 2024, we had no borrowings outstanding and were in compliance with our covenants under the 2024 Credit Agreement. For the nine months ended September 30, 2024, we repaid $50.0 million of the Term Loans and had no borrowings outstanding under the 2021 Credit Agreement prior to its termination on September 25, 2024.

Convertible Senior Notes due 2026

On March 9, 2021, we issued 0.25% Convertible Senior Notes due in 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 to 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. 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 up to, but excluding, the redemption date.

As of September 30, 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 rate for the borrowings under the Convertible Senior Notes was 0.25% as of September 30, 2024. For the nine months ended September 30, 2024, the effective interest rate was 8.66% for the Term Loans under the 2021 Credit Agreement and 0.54% for the Convertible Senior Notes. The following sets forth the interest expense recognized related to the borrowings and commitment fees for unused portions under the 2024 Credit Agreement, the 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2024						2023						2024						2023
Contractual interest expense - 2024 Revolving Credit Facility			$	—					$	—					$	—					$	—
Contractual interest expense - 2021 Revolving Credit Facility			(212)						(319)						(671)						(1,257)
Contractual interest expense - Term Loans			—						(3,787)						(761)						(13,993)
Contractual interest expense - Convertible Senior Notes			(375)						(375)						(1,125)						(1,125)
Amortization of debt discount and debt issuance costs			(648)						(1,327)						(2,115)						(3,504)
Total			$	(1,235)					$	(5,808)					$	(4,672)					$	(19,879)

As of September 30, 2024, we had one outstanding standalone letter of credit totaling $500,000. The letter of credit, which guarantees our performance under a client contract, automatically renews annually unless canceled in writing, and expires in the third quarter of 2025.

(9) Financial Instruments

The following table presents our financial instruments:

						September 30, 2024						December 31, 2023
Cash and cash equivalents						$	538,296					$	165,493
Available-for-sale investments						9,869						17,431
Equity investments						10,000						10,000
Total						$	558,165					$	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. 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 September 30, 2024, we have an accrued interest receivable balance of approximately $43,000 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 and nine months ended September 30, 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:

			September 30, 2024						December 31, 2023
Amortized cost			$	10,088					$	17,866
Unrealized gains			—						—
Unrealized losses			(219)						(435)
Estimated fair value			$	9,869					$	17,431

As of September 30, 2024, we have $6.0 million of available-for-sale debt securities with contractual maturities of one year or less and $3.9 million with contractual maturities greater than one year. As of September 30, 2024, no available-for-sale security has been in a loss position for one year or less and 10 securities with a fair value of $9.6 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 September 30,												Nine Months Ended September 30,
			2024						2023						2024						2023
Proceeds from sales and maturities			$	1,349					$	8,345					$	7,700					$	45,452
Realized gains (losses) on sales, net of tax			1						—						1						(1)

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 June 30, 2024			$	(218)					$	—					$	(218)
Other comprehensive income before reclassifications			56						—						56
Reclassification adjustment for net income on sale of available-for-sale securities, included in net income			(1)						—						(1)
Other comprehensive income			55						—						55
Balance as of September 30, 2024			$	(163)					$	—					$	(163)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of June 30, 2023			$	(785)					$	—					$	(785)
Other comprehensive income before reclassifications			263						—						263
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income			—						—						—
Other comprehensive income			263						—						263
Balance as of September 30, 2023			$	(522)					$	—					$	(522)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of December 31, 2023			$	(326)					$	—					$	(326)
Other comprehensive income before reclassifications			164						—						164
Reclassification adjustment for net income on sale of available-for-sale securities, included in net income			(1)						—						(1)
Other comprehensive income			163						—						163
Balance as of September 30, 2024			$	(163)					$	—					$	(163)

			Unrealized Loss On Available-for-Sale Securities						Other						Accumulated Other Comprehensive Loss
Balance as of December 31, 2022			$	(844)					$	—					$	(844)
Other comprehensive income before reclassifications			321						—						321
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income			1						—						1
Other comprehensive income			322						—						322
Balance as of September 30, 2023			$	(522)					$	—					$	(522)

(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 September 30, 2024:

			Level 1						Level 2						Level 3						Total
Cash and cash equivalents			$	538,296					$	—					$	—					$	538,296
Available-for-sale investments			—						9,869						—						9,869
Equity investments			—						—						10,000						10,000
Convertible Senior Notes due 2026			—						735,672						—						735,672

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 September 30, 2024, we have $9.9 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 September 30, 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, in 2024 we identified no indicators of impairment to goodwill, property and equipment, and other intangibles. Therefore, no impairment was recorded as of or for the nine months ended September 30, 2024.

Financial instruments measured at fair value only for disclosure purposes

The carrying amount of the Term Loan under the 2021 Credit Agreement 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 Term Loan. 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 Term Loan under the 2021 Credit Agreement and our Convertible Senior Notes:

			Fair Value at												Carrying Value at
			September 30, 2024						December 31, 2023						September 30, 2024						December 31, 2023
2021 Credit Agreement
Term Loan A-1			$	—					$	49,801					$	—					$	49,801
Convertible Senior Notes due 2026			735,672						609,168						597,502						596,206
			$	735,672					$	658,969					$	597,502					$	646,007

(12) Income Tax Provision

We had an effective income tax rate of 11.8% and 14.5% for the three and nine months ended September 30, 2024, respectively, compared to 20.2% and 17.3% for the three and nine months ended September 30, 2023, respectively. 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.

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.

(13) Share-Based Compensation

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

						Three Months Ended September 30,												Nine Months Ended September 30,
						2024						2023						2024						2023
Subscriptions, maintenance, and professional services						$	7,972					$	6,847					$	22,982					$	19,626
Sales and marketing expense						3,259						2,628						9,383						7,388
General and administrative expense						19,956						17,506						56,095						53,891
Total share-based compensation expense						$	31,187					$	26,981					$	88,460					$	80,905

(14) Earnings Per Share

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2024						2023						2024						2023
Numerator for basic and diluted earnings per share:
Net income			$	75,897					$	47,011					$	197,805					$	127,016
Denominator:
Weighted-average basic common shares outstanding			42,714						42,087						42,592						42,002
Assumed conversion of dilutive securities:
Stock awards			830						754						782						734
Convertible Senior Notes			150						—						50						—
Denominator for diluted earnings per share - Adjusted weighted-average shares			43,694						42,841						43,424						42,736
Earnings per common share:
Basic			$	1.78					$	1.12					$	4.64					$	3.02
Diluted			$	1.74					$	1.10					$	4.56					$	2.97

For the three and nine months ended September 30, 2024, and 2023, stock awards representing the right to purchase common stock of approximately 500 and 79,000 shares and 260,000 and 369,000 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 on our diluted net income per share if our average stock price for the period exceeded the conversion price of $493.44 per share of common stock. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and the resulting common shares, if dilutive, are included in the denominator of the diluted earnings per share calculation for the entire period being presented. For the three and nine months ended September 30, 2024, our average stock price for the period exceeded the conversion price resulting in a dilutive impact of the if-converted method as reflected in the table above. For the three and nine months ended September 30, 2023, our average stock price for the period did not exceed the conversion price, therefore there was no dilutive impact as reflected in the table above.

(15) Leases

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. We have no finance leases as of September 30, 2024. Right-of-use lease assets and lease liabilities for our operating leases are recorded in the condensed consolidated balance sheets. We had no lease restructuring costs during the three and nine months ended September 30, 2024. For the three and nine months ended September 30, 2023, we incurred lease restructuring costs, resulting in $3.1 million and $4.5 million of operating lease costs.

The components of operating lease expense were as follows:

Lease Costs						Three Months Ended September 30,												Nine Months Ended September 30,
						2024						2023						2024						2023
Operating lease cost						$	2,284					$	6,306					$	6,695					$	13,816
Short-term lease cost						510						540						1,583						1,576
Variable lease cost						219						233						593						769
Net lease cost						$	3,013					$	7,079					$	8,871					$	16,161

Supplemental information related to leases is as follows:

Other Information						Nine Months Ended September 30,
						2024						2023
Cash flows:
Cash paid amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases						$	9,456					$	9,118
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases						$	2,865					$	3,108
Lease term and discount rate:
Weighted average remaining lease term (years)						6.4						6.9
Weighted average discount rate						1.71		%				1.66		%

Rental income from third parties

We own office buildings in Bangor, Falmouth, Yarmouth, and Orono, 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, one of which was formerly a related party (see Note 16, "Related Party Transactions"). 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 and nine months ended September 30, 2024 and 2023, totaled $809,000 and $2.4 million and $552,000 and $1.6 million, respectively. Rental income is included in hardware and other revenue on the consolidated statements of income. As of September 30, 2024, future minimum operating rental income based on contractual agreements is as follows:

Year ending December 31,						Amount
2024 (Remaining)						$	802
2025						2,255
2026						1,274
2027						982
2028						704
Thereafter						—
Total						$	6,017

(16) Related Party Transactions

In April 2023, we entered into an arm’s length lease agreement under which we lease 25,000 square feet of office space in our Lubbock, Texas, office facility to a company co-owned by a former member of our board of directors. The lease agreement, which commenced on April 1, 2023, and was amended on April 8, 2024, has an initial term of five years with a pro-rata base rent of $25,000 per month until December 1, 2023, followed by a base rent of $58,000 for the next year and a 2.5% annual increase thereafter. We recognized rental income of $174,000 and $522,000 under this lease for the three and nine months ended September 30, 2024, respectively, and $150,000 for the nine months ended September 30, 2023.

(17) Commitments and Contingencies

Litigation

During the first quarter of 2022, we received a notice of termination for convenience under a contractual arrangement with a state government client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience.

The client was unresponsive to our outreach for several months, 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.

Purchase Commitments

We have contractual obligations for third-party technology used in our solutions and for other services that we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of September 30, 2024, the remaining aggregate minimum purchase commitment under these arrangements was approximately $663.8 million through 2031.

(18) Subsequent Events

There have been no material events or transactions that occurred subsequent to September 30, 2024.