Speaking from Experience
2009 Annual Report
On the cover from left to right:
Ken Miles, Courts & Justice Solutions
Melissa Baer, Appraisal & Property Tax Solutions
Mandye Perez, Public Safety Solutions
Every day, Tyler Technologies draws from our
many years of experience to empower the people
who serve the public. With best-in-class software
solutions and deep domain expertise, Tyler helps
local governments and schools manage their
many complex operations—including financial
management, property appraisal and assessment,
school administration, court case management and
law enforcement. Following an outstanding financial
performance in 2008, Tyler once again grew
revenues and earnings in 2009, delivering solid
results for our shareholders, clients and employees.
To Our Shareholders
earnest commitment to our clients—we are positioned
Tyler Technologies’ performance in 2009
better than anyone to anticipate and address the
demonstrated how our business strategy was
changing technology needs of the public sector.
designed to perform in all economic environments.
During a challenging recession year, we made
meaningful progress under our long-term plans
while growing both revenues and earnings.
However, our commitment goes well beyond
delivering solutions that work for our public sector
clients. It’s about consistently delivering value for
employees and shareholders as well. Building on a
At Tyler, we have a unique vantage point due to our
successful foundation, Tyler continues to provide
singular focus on serving the public sector with a
a solid return for shareholders. We remained
broad product portfolio. From financial management
committed to our long-term growth strategies
and property taxes to courts and education, we
even through a challenging financial climate
create, deliver and support software solutions that
and ended 2009 in a position of strength.
make it easier for local governments and schools
to manage their complex, day-to-day business
functions. Tyler knows how to develop and support
innovative software solutions for the market. We
also have an insider’s insight to the market, as many
of Tyler’s employees worked in the public sector
prior to joining our team. With this knowledge and
experience—along with focused innovation and an
In 2009, Tyler was once again recognized for its
business performance and leadership, as well as
being honored as a top place to work. For the third
straight year, Forbes named Tyler Technologies as
one of “America’s 200 Best Small Companies.” In
addition, Tyler was recognized as one of the “Best
Places to Work in Maine,” as well as one of “The
Dallas Morning News Top 100 Places to Work 2009.”
2
Tyler Technologies
John S. Marr, Jr., President and CEO
John M. Yeaman, Chairman of the Board
Making Meaningful Progress
we experienced lengthened sales cycles throughout
In a difficult economic climate that saw many
the year. New request for proposal activity continues
software companies struggle, Tyler Technologies
to support a very healthy sales pipeline. However, the
was still able to make progress, both financially and
timing of contract signings and revenue recognition
strategically. We ended 2009 with 35 consecutive
is less predictable, as many local governments’
quarters of profitability. Tyler closed the year with total
purchasing processes are longer and more complex
revenue of $290.3 million, up 10 percent from 2008.
than in a more favorable economic environment.
Gross margins increased 300 basis points to 44.4
percent, and our operating margin reached a new high
of 15.4 percent. Earnings per diluted share totaled
$0.74, and increased 21 percent over non-GAAP EPS
Tyler was once again recognized for its
for 2008, even as we continued to invest aggressively
business performance and leadership, as
in product development and competitive initiatives.
well as being honored as a top place to
Although Tyler achieved improved financial results
work by our employees.
by almost every meaningful measure, our growth
has clearly been affected by the broader economic
environment and by pressures on local government
budgets. While our significant base of recurring
In 2009, we experienced another year of strong
revenues (now comprising approximately half of total
cash flow generation, with total free cash flow of
revenues) combined with the mission-critical nature of
$40 million (excluding capital expenditures for
our solutions provides us with a great deal of stability,
office construction). We rely on this strong free
Annual Report 2009
3
cash flow to make strategic investments that will
While the timing of public sector investments in
further strengthen our position for the future,
technology is clearly affected by the economy, the
while enhancing shareholder value. We also
fact remains that the functions Tyler automates are
repurchased $17 million of our common stock and
essential to our clients, and our solutions enable them
completed several acquisitions to augment our
to operate more efficiently, doing more with less.
appraisal and property tax and schools solutions.
Tyler’s success follows a carefully designed business
Given our consistent growth, significant
plan that focuses on four key strategies: expanding
recurring revenues, healthy cash flow and strong
geographically, broadening our product offerings,
market reputation, Tyler is in an excellent
securing larger opportunities, and extending our
position to build upon its competitive strengths
relationships with existing clients. As we look
as we move into 2010 and beyond.
forward to 2010 and beyond, we intend to continue
Speaking from our many years of experience, Tyler
building upon these long-term strategies.
Creating a Stronger Identity
Since the late 1990s, Tyler has shown consistent
empowers local governments and schools, and
organic growth at above market rates—augmenting
consistently delivers a solid return for shareholders.
And it is with this experience that we move
into 2010 with confidence in and commitment
to our long-term opportunities and strategies.
Building Lasting Success
While many competitors target multiple vertical
markets, Tyler has a singular focus—delivering
essential software solutions that empower the public
sector. And unlike many of our competitors that serve
only a narrow niche of the public sector, we offer
what we believe is the broadest range of software
and solutions for local governments and schools.
From the courtroom to the classroom, Tyler’s solutions
serve as the backbone for core business functions. We
devote all of our time, energy and resources to helping
local governments and school districts streamline
the many aspects of their financial management,
court case, property tax, public safety, citizen
services, public records and education systems.
its market strength through targeted acquisitions.
While this has afforded us the ability to broaden our
product offerings and penetrate new markets, these
acquisitions have also posed some challenges.
As expected, each acquired business had its
own identity, strategy and approach to sales and
marketing—not to mention its own unique way of
interfacing with clients. As these business units
and products were integrated into the company,
Tyler worked hard to create a unified corporate
identity—bringing together strong products with
long-standing reputations—under the Tyler name.
In 2009, we launched a wide-scale rebranding effort
to further strengthen Tyler’s identity and position
in the public sector—a historically fragmented
market. A cohesive identity allows us to build
a stronger competitive advantage for Tyler to
capture even more market share and build greater
awareness as the leader in public sector software.
And through new communication channels and
branding efforts, we are also generating a renewed
sense of energy and enthusiasm among Tyler
employees and clients across all product groups.
4
Tyler Technologies
Investing in the Future
to the solution. In 2009, we also secured our first
Throughout 2009, Tyler Technologies again
“beta” client for Microsoft Dynamics AX—with
demonstrated that success requires the right
a general release slated for early 2011.
combination of many factors—a well-designed
strategy, consistent execution, feature-rich and
industry-proven products, talented employees and
a solid brand identity. Underscoring each of these
components is the one fundamental question: how
can we empower the people who serve the public?
Moving Forward
Although 2009 presented a challenging economic
climate that we expect to continue in 2010, Tyler
Technologies had a solid year in terms of financial
performance. Looking to the future, it is our hope
that 2010 will be a year of economic recovery for
For us, the simplest answer is to develop, implement,
the marketplace, providing Tyler a healthy mix of
and support software solutions that deliver—again
opportunity and challenge. Given our strong market
and again. For our clients, this means delivering
position and rich history of proven success, we
the right types of systems to address their many
are confident in our ability to generate reasonable
complex needs. For our shareholders, this translates
results in difficult times—while continuing to
to delivering a solid return on their investment now
invest in initiatives that we believe will put us
and over the long term. And for our employees, this
in an even stronger competitive position as the
means fostering the right work environment—one
market returns to more normal conditions.
that encourages them to innovate, create, and
achieve success personally and professionally.
Tyler empowers local governments and schools,
and consistently delivers a solid return for
At Tyler, we consider research and development
shareholders. And it is with this experience that we
an essential investment in our future. And in
move into 2010 with confidence in and commitment
2009—at a time when many companies chose, or
to our long-term opportunities and strategies.
were forced, to reduce discretionary spending for
R&D and cut staff—Tyler aggressively invested in
product development and added to our team.
In addition to investing in product updates to
enhance functionality and integrate new features
and technologies in our existing products, Tyler has
devoted substantial resources to the development of
new products that we believe will provide meaningful
growth opportunities in the future. This includes
Microsoft Dynamics AX, a business management
solution for the public sector that we are co-
developing with Microsoft. During the fourth quarter
of 2009, we expanded the scope of our multi-year
arrangement with Microsoft, adding payroll, human
resources, and budget formulation applications
John S. Marr, Jr.
President and Chief Executive Officer
Annual Report 2009
5
Donna Martindale and John White
ERP/Financial Solutions
Speaking the Same Language. There’s a certain familiarity
sharing his expertise to help local governments realize
and comfort in sharing a common language with your
the full power of Tyler’s financial management solutions.
clients—something Donna Martindale and John White
Like John, Donna was also a Tyler financial management
understand firsthand. Both John and Donna were early
solution end-user while in her role as finance director for
adopters of Tyler products long before they ever joined
Harker Heights, Texas. And for the past 12 years, Donna
the company as employees. When he went to work for the
has been helping local governments migrate to Tyler as
Town of Shrewsbury, Massachusetts, John had the rare
an implementation manager. “I sit with a client and can
opportunity to design a town-wide information system
relate to them,” Donna explains. “I can tell them ‘I did
from the ground up. During this process, Tyler’s financial
your job.’ It’s so incredible that I’m able to hand off a tool
management solution was selected for implementation.
to our clients—a tool that empowers them to make a real
Today, as senior solution consultant at Tyler, John is still
change in their city.”
6
Tyler Technologies
Empowering the Public Sector
During a time when many companies have
struggled, Tyler Technologies has proven itself
as a market leader. Drawing from our years of
Tyler Technologies’ consistent, long-term success
is the result of singularly focusing on serving
experience, Tyler posted another successful year in
the public sector, creating a sound vision, and
2009—even in the midst of a turbulent economy.
executing our growth strategy with precision.
Tyler delivers software and services solutions that
enable city, county and state agencies of all sizes
to efficiently and effectively manage their day-to-
day business operations. In fact, no other company
offers as wide a range of products as Tyler.
Today, Tyler has more than 9,000 client installations
in all 50 states, Puerto Rico, the U.S. Virgin Islands,
Canada and the United Kingdom. Thanks to Tyler’s
exceptional flexibility and comprehensive product
portfolio, we are competitive at every level—from
small rural communities to large metropolitan
areas and statewide implementations. We have the
financial strength and resources of a large company,
yet we can act with the agility and ingenuity of an
innovative entrepreneurial organization committed
to building lasting relationships with our clients.
Many people don’t appreciate the challenges that
local governments and schools face in providing
numerous mission-critical services every day—from
routing school buses and managing jails to collecting
taxes and paying firemen. To effectively oversee these
activities, public sector organizations must have
robust technology platforms available around the clock.
Total Annual Revenues
(In Millions)
2009
2008
2007
2006
2005
$290.3
$265.1
$219.8
$195.3
$170.5
Yet, like many private sector businesses today,
local governments are increasingly facing pressure
to be more efficient and more productive using
fewer resources. Thus, governments must make
smarter business decisions based on the needs
of their agencies and the citizens they serve.
From our years of experience in serving the public
sector, Tyler understands that delivering software
solutions that help our clients efficiently manage their
many operations is just the beginning. Harnessing the
true power and potential of Tyler’s product offerings—
solutions backed by our highly experienced team—is
realized through long-term partnerships with our clients.
That’s why Tyler’s relationship with clients goes well
beyond merely that of a vendor. We act as a trusted
partner for local governments. It is this commitment that
has helped us maintain an approximately 98 percent
customer retention rate for many years. In fact, many
of our first clients are still with Tyler today. With a deep
understanding of how local governments operate, Tyler
is well positioned to deliver solutions that address
these unique needs now—and well into the future.
Building a Strong Foundation
As communities throughout the United States
experience growth and face changes in budgets,
demographics and technology, local governments
must have the right systems in place to handle
citizens’ evolving needs and demands—from parental
access to student grades to the convenience of
paying traffic tickets and utility bills online.
Annual Report 2009
7
With Tyler’s performance in 2009, we have once again
illustrated that focusing exclusively on one vertical
market offers ample room for long-term growth. In fact,
there are approximately 3,000 counties, 13,900 school
Tyler Technologies experienced solid growth in key
areas throughout 2009—and we will continue to
districts, 36,000 cities and towns, and more than
build upon this foundation in the years to come.
35,000 other local government agencies in the United
States alone—each with multiple software systems. We
believe that the majority of these systems are either
Throughout the year, Tyler experienced a reasonable,
“in-house” solutions or were purchased from vendors
although not robust, level of new business activity,
that are no longer competitive in the market—presenting
creating a healthy pipeline of new business. However,
great opportunities for Tyler to gain market share as
longer sales cycles and delayed decision processes
these systems are replaced over the coming years.
made the timing of new business less predictable.
In 2009, Tyler increased revenues by 10 percent,
more than doubling the estimated market growth in a
sluggish economy. Additionally, our recurring revenues
from maintenance and subscriptions increased by
16 percent, and now make up almost half of our
We ended 2009 with a total backlog of signed
contracts of $233 million, down modestly from the
end of 2008. Our backlog, combined with highly
reliable recurring revenues, provides us with a high
degree of visibility into our expected revenues.
total revenues. This creates a solid base of reliable
While Tyler has continued to refine our growth strategy
revenues on which we can build sustainable growth.
over the years, in 2009, we focused primarily on the
same core initiatives—moving into new geographic
areas, expanding our product offerings, securing larger
contracts, and cross-selling additional products and
services to existing clients. And in refreshing our
brand identity in 2009, we now have a more cohesive
$233.1
$249.8
$250.1
product portfolio under the Tyler name—helping
us further solidify our position as the go-to leader
for software solutions within the public sector.
$205.9
$165.4
43% Maintenance
28% Software Services
15% Software Licenses
6% Appraisal Services
6% Subscriptions
2% Other
Innovating for Tomorrow
As Tyler has grown over the years, our market has
matured as well. While there are fewer competitors
now than a decade ago, there are always good
companies vying with Tyler for market share. To stay
competitive in this vertical market, it’s essential that
Tyler stay at the forefront of innovation. Only then
can we deliver the types of robust solutions local
governments and schools need—when they need them.
At Tyler, we believe this starts by having the best
possible team in place. Tyler now has more than
2,000 professionals who bring unmatched expertise
Backlog
(In Millions)
2009
2008
2007
2006
2005
Revenue Mix
8
Tyler Technologies
Tyler Technologies experienced solid growth in key
areas throughout 2009—and we will continue to
build upon this foundation in the years to come.
Johnnie Gordon, Amy Puckett and John Mathis
Courts & Justice Solutions
Speaking from Authority. From minor traffic citations to major
develops the tools and functionality courts and justice
criminal trials, courts and justice offices at the state, county
offices rely on to serve their constituents. Having this level
and municipal level face a tremendous task of streamlining
of insight has also been invaluable for Amy Puckett who, like
critical information. “The most important thing is first
John, served in various roles for Denton County—including
understanding their business processes, so we can help them
emergency dispatcher and detention officer. For the past
make the most out of their software environment,” explains
18 years, she has helped courts and justice offices fine-
Johnnie Gordon, who was a courts and justice consultant
tune their processes as a product manager. “At the end of
prior to joining Tyler as a regional project manager for Tyler’s
the day, there’s simply no substitute for this experience,”
courts & justice solutions. Like Johnnie, developer John
says Johnnie. “To me, what we do is more than just deliver
Mathis spent many years in the public sector, including
software—it’s about bringing value to courts and justice
positions such as a system administrator for Denton County,
offices and the people they serve through the experience and
Texas. He came on board at Tyler in 1994, and today
firsthand knowledge we have gained over the years.”
Annual Report 2009
9
Melissa Belec, Marsha Craft and Larry Frazier
School Solutions
Speaking from Support. Fortunately, there are people
her 35-year career—15 of those years spent serving in
like Larry Frazier, Marsha Craft and Melissa Belec who
a student information system role in a growing Missouri
work behind the scenes to empower school personnel.
school district—to help clients navigate changes,
“Some people know the software, but it helps that I also
address key issues and share best practices. Marketing
know schools,” comments Larry, who held positions
Program Specialist Melissa Belec understands the
as a teacher, a principal and a technology coordinator
advantage in having a client’s perspective. “I was
prior to becoming an implementation analyst for
a hands-on user of Tyler’s student transportation
Tyler. “My experience makes it easier for me to help
solutions for three years in a school district,” explains
school districts use our school solutions to work more
Melissa, who later joined Tyler in product and technical
efficiently.” Like Larry, Marsha Craft is no stranger to
support before moving into a marketing role. “I can
educating others. As a senior trainer, she helps school
speak their language and I understand their issues,
district personnel realize the full power and potential of
which really makes a big difference.”
Tyler’s products. She brings the in-depth experience of
10
Tyler Technologies
in technology development and deployment, as well
as a deep understanding of how our clients operate.
In fact, many of our employees held positions in
the public sector prior to joining Tyler, providing a
Tyler’s deep domain expertise gives us an insider’s
insight into the unique needs of local governments.
firsthand understanding of the many nuances of how
With this knowledge, we deliver highly responsive
local governments and schools work from day to day.
software solutions that evolve as the public sector does.
Some of our competitors reduced their workforce and
cut expenditures in research and development last year
in response to the recession. However, Tyler’s strong
cash flow and above-market growth throughout the year
enabled us to continue investing aggressively in product
development and to expand our employee team—adding
Assessment Evaluation Services Inc., which
develops integrated property appraisal solutions
and applications unique to California.
78 new employees over the course of the year.
Additionally, we acquired technology that delivers
Free Cash Flow
(In Millions)
2009
2008
2007
2006
2005
$40.0 (a)
$42.3 (a)
$30.3
$22.5
$18.5
(a) excludes capital expenditures for office facilities of $9.4 million
in 2009 and $16.0 million in 2008.
specialized information and data warehouse solutions
for K–12 school and local government markets. In
January 2010, Tyler completed the acquisition of
Wiznet, which provides software products and services
that simplify the electronic filing and management
of documents related to court cases. Looking to the
future, we will continue to seek opportunities to expand
our product offerings and customer base through
strategic acquisitions at reasonable valuations.
Delivering Greater Accessibility
From the nation’s largest counties to the smallest
rural agencies, Tyler Technologies understands that
each of our clients deserves the best possible return
on its technology investment—not to mention a high
In addition to expanding our team, Tyler made significant
degree of flexibility. Delivering long-term scalability by
investments in our existing software portfolio to develop
providing regular product updates with new features
new features and functionality. We also continued to
and functionality is particularly important in the
invest in new products in the education market and in
public sector because it’s not uncommon for local
our Microsoft Dynamics AX development effort for the
governments and schools to keep their systems for
public sector that’s slated for release in early 2011.
much longer than organizations in the private sector.
Tyler also made several small acquisitions that
As a result, many agencies are using a potpourri of
augment our offerings in specific product or geographic
software and hardware solutions that are no longer
areas. To expand the geographic reach of our land
supported—because the vendor is no longer in
and vital records business, we acquired Parker-Lowe &
business or simply hasn’t invested in new technology.
Associates in North Carolina, which develops software
It can also pose challenges for governments when
designed for registering and retrieving deeds for land
personnel with proprietary knowledge of these
records and social services offices. We also acquired
legacy systems retire or leave the organization.
Annual Report 2009
11
Tyler’s Software-as-a-Service (SaaS) model gives
clients seamless access to the innovative software
solutions they need. Through a subscription-based
arrangement, Tyler hosts and manages both software
and data. By opting for the SaaS model, our clients
can avoid making capital investments to overhaul their
infrastructure and can access these sophisticated
systems with significantly fewer in-house resources.
Expanding Our Visibility
Over the years, one of our core strategies for growth
2008-2009 Quarterly EPS (a)
(In Dollars)
Q1
Q2
Q3
Q4
$0.08
$0.16
$0.19
$0.17
$0.20
$0.20
$0.18
$0.17
has been to improve Tyler’s visibility and expand sales
2008
2009
in regions where our products previously had limited
presence. By updating Tyler’s brand identity and
messaging, we now have a more cohesive platform to
effectively market our products in new regions—as well
as existing ones where we already have a presence.
Tyler continued adding new clients in key markets
throughout 2009. For example, we secured a deal
with Denver Public Schools for our transportation
management system, a product we added to our
portfolio in 2008. Tyler also introduced our financial
management and citizen service solutions in five public
sector agencies within California, and we secured a
deal with the City of Nashville and Davidson County
(Tennessee) for our courts & justice solutions.
Given the exceptional breadth and depth of our product
portfolio, many of our existing clients turn to Tyler
when the time comes to upgrade or add new software
applications. This provides Tyler a prime opportunity
to cross-sell our broad line of software solutions.
No matter how large or small, Tyler provides
(a) 2008 EPS is non-GAAP and excludes non-cash legal
settlement charge related to warrants of $0.16 in Q2,
$0.04 in Q3 and $0.03 in Q4
Diluted Annual EPS
(In Dollars)
2009
2008 (a)
2007
2006
2005 (b)
$0.42
$0.34
$0.19
$0.74
$0.61
(a) 2008 EPS is non-GAAP and excludes non-cash legal settlement
charge related to warrants of $0.23
(b) includes restructuring charge of $0.02
For example, we won a $2.5 million contract for
our jail management and law enforcement solutions
with Collin County, Texas, which has used Tyler’s
court case management solution since 2006. We
also secured a number of deals with clients who
purchased multiple Tyler solutions at the same time.
public sector organizations of all sizes access
Tyler also integrated our transportation management
to a broad range of innovative software
solutions that address their unique needs.
solution with our financial management solution
for the Fort Worth (Texas) Independent School
District to streamline invoicing, budgetary control,
reconciliation, and account management.
12
Tyler Technologies
Rita Lewis-Devereaux
Appraisal & Property Tax Solutions
Speaking from Passion. Rita Lewis-Devereaux is no
used Tyler’s appraisal products for more than two decades.
stranger to anticipating needs when it comes to helping
Today, she helps appraisal jurisdictions of all sizes
local governments effectively and efficiently appraise
implement Tyler’s appraisal and property tax solutions.
all types of properties. In fact, since 1973 she’s been
It’s a role that suits her well, she says, not only because
involved in the property tax field—including positions
of her extensive understanding of the public sector
with Dekalb County, Georgia, as deputy tax commissioner,
and Tyler’s solutions—but, more importantly, because
appraisal auditor and software project manager. Rita
she enjoys guiding clients through the implementation
also served as vice chairman of the Board of Assessors
process. “I really love the creativity in what I do and
for Fulton County (Atlanta), Georgia. Prior to joining the
helping clients bring the software live,” Rita explains.
Tyler team as a lead business analyst in 2001, Rita had
“I couldn’t ask for a better job—it’s perfect for me.”
Annual Report 2009
13
Tyler consistently expanded its presence in new
geographic areas and secured larger deals in
2009—further solidifying our position as a market
leader in public sector software.
Brock Taylor
Land & Vital Records Solutions
Speaking from Service. Far beyond the “Comments
most—and eventually is what led him to join Tyler. And for
Welcome” box organizations once used, Brock Taylor,
the past 12 years, Brock has been helping other land
manager of the Land Records Office for Boulder County,
records offices streamline their operations as a product
Colorado, shared his wish list of software features directly
manager. “Understanding the client experience is
with the source—Tyler. Beyond the software’s ability to
invaluable,” explains Brock. “I’m now able to reflect on
streamline Boulder County’s Land Records Office, it was
how clients use the software and appreciate the reasons
Tyler’s client-centric approach that impressed Brock the
behind their development requests.”
14
Tyler Technologies
While Tyler has historically focused on serving the
solutions and securing larger deals. We believe
needs of small and mid-sized governments, in
we are well positioned for new growth, particularly
recent years we have gained a stronger foothold in
with our Software-as-a-Service (SaaS) offerings.
larger, metropolitan markets. These markets are
especially significant as they provide considerable
revenue growth and margin expansion potential.
Tyler consistently expanded its presence in new
geographic areas and secured larger deals in
Whether delivering the right types of solutions for local
governments, providing an exceptional workplace for
employees, or producing a solid return on investment
for shareholders, Tyler Technologies speaks from
experience. It is with this insight that we plan for the
future. We empower those who serve the public. And
we make a difference to the communities we serve.
2009—further solidifying our position as a market
Continuing the trend we’ve seen in recent years, many
local governments—even those that had previously
deployed Tyler software solutions on site—are now
migrating to our SaaS model. Today, many of Tyler’s
products are available in a hosted format. Based on
client response, including our near perfect retention
rate, this model is proving to be incredibly effective
and efficient at delivering clients greater flexibility
and scalability. Although only comprising 6 percent
of our total revenues in 2009, subscription revenues
represented our fastest-growing revenue line, with an
increase of 20 percent over 2008. Among the larger
SaaS contracts we signed in 2009 were a $1.4 million
deal with the City of Enfield, Connecticut, and a $1.2
million deal with Tualatin Valley (Oregon) Fire & Rescue.
leader in public sector software.
Tyler secured a number of larger deals, including
a $5.9 million contract with Hillsborough County,
Florida, for Tyler’s integrated case management
software. We also signed a $2.2 million contract with
San Antonio, Texas, the nation’s seventh largest city,
for our municipal court case management solution.
In a deal valued at $3.5 million, Dakota County,
Minnesota, the state’s fourth largest county, purchased
our appraisal and property tax software. The cities of
Bridgeport, Connecticut, and Chesapeake, Virginia, will
implement our financial management solution under
contracts valued at approximately $2 million each.
Looking Ahead
Closing out 2009, Tyler delivered another solid year
by consistently executing our growth strategies. Given
our extensive experience in delivering proven software
solutions and our growing presence in key markets, we
look to carry this momentum into 2010 and beyond.
Tyler will continue to build upon the foundation
we’ve established using our time-tested growth
strategy of expanding into new geographic areas,
enhancing our product offerings, cross-selling our
Annual Report 2009
15
Tyler Technologies’ success in 2009 is a continuation
of the strong foundation we’ve established in years
past. Through careful planning, consistent execution
and an unwavering commitment to our clients, Tyler
has become the brand of choice for essential software
solutions that can respond to the ever-changing
needs of the public sector market. Building from our
record-setting year in 2008, Tyler Technologies grew
revenues, expanded gross and operating margins and
increased earnings per share during 2009—even
while aggressively investing in product development.
The following financial statements detail our results.
16
Tyler Technologies
Stock Market Data
Our common stock is traded on the New York Stock Exchange under the symbol “TYL.” At December 31, 2009, we had
approximately 2,115 stockholders of record. A number of our stockholders hold their shares in street name; therefore, there
are substantially more than 2,115 beneficial owners of our common stock.
The following table shows, for the calendar periods indicated, the high and low sales price per share of our common stock as
reported on the New York Stock Exchange.
2008: First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009: First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 14.70
15.97
18.47
15.17
$ 14.79
17.76
17.62
21.09
$ 12.29
13.33
13.29
9.79
$ 11.35
14.17
14.51
16.76
We did not pay any cash dividends in 2009 or 2008. Our bank credit agreement contains restrictions on the payment of
cash dividends. We intend to retain earnings for use in the operation and expansion of our business, and, therefore, we do not
anticipate declaring a cash dividend in the foreseeable future.
During 2009, we purchased approximately $1.2 million shares of our common stock for an aggregate purchase price of
$17.0 million. The repurchase program, which was approved by our board of directors, was announced in October 2002, and
was amended in April and July 2003, October 2004, October 2005, May 2007, May 2008, October 2008 and May 2009.
Our board of directors authorized the repurchase of an additional 2.0 million shares on May 14, 2009. As of December 31,
2009, we had remaining authorization to repurchase up to 2.3 million additional shares of our common stock. There is no
expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time. Our bank
credit agreement contains restrictions on the amount of common stock we may purchase.
Tyler Technologies Annual Report 2009
17
Selected Financial Data
SELECTED FINANCIAL DATA
(In thousands, except per share data)
2009
2008
2007
2006
2005
For the Years Ended December 31,
STATEMENT OF OPERATIONS DATA:
Revenues
Costs and expenses:
Cost of revenues (1)
$ 290,286
$ 265,101
$ 219,796
$ 195,303
$ 170,457
161,523
155,314
135,371
120,499
108,970
Selling, general and administrative expenses (1)
70,115
62,923
51,724
48,389
43,821
Research and development expense
Restructuring charge
Amortization of customer and trade name intangibles
Non-cash legal settlement related to warrants (2)
Operating income
Other (expense) income, net
11,159
—
2,705
—
7,286
—
2,438
9,045
4,443
—
1,478
—
3,322
—
1,318
—
2,421
1,260
1,266
—
44,784
28,095
26,780
21,775
12,719
(146)
1,181
1,800
1,080
906
Income from operations before income taxes
44,638
29,276
28,580
22,855
13,625
Income tax provision
Net income
Net income per diluted share
Weighted average diluted shares
STATEMENT OF CASH FLOWS DATA:
17,628
14,414
11,079
8,493
5,432
$ 27,010
$ 14,862
$ 17,501
$ 14,362
$ 8,193
$
0.74
$
0.38
$
0.42
$
0.34
$
0.19
36,624
39,184
41,352
41,868
42,075
Cash flows provided by operating activities
$ 42,941
$ 47,802
$ 34,111
$ 26,804
$ 21,187
Cash flows (used by) provided by investing activities
Cash flows used by financing activities
(13,658)
(21,349)
(9,554)
(34,275)
(24,326)
1,820
(46,128)
(7,406)
(5,999)
(14,847)
BALANCE SHEET DATA:
Total assets
Shareholders’ equity
$ 270,670
$ 251,761
$ 241,508
$ 220,276
$ 194,437
134,358
114,262
137,211
125,875
112,197
(1) Effective January 1, 2006, we adopted the fair value recognition provisions of Accounting Standards Codification 718, Stock
Compensation, using the modified-prospective method. In 2009, 2008, 2007 and 2006, respectively, cost of revenues included
$540,000, $364,000, $227,000 and $147,000 share-based compensation expense. Selling, general and administrative expenses in
2009, 2008, 2007 and 2006, respectively, included $4.5 million, $3.5 million, $2.1 million and $1.8 million share-based
compensation expense. In accordance with the standard, results of operations for the year 2005 are reported under the previous
accounting standard and no expense was recorded.
(2) On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of America,
N. A. (“BANA”). The Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per
share. Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares
of Tyler common stock. Accordingly, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which was
not tax deductible.
18 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains forward-looking statements. The forward-looking statements
are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking
statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors
described in documents we file from time to time with the SEC.
When used in this Annual Report, the words “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,”
“plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or the negative of such terms and
similar expressions are intended to identify forward-looking statements. Similarly, statements that describe our business
strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements.
OVERVIEW
General
We provide integrated information management solutions and services for the public sector, with a focus on local governments.
We develop and market a broad line of software products and services to address the information technology (“IT”) needs of
cities, counties, schools and other local government entities. In addition, we provide professional IT services to our customers,
including software and hardware installation, data conversion, training and for certain customers, product modifications,
along with continuing maintenance and support for customers using our systems. We also provide subscription-based services
such as hosted solutions as well as property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate three major functional areas:
• Financial Management and Education;
• Courts and Justice; and
• Property Appraisal and Tax and Other.
We monitor and analyze several key performance indicators in order to manage our business and evaluate our financial and
operating performance. These indicators include the following:
• Revenues – We derive our revenues from five primary sources: sale of software licenses; subscription-based services;
software services; maintenance and support; and appraisal services. Because the majority of the software we sell is “off-the-
shelf,” increased sales of software products generally result in incrementally higher gross margins. Thus, the most
significant driver to our business is the number and size of software license sales. In addition, new software license sales
generally generate implementation services revenues as well as future maintenance and support revenues, which are a
recurring revenue source. We also monitor our customer base and churn since our maintenance and support revenue should
increase due to our historically low customer turnover. During 2009, approximately 43% of our revenue was attributable
to ongoing support and maintenance agreements and our customer turnover was approximately 2%.
• Cost of Revenues and Gross Margins – Our primary cost component is personnel expenses in connection with providing
software implementation, subscription-based services, maintenance and support, and appraisal services to our customers.
We can improve gross margins by controlling headcount and related costs and by expanding our revenue base, especially
from those products and services that produce incremental revenue with minimal incremental cost, such as software
licenses, subscription-based services, and maintenance and support. Our appraisal projects are seasonal in nature, and we
often employ appraisal personnel on a short-term basis to coincide with the life of a project. As of December 31, 2009,
our total employee count increased to 2,018 from 1,940 at December 31, 2008. Approximately a third of these additions
were to our implementation and support staff, including additions that increased our capacity to deliver our backlog.
Tyler Technologies Annual Report 2009
19
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
• Selling, General and Administrative (“SG&A”) Expenses – The primary components of SG&A expense are administrative
and sales personnel salaries and commissions, marketing expense, share-based compensation expense, rent and
professional fees. Sales commissions generally fluctuate with revenues but other administrative expenses tend to grow at a
slower rate than revenues.
• Liquidity and Cash Flows – The primary driver of our cash flows is net income. Uses of cash include acquisitions, capital
investments in property and equipment and the discretionary purchases of treasury stock. In 2009, we purchased
1.2 million shares of our common stock for an aggregate purchase price of $17.0 million. We also paid $1.3 million for
common stock repurchases accrued as of December 31, 2008. During 2009 we used cash of $2.9 million to acquire two
companies and invested $12.4 million in property and equipment. Our investment in property and equipment included
$9.4 million for an office building and we expect to pay the final retainage payment of $1.8 million for this office building
by mid-2010. We also paid-down $8.0 million on our short-term revolving line of credit. Our working capital needs are
fairly stable throughout the year with the significant components of cash outflows being payment of personnel expenses
offset by cash inflows representing collection of accounts receivable and cash receipts from customers in advance of
revenue being earned.
• Balance Sheet – Cash, accounts receivable and days sales outstanding and deferred revenue balances are important
indicators of our business.
Acquisitions
On July 16, 2009, we completed the acquisition of certain assets of KPL, Inc. d/b/a Parker-Lowe & Associates (“Parker-
Lowe”) for $700,000 in cash. Parker-Lowe provides scanning and retrieval software and related services for land record and
social services offices in local governments primarily in the North Carolina area. This acquisition was accounted for as a
purchase of a business.
On April 3, 2009, we completed the acquisition of all of the capital stock of Assessment Evaluation Services, Inc. (“AES”).
AES develops integrated property appraisal solutions and specializes in applications that deal with the unique provisions of
the California Revenue and Taxation Code. The purchase price was approximately $1.1 million in cash.
In connection with these transactions we acquired total tangible assets of approximately $480,000 and assumed total
liabilities of approximately $835,000, including $450,000 for contingent consideration for which we have paid $38,000 as
of December 31, 2009. We recorded goodwill of approximately $1.3 million, all of which is expected to be deductible for
tax purposes, and other intangible assets of approximately $820,000. The $820,000 of intangible assets is attributable to
acquired software and customer relationships that will be amortized over a weighted average period of approximately 9 years.
Our balance sheet as of December 31, 2009 reflects the allocation of the purchase price to the assets acquired and liabilities
assumed based on their estimated fair values at the dates of acquisition.
The operating results of these acquisitions are included in our results of operations since the date of acquisition. We believe
these acquisitions will complement our business by expanding our presence in certain geographic areas and adding to our
customer base.
In the twelve months ended December 31, 2009, we also paid approximately $1.1 million for certain software assets to
complement our tax and appraisal solutions and our student information management solutions.
Outlook
The financial market crisis has continued to disrupt credit and equity markets worldwide. Broad economic conditions remain
uncertain and public sector entities continue to experience pressures that are reflected in longer than normal decision
processes. Local and state governments may face financial pressures that could in turn affect our growth rate in the first
quarter of 2010 and for the calendar year. While market conditions are not robust, we have great stability from the foundation
of recurring revenues and high customer retention. Our base of recurring revenues from maintenance and support and
subscription-based services is approximately 49% of total revenues. Consistent with our historical trends, we expect that first
quarter 2010 earnings will not reach the level achieved in the fourth quarter of 2009 and will likely be below last year’s
first quarter earnings. We also expect that in excess of 60% of our annual earnings will occur in the second half of 2010.
20 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations is based upon our financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities at the date of the financial statements, the reported amounts of revenues, cost of revenues and expenses
during the reporting period, and related disclosure of contingencies. The Notes to the Financial Statements included as
part of this Annual Report describe our significant accounting policies used in the preparation of the financial statements.
Significant items subject to such estimates and assumptions include the application of the percentage-of-completion and
proportionate performance methods of revenue recognition, the carrying amount and estimated useful lives of intangible
assets, determination of share-based compensation expense and valuation allowance for receivables. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies require significant judgments and estimates used in the preparation of our
financial statements.
Revenue Recognition. We recognize revenues in accordance with the provisions of Accounting Standards Codification (“ ASC”)
605, Revenue Recognition and ASC 985-605, Software Revenue Recognition. Our revenues are derived from sales of software
licenses, subscription-based services, appraisal services, maintenance and support, and services that typically range from
installation, training and basic consulting to software modification and customization to meet specific customer needs. For
multiple element software arrangements, which do not entail the performance of services that are considered essential to the
functionality of the software, we generally record revenue when the delivered products or performed services result in a legally
enforceable and non-refundable claim. We maintain allowances for doubtful accounts and sales adjustments, which are provided
at the time the revenue is recognized. Because most of our customers are governmental entities, we rarely incur a loss resulting
from the inability of a customer to make required payments. In a limited number of cases, we encounter a customer who is
dissatisfied with some aspect of the software product or our service, and we may offer a “concession” to such customer. In those
limited situations where we grant a concession, we rarely reduce the contract arrangement fee, but alternatively may perform
additional services, such as additional training or programming a minor feature the customer had in their prior software solution.
These amounts have historically been nominal. In connection with our customer contracts and the adequacy of related
allowances and measures of progress towards contract completion, our project managers are charged with the responsibility to
continually review the status of each customer on a specific contract basis. Also, we review, on at least a quarterly basis,
significant past due accounts receivable and the adequacy of related reserves. Events or changes in circumstances that indicate
that the carrying amount for the allowances for doubtful accounts and sales adjustments may require revision, include, but
are not limited to, deterioration of a customer’s financial condition, failure to manage our customer’s expectations regarding the
scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products.
We use contract accounting, primarily the percentage-of-completion method, as discussed in ASC 605-35, Construction —
Type and Certain Production — Type Contracts, for those software arrangements that involve significant production, modification
or customization of the software, or where our software services are otherwise considered essential to the functionality of the
software. We measure progress-to-completion primarily using labor hours incurred, or value added. In addition, we recognize
revenue using the proportionate performance method of revenue recognition for our property appraisal projects, some of which
can range up to five years. These methods rely on estimates of total expected contract revenue, billings and collections and
expected contract costs, as well as measures of progress toward completion. We believe reasonably dependable estimates of
revenue and costs and progress applicable to various stages of a contract can be made. At times, we perform additional and/or
non-contractual services for little to no incremental fee to satisfy customer expectations. If changes occur in delivery,
productivity or other factors used in developing our estimates of expected costs or revenues, we revise our cost and revenue
estimates, and any revisions are charged to income in the period in which the facts that give rise to that revision first
become known. In connection with these and certain other contracts, we may perform the work prior to when the services are
billable and/or payable pursuant to the contract. The termination clauses in most of our contracts provide for the payment
for the fair value of products delivered and services performed in the event of an early termination.
Tyler Technologies Annual Report 2009
21
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
For subscription-based services such as application service provider arrangements and other hosting arrangements, we
evaluate whether each of the elements in these arrangements represents a separate unit of accounting, as defined by ASC
605-25, Multiple Element Arrangements, using all applicable facts and circumstances, including whether (i) we sell or could
readily sell the element unaccompanied by the other elements, (ii) the element has stand-alone value to the customer,
(iii) there is objective reliable evidence of the fair value of the undelivered item, and (iv) there is a general right of return.
We consider the applicability of ASC 605-55-121 and 122 with respect to arrangements that include the right to use software
stored on another entity’s hardware on a contract-by-contract basis. In hosted term-based agreements, where the customer
does not have the contractual right to take possession of the software, hosting fees are recognized on a monthly basis over the
term of the contract commencing when the customer has access to the software. For professional services associated with
hosting arrangements that we determine do not have stand-alone value to the customer, we recognize the services revenue
ratably over the remaining contractual period once hosting has gone live and we may begin billing for the hosting services.
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 connection with certain of our contracts, we have recorded retentions receivable or unbilled receivables consisting of costs
and estimated profit in excess of billings as of the balance sheet date. Many of the contracts which give rise to unbilled
receivables at a given balance sheet date are subject to billings in the subsequent accounting period. Management reviews
unbilled receivables and related contract provisions to ensure we are justified in recognizing revenue prior to billing the
customer and that we have objective evidence which allows us to recognize such revenue. In addition, we have a sizable
amount of deferred revenue which represents billings in excess of revenue earned. The majority of this liability consists of
maintenance billings for which payments are made in advance and the revenue is ratably earned over the maintenance period,
generally one year. We also have deferred revenue for those contracts in which we receive a deposit and the conditions in
which to record revenue for the service or product has not been met. On a periodic basis, we review by customer the detail
components of our deferred revenue to ensure our accounting remains appropriate.
Intangible Assets and Goodwill. Our business acquisitions typically result in the creation of goodwill and other intangible
asset balances, and these balances affect the amount and timing of future period amortization expense, as well as expense we
could possibly incur as a result of an impairment charge. The cost of acquired companies is allocated to identifiable tangible
and intangible assets based on estimated fair value, with the excess allocated to goodwill. Accordingly, we have a significant
balance of acquisition date intangible assets, including software, customer related intangibles, trade name and goodwill.
In addition, we capitalize software development costs incurred subsequent to the establishment of technological feasibility.
These intangible assets are amortized over their estimated useful lives. All intangible assets with definite and indefinite
lives are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
Recoverability of goodwill is generally measured by a comparison of the carrying amount of an asset to its fair value, generally
determined by estimated future net cash flows expected to be generated by the asset. We evaluate goodwill for impairment
annually as of April, or more frequently if impairment indicators arise. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset’s fair value. The fair values calculated in our impairment tests are determined using
discounted cash flow models involving several assumptions. These assumptions include, but are not limited to, anticipated
operating income growth rates, our long-term anticipated operating income growth rate and the discount rate. Our cash flow
forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying
businesses. The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use
in estimating fair value. We have identified two reporting units for impairment testing. Our reporting units are the same as
our reportable segments and consistent with the reporting units tested for impairment in prior years. Assets, liabilities and
goodwill have been assigned to reporting units based on assets acquired and liabilities assumed as of the date of acquisition.
We evaluate the reasonableness of the fair value calculations of our reporting units by comparing the total of the fair value of
all of our reporting units to our total market capitalization. We base our fair value estimates on assumptions we believe to be
reasonable but that are unpredictable and inherently uncertain.
22 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Recoverability of other intangible assets is generally measured by comparison of the carrying amount to estimated
undiscounted future cash flows. The assessment of recoverability or of the estimated useful life for amortization purposes will
be affected if the timing or the amount of estimated future operating cash flows is not achieved. Such indicators may
include, among others: a significant decline in expected future cash flows; a sustained, significant decline in stock price and
market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition;
and reductions in growth rates. In addition, products, capabilities, or technologies developed by others may render our
software products obsolete or non-competitive. Any adverse change in these factors could have a significant impact on the
recoverability of goodwill or other intangible assets.
Our annual goodwill impairment analysis, which we performed during the second quarter of 2009, did not result in an
impairment charge. During 2009 we did not identify any triggering events which would require an update to our annual
impairment. A hypothetical 10% decrease in the fair value of either of our reporting units as of December 31, 2009 would
have had no impact on the carrying value of our goodwill.
Share-Based Compensation. We have a stock option plan that provides for the grant of stock options to key employees,
directors and non-employee consultants. We estimate the fair value of share-based awards on the date of grant using the
Black-Scholes option valuation model. Share-based compensation expense includes the estimated effects of forfeitures, which
will be adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ from such
estimates. Changes in estimated forfeitures are recognized in the period of change and will also impact the amount of
expense to be recognized in future periods. Forfeiture rate assumptions are derived from historical data. We estimate stock
price volatility at the date of grant based on the historical volatility of our common stock. Estimated option life is determined
using the “simplified method” in accordance with Staff Accounting Bulletin No. 110. Determining the appropriate fair-value
model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including
estimating stock price volatility, expected option life and forfeiture rates.
ANALYSIS OF RESULTS OF OPERATIONS AND OTHER
The following discussion compares the historical results of operations on a basis consistent with GAAP for the years ended
December 31, 2009, 2008 and 2007.
2009 Compared to 2008
Revenues
The following table sets forth a comparison of the key components of our revenues for the following years ended December 31:
($ in thousands)
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Total revenues
Change
2009
% of Total
2008
% of Total
$
$ 42,131
17,181
80,405
124,512
18,740
7,317
15%
$ 41,490
16%
6
28
43
6
2
14,374
74,997
107,458
19,098
7,684
5
28
41
7
3
$
641
2,807
5,408
17,054
(358)
(367)
%
2%
20
7
16
(2)
(5)
$ 290,286
100%
$ 265,101
100%
$ 25,185
10%
Software licenses. Software license revenues consist of the following components for the following years ended December 31:
($ in thousands)
2009
% of Total
2008
% of Total
$
%
Change
Financial management and education
Courts and justice
Appraisal and tax and other
$ 25,708
13,801
2,622
33
6
61%
$ 29,124
70%
$ (3,416)
(12)%
10,128
24
3,673
2,238
6
384
641
36
17
2%
Total software license revenues
$ 42,131
100%
$ 41,490
100%
$
Tyler Technologies Annual Report 2009
23
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
In 2009 we signed 74 large new contracts with average software license fees of approximately $307,000, compared to 72
large new contracts signed in 2008 with average software license fees of approximately $311,000. We consider contracts with
a license fee component of $100,000 or more to be large. Although a contract is signed in a particular year, the year in
which the revenue is recognized may be different because we recognize revenue according to our revenue recognition policy as
described in Note 1 in the Notes to Financial Statements.
Changes in software license revenues consist of the following components:
• Software license revenue related to our financial management and education solutions declined $3.4 million compared to
the prior year. We acquired several student information and financial management solutions for K-12 schools from
January through August 2008. Excluding the impact of these acquisitions software license revenue would have declined
$4.3 million. The decline was due to several factors. In 2009 our sales cycle to negotiate and close contracts which
have reached the request for proposal phase lengthened slightly mainly due to budgetary constraints related to declining
economic conditions. As a result the purchasing processes for some of our customers have been extended to include
more approval and documentation requirements. The software installation period for most of our financial management and
education solutions is relatively short and delays in the timing of signing new contracts will impact our results in the
short term. In addition, a few contracts have included requirements to construct interfaces to existing systems or other
essential functionality which results in recognizing revenue over a longer period of time. While we expect to continue
to experience longer than normal sales cycles in 2010 and continued weakness through mid-2010, we currently expect
financial management and education solutions software license revenues for 2010 to be slightly higher than 2009.
• Software license revenue related to our courts and justice software solutions increased $3.7 million in 2009 compared to
2008. Both 2009 and 2008 included approximately $1.7 million of revenue from contracts which had been deferred in
accordance with the terms of these contracts. Courts and justice software license revenues were higher in 2009 due to
contract arrangements that included more software license revenue than in the comparable prior year periods, slight price
increases and improved installation processes as our primary courts and justice solution matures. In addition approximately
$1.0 million of the increase related to achieving certain milestones for several contracts. We do not expect similar large
adjustments to courts and justice software solutions revenue in 2010 due to recognition of revenue previously deferred in
accordance with contract language. Therefore we currently expect courts and justice software solutions software license
revenue in 2010 to increase at a much slower rate compared to 2009.
Subscriptions. Subscription-based services revenue primarily consists of revenues derived from application service provider
(“ASP”) arrangements and other hosted service offerings, software subscriptions and disaster recovery services. ASP and other
software subscription agreements are typically for periods of three to six years and automatically renew unless either party
cancels the agreement. Disaster recovery and miscellaneous other hosted service agreements are typically renewable annually.
New customers for ASP and other hosted service offerings as well as existing customers who converted to our ASP model
provided the majority of the subscription revenue increase with the remaining increase due to slightly higher rates for disaster
recovery services. In June 2008, as a result of changes in its technology organization, one customer terminated its ASP
arrangement with us and elected, as provided in the ASP contract, to purchase the software instead. This contract contributed
approximately $450,000 of subscription revenue in each of the first two quarters of 2008.
Software services. Changes in software services revenues consist of the following components:
• Software services revenue related to financial management and education solutions, which comprise approximately 60% of
our software services revenue in the periods presented, increased 5% compared to 2008. We acquired several student
information and financial management solutions for K-12 schools from January through August 2008. Excluding the impact
of these acquisitions, software services revenue increased 3%, which was mainly due to additions to our implementation
and support staff as well as leverage in the utilization of our implementation and support staff.
• Software services revenue related to courts and justice solutions comprise approximately 30% of our software services revenues
in the periods presented and increased 21% compared to 2008. These increases reflect our increased capacity to deliver backlog
following additions to our implementation and support staff and slightly higher rates on some arrangements. Also, increased
contract volume in our municipal courts software solutions, primarily in Texas, generated higher related services revenue.
24 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance
revenues increased 16% in 2009 compared to 2008. Maintenance and support services grew 14% in 2009, excluding the
impact of acquisitions. This increase was due to growth in our installed customer base and slightly higher maintenance rates
on most of our product lines.
Appraisal services. Appraisal services revenue declined 2% in 2009 compared to 2008. The appraisal services business is
somewhat cyclical and driven in part by statutory revaluation cycles in various states. We substantially completed several large
appraisal projects mid-2009. We began several new revaluation contracts late 2009 and as a result currently expect appraisal
revenues to increase slightly in 2010.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues and those components stated as a
percentage of related revenues for the following years ended December 31:
($ in thousands)
Software licenses
Acquired software
Appraisal services
Hardware and other
Total cost of revenues
Software services, maintenance and subscriptions
137,199
2009
% of Related
Revenues
2008
% of Related
Revenues
Change
$
%
$ 5,440
13%
$ 9,224
22%
$ (3,784)
(41)%
1,411
11,518
5,955
3
62
61
81
1,799
126,247
12,251
5,793
4
64
64
75
(388)
10,952
(733)
162
(22)
9
(6)
3
$ 161,523
56%
$ 155,314
59%
$ 6,209
4%
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented for the
following years ended December 31:
Gross Margin Percentages
Software licenses and acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Overall gross margin
2009
2008
Change
83.7%
73.4%
10.3%
38.2
38.5
18.6
35.9
35.9
24.6
44.4%
41.4%
2.3
2.6
(6.0)
3.0%
Software license and acquired software. Amortization expense for capitalized development costs on certain software products
comprised approximately 15% of our cost of software license revenues in 2009 compared to approximately 50% of our cost
of software license in 2008. The remaining balance is made up of third party software costs. Once a product is released, we
begin to amortize, over the estimated useful life of the product, any capitalized costs associated with its development.
Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the
product’s estimated life, which is generally five years. Development costs consist mainly of personnel costs, such as salary
and benefits paid to our developers, and rent for related office space.
Cost of acquired software includes amortization expense for software acquired through acquisitions. We completed several
acquisitions in the period 2007 through 2009 and these costs are being amortized over a weighted average period of
approximately 5 years. In late 2008 software associated with one significant acquisition completed in December 2003
became fully amortized.
In 2009, our software license gross margin percentage rose significantly compared to the prior year periods because several
products became fully amortized in late 2008, as did software acquired related to a significant acquisition in December 2003.
We did not capitalize any internal software development costs in 2009 or 2008.
Software services, maintenance and subscription-based services. Cost of software services, maintenance and subscriptions
primarily consists of personnel costs related to installation of our software, conversion of customer data, training customer
personnel and support activities and various other services such as ASP and disaster recovery. In 2009, the software services,
Tyler Technologies Annual Report 2009
25
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
maintenance and subscriptions gross margin increased compared to the prior year partly because maintenance and various
other services such as ASP and disaster recovery costs typically grow at a slower rate than related revenues due to leverage in
the utilization of our support and maintenance staff and economies of scale. We have increased our implementation and
support staff for both the financial management and education solutions and courts and justice solutions by 51employees
since 2008 in order to expand our capacity to implement our contract backlog. This increase was offset somewhat by 24
fewer employees for appraisal and tax solutions. The software services, maintenance and subscription-based services gross
margin also benefited from slightly higher rates for certain services.
Appraisal services. Our appraisal gross margin increased compared to 2008 as the result of cost savings and operational
efficiencies experienced on an unusually complex project. A high proportion of the costs of appraisal services revenue are
variable, as we often hire temporary employees to assist in appraisal projects whose term of employment generally ends with
the projects’ completion.
Our blended gross margin for 2009 was higher than 2008 due to lower amortization expense of software development costs
described above. The gross margin also benefited from leverage in the utilization of our support and maintenance staff and
economies of scale and slightly higher rates on certain services.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based
compensation expense, commissions and related overhead costs for administrative and sales and marketing employees as well
as, professional fees, trade show activities, advertising costs and other marketing related costs. The following table sets
forth a comparison of our SG&A expenses for the following years ended December 31:
($ in thousands)
2009
% of Revenues
2008
% of Revenues
$
%
Selling, general and administrative expenses
$ 70,115
24%
$ 62,923
24%
$ 7,192
11%
Change
The increase in SG&A expenses included higher share-based compensation expense, commission costs and marketing
expenses. Marketing expenses in 2009 include costs associated with the launch of a new corporate branding initiative. Our
SG&A employee count increased 4% from 2008.
Research and Development Expense
Research and development expenses consist primarily of salaries, employee benefits and related overhead costs associated
with product development and enhancements and upgrades provided to existing customers under maintenance plans. The
following table sets forth a comparison of our research and development expense for the following years ended December 31:
($ in thousands)
2009
% of Revenues
2008
% of Revenues
$
%
Research and development expense
$ 11,159
4%
$ 7,286
3%
$ 3,873
53%
Change
Research and development expense consist mainly of costs associated with the Microsoft Dynamics AX project, in addition to
costs associated with other new product development efforts. We have increased our research and development staff by 72
employees since 2008. In January 2007, we entered into a Software Development and License Agreement, which provided
for a strategic alliance with Microsoft Corporation (“Microsoft”) to jointly develop core public sector functionality for Microsoft
Dynamics AX to address the accounting needs of public sector organizations worldwide. In September 2007, Tyler and
Microsoft signed an amendment to the Software Development and License Agreement, which grants Microsoft intellectual
property rights in and to certain portions of the software code provided and developed by Tyler into Microsoft Dynamics AX
products to be marketed and sold outside of the public sector in exchange for reimbursement payments to partially offset
the research and development costs.
In 2009 and 2008, we offset our research and development expense by $3.5 million and $1.8 million, respectively, which
were the amounts earned under the terms of our agreement with Microsoft. In September 2008, Tyler and Microsoft signed a
26 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
statement of work under the Amended Software Development and License Agreement for which we currently expect to recognize
offsets to our research and development expense by approximately $850,000 each quarter through the end of 2010. In addition,
in October 2009, the scope of the project was further expanded that will result in additional offsets to research and development
expense, varying in amount from quarter to quarter, with the first payment to be invoiced on August 31, 2010 and invoiced
quarterly through March 31, 2012 for a total of approximately $6.2 million. The actual amount and timing of future research
and development costs and related reimbursements and whether they are capitalized or expensed may vary.
Non-Cash Legal Settlement Related to Warrants
On June 27, 2008, we settled outstanding litigation related to the Warrants owned by Bank of America, N. A. (“ BANA”).
As disclosed in prior SEC filings, the Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an
exercise price of $2.50 per share. Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued
to BANA 801,883 restricted shares of Tyler common stock. Accordingly, we recorded a non-cash legal settlement related to
warrants charge of $9.0 million, which was not tax deductible.
Amortization of Customer and Trade Name Intangibles
Acquisition intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired
that is allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is
allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with
cost of revenues, while amortization expense of customer and trade name intangibles is recorded as other operating expense.
The estimated useful lives of both customer and trade name intangibles are 5 to 25 years. The following table sets forth a
comparison of amortization of customer and trade name intangibles for the following years ended December 31:
($ in thousands)
2009
2008
$
%
Amortization of customer and trade name intangibles
$ 2,705
$ 2,438
$ 267
11%
Change
In 2009 we completed several acquisitions and purchased certain software assets to complement our tax and appraisal
solutions and our student information management solutions. These transactions increased amortizable customer and trade
name intangibles by approximately $625,000. This amount will be amortized over approximately 10 years.
Estimated annual amortization expense relating to customer and trade name acquisition intangibles, excluding acquired
software for which the amortization expense is recorded as cost of revenues, for the next five years is as follows (in thousands):
2010
2011
2012
2013
2014
$ 2,654
2,638
2,586
2,427
2,426
Other
Other (expense) income in 2009 and 2008 includes non-usage and other fees associated with a credit agreement entered
into in October 2008. Other income in 2008 also included $1.1 million of interest income which declined due to significantly
lower invested cash balances in 2009. Our invested cash balances declined due to purchases of treasury stock and
investments in office facilities in late 2008 and 2009.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
($ in thousands)
Income tax provision
Effective income tax rate
Change
2009
2008
$
%
$ 17,628
$ 14,414
$ 3,214
22%
39.5%
49.2%
Tyler Technologies Annual Report 2009
27
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Our effective income tax rate declined compared to 2008 mainly due to a non-cash legal settlement related to warrants
charge of $9.0 million in 2008, which was not deductible. In addition to the impact of the non-deductible non-cash legal
settlement charge in 2008, the effective income tax rate for both years were different from the statutory United States
federal income tax rate of 35% due to state income taxes, non-deductible share-based compensation expense, the qualified
manufacturing activities deduction, and non-deductible meals and entertainment costs.
Approximately 40% of our stock option awards qualify as incentive stock options (“ISOs”) for income tax purposes. As such,
a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due
to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Non-qualified
stock options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is
exercised. Due to the treatment of ISOs for tax purposes, our effective tax rate from year to year is subject to variability.
2008 Compared to 2007
Revenues
The following table sets forth a comparison of the key components of our revenues for the following years ended December 31:
($ in thousands)
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Total revenues
Change
2008
% of Total
2007
% of Total
$
$ 41,490
16%
$ 35,063
16%
14,374
74,997
107,458
19,098
7,684
5
28
41
7
3
10,406
60,283
85,411
21,318
7,315
5
27
39
10
3
$ 6,427
3,968
14,714
22,047
(2,220)
369
%
18%
38
24
26
(10)
5
$ 265,101
100%
$ 219,796
100%
$ 45,305
21%
Software licenses. Software license revenues consist of the following components for the following years ended December 31:
($ in thousands)
2008
% of Total
2007
% of Total
$
Change
Financial management and education
Courts and justice
Appraisal and tax and other
Total software license revenues
$ 29,124
10,128
2,238
$ 41,490
70%
24
6
100%
$ 27,236
5,987
1,840
$ 35,063
78%
17
5
$ 1,888
4,141
398
100%
$ 6,427
18%
%
7%
69
22
Changes in software license revenues consist of the following components:
• Software license revenue related to our financial management and education solutions for 2008 increased 7% compared to
the prior year. Revenue from student information management solutions as well as student transportation management
solutions acquired in the last twelve months contributed substantially to the increase. The remaining increase was mainly
due to contract arrangements that included more software license revenue than in the past.
• Software license revenue related to our courts and justice software solutions increased 69% for 2008 compared to the prior
year. New statewide contracts in Indiana and New Mexico contributed approximately two-thirds of the increase. The
remaining increase was primarily due to an expanded presence in the markets for municipal courts software solutions and
public safety software solutions.
Subscriptions. New ASP customers and existing customers converting to ASP arrangements provided the majority of the
subscription revenue increase with the remaining increase due to new disaster recovery customers and slightly higher rates for
disaster recovery services.
28 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Software services. Changes in software services revenues consist of the following components:
• Software services revenue related to financial management and education solutions, which comprises slightly more than
half of our software services revenue in the years presented, increased substantially compared to 2007. This increase was
driven in part by increased capacity to deliver backlog following additions to our implementation and support staff since
2007 and due to larger and more complex contracts, which include more programming and project management services.
In addition, we acquired a student transportation management solution in January 2008 which contributed approximately
$3.9 million to software service revenues in 2008. Excluding the impact of acquisitions, we added approximately
95 employees to our financial management and education implementation and training staff during 2008.
• Software services revenue related to our courts and justice solutions experienced strong increases compared to 2007,
reflecting increased capacity to deliver backlog following additions to our implementation and support staff since
mid-2007. In addition, increased contract volume for municipal courts software solutions and public safety software
solutions also generated higher related services revenue. We added approximately 12 employees to our courts and
justice implementation and training staff during 2008.
Maintenance. Maintenance revenues increased 26% in 2008 compared to 2007. Excluding the impact of acquisitions,
maintenance and support services grew 16% in 2008. This increase was due to growth in our installed customer base and
slightly higher maintenance rates on most of our product lines.
Appraisal services. Appraisal services revenue declined 10% in 2008 compared to 2007. In late 2007, we substantially
completed several projects related to the Ohio revaluation cycle, which occurs every six years, as well as a few other large
contracts. Appraisal revenues for the first six months of 2008 were down 23% compared to the first six months of 2007.
In mid-2008 we began a complete reappraisal of real property in Orleans Parish, Louisiana. As a result of this contract and
an overall increase in contract volume, appraisal revenues for the last six months of 2008 increased 4% over the last six
months of 2007.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues and those components stated as a
percentage of related revenues for the following years ended December 31:
($ in thousands)
Software licenses
Acquired software
Appraisal services
Hardware and other
Total cost of revenues
Software services, maintenance and subscriptions
126,247
2008
% of Related
Revenues
2007
% of Related
Revenues
Change
$
%
$ 9,224
22%
$ 7,953
23%
$ 1,271
16%
1,799
12,251
5,793
4
64
64
75
2,279
104,993
14,467
5,679
7
67
68
78
(480)
21,254
(2,216)
(21)
20
(15)
114
2
$ 155,314
59%
$ 135,371
62%
$ 19,943
15%
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented for the
following years ended December 31:
Gross Margin Percentages
Software licenses and acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Overall gross margin
2008
2007
Change
73.4%
70.8%
2.6%
35.9
35.9
24.6
32.7
32.1
22.4
3.2
3.8
2.2
41.4%
38.4%
3.0%
Software license. In 2008, our software license gross margin percentage rose compared to the prior year mainly due to strong
license fee revenue increases. Because approximately one-half of our cost of software license revenues in both periods is
comprised of amortization of capitalized development costs, increased license fee revenues inherently result in higher gross margins.
Tyler Technologies Annual Report 2009
29
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Software services, maintenance and subscription-based services. In 2008, the software services, maintenance and
subscriptions gross margin increased compared to the prior year partly because maintenance and various other services such
as ASP and disaster recovery costs typically grow at a slower rate than related revenues due to leverage in the utilization
of our support and maintenance staff and economies of scale. We increased our implementation and support staff by 215
employees during 2008 in order to expand our capacity to implement our contract backlog. This increase includes
102 employees related to acquisitions completed in 2008.
Appraisal services. Our appraisal gross margin for 2008 was higher than the prior year due to cost savings associated with a
significant complex reappraisal project.
Our blended gross margin in 2008 was higher than the prior year in large part due to leverage in the utilization of our support
and maintenance staff and economies of scale, with resulting increases in gross margin for each revenue category.
Selling, General and Administrative Expenses
The following table sets forth a comparison of our SG&A expenses for the following years ended December 31:
($ in thousands)
2008
% of Revenues
2007
% of Revenues
$
%
Selling, general and administrative expenses
$ 62,923
24%
$ 51,724
24%
$ 11,199
22%
Change
Excluding the impact of acquisitions, our SG&A employee count increased 9% during 2008.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the following years ended December 31:
($ in thousands)
2008
% of Revenues
2007
% of Revenues
$
%
Research and development expense
$ 7,286
3%
$ 4,443
2%
$ 2,843
64%
Change
Research and development expense consist mainly of costs associated with the Microsoft Dynamics AX project, in addition to
costs associated with other new product development efforts. In 2008 and 2007, we offset our research and development
expense by $1.8 million and $1.6 million, respectively, which were the amounts earned under the terms of our research and
development agreement with Microsoft.
Non-Cash Legal Settlement Related to Warrants
On June 27, 2008, we settled outstanding litigation related to the Warrants owned by BANA. The Warrants entitled BANA to
acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per share. Following court-ordered mediation,
in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock.
Accordingly, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which was not tax deductible.
Amortization of Customer and Trade Name Intangibles
The following table sets forth a comparison of amortization of customer and trade name intangibles for the following years
ended December 31:
($ in thousands)
2008
2007
$
%
Change
Amortization of customer and trade name intangibles
$ 2,438
$ 1,478
$ 960
65%
In 2008, we completed three acquisitions, which increased amortizable customer and trade name intangibles by $12.3 million.
30 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Other
Interest income was the main component of other income in both 2008 and 2007. Other income in 2008 also includes
non-usage and other fees associated with a credit agreement entered into in October 2008. Interest income in 2008 was
$1.1 million compared to $1.8 million in 2007. Interest income declined due to lower invested cash balances and slightly lower
interest rates. Our invested cash balances declined due to purchases of treasury stock and investments in office facilities in 2008.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
($ in thousands)
Income tax provision
Effective income tax rate
Change
2008
2007
$
%
$ 14,414
$ 11,079
$ 3,335
30%
49.2%
38.8%
Our effective income tax rate increased approximately twelve points compared to the prior year due to a non-cash legal
settlement related to warrants charge of $9.0 million, which was not deductible. The effective income tax rates were different
from the statutory United States federal income tax rate of 35% primarily due to non-cash legal settlement related to
warrants charge which was not deductible, as well as state income taxes, non-deductible share-based compensation expense,
the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs.
BUSINESS SEGMENT DISCUSSION
Enterprise Software Solutions
Revenue
Gross margin
Gross margin percentage
Segment operating income
2009
% Change
2008
% Change
2007
$ 250,059
11%
$ 225,887
24%
$ 182,065
$ 114,309
46%
$ 97,214
43%
$ 71,684
39%
$ 55,639
17%
$ 47,698
37%
$ 34,833
In 2009 software license revenues were flat compared to 2008. Growth in recurring revenues from subscription-based services
and maintenance experienced a 14% increase, excluding the impact of acquisitions, and was the primary factor for the
increase in overall revenue and segment operating income for the Enterprise Software Solutions segment. This increase was
due to growth in our installed customer base and slightly higher maintenance rates on most of our product lines. New
customers for ASP and other hosted service offerings as well as existing customers converting to ASP arrangements and
slightly higher rates for disaster recovery services also contributed to this increase. The gross margin and segment operating
income rose in 2009 due to lower amortization expense of software development costs. The gross margin and segment
operating income also benefited from leverage in the utilization of our support and maintenance staff and economies of scale
and slightly higher rates on certain services.
In 2008 software license revenues were 18% higher than 2007 mainly due to higher courts and justice contract volume as a
result of an expanded presence in Indiana and New Mexico. 2008 software license revenue also benefitted from student
information management solutions and transportation solutions acquired in early 2008. Excluding the impact of acquisitions
in 2008, revenues from subscription-based arrangements and maintenance grew by 19% compared to 2007 primarily due to
growth in our customer base. Our gross margin and segment operating income in 2008 was higher than 2007 in large part due
to leverage in the utilization of our support and maintenance staff and economies of scale and higher software license revenues.
Appraisal and Tax Software Solutions and Services
Revenue
Gross margin
Gross margin percentage
Segment operating income
2009
% Change
2008
% Change
2007
$ 40,776
$ 15,489
38%
5%
$ 38,868
$ 13,231
34%
1%
$ 38,649
$ 12,966
34%
$ 6,949
28%
$ 5,448
8%
$ 5,040
Tyler Technologies Annual Report 2009
31
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
In 2009 overall revenues for the Appraisal and Tax Software Solutions and Services segment increased compared to 2008
mainly due to a 16% increase in subscription-based arrangements and maintenance due to growth in our customer base and
slightly higher rates. Excluding the results of acquisitions, subscription-based arrangements and maintenance increased
15% compared to 2008. This increase was offset slightly by 2% lower appraisal services. The appraisal services business is
somewhat cyclical and driven in part by scheduled revaluation cycles in various states. We substantially completed several
large appraisal projects mid-2009. Our appraisal gross margin and segment operating income increased compared to 2008 as
the result of cost savings and operational efficiencies experienced on an unusually complex appraisal project. A high
proportion of the costs of appraisal services revenue are variable, as we often hire temporary employees to assist in appraisal
projects whose term of employment generally ends with the projects’ completion.
Overall appraisal and tax revenues in 2008 were flat compared to 2007. Although maintenance revenues increased 8%,
appraisal services revenues declined 10%. In late 2007, we substantially completed several appraisal projects related to the
Ohio revaluation cycle, which occurs every six years, as well as a few other large contracts. The gross margin for 2008 was
flat compared to 2007 due to cost savings associated with a significant complex reappraisal project which offset declines from
lower contract volume.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 2009, we had cash and cash equivalents (including restricted cash equivalents) of $15.7 million and
current and non-current investments of $2.0 million, compared to cash and cash equivalents (including restricted cash
equivalents) of $6.8 million and current and non-current investments of $4.6 million at December 31, 2008. As of December 31,
2009, we had no outstanding borrowings and outstanding letters of credit totaling $7.3 million to secure surety bonds
required by some of our customer contracts. These letters of credit expire through mid-2010.
The following table sets forth a summary of cash flows for the years ended December 31:
($ in thousands)
Cash flows provided by (used by):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
2009
2008
2007
$ 42,941
$ 47,802
$ 34,111
(13,658)
(9,554)
(34,275)
(21,349)
(46,128)
(7,406)
$ 7,934
$ (7,880)
$ (7,570)
Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital
expenditures. Other capital resources include cash on hand, public and private issuances of debt and equity securities, and
bank borrowings. The capital and credit markets have become more volatile and tightened as a result of adverse conditions
that have caused the failure and near failure of a number of large financial services companies. It is possible that our ability
to access the capital and credit markets may be limited by these or other factors. Notwithstanding the foregoing, we believe
that cash provided by operating activities, cash on hand and our revolving credit agreement are sufficient to fund our working
capital requirements, capital expenditures, income tax obligations, and share repurchases for the foreseeable future.
In 2009, operating activities provided net cash of $42.9 million, primarily generated from net income of $27.0 million,
non-cash depreciation and amortization charges of $9.5 million, non-cash share-based compensation expense of $5.0 million
and a decrease in working capital of $2.7 million offset slightly by a $1.7 million decrease related to deferred income taxes.
Working capital declined due to higher accounts payable and accrued liabilities pertaining to timing of payments on vendor
invoices and income tax liabilities and an accrued liability of $1.8 million for a retention payment related to construction
of an office building. Other sources of working capital were deferred revenue related to December maintenance billings and a
decrease in prepaid expenses. These working capital declines were offset somewhat by an increase in annual software
maintenance billings as a result of growth in our installed customer base. The increase in accounts receivable was offset
slightly by the collection of several large customer billings, one of which had been outstanding for over twelve months.
32 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Cash flows provided by operating activities in 2008 included several advance payments from customers. In general, changes
in the balance of deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings.
Our renewal dates occur throughout the year but our heaviest renewal cycles occur in the second and fourth quarters.
Non-current investments available-for-sale consist of two auction rate municipal securities (“ARS”) which are collateralized
debt obligations supported by municipal and state agencies and do not include mortgage-backed securities. Short-term
investments available-for-sale consists of the portion of one of these ARS which was partially redeemed at par during the
period January 1, 2010 through February 22, 2010. These ARS are debt instruments with stated maturities ranging from
22 to 33 years, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days.
However, due to events in the credit markets, auctions for these securities have not occurred since February 2008. Both of
our ARS have had very small partial redemptions at par in the period from July 2009 through February 2010. As of
December 31, 2009 we have continued to earn and collect interest on both of our ARS. Because quoted prices in active
markets are no longer available we determined the estimated fair values of these securities utilizing a discounted trinomial
model. The model considers the probability of three potential occurrences for each auction event through the maturity date of
each ARS. The three potential outcomes for each auction are (i) successful auction/early redemption, (ii) failed auction
and (iii) issuer default. Inputs in determining the probabilities of the potential outcomes include but are not limited to, the
securities’ collateral, credit rating, insurance, issuer’s financial standing, contractual restrictions on disposition and the
liquidity in the market. The fair value of each ARS is determined by summing the present value of the probability-weighted
future principal and interest payments determined by the model. Since there can be no assurances that auctions for these
securities will be successful in the near future, we have classified our ARS as non-current investments.
In association with this estimate of fair value, we have recorded an after-tax temporary unrealized loss on our non-current ARS
of $18,000, net of related tax effects of $10,000 in 2009, which is included in accumulated other comprehensive loss on
our balance sheet. The unrealized loss includes the impact of adjusting previously recorded unrealized losses of approximately
$120,000, net of related tax effects of $65,000 as of December 31, 2008 for several ARS which were subsequently
redeemed for $2.5 million at par during 2009.
We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor is it more-likely-than-not
that we will be required to sell these securities before recovery of their cost basis. We believe that this temporary decline in
fair value is due entirely to liquidity issues, because the underlying assets of these securities are supported by municipal and
state agencies and do not include mortgage-backed securities, have redemption features which call for redemption at 100%
of par value and have a current credit rating of A or AAA. The ratings on the ARS take into account credit support through
insurance policies guaranteeing each of the bonds’ payment of principal and accrued interest, if it becomes necessary. In
addition, both ARS have had very small partial redemptions at par in the period July 2009 through February 2010. Based on
our cash and cash equivalents balance of $15.7 million and expected operating cash flows, we do not believe a lack of
liquidity associated with our ARS will adversely affect our ability to conduct business, and believe we have the ability to hold
the securities throughout the currently estimated recovery period. We will continue to evaluate any changes in the market
value of our ARS and in the future, depending upon existing market conditions, we may be required to record an other-than-
temporary decline in market value.
At December 31, 2009, our days sales outstanding (“DSOs”) were 98 days compared to DSOs of 99 days at December 31,
2008. DSOs are calculated based on accounts receivable (excluding long-term receivables, but including unbilled receivables)
divided by the quotient of annualized quarterly revenues divided by 360 days.
Investing activities used cash of $13.7 million in 2009 compared to $9.6 million in 2008. In connection with plans to
consolidate our workforce and support planned long-term growth, we paid $9.4 million for construction of an office building
and expect to pay the final retainage of $1.8 million by mid-2010. We also liquidated $2.5 million of investments in ARS
for cash at par. In 2009 we completed the acquisition of all of the capital stock of Assessment Evaluation Services, Inc. for
$1.1 million in cash, paid $700,000 in cash for certain assets of KPL, Inc. d/b/a Parker-Lowe & Associates and acquired various
software assets for $1.1 million in cash. Capital expenditures and acquisitions were funded from cash generated from operations.
Tyler Technologies Annual Report 2009
33
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
In 2008, we liquidated $36.4 million of ARS investments for cash at par, and we completed the acquisitions of School
Information Systems, Inc., VersaTrans Solutions Inc. and certain assets of Olympia Computing Company, Inc. d/b/a
Schoolmaster to expand our presence in the education market. The combined purchase price, excluding cash acquired and
including transaction costs, was approximately $23.9 million in cash and approximately 196,000 shares of Tyler common
stock valued at $2.9 million. We paid $3.3 million, which included $2.1 million for land, for an office development. We also
paid $12.7 million for an office building, land, and a related tenant lease in Yarmouth, Maine.
Cash used in financing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option
exercises, payments on our revolving credit line and contributions from our employee stock purchase plan. During 2009,
we purchased 1.2 million shares of our common stock for an aggregate purchase price of $17.0 million. We also paid
$1.3 million for common stock repurchases accrued as of December 31, 2008.
The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended
in April and July 2003, October 2004, October 2005, May 2007, May 2008, October 2008 and May 2009. Our board of
directors authorized the repurchase of an additional 2.0 million shares on May14, 2009. As of December 31, 2009, we had
remaining authorization to repurchase up to 2.3 million additional shares of our common stock. Our share repurchase program
allows us to repurchase shares at our discretion and market conditions influence the timing of the buybacks and the number
of shares repurchased. These share repurchases are funded using our existing cash balances as well as borrowings under our
revolving credit agreement and may occur through open market purchase and transactions structured through investment
banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the
authorization and we intend to repurchase stock under the plan from time to time. Our bank credit agreement contains
restrictions on the amount of common stock we may purchase.
During 2008, we purchased 4.3 million shares of our common stock for an aggregate purchase price of $59.0 million.
In 2009 we issued 425,000 shares of common stock and received $2.3 million in aggregate proceeds upon exercise of stock
options. In 2008 we received $1.8 million from the exercise of options to purchase approximately 379,000 shares of our
common stock under our employee stock option plan and during 2007, we received $3.6 million from the exercise of options
to purchase approximately 878,000 shares of our common stock under our employee stock option plan. In 2009 we received
$1.5 million from contributions to the Tyler Technologies, Inc. Employee Stock Purchase Plan (“ESPP”). In both 2008 and
2007, we received $1.2 million from contributions to the ESPP.
Subsequent to December 31, 2009 and through February 22, 2010 we purchased approximately 59,000 shares of our common
stock for an aggregate cash purchase price of $1.1 million.
In October 2008, we entered into a revolving bank credit agreement (the “Credit Facility”) and a related pledge and security
agreement which originally matured October 19, 2009. We amended and extended the related pledge and security agreement
in October 2009. The Credit Facility matures October 18, 2010 and provides for total borrowings of up to $25.0 million
and a $10.0 million Letter of Credit facility which can either be cash collateralized or issued using availability under the
Credit Facility. The Credit Facility is secured by substantially all of our property. The Credit Facility requires us to maintain
certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash
dividends or loans, restricts the amount of our common stock we may purchase and limits incurrence of additional
indebtedness and liens. As of December 31, 2009, we were in compliance with those covenants. We expect borrowings to
fund discretionary purchases of our common stock or fund acquisitions.
As of December 31, 2009, we had no outstanding borrowings and unused available borrowing capacity of $23.7 million
under the Credit Facility. In addition, as of December 31, 2009, our bank had issued outstanding letters of credit totaling
$7.3 million to secure surety bonds required by some of our customer contracts. These letters of credit have been
collateralized by restricted cash balances of $6.0 million and $1.3 million of our available borrowing capacity and expire
through mid-2010.
We paid income taxes, net of refunds received, of $18.1 million in 2009, $15.7 million in 2008, and $8.7 million in 2007.
34 Tyler Technologies Annual Report 2009
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
In the first quarter of 2010 we acquired all the assets of Wiznet, Inc. (“Wiznet”) for a cash purchase price of $9.5 million.
Wiznet provides electronic document filing solutions for courts and law offices throughout the United States and is currently
integrated with our primary courts and justice solution. We have not finalized the allocation of the purchase price.
Excluding acquisitions and final retainage payment of $1.8 million for an office building, we anticipate that 2010 capital
spending will be between $3.7 million and $4.2 million. We expect the majority of our capital spending in 2010 will consist
of computer equipment and software for infrastructure expansion. We currently do not expect to capitalize significant amounts
related to software development in 2010, but the actual amount and timing of those costs, and whether they are capitalized
or expensed may result in additional capitalized software development. Capital spending in 2010 is expected to be funded
from existing cash balances and cash flows from operations.
From time to time we engage in discussions with potential acquisition candidates. In order to pursue such opportunities,
which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially
dilutive securities in the future. No assurance can be given as to our future acquisition opportunities and how such
opportunities will be financed.
We lease office facilities, as well as transportation, computer and other equipment used in our operations under non-cancelable
operating lease agreements expiring at various dates through 2014. Most leases contain renewal options and some contain
purchase options. Following are the future obligations under non-cancelable leases at December 31, 2009 (in thousands):
Future rental payments under
operating leases
$ 6,033
$ 5,265
$ 3,954
$ 2,365
$ 1,721
$ —
$ 19,338
2010
2011
2012
2013
2014
Thereafter
Total
As of December 31, 2009, we do not have any off-balance sheet arrangements, guarantees to third parties or material purchase
commitments, except for the operating lease commitments listed above.
CAPITALIZATION
At December 31, 2009, our capitalization consisted of $134.4 million of shareholders’ equity.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2009, the Financial Accounting Standards Board issued ASU 2009-13, Multiple Element Arrangements.
ASU 2009-13 addresses the determination of when the individual deliverables included in a multiple arrangement may be
treated as separate units of accounting. ASU 2009-13 also modifies the manner in which the transaction consideration
is allocated across separately identified deliverables and establishes definitions for determining fair value of elements in an
arrangement. This new update is effective for fiscal years beginning on or after June 15, 2010. Early adoption is allowed.
The new standard may impact our application service provider arrangements to recognize revenues, such as installation and
data conversion, which are generally provided at the beginning of the arrangement as incurred instead of ratably over
the life of the initial hosting term. The adoption of this standard is not expected to have a material impact on our financial
condition or results of operation.
Tyler Technologies Annual Report 2009
35
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates.
Our investments available-for-sale consist of auction rate municipal securities (“ARS”) which are collateralized debt
obligations supported by municipal and state agencies and do not include mortgage-backed securities.
Non-current investments available-for-sale consist of two ARS with stated maturities ranging from 22 to 33 years, for which
the interest rate is designed to be reset through Dutch auctions approximately every 30 days which would have qualified as
Level 1 under ASC 820, Fair Value Measurements. However, due to events in the credit markets, auctions for these securities
have not occurred since February 2008. Therefore, quoted prices in active markets are no longer available and we determined
the estimated fair values of these securities as of December 31, 2009, utilizing a discounted trinomial model.
In association with this estimate of fair value, we have recorded an after-tax temporary unrealized loss on our non-current ARS
of $18,000, net of related tax effects of $10,000 in 2009, which is included in accumulated other comprehensive loss on
our balance sheet. The unrealized loss includes the impact of adjusting previously recorded unrealized losses of approximately
$120,000, net of related tax effects of $65,000 as of December 31, 2008 for several ARS which were subsequently
redeemed for $2.5 million at par during 2009. We consider the impairment in our ARS as temporary because we do not have
the intent to sell, nor is it more-likely-than-not that we will be required to sell these securities before recovery of their cost
basis. We believe that this temporary decline in fair value is due entirely to liquidity issues, because the underlying assets of
these securities are supported by municipal and state agencies and do not include mortgage-backed securities, have
redemption features which call for redemption at 100% of par value and have a current credit rating of A or AAA. The ratings
on the ARS take into account credit support through insurance policies guaranteeing each of the bonds’ payment of principal
and accrued interest, if it becomes necessary. In addition, both ARS have had very small partial redemptions at par in the
period July 2009 through February 2010. Based on our cash and cash equivalents balance of $15.7 million and expected
operating cash flows, we do not believe a lack of liquidity associated with our ARS will adversely affect our ability to conduct
business, and believe we have the ability to hold the securities throughout the currently estimated recovery period. We
will continue to evaluate any changes in the market value of our ARS and in the future, depending upon existing market
conditions, we may be required to record an other-than-temporary decline in market value.
36 Tyler Technologies Annual Report 2009
Management’s Report on Internal Control Over Financial Reporting
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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 December 31, 2009. Based on this evaluation the chief executive officer and chief financial officer have concluded that
our disclosure controls and procedures were effective as of December 31, 2009.
Management’s Report on Internal Control Over Financial Reporting – Tyler’s management is responsible for establishing
and maintaining effective internal control over financial reporting as defined in Securities Exchange Act Rule 13a-15(f).
Tyler’s internal control over financial reporting is designed to provide reasonable assurance to Tyler’s management and board
of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management assessed the effectiveness of Tyler’s internal control over financial reporting as of December 31, 2009. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, we concluded that, as of
December 31, 2009, Tyler’s internal control over financial reporting was effective based on those criteria.
Tyler’s internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, the
independent registered public accounting firm who also audited Tyler’s financial statements. Ernst & Young’s attestation report
on Tyler’s internal control over financial reporting appears on page 38 hereof.
Changes in Internal Control Over Financial Reporting – During the quarter ended December 31, 2009, there were no changes
in our internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f), that are materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Tyler Technologies Annual Report 2009
37
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited Tyler Technologies, Inc.’s internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Tyler Technologies, Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying “Managements’ Report on Internal Control Over Financial Reporting.” Our responsibility is to
express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Tyler Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the balance sheets of Tyler Technologies, Inc. as of December 31, 2009 and 2008, and the related statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report
dated February 25, 2010 expressed an unqualified opinion thereon.
Dallas, Texas
February 25, 2010
38 Tyler Technologies Annual Report 2009
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited the accompanying balance sheets of Tyler Technologies, Inc. as of December 31, 2009 and 2008, and the
related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
Tyler Technologies, Inc. at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Tyler Technologies, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 25, 2010 expressed an unqualified opinion thereon.
Dallas, Texas
February 25, 2010
Tyler Technologies Annual Report 2009
39
2009
2008
2007
$ 42,131
$ 41,490
17,181
14,374
80,405
74,997
124,512
107,458
18,740
19,098
7,317
7,684
$ 35,063
10,406
60,283
85,411
21,318
7,315
290,286
265,101
219,796
5,440
1,411
9,224
1,799
137,199
126,247
11,518
12,251
5,955
5,793
7,953
2,279
104,993
14,467
5,679
161,523
155,314
135,371
128,763
109,787
84,425
70,115
62,923
51,724
11,159
2,705
—
7,286
2,438
9,045
4,443
1,478
—
44,784
28,095
26,780
(146)
1,181
44,638
29,276
17,628
14,414
$ 27,010
$ 14,862
$
$
0.77
0.74
$
$
0.39
0.38
35,240
37,714
36,624
39,184
1,800
28,580
11,079
$ 17,501
$
$
0.45
0.42
38,735
41,352
Statements of Operations
STATEMENTS OF O PERATIONS
For the years ended December 31
In thousands, except per share amounts
Revenues:
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Total revenues
Cost of revenues:
Software licenses
Acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Total cost of revenues
Gross profit
Selling, general and administrative expenses
Research and development expense
Amortization of customer and trade name intangibles
Non-cash legal settlement related to warrants
Operating income
Other (expense) income, net
Income before income taxes
Income tax provision
Net income
Earnings per common share:
Basic
Diluted
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
See accompanying notes.
40 Tyler Technologies Annual Report 2009
BALANCE SHEETS
December 31
In thousands, except share and per share amounts
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash equivalents
Short-term investments available-for-sale
Balance Sheets
2009
2008
$ 9,696
$ 1,762
6,000
50
5,082
775
Accounts receivable (less allowance for losses of $2,389 in 2009 and $2,115 in 2008)
81,245
76,989
Prepaid expenses
Other current assets
Deferred income taxes
Total current assets
Accounts receivable, long-term portion
Property and equipment, net
Non-current investments available-for-sale
Other assets:
Goodwill
Customer related intangibles, net
Software, net
Trade name, net
Sundry
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Short-term revolving line of credit
Deferred revenue
Income taxes payable
Total current liabilities
Deferred income taxes
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 in 2009 and 2008
Additional paid-in capital
Accumulated other comprehensive loss, net of tax
Retained earnings
7,921
1,437
3,338
8,602
1,444
2,570
109,687
97,224
1,018
197
35,750
26,522
1,976
3,779
90,258
25,490
88,791
27,438
4,218
2,063
210
5,112
2,471
227
$ 270,670
$ 251,761
$ 3,807
26,110
—
$ 2,617
22,913
8,000
99,116
95,773
220
166
129,253
129,469
7,059
8,030
—
481
—
481
153,734
151,245
(405)
(387)
77,504
50,494
Treasury stock, at cost; 13,027,838 and 12,333,549 shares in 2009 and 2008, respectively
(96,956)
(87,571)
Total shareholders’ equity
See accompanying notes.
134,358
$ 270,670
114,262
$ 251,761
Tyler Technologies Annual Report 2009
41
Statements of Shareholders’ Equity
STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2009, 2008 and 2007
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Retained
Income (Loss) Earnings
Treasury Stock
Shares
Amount
Total
Shareholders’
Equity
In thousands
Balance at December 31, 2006
48,148
$ 481
$ 151,627
$ (10)
$ 18,131
(9,256)
$ (44,354)
$ 125,875
149,568
—
35,632
(9,528)
(48,470)
137,211
Comprehensive income:
Net income
Unrealized gain on investment
—
—
—
—
17,501
securities, net of tax
—
—
—
10
—
Total comprehensive income
Issuance of shares pursuant
to stock compensation plan
Stock compensation
Treasury stock purchases
Issuance of shares pursuant to
—
—
—
—
—
—
(7,339)
—
2,365
—
—
—
Employee Stock Purchase Plan
—
—
(2)
—
Federal income tax benefit related
to exercise of stock options
—
Balance at December 31, 2007
48,148
—
481
2,917
—
Comprehensive income:
Net income
Unrealized loss on investment
—
—
—
—
14,862
securities, net of tax
—
—
—
(387)
—
Total comprehensive income
Issuance of shares pursuant
to stock compensation plan
Stock compensation
Treasury stock purchases
Issuance of shares pursuant to
—
—
—
—
—
—
(3,495)
—
3,820
—
—
—
Employee Stock Purchase Plan
—
—
(186)
—
Federal income tax benefit related
to exercise of stock options
—
—
822
—
Issuance of shares in connection
with legal settlement
Issuance of shares for acquisitions
—
—
Balance at December 31, 2008
48,148
—
—
481
455
261
—
—
Comprehensive income:
Net income
Unrealized loss on investment
—
—
—
—
27,010
securities, net of tax
—
—
—
(18)
—
Total comprehensive income
Issuance of shares pursuant
to stock compensation plan
Stock compensation
Treasury stock purchases
Issuance of shares pursuant to
—
—
—
—
—
—
(3,774)
—
5,045
—
—
—
Employee Stock Purchase Plan
—
—
(118)
—
—
—
—
17,501
—
10
17,511
—
—
—
—
—
878
10,928
—
—
3,589
2,365
(1,250)
(16,163)
(16,163)
100
1,119
1,117
—
—
2,917
—
—
—
14,862
—
(387)
14,475
379
—
5,310
—
1,815
3,820
(4,283)
(58,984)
(58,984)
101
1,376
1,190
—
—
822
802
196
10,595
11,050
2,602
2,863
—
—
—
—
—
—
—
—
—
—
27,010
—
(18)
26,992
—
—
—
—
—
425
—
6,069
—
2,295
5,045
(1,235)
(17,000)
(17,000)
115
1,546
1,428
—
—
1,336
151,245
(387)
50,494
(12,333)
(87,571)
114,262
1,336
—
$ 153,734
$ (405)
$ 77,504
(13,028)
$ (96,956)
$ 134,358
Federal income tax benefit related
to exercise of stock options
—
Balance at December 31, 2009
48,148
—
$ 481
See accompanying notes.
42 Tyler Technologies Annual Report 2009
STATEMENTS OF C ASH FLOWS
For the years ended December 31
In thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Non-cash legal settlement related to warrants
Share-based compensation expense
Provision for losses – accounts receivable
Excess tax benefit from exercises of share-based arrangements
Deferred income tax benefit
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable
Income tax payable
Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of investments
Purchases of investments
Cost of acquisitions, net of cash acquired
Additions to property and equipment
Investment in software development costs
Acquired lease
(Increase) decrease in restricted investments
Decrease in other
Statements of Cash Flows
2009
2008
2007
$ 27,010
$ 14,862
$ 17,501
9,497
—
5,045
1,538
(1,125)
(1,730)
12,611
9,045
3,820
1,764
(666)
(2,151)
11,211
—
2,365
753
(1,891)
(1,598)
(6,277)
(11,853)
(1,575)
1,391
1,377
1,190
1,960
3,065
42,941
827
(338)
(870)
3,420
17,331
47,802
3,919
(304)
(1,955)
(1,619)
7,304
34,111
2,500
45,065
45,480
—
(8,625)
(67,545)
(2,934)
(12,352)
(23,868)
(20,143)
—
—
(918)
46
—
(1,387)
(620)
24
(9,005)
(3,678)
(167)
—
500
140
Net cash used by investing activities
(13,658)
(9,554)
(34,275)
Cash flows from financing activities:
(Decrease) increase in net borrowings on revolving credit facility
(8,000)
8,000
—
Purchase of treasury shares
Contributions from employee stock purchase plan
Proceeds from exercise of stock options
Excess tax benefits from exercise of share-based arrangements
Warrant exercise in connection with legal settlement
(18,263)
(59,847)
(14,037)
1,494
2,295
1,125
—
1,233
1,815
666
2,005
1,151
3,589
1,891
—
Net cash used by financing activities
(21,349)
(46,128)
(7,406)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes.
7,934
1,762
(7,880)
9,642
$ 9,696
$ 1,762
(7,570)
17,212
$ 9,642
Tyler Technologies Annual Report 2009
43
Notes to Financial Statements
(Tables in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We provide integrated software systems and related services for the public sector, with a focus on local governments.
We develop and market a broad line of software solutions and services to address the information technology (“IT”) needs of
cities, counties, schools and other local government entities. In addition, we provide professional IT services, including
software and hardware installation, data conversion, training, and for certain customers, product modifications, along with
continuing maintenance and support for customers using our systems. We also provide subscription-based services such
as application service provider arrangements and other hosting services as well as property appraisal outsourcing services for
taxing jurisdictions.
CASH AND CASH EQUIVALENTS
Cash in excess of that necessary for operating requirements is invested in short-term, highly liquid, income-producing
investments. Investments with original maturities of three months or less are classified as cash and cash equivalents, which
primarily consist of money market funds. Cash and cash equivalents are stated at cost, which approximates market value.
As of December 31, 2009, we had issued outstanding letters of credit totaling $7.3 million in connection with our surety
bond program. These letters of credit have been collateralized by restricted cash balances of $6.0 million and $1.3 million
of our available borrowing capacity. We do not believe these letters of credit will be required to be drawn upon. The letters of
credit expire through mid-2010.
INVESTMENTS
Investments consist of auction rate municipal securities. These investments are classified as available-for-sale securities and
are stated at fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements
and Disclosures. Unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are
reported as a separate component of other comprehensive income until realized. The cost basis of securities sold is the
specific cost of the auction rate municipal security. We account for the transactions as “Proceeds from sales of investments”
for the security relinquished, and a “Purchases of investments” for the security purchased, in the accompanying Statements
of Cash Flows.
REVENUE RECOGNITION
Software Arrangements:
We earn revenue from software licenses, subscriptions, software services, post-contract customer support (“PCS” or
“maintenance”), and hardware. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available
basis. We provide services that range from installation, training, and basic consulting to software modification and
customization to meet specific customer needs. In software arrangements that include rights to multiple software products,
specified upgrades, PCS, and/or other services, we allocate the total arrangement fee among each deliverable based on the
relative fair value of each.
We typically enter into multiple element arrangements, which include software licenses, software services, PCS and
occasionally hardware. The majority of our software arrangements are multiple element arrangements, but for those arrangements
that involve significant production, modification or customization of the software, or where software services are otherwise
considered essential to the functionality of the software in the customer’s environment, we use contract accounting and apply
the provisions of the Construction — Type and Production — Type Contracts as discussed in ASC 605-35.
If the arrangement does not require significant production, modification or customization or where the software services are not
considered essential to the functionality of the software, revenue is recognized when all of the following conditions are met:
44 Tyler Technologies Annual Report 2009
Notes to Financial Statements
i. persuasive evidence of an arrangement exists;
ii. delivery has occurred;
iii. our fee is fixed or determinable; and
iv. collectability is probable.
For multiple element arrangements, each element of the arrangement is analyzed and we allocate a portion of the total
arrangement fee to the elements based on the fair value of the element using vendor-specific objective evidence of fair value
(“VSOE”), regardless of any separate prices stated within the contract for each element. Fair value is considered the price a
customer would be required to pay if the element was sold separately based on our historical experience of stand-alone sales
of these elements to third parties. For PCS, we use renewal rates for continued support arrangements to determine fair value.
For software services, we use the fair value we charge our customers when those services are sold separately. We monitor our
transactions to insure we maintain and periodically revise VSOE to reflect fair value. In software arrangements in which we
have the fair value of all undelivered elements but not of a delivered element, we apply the “residual method”, in compliance
with ASC 985-605, Software Revenue Recognition, in accounting for any element of a multiple element arrangement involving
software that remains undelivered such that any discount inherent in a contract is allocated to the delivered element.
Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is
recognized as revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not
have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which we
do not have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only undelivered element is
services that do not involve significant modification or customization of the software, the entire fee is recognized over the
period during which the services are expected to be performed.
Software Licenses
We recognize the revenue allocable to software licenses and specified upgrades upon delivery of the software product or
upgrade to the customer, unless the fee is not fixed or determinable or collectability is not probable. If the fee is not fixed or
determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally
recognized as payments become due from the customer. If collectability is not considered probable, revenue is recognized
when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to
determine whether those services are essential to the product’s functionality.
A majority of our software arrangements involve “off-the-shelf” software. We consider software to be off-the-shelf software
if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the
customer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee
as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents a
non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not
considered essential to the product’s functionality.
For arrangements that involve significant production, modification or customization of the software, or where software services
are otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-
completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor
hours incurred, or value added. The percentage-of-completion method generally results in the recognition of reasonably
consistent profit margins over the life of a contract because we have the ability to produce reasonably dependable estimates of
contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most
likely profit margin cannot be precisely determined, the lowest probable level of profit in the range of estimates is used until
the results can be estimated more precisely. These arrangements are often implemented over an extended time period and
occasionally require us to revise total cost estimates. 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.
Tyler Technologies Annual Report 2009
45
Notes to Financial Statements
For arrangements that include new product releases for which it is difficult to estimate final profitability except to assume that
no loss will ultimately be incurred, we recognize revenue under the completed contract method. Under the completed contract
method, revenue is recognized only when a contract is completed or substantially complete. Historically these amounts have
been immaterial.
Subscription-Based Services
Subscription-based services primarily consist of revenues derived from application service provider (“ASP”) arrangements and
other hosted service offerings, software subscriptions and disaster recovery services.
We recognize revenue for ASP and other hosting services, software subscriptions, term license arrangements with renewal
periods of twelve months or less and disaster recovery ratably over the period of the applicable agreement as services are
provided. Disaster recovery agreements and other hosting services are typically renewable annually. ASP and software
subscriptions are typically for periods of three to six years and automatically renew unless either party cancels the agreement.
The majority of the ASP and other hosting services and software subscriptions also include professional services as well as
maintenance and support. In certain ASP arrangements, the customer also acquires a license to the software.
For ASP and other hosting arrangements, we evaluate whether each of the elements in these arrangements represents a
separate unit of accounting, as defined by ASC 605-25, Multiple Element Arrangements and ASC 985-605, Software Revenue
Recognition, using all applicable facts and circumstances, including whether (i) we sell or could readily sell the element
unaccompanied by the other elements, (ii) the element has stand-alone value to the customer, (iii) there is objective reliable
evidence of the fair value of the undelivered item, and (iv) there is a general right of return. We consider the applicability of
ASC 605-55-121 and 122 with respect to arrangements that include the right to use software stored on another entity’s
hardware on a contract-by-contract basis. In hosted term-based agreements, where the customer does not have the contractual
right to take possession of the software, hosting fees are recognized on a monthly basis over the term of the contract
commencing when the customer has access to the software. For professional services associated with hosting arrangements
that we determine do not have stand-alone value to the customer, we recognize the services revenue ratably over the
remaining contractual period once hosting has gone live and we may begin billing for the hosting services. 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.
If we determine that the customer has the contractual right to take possession of our software at any time during the hosting
period without significant penalty, and can feasibly maintain the software on the customer’s hardware or enter into another
arrangement with a third party to host the software, we recognize the license, professional services and hosting services
revenues pursuant to ASC 985-605, Software Revenue Recognition.
Software Services
Some of our software arrangements include services considered essential for the customer to use the software for the customer’s
purposes. For these software arrangements, both the software license revenue and the services revenue are recognized as
the services are performed using the percentage-of-completion contract accounting method. When software services are not
considered essential, the fee allocable to the service element is recognized as revenue as we perform the services.
Computer Hardware Equipment
Revenue allocable to computer hardware equipment, which is based on VSOE, is recognized when we deliver the equipment
and collection is probable.
Postcontract Customer Support
Our customers generally enter into PCS agreements when they purchase our software licenses. Our PCS agreements are
typically renewable annually. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is
provided. All significant costs and expenses associated with PCS are expensed as incurred. Fair value for the maintenance and
support obligations for software licenses is based upon the specific sale renewals to customers.
46 Tyler Technologies Annual Report 2009
Notes to Financial Statements
Allocation of Revenue in Statement of Operations
In our statement of operations, we allocate revenue to software licenses, software services, maintenance and hardware and
other based on the VSOE of fair value for elements in each revenue arrangement and the application of the residual method
for arrangements in which we have established VSOE of fair value for all undelivered elements. In arrangements where we are
not able to establish VSOE of fair value for all undelivered elements, revenue is first allocated to any undelivered elements for
which VSOE of fair value has been established. We then allocate revenue to any undelivered elements for which VSOE of fair
value has not been established based upon management’s best estimate of fair value of those undelivered elements and apply
a residual method to determine the license fee. Management’s best estimate of fair value of undelivered elements for
which VSOE of fair value has not been established is based upon the VSOE of similar offerings and other objective criteria.
Appraisal Services:
For our property appraisal projects, we recognize revenue using the proportionate performance method of revenue recognition
since many of these projects are implemented over one to three year periods and consist of various unique activities. Under
this method of revenue recognition, we identify each activity for the appraisal project, with a typical project generally calling
for bonding, office set up, training, routing of map information, data entry, data collection, data verification, informal hearings,
appeals and project management. Each activity or act is specifically identified and assigned an estimated cost. Costs which
are considered to be associated with indirect activities, such as bonding costs and office set up, are expensed as incurred.
These costs are typically billed as incurred and are recognized as revenue equal to cost. Direct contract fulfillment activities
and related supervisory costs such as data collection, data entry and verification are expensed as incurred. The direct costs
for these activities are determined and the total contract value is then allocated to each activity based on a consistent profit
margin. Each activity is assigned a consistent unit of measure to determine progress towards completion and revenue is
recognized for each activity based upon the percentage complete as applied to the estimated revenue for that activity.
Progress for the fulfillment activities is typically based on labor hours or an output measure such as the number of parcel
counts completed for that activity. Estimated losses on uncompleted contracts are recorded in the period in which we first
determine that a loss is apparent.
Other:
The majority of deferred revenue consists of unearned support and maintenance revenue that has been billed based on
contractual terms in the underlying arrangement with the remaining balance consisting of payments received in advance of
revenue being earned under software licensing, subscription-based services, software and appraisal services and hardware
installation. Unbilled revenue is not billable at the balance sheet date but is recoverable over the remaining life of the
contract through billings made in accordance with contractual agreements. The termination clauses in most of our contracts
provide for the payment for the fair value of products delivered and services performed in the event of an early termination.
Prepaid expenses and other current assets include direct and incremental costs, consisting primarily of commissions
associated with arrangements for which revenue recognition has been deferred and third party subcontractor payments. Such
costs are expensed at the time the related revenue is recognized.
USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States
(“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant items subject to such estimates and assumptions include the application
of the percentage-of-completion and proportionate performance methods of revenue recognition, the carrying amount and
estimated useful lives of intangible assets, determination of share-based compensation expense and valuation allowance for
receivables. Actual results could differ from estimates.
Tyler Technologies Annual Report 2009
47
Notes to Financial Statements
PROPERTY AND EQUIPMENT, NET
Property, equipment and purchased software are recorded at original cost and increased by the cost of any significant
improvements after purchase. We expense maintenance and repairs when incurred. Depreciation and amortization is
calculated using the straight-line method over the shorter of the asset’s estimated useful life or the term of the lease in the
case of leasehold improvements. For income tax purposes, we use accelerated depreciation methods as allowed by tax laws.
RESEARCH AND DEVELOPMENT COSTS
We expensed research and development costs of $11.2 million during 2009, $7.3 million during 2008 and $4.4 million during
2007. We reduced our research and development expense by approximately $3.5 million in 2009, $1.8 million in 2008
and $1.6 million in 2007, which was the amount earned under the terms of our strategic alliance with a development partner.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred taxes arise because of different treatment
between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of
these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in the
future periods) and “deferred tax liabilities” (generally items that we received a tax deduction for, which have not yet been
recorded in the income statement). The deferred tax assets and liabilities are measured using enacted tax rules and laws
that are expected to be in effect when the temporary differences are expected to be recovered or settled. A valuation
allowance would be established to reduce deferred tax assets if it is likely that a deferred tax asset will not be realized.
SHARE-BASED COMPENSATION
We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee
consultants. Stock options vest after three to five years of continuous service from the date of grant and have a contractual
term of ten years. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718,
Stock Compensation. See Note 10 – “Share-Based Compensation” for further information.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
We have used the purchase method of accounting for all of our business combinations. Our business acquisitions result in the
allocation of the purchase price to goodwill and other intangible assets. We first allocate the cost of acquired companies to
identifiable assets based on estimated fair values. The excess of the purchase price over the fair value of identifiable assets
acquired, net of liabilities assumed, is recorded as goodwill.
We review goodwill impairment annually as of April or more frequently whenever events or changes in circumstances indicate
its carrying value may not be recoverable. We have identified two reporting units for impairment testing. Our reporting units
are the same as our reportable segments and consistent with the reporting units tested for impairment in prior years. Assets,
liabilities and goodwill have been assigned to reporting units based on assets acquired and liabilities assumed as of the date
of acquisition.
The provisions of ASC 350, Intangibles — Goodwill and Other, require that we perform a two-step impairment test on goodwill.
In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit
exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to
perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting
unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting
unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds the asset’s implied fair value, then we would record an
impairment loss equal to the difference. The fair values calculated in our impairment tests are determined using discounted cash
flow models involving several assumptions. These assumptions include, but are not limited to, anticipated operating income growth
rates, our long-term anticipated operating income growth rate and the discount rate. Our cash flow forecasts are based on
48 Tyler Technologies Annual Report 2009
Notes to Financial Statements
assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. The
assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair
value. We evaluate the reasonableness of the fair value calculations of our reporting units by comparing the total of the fair
value of all of our reporting units to our total market capitalization. We base our fair value estimates on assumptions we believe
to be reasonable but that are unpredictable and inherently uncertain. A significant amount of judgment is involved in determining
if an indicator of impairment has occurred between testing dates. Such indicators may include, among others: a significant
decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant
adverse change in legal factors or in the business climate; unanticipated competition; and reductions in growth rates. In addition,
products, capabilities, or technologies developed by others may render our software products obsolete or non-competitive. Any
adverse change in these factors could have a significant impact on the recoverability of goodwill. Our annual goodwill impairment
analysis, which we performed during the second quarter of 2009, did not result in an impairment charge.
Other Intangible Assets
We make judgments about the recoverability of purchased intangible assets other than goodwill whenever events or changes in
circumstances indicate that an impairment may exist. Customer base constitutes approximately 80% of our purchased
intangible assets other than goodwill. We review our customer turnover each year for indications of impairment. Our customer
turnover has historically been very low (approximately 2%). If indications of impairment are determined to exist, we measure
the recoverability of assets by a comparison of the carrying amount of the asset to the estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of the assets exceeds their estimated future cash flows,
an impairment charge is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the
assets. There have been no significant impairments of intangible assets in any of the periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically evaluate whether current facts or circumstances indicate that the carrying value of our property and equipment
or other long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, we
measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset or appropriate
grouping of assets and the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying
amount of the assets exceeds their estimated future cash flows, an impairment charge is recognized for the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately
in the appropriate asset and liability sections of the balance sheet. There have been no significant impairments of long-lived
assets in any of the periods presented.
COSTS OF COMPUTER SOFTWARE
We capitalize software development costs upon the establishment of technological feasibility and prior to the availability
f the product for general release to customers. We did not capitalize any software development costs in 2009 or 2008. We
capitalized software development costs of approximately $167,000 during 2007. Software development costs primarily
consist of personnel costs and rent for related office space. 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 product’s remaining estimated economic life, but not to exceed five years. Amortization of software
development costs was approximately $743,000 in 2009, $4.7 million in 2008, and $4.6 million in 2007, and is included
in cost of software license revenue in the accompanying statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivables, accounts payables, short-term obligations, deferred revenues and certain
other assets at cost approximate fair value because of the short maturity of these instruments. Our investments available-for-
sale are recorded at fair value as of December 31, 2009 based upon the level of judgment associated with the inputs used to
measure their fair value. See Note 3 – “Fair Value of Financial Instruments” for further information.
Tyler Technologies Annual Report 2009
49
Notes to Financial Statements
CONCENTRATIONS OF CREDIT RISK AND UNBILLED RECEIVABLES
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and
cash equivalents, investments in auction rate securities and accounts receivable from trade customers. Our cash and cash
equivalents primarily consists of money market fund investments which are maintained at one major financial institution and
the balances often exceed insurable amounts. As of December 31, 2009 we had cash and cash equivalents (including
restricted cash) of $15.7 million. We perform periodic evaluations of the credit standing of this financial institution.
Concentrations of credit risk with respect to receivables are limited due to the size and geographical diversity of our customer
base. Historically, our credit losses have not been significant. As a result, we do not believe we have any significant
concentrations of credit risk as of December 31, 2009.
We maintain allowances for doubtful accounts and sales adjustments, which are provided at the time the revenue is recognized.
Since most of our customers are domestic governmental entities, we rarely incur a loss resulting from the inability of a
customer to make required payments. Events or changes in circumstances that indicate that the carrying amount for the
allowances for doubtful accounts and sales adjustments may require revision, include, but are not limited to, deterioration
of a customer’s financial condition, failure to manage our customer’s expectations regarding the scope of the services to be
delivered, and defects or errors in new versions or enhancements of our software products. The following table summarizes
the changes in the allowances for doubtful accounts and sales adjustments:
Years ended December 31,
Balance at beginning of year
Provisions for losses – accounts receivable
Collection of accounts previously written off
Deductions for accounts charged off or credits issued
Balance at end of year
2009
2008
2007
$ 2,115
1,538
—
$ 1,851
1,764
10
$ 2,971
753
—
(1,264)
(1,510)
(1,873)
$ 2,389
$ 2,115
$ 1,851
The termination clauses in most of our contracts provide for the payment for the fair value of products delivered or services
performed in the event of early termination. Our property appraisal outsourcing service contracts can range up to three years
and, in a few cases, as long as five years in duration. In connection with these contracts, as well as certain software service
contracts, we may perform work prior to when the software and services are billable and/or payable pursuant to the contract.
We have historically recorded such unbilled receivables (costs and estimated profit in excess of billings) in connection with
(1) property appraisal services contracts accounted for using proportionate performance accounting in which the revenue is
earned based upon activities performed in one accounting period but the billing normally occurs shortly thereafter and may
span another accounting period; (2) software services contracts accounted for using the percentage-of-completion method of
revenue recognition using labor hours as a measure of progress towards completion in which the services are performed in one
accounting period but the billing for the software element of the arrangement may be based upon the specific phase of the
implementation; (3) software revenue for which we have objective evidence that the customer-specified objective criteria has
been met but the billing has not yet been submitted to the customer; (4) some of our contracts provide for an amount to
be withheld from a progress billing (generally a 10% retention) until final and satisfactory project completion is achieved; and
(5) in a limited number of cases, we may grant extended payment terms generally to existing customers with whom we have
a long-term relationship and favorable collection history.
In connection with this activity, we have recorded unbilled receivables of $13.8 million and $11.2 million at December 31,
2009 and 2008, respectively. We also have recorded retention receivable of $4.0 million at both December 31, 2009 and
2008 and these retentions become payable upon the completion of the contract or completion of our field work and formal
hearings. Unbilled receivables and retention receivables expected to be collected in excess of one year have been classified as
accounts receivable, long-term portion in the accompanying balance sheets.
INDEMNIFICATION
Most of our software license agreements indemnify our customers in the event that the software sold infringes upon the
intellectual property rights of a third party. These agreements typically provide that in such event we will either modify or replace
50 Tyler Technologies Annual Report 2009
Notes to Financial Statements
the software so that it becomes non-infringing or procure for the customer the right to use the software. We have recorded no
liability associated with these indemnifications, as we are not aware of any pending or threatened infringement actions that are
possible losses. We believe the estimated fair value of these intellectual property indemnification clauses is minimal.
We have also agreed to indemnify our officers and board members if they are named or threatened to be named as a party
to any proceeding by reason of the fact that they acted in such capacity. A form of the indemnification agreement was filed
as Exhibit 10.1 to our Form 10-K for the year ended December 31, 2002. We maintain directors’ and officers’ insurance
coverage to protect against any such losses. We have recorded no liability associated with these indemnifications. Because of
our insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2009, the Financial Accounting Standards Board issued ASU 2009-13, Multiple Element Arrangements.
ASU 2009-13 addresses the determination of when the individual deliverables included in a multiple arrangement may be
treated as separate units of accounting. ASU 2009-13 also modifies the manner in which the transaction consideration
is allocated across separately identified deliverables and establishes definitions for determining fair value of elements in an
arrangement. This new update is effective for fiscal years beginning on or after June 15, 2010. Early adoption is allowed.
The new standard may impact our application service provider arrangements to recognize revenues, such as installation and
data conversion, which are generally provided at the beginning of the arrangement as incurred instead of ratably over
the life of the initial hosting term. The adoption of this standard is not expected to have a material impact on our financial
condition or results of operation.
(2) ACQUISITIONS
On July 16, 2009, we completed the acquisition of certain assets of KPL, Inc. d/b/a Parker-Lowe & Associates (“Parker-
Lowe”) for $700,000 in cash. Parker-Lowe provides scanning and retrieval software and related services for land record and
social services offices in local governments primarily in the North Carolina area. This acquisition was accounted for as a
purchase of a business.
On April 3, 2009, we completed the acquisition of all of the capital stock of Assessment Evaluation Services, Inc. (“AES”).
AES develops integrated property appraisal solutions and specializes in applications that deal with the unique provisions of
the California Revenue and Taxation Code. The purchase price was approximately $1.1 million in cash.
In connection with these transactions we acquired total tangible assets of approximately $480,000 and assumed total
liabilities of approximately $835,000, including $450,000 for contingent consideration for which we have paid $38,000
as of December 31, 2009. The remaining contingent consideration is expected to be paid over the next two years.
We recorded goodwill of approximately $1.3 million, all of which is expected to be deductible for tax purposes, and other
intangible assets of approximately $820,000. The $820,000 of intangible assets is attributable to acquired software and
customer relationships that will be amortized over a weighted average period of approximately 9 years. Our balance sheet as
of December 31, 2009 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based
on their estimated fair values at the dates of acquisition.
The operating results of these acquisitions are included in our results of operations since the date of acquisition. We believe
these acquisitions will complement our business by expanding our presence in certain geographic areas and adding to our
customer base.
In 2009, we also paid approximately $1.1 million for certain software assets to complement our tax and appraisal solutions
and our student information management solutions.
In August 2008, we completed the acquisition of all the capital stock of School Information Systems, Inc., which develops
and sells a full suite of student information and financial management systems for K-12 schools. The purchase price,
including transaction costs and excluding cash balances acquired, was approximately $9.9 million in cash and approximately
70,000 shares of Tyler common stock valued at $1.2 million.
Tyler Technologies Annual Report 2009
51
Notes to Financial Statements
In the first quarter of 2008, we completed the acquisitions of all of the capital stock of VersaTrans Solutions Inc.
(“VersaTrans”) and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster (“Schoolmaster”). VersaTrans is a
provider of student transportation management software solutions for school districts and school transportation providers
across North America, including solutions for school bus routing and planning, redistricting, GPS fleet tracking, fleet maintenance
and field trip planning. Schoolmaster provides a full suite of student information systems, which manage such functions
as grading, attendance, scheduling, guidance, health, admissions and fund raising. The combined purchase price for these
transactions excluding cash acquired and including transaction costs was approximately $13.9 million in cash and
approximately 126,000 shares of Tyler common stock valued at $1.7 million.
In September 2007, we completed the acquisition of all the capital stock of EDP Enterprises, Inc. (“EDP”), which develops
and sells financial and student information and management systems for public school districts in Texas. In February 2007,
we completed the acquisition of all of the capital stock of Advanced Data Systems, Inc. (“ADS”), which develops and sells
fund accounting solutions, primarily in New England. The combined purchase price, including transaction costs along with an
office building used in ADS’s business and excluding cash balances acquired, for these acquisitions as well as miscellaneous
other software asset purchases was $9.0 million.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets recorded at fair value in the balance sheet as of December 31, 2009 are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820, Fair Value Measurements
and Disclosures, are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets,
are as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 – Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own
assumptions.
As of December 31, 2009 we held certain items that are required to be measured at fair value on a recurring basis.
The following tables summarize the fair value of these financial assets:
December 31, 2009
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$ 15,696
$ 15,696
$ —
$ —
50
1,976
$ 17,722
50
—
—
—
$ 15,746
$ —
—
1,976
$ 1,976
December 31, 2008
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$ 6,844
$ 6,844
$ —
$ —
775
3,779
$ 11,398
775
—
—
—
$ 7,619
$ —
—
3,779
$ 3,779
Cash and cash equivalents
Short-term investments available-for-sale
Non-current investments available-for-sale
Cash and cash equivalents
Short-term investments available-for-sale
Non-current investments available-for-sale
52 Tyler Technologies Annual Report 2009
Notes to Financial Statements
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. These money market funds did not experience any declines in fair value in 2009.
Investments available-for-sale consist of two auction rate municipal securities (“ARS”) which are collateralized debt obligations
supported by municipal and state agencies and do not include mortgage-backed securities. Short-term investments available-
for-sale consists of the portion of one of these ARS, which was partially redeemed at par during the period January 1, 2010
through February 22, 2010. These ARS are debt instruments with stated maturities ranging from 22 to 33 years, for which the
interest rate is designed to be reset through Dutch auctions approximately every 30 days. However, due to events in the credit
markets, auctions for these securities have not occurred since February 2008. Both of our ARS have had very small partial
redemptions at par in the period from July 2009 through February 2010. As of December 31, 2009 we have continued to earn
and collect interest on both of our ARS.
Because quoted prices in active markets are no longer available we determined the estimated fair values of these securities
utilizing a discounted trinomial model. The model considers the probability of three potential occurrences for each auction event
through the maturity date of each ARS. The three potential outcomes for each auction are (i) successful auction/early
redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the probabilities of the potential outcomes include
but are not limited to, the securities’ collateral, credit rating, insurance, issuer’s financial standing, contractual restrictions
on disposition and the liquidity in the market. The fair value of each ARS is determined by summing the present value of the
probability-weighted future principal and interest payments determined by the model. Since there can be no assurances that
auctions for these securities will be successful in the near future, we have classified our ARS as non-current investments.
The par and carrying values, and related cumulative unrealized loss for our non-current ARS as of December 31, 2009 are
as follows:
Non-current investments available-for-sale
Par
Value
Temporary
Impairment
Carrying
Value
$ 2,600
$ 624
$ 1,976
In association with this estimate of fair value, we have recorded an after-tax temporary unrealized loss on our non-current ARS
of $18,000, net of related tax effects of $10,000 in 2009, which is included in accumulated other comprehensive loss on
our balance sheet. The unrealized loss includes the impact of adjusting previously recorded unrealized losses of approximately
$120,000, net of related tax effects of $65,000 as of December 31, 2008 for several ARS which were subsequently
redeemed for $2.5 million at par during 2009.
We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor is it more-likely-than-not
that we will be required to sell these securities before recovery of their cost basis. We believe that this temporary decline in
fair value is due entirely to liquidity issues, because the underlying assets of these securities are supported by municipal and
state agencies and do not include mortgage-backed securities, have redemption features which call for redemption at 100%
of par value and have a current credit rating of A or AAA. The ratings on the ARS take into account credit support through
insurance policies guaranteeing each of the bonds’ payment of principal and accrued interest, if it becomes necessary. In
addition, both ARS have had very small partial redemptions at par in the period July 2009 through February 2010. Based on
our cash and cash equivalents balance of $15.7 million and expected operating cash flows, we do not believe a lack of
liquidity associated with our ARS will adversely affect our ability to conduct business, and believe we have the ability to hold
the securities throughout the currently estimated recovery period. We will continue to evaluate any changes in the market
value of our ARS and in the future, depending upon existing market conditions, we may be required to record an other-than-
temporary decline in market value.
Tyler Technologies Annual Report 2009
53
Notes to Financial Statements
The following table reflects the activity for assets measured at fair value using Level 3 inputs for the years ended December 31:
Balance as of December 31, 2007
Transfers into level 3
Transfers out of level 3
Unrealized losses included in accumulated other comprehensive loss
Balance as of December 31, 2008
Transfers into level 3
Transfers out of level 3
Purchases, sales, issuances and settlements
Unrealized losses included in accumulated other comprehensive loss
Balance as of December 31, 2009
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following at December 31:
Land
Computer equipment and purchased software
Furniture and fixtures
Building and leasehold improvements
Transportation equipment
Accumulated depreciation and amortization
Property and equipment, net
$ —
5,150
(775)
(596)
3,779
—
(75)
(1,700)
(28)
$ 1,976
Useful Lives
(years)
2009
2008
—
3–5
5
$ 3,349
21,394
6,467
$ 3,349
19,553
5,103
5–39
26,208
16,248
5
329
266
57,747
44,519
(21,997)
(17,997)
$ 35,750
$ 26,522
Depreciation expense was $4.4 million during 2009, $3.5 million during 2008, and $2.8 million during 2007.
We own an office building in Yarmouth, Maine, which is leased to third-party tenants and a building in Lubbock, Texas,
for which a small portion is leased to a third-party tenant. These leases expire between 2011 and 2015 and are expected to
provide rental income of approximately $1.5 million during 2010, $1.1 million during 2011, $628,000 during 2012,
$391,000 during 2013, $222,000 during 2014 and $74,000 thereafter. The lease agreements in Yarmouth, Maine, expire
between 2011 and 2013, at which time we expect to begin occupying the facility. Rental income associated with these leases
was $1.3 million and $662,000 in 2009 and 2008, respectively and was included as a reduction of selling, general and
administrative expenses.
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and related accumulated amortization consists of the following at December 31:
Gross carrying amount of acquisition intangibles:
Goodwill
Customer related intangibles
Software acquired
Trade name
Lease acquired
Accumulated amortization
Acquisition intangibles, net
Post acquisition software development costs
Accumulated amortization
Post acquisition software costs, net
54 Tyler Technologies Annual Report 2009
2009
2008
$ 90,258
$ 88,791
39,512
38,887
23,403
22,143
1,971
1,387
1,971
1,387
156,531
153,179
(35,217)
(30,825)
$ 121,314
$ 122,354
$ 36,701
$ 36,701
(35,986)
(35,243)
$
715
$ 1,458
Notes to Financial Statements
Total amortization expense, for acquisition related intangibles and post acquisition software development costs, was $5.1 million
during 2009, $9.1 million during 2008, and $8.4 million during 2007.
The allocation of acquisition intangible assets is summarized in the following table:
Non-amortizable intangibles:
Goodwill
Amortizable intangibles:
Customer related intangibles
Software acquired
Trade name
Lease acquired
December 31, 2009
December 31, 2008
Gross
Carrying
Amount
Weighted
Average
Amortization
Period
Accumulated
Amortization
Gross
Carrying
Amount
Weighted
Average
Amortization
Period
Accumulated
Amortization
$ 90,258
—
$ —
$ 88,791
—
$ —
39,512
23,403
1,971
1,387
18 years
5 years
19 years
5 years
14,022
19,900
879
416
38,887
22,143
1,971
1,387
18 years
5 years
19 years
5 years
11,449
18,489
749
138
The changes in the carrying amount of goodwill for the two years ended December 31, 2009 are as follows:
Balance as of December 31, 2007
Goodwill acquired during the year related to the purchase of VersaTrans
Goodwill acquired during the year related to the purchase of SIS
Goodwill acquired during the year related to the purchase of Schoolmaster
Other
Balance as of December 31, 2008
Goodwill acquired during the year related to the purchase of AES
Goodwill acquired during the year related to the purchase of Parker-Lowe
Other
Balance as of December 31, 2009
Enterprise
Software
Solutions
Appraisal and Tax
Software Solutions
and Services
$ 66,966
$ 4,711
9,278
6,351
1,475
10
—
—
—
—
Total
$ 71,677
9,278
6,351
1,475
10
84,080
4,711
88,791
—
430
158
879
—
—
879
430
158
$ 84,668
$ 5,590
$ 90,258
Estimated annual amortization expense relating to acquisition intangibles, including acquired software for which the
amortization expense is recorded as cost of revenues and acquired leases for which amortization expense is recorded as
selling, general and administrative expenses, is as follows:
Years ending December 31,
2010
2011
2012
2013
2014
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
Accrued wages, bonuses and commissions
Other accrued liabilities
Accrued building construction costs
Accrued health claims
Accrued third party contract costs
$4,387
3,805
3,538
2,973
2,498
2009
2008
$ 15,945
5,378
1,816
1,551
1,420
$ 26,110
$ 13,908
5,737
—
1,921
1,347
$ 22,913
Tyler Technologies Annual Report 2009
55
Notes to Financial Statements
(7) SHORT-TERM REVOLVING LINE OF CREDIT
In October 2008, we entered into a revolving bank credit agreement (the “Credit Facility”) and a related pledge and security
agreement which originally matured October 19, 2009. We amended and extended the related pledge and security agreement
in October 2009. The Credit Facility matures October 18, 2010 and provides for total borrowings of up to $25.0 million and
a $10.0 million Letter of Credit facility which can either be cash collateralized or issued using availability under the Credit
Facility. Borrowings under the Credit Facility bear interest at a rate of either the Wall Street Journal prime rate minus .5% or
the 30, 60 or 90-day LIBOR rate plus 2%; however, a minimum interest rate of 3.25% will apply. As of December 31, 2009,
our effective interest rate was 3.25% under the Credit Facility. The effective average interest rate for borrowings during the
twelve months ended December 31, 2009 was 1.8%. The Credit Facility is secured by substantially all of our assets. The
Credit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making
certain investments, advances, cash dividends or loans, restricts the amount of our common stock we may purchase and limits
incurrence of additional indebtedness and liens. As of December 31, 2009, we were in compliance with those covenants.
As of December 31, 2009, we had no outstanding borrowings and unused available borrowing capacity of $23.7 million under
the Credit Facility. In addition, as of December 31, 2009, our bank had issued outstanding letters of credit totaling
$7.3 million to secure surety bonds required by some of our customer contracts. These letters of credit have been collateralized
by restricted cash balances of $6.0 million and $1.3 million of our available borrowing capacity and expire through
mid-2010. The carrying amount of the Credit Facility approximates fair value due to the short-term nature of the instrument.
We paid interest of $174,000 in 2009.
(8) INCOME TAX
The income tax provision (benefit) on income from operations consists of the following:
Years ended December 31,
2009
2008
2007
Current:
Federal
State
Deferred
$ 16,822
2,536
19,358
$ 14,320
2,245
16,565
$ 10,593
2,084
12,677
(1,730)
(2,151)
(1,598)
$ 17,628
$ 14,414
$ 11,079
Reconciliation of the U.S. statutory income tax rate to our effective income tax expense rate for operations follows:
Years ended December 31,
Income tax expense at statutory rate
State income tax, net of federal income tax benefit
Non-deductible business expenses
Qualified manufacturing activities
Other, net
2009
2008
2007
$ 15,623
1,634
965
(586)
(8)
$ 10,247
1,089
3,988
(700)
(210)
$ 10,003
1,321
608
(490)
(363)
$ 17,628
$ 14,414
$ 11,079
In 2008, non-deductible business expenses included the impact of a non-cash legal settlement related to warrants charge of
$9.0 million, which was not tax deductible. See Note 14 – “Commitments and Contingencies” for more information.
Approximately 40% of our unvested stock option awards qualify as incentive stock options (“ISOs”) for income tax purposes.
As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book
purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition.
Stock option grants of non-qualified options result in the creation of a deferred tax asset, which is a temporary difference,
until the time that the option is exercised. Due to the treatment of ISOs for tax purposes, our effective tax rate from year to
year is subject to variability.
56 Tyler Technologies Annual Report 2009
The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are:
Notes to Financial Statements
Deferred income tax assets:
Operating expenses not currently deductible
Employee benefit plans
Capital loss carryforward
Property and equipment
Total deferred income tax assets
Deferred income tax liabilities:
Intangible assets
Other
Total deferred income tax liabilities
Net deferred income tax liabilities
2009
2008
$ 2,068
3,628
230
230
$ 1,466
2,528
221
203
6,156
4,418
(9,720)
(9,697)
(157)
(9,877)
$ (3,721)
(181)
(9,878)
$ (5,460)
Although realization is not assured, we believe it is more likely than not that all the deferred tax assets at December 31, 2009
and 2008 will be realized. Accordingly, we believe no valuation allowance is required for the deferred tax assets. However,
the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of reversing taxable
temporary differences are revised.
No reserves for uncertain income tax positions have been recorded pursuant to ASC 740-10, Income Taxes.
We are subject to U.S. federal tax as well as income tax of multiple state and local jurisdictions. We are no longer subject
to United States federal income tax examinations for years before 2006. We are no longer subject to state and local income
tax examinations by tax authorities for the years before 2004.
We paid income taxes, net of refunds received, of $18.1 million in 2009, $15.7 million in 2008, and $8.7 million in 2007.
(9) SHAREHOLDERS’ EQUITY
The following table details activity in our common stock:
Years ended December 31,
2009
2008
2007
Shares
Amount
Shares
Amount
Shares
Amount
Purchases of common stock
(1,235)
$ (17,000)
(4,283)
$ (58,984)
(1,250)
$ (16,163)
Stock option exercises
Employee stock plan purchases
Shares issued for acquisitions
Shares issued in connection with legal settlement
425
115
—
—
2,295
1,428
—
—
379
101
196
802
1,815
1,190
2,863
11,050
878
100
—
—
3,589
1,117
—
—
Subsequent to December 31, 2009 and through February 22, 2010, we repurchased 59,000 shares for an aggregate
purchase price of $1.1 million. As of February 22, 2010 we had authorization from our board of directors to repurchase up
to 2.2 million additional shares of our common stock.
In 2008, we settled outstanding litigation related to two Stock Purchase Warrants owned by Bank of America, N. A.
(“BANA”). In July 2008, as a result of this settlement, BANA paid us $2.0 million and we issued to BANA 801,883
restricted shares of Tyler common stock. See Note 14 – “Commitments and Contingencies” for further information.
(10) SHARE-BASED COMPENSATION
Share-Based Compensation Plan
We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee
consultants. Stock options vest after three to five years of continuous service from the date of grant and have a contractual
Tyler Technologies Annual Report 2009
57
Notes to Financial Statements
term of ten years. Once options become exercisable, the employee can purchase shares of our common stock at the market
price on the date we granted the option. We account for share-based compensation utilizing the fair value recognition
pursuant to ASC 718, Stock Compensation.
As of December 31, 2009, there were 176,000 shares available for future grants under the plan from the 11.0 million shares
previously approved by the stockholders.
Determining Fair Value of Stock Compensation
Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes option
valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which
are generally the vesting periods.
Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding.
As provided by ASC 718-10, Stock Compensation, we use the “simplified” method which is allowed for those companies that
cannot reasonably estimate expected life of options based on its historical share option exercise experience. We use the
“simplified” method to estimate expected life due to insufficient historical exercise data for the current optionee group. In
2005 we established a practice of granting options to a consistent optionee group. This optionee group has not been in place
long enough to generate sufficient historical data to estimate the expected period of time an option award would be expected
to be outstanding.
Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock.
Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied
yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of
the award.
Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten years and we do not
anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the
Black-Scholes option valuation model.
Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation
only for those awards that are expected to vest.
The following weighted average assumptions were used for options granted:
Years ended December 31,
Expected life (in years)
Expected volatility
Risk-free interest rate
Expected forfeiture rate
2009
6.5
2008
6.5
2007
6.5
37.2%
40.9%
42.6%
3.1%
3%
3.5%
3%
4.5%
3%
The following table summarizes share-based compensation expense related to share-based awards which is recorded in the
statement of operations:
Years ended December 31,
Cost of software services, maintenance and subscriptions
Selling, general and administrative expense
Total share-based compensation expense
Tax benefit
Net decrease in net income
58 Tyler Technologies Annual Report 2009
2009
2008
2007
$ 540
4,505
5,045
(1,233)
$ 3,812
$ 364
3,456
3,820
(846)
$ 2,974
$ 227
2,138
2,365
(451)
$ 1,914
Stock Option Activity
Options granted, exercised, forfeited and expired are summarized as follows:
Outstanding at December 31, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Granted
Exercised
Forfeited
Outstanding at December 31, 2009
Exercisable at December 31, 2009
Notes to Financial Statements
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic
Value
$ 5.32
13.42
4.09
8.29
7.16
14.38
4.79
10.82
9.69
17.25
5.40
7.80
Number
of Shares
4,087
773
(878)
(10)
3,972
1,750
(379)
(34)
5,309
835
(425)
(15)
5,704
2,765
11.12
$ 7.50
7
5
$ 50,139
$ 34,314
As of December 31, 2009, we had unvested options to purchase 2.9 million shares with a weighted average grant date fair
value of $6.70. As of December 31, 2009, we had $15.8 million of total unrecognized compensation cost related to unvested
options, net of expected forfeitures, which is expected to be amortized over a weighted average amortization period of 3.6 years.
Other information pertaining to option activity was as follows during the twelve months ended December 31:
Weighted average grant-date fair value of stock options granted
Total fair value of stock options vested
Total intrinsic value of stock options exercised
2009
2008
2007
$ 7.38
4,346
4,656
$ 6.73
2,600
3,929
$ 6.69
1,710
8,793
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to
purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on
the last day of each quarterly offering period. As of December 31, 2009, there were 341,000 shares available for future grants
under the ESPP from the 1.0 million shares originally reserved for issuance.
(11) EARNINGS PER SHARE
Basic earnings and diluted earnings per share data were computed as follows:
Years Ended December 31,
2009
2008
2007
Numerator for basic and diluted earnings per share
Net income
Denominator:
Weighted-average basic common shares outstanding
Assumed conversion of dilutive securities:
Stock options
Warrants
Potentially dilutive common shares
Denominator for diluted earnings per share – Adjusted weighted-average shares
Earnings per common share:
Basic
Diluted
$ 27,010
$ 14,862
$ 17,501
35,240
37,714
38,735
1,384
1,470
1,715
—
1,384
36,624
—
1,470
39,184
902
2,617
41,352
$ 0.77
$ 0.74
$ 0.39
$ 0.38
$ 0.45
$ 0.42
Tyler Technologies Annual Report 2009
59
Notes to Financial Statements
Stock options representing the right to purchase common stock of 2.6 million shares in 2009, 1.6 million shares in 2008,
and 128,000 shares in 2007 were not included in the computation of diluted earnings per share because their inclusion
would have had an anti-dilutive effect.
(12) LEASES
We lease office facilities for use in our operations, as well as transportation, computer and other equipment. We also have an
office facility lease agreement with a shareholder. Most of our leases are non-cancelable operating lease agreements and they
expire at various dates through 2014. In addition to rent, the leases generally require us to pay taxes, maintenance, insurance
and certain other operating expenses.
Rent expense was approximately $6.3 million in 2009, $5.9 million in 2008, and $4.9 million in 2007, which included rent
expense associated with related party lease agreements of $2.0 million in 2009 and $1.8 million in both 2008 and 2007.
Future minimum lease payments under all non-cancelable leases at December 31, 2009 are as follows:
Years ending December 31,
2010
2011
2012
2013
2014
Thereafter
$ 6,033
5,265
3,954
2,365
1,721
—
$ 19,338
Included in future minimum lease payments are non-cancelable payments due to related parties of $1.9 million in 2010,
$1.8 million in 2011, $1.7 million in 2012, $1.7 million in 2013, $1.7 million in 2014 and none thereafter.
(13) EMPLOYEE BENEFIT PLANS
We provide a defined contribution plan for the majority of our employees meeting minimum service requirements.
The employees can contribute up to 30% of their current compensation to the plan subject to certain statutory limitations.
We contribute up to a maximum of 3% of an employee’s compensation to the plan. We made contributions to the plan
and charged operations $2.6 million during 2009, $2.0 million during 2008, and $1.7 million during 2007.
(14) COMMITMENTS AND CONTINGENCIES
On November 3, 2008, a putative collective action complaint was filed against us in the United States District Court for the
Eastern District of Texas (the “Court”) on behalf of current and former telephone and remote customer support personnel
(“Category 1”), computer hardware and software set up and maintenance personnel (“Category 2”), implementation personnel
(“Category 3”), sales support personnel (“Category 4”), and quality assurance analysts (“Category 5”). The petition alleges
that we misclassified these groups of employees as “exempt” rather than “non-exempt” under the Fair Labor Standards Act
and that we therefore failed to properly pay overtime wages. The suit was initiated by six former employees working out
of our Longview, Texas, office and seeks to recover damages in the form of lost overtime pay, liquidated damages equal to the
amount of lost overtime pay, interest, costs, and attorneys’ fees. On June 23, 2009, the Court issued an Order granting
Plaintiffs’ motion for conditional certification for the purpose of providing notice to potential plaintiffs about the litigation.
Accordingly, the plaintiffs sent the court ordered notice to all current and former employees who worked in the foregoing job
classifications at any time from June 23, 2006 until June 23, 2009. On October 26, 2009, the “opt in” period for plaintiffs
and potential plaintiffs closed. There are a total of 78 plaintiffs in the litigation consisting of the following: 31 in Category 1;
4 in Category 2; 39 in Category 3; 2 in Category 4; and 2 in Category 5. We intend to vigorously defend the action. Given the
preliminary nature of the alleged claims and the inherent unpredictability of litigation, we cannot at this time estimate the
possible outcome of any such action.
60 Tyler Technologies Annual Report 2009
Notes to Financial Statements
On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank
of America, N. A. (“BANA”). As disclosed in prior SEC filings, the Warrants entitled BANA to acquire 1.6 million shares
of Tyler common stock at an exercise price of $2.50 per share. The Warrants expired on September 10, 2007. Prior to their
expiration, BANA attempted to exercise the Warrants; however, the parties disputed whether or not BANA’s exercise was
effective. We filed suit for declaratory judgment seeking a court’s determination on the matter, and BANA asserted numerous
counterclaims against us, including breach of contract and misrepresentation. Following court-ordered mediation, in July
2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock. Accordingly,
as a result of the settlement, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which was
not tax deductible.
Other than ordinary course, routine litigation incidental to our business and except as described in this Annual Report, there
are no material legal proceedings pending to which we are party or to which any of our properties are subject.
(15) SUBSEQUENT EVENTS
On January 6, 2010, we acquired all the assets of Wiznet, Inc. (“Wiznet”) for a cash purchase price of $9.5 million.
Wiznet provides electronic document filing solutions for courts and law offices throughout the United States and is currently
integrated with our primary courts and justice applications. We have not finalized the allocation of the purchase price.
We evaluate events and transactions that occur after the balance sheet date as potential subsequent events. We performed
this evaluation through February 25, 2010, the date on which we issued our financial statements.
(16) SEGMENT AND RELATED INFORMATION
We are a major provider of integrated information management solutions and services for the public sector, with a focus on
local governments. Factors used to identify our reportable operating segments include the financial information regularly
utilized for evaluation by our chief operating decision-maker (CODM) in making decisions about how to allocate resources and
in assessing our performance. We have determined that our CODM is our Chief Executive Officer.
We provide our software systems and services and appraisal services through four business units:
• financial management and education software solutions;
• financial management and municipal courts and justice software solutions;
• courts and justice software solutions; and
• appraisal and tax software solutions and property appraisal services.
Historically, we have reported one segment. In 2009 we reexamined the economics of our businesses, and found that the
financial metrics for our appraisal and tax software solutions and services unit were becoming dissimilar from our enterprise
software solutions units. Accordingly, we now report two segments: (1) Enterprise Software Solutions and (2) Appraisal and
Tax Software Solutions and Services. In accordance with ASC 280-10, Segment Reporting, the financial management and
education software solutions unit, financial management and municipal courts and justice software solutions unit and the courts
and justice software solutions unit meet the criteria for aggregation and are presented in one segment, “Enterprise Software
Solutions.” The Enterprise Software Solutions segment provides municipal and county governments and schools with software
systems to meet their information technology and automation needs for mission-critical “back-office” functions such as financial
management and courts and justice processes. The Appraisal and Tax Software Solutions and Services segment provides
systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal
outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical
inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation;
preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
We evaluate performance based on several factors, of which the primary financial measure is business segment operating
income. We define segment operating income as income before noncash amortization of intangible assets associated with their
acquisition, share-based compensation expense, interest expense and income taxes. Segment operating income includes
Tyler Technologies Annual Report 2009
61
Notes to Financial Statements
intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and
are valued based on the contractual arrangement. Segment operating income for corporate primarily consists of compensation
costs for the executive management team and certain accounting and administrative staff and share-based compensation
expense for the entire company. The accounting policies of the reportable segments are the same as those described in Note 1,
“Summary of Significant Accounting Policies.”
Segment assets include net accounts receivable, prepaid expenses and other current assets, net property and equipment and
intangibles associated with their acquisition. Corporate assets consist of cash and investments, prepaid insurance, deferred
income taxes and net property and equipment mainly related to unallocated information and technology assets.
Enterprise Software Solutions segment capital expenditures in 2009 and 2008 include $11.2 million and $16.0 million,
respectively for the purchase of buildings in connection with plans to consolidate workforces and support long-term growth.
2009 capital expenditures include a $1.8 million accrued retainage payment we expect to pay by mid-2010.
In 2009 and 2008 the Appraisal and Tax Software Solutions and Services segment had one appraisal services customer which
accounted for 10.4% and 12.6%, respectively, of this segment’s total revenues.
As of and year ended December 31, 2009
Enterprise
Software
Solutions
Appraisal and Tax
Software Solutions
and Services
Corporate
Totals
Revenues
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Intercompany
Total revenues
$ 39,910
$ 2,221
$
311
9,229
10,275
18,740
16,870
71,176
114,237
—
6,248
1,618
—
—
1,069
(1,618)
—
—
—
—
—
$ 42,131
17,181
80,405
124,512
18,740
7,317
—
$ 250,059
$ 40,776
$
(549)
$ 290,286
Depreciation and amortization expense
8,031
608
858
9,497
55,639
6,949
(13,688)
48,900
13,361
192
614
$ 220,135
$ 25,597
$ 24,938
14,167
$ 270,670
Enterprise
Software
Solutions
Appraisal and Tax
Software Solutions
and Services
Corporate
Totals
$ 39,936
$ 1,554
$
14,352
65,906
98,383
—
6,354
956
22
9,091
9,075
19,098
26
2
$ 225,887
$ 38,868
$
11,596
510
—
—
—
—
—
1,304
(958)
346
505
$ 41,490
14,374
74,997
107,458
19,098
7,684
—
$ 265,101
12,611
47,698
5,448
(11,769)
41,377
17,563
420
2,160
$ 208,868
$ 24,409
$ 18,484
20,143
$ 251,761
Segment operating income
Capital expenditures
Segment assets
As of and year ended December 31, 2008
Revenues
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Intercompany
Total revenues
Depreciation and amortization expense
Segment operating income
Capital expenditures
Segment assets
62 Tyler Technologies Annual Report 2009
As of and year ended December 31, 2007
Revenues
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Intercompany
Total revenues
Notes to Financial Statements
Enterprise
Software
Solutions
Appraisal and Tax
Software Solutions
and Services
Corporate
Totals
$ 33,789
$ 1,274
$
10,406
52,784
77,012
—
7,294
780
—
7,499
8,399
21,318
21
138
—
—
—
—
—
—
(918)
$ 35,063
10,406
60,283
85,411
21,318
7,315
—
$ 182,065
$ 38,649
$
(918)
$ 219,796
Depreciation and amortization expense
10,310
542
359
11,211
Segment operating income
Capital expenditures
Segment assets
34,833
5,040
(9,336)
30,537
2,449
412
817
3,678
$ 157,981
$ 22,869
$ 60,658
$ 241,508
Reconciliation of reportable segment operating
income to the Company’s consolidated totals:
Total segment operating income
Amortization of acquired software
Amortization of customer and trade name intangibles
Non-cash legal settlement related to warrants
Other (expense) income
Income before income taxes
2009
2008
2007
$ 48,900
$ 41,377
$ 30,537
(1,411)
(1,799)
(2,705)
(2,438)
—
(9,045)
(146)
$ 44,638
1,181
$ 29,276
(2,279)
(1,478)
—
1,800
$ 28,580
(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected financial information from unaudited statements of operations for each quarter of 2009
and 2008.
2009
2008
Quarters Ended
Dec. 31
Sept. 30
June 30
Mar. 31
Dec. 31
Sept. 30
June 30 (A)
Mar. 31
Revenues
Gross profit
$ 74,217
$ 74,332
$ 72,172
$ 69,565
$ 69,544
$ 68,637
$ 67,569
$ 59,351
33,239
33,235
31,997
30,292
28,945
29,950
29,089
21,803
Income before income taxes
10,922
12,421
11,334
9,961
9,845
12,335
2,026
5,070
Net income
6,656
7,475
6,873
6,006
5,131
6,359
Earnings per diluted share
0.18
0.20
0.19
0.16
0.14
0.16
246
0.01
3,126
0.08
Shares used in computing
diluted earnings per share
36,600
36,487
36,723
36,747
37,604
40,019
39,633
39,527
(A) On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of America,
N. A. (“BANA”). The Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per
share. Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of
Tyler common stock. Accordingly, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which was not tax
deductible, during the three months ended June 30, 2008.
Tyler Technologies Annual Report 2009
63
Performance Graph
The following table compares total Shareholder returns for Tyler over the last five years to the Standard and Poor’s 500 Stock
Index and the Standard and Poor’s 600 Information Technology Index assuming a $100 investment made on December 31,
2004. Each of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance
shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$250
$200
$150
$100
$50
$0
2004
2005
2006
2007
2008
2009
100
100
100
105.02
104.91
99.76
168.18
121.48
109.17
154.19
128.16
119.32
143.30
80.74
71.15
238.16
102.11
105.41
Tyler Technologies, Inc.
S&P 500 Index
S&P 600 Information
Technology Index
64 Tyler Technologies Annual Report 2009
Corporate Headquarters
5949 Sherry Lane
Suite 1400
Dallas, Texas 75225
972.713.3700
www.tylertech.com
Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
800.937.5449 tel
718.236.2641 fax
www.amstock.com
Independent Registered Public
Accounting Firm
Ernst & Young LLP
Dallas, Texas
Annual Meeting of Stockholders
Our Annual Meeting will be held on Thursday,
May 13, 2010, at 9:30 a.m. Central time at
The Park City Club, 5956 Sherry Lane,
Suite 1700, Dallas, Texas 75225.
Certifications
We submitted an unqualified Annual CEO Certification
to the New York Stock Exchange (NYSE) as required by
the NYSE Listed Company rules. We also filed with the
Securities and Exchange Commission the Chief Executive
Officer and Chief Financial Officer certifications required
under Section 302 of the Sarbanes-Oxley Act as exhibits
to our Annual Report on Form 10-K.
Investor Information
Our Annual Report on Form 10-K is available on the
Company’s website at www.tylertech.com. A copy of
the Form 10-K or other information may also be obtained
by contacting the Investor Relations Department at
corporate headquarters.
Investor Relations
Tyler Technologies, Inc.
972.713.3714
info@tylertech.com
Common Stock
Listed on the New York Stock Exchange under
the symbol “TYL”
Corporate Officers
John M. Yeaman
Chairman of the Board
John S. Marr, Jr.
President and Chief Executive Officer
Dustin R. Womble
Executive Vice President
Brian K. Miller
Executive Vice President
Chief Financial Officer and Treasurer
H. Lynn Moore, Jr.
Executive Vice President
General Counsel and Secretary
Samantha B. Crosby
Vice President
Marketing
Rick L. Hoff
Vice President
Chief Technology Officer
Robert J. Sansone
Vice President
Human Resources
W. Michael Smith
Vice President
Chief Accounting Officer
Terri L. Alford
Controller
Board of Directors
John M. Yeaman1
Chairman of the Board
Tyler Technologies, Inc.
John S. Marr, Jr.1
President and Chief Executive Officer
Tyler Technologies, Inc.
Donald R. Brattain2,3
President
Brattain and Associates, LLC
J. Luther King, Jr.2,4
Chief Executive Officer
Luther King Capital Management
G. Stuart Reeves2,3,4
Retired Executive Vice President
Electronic Data Systems Corporation
Michael D. Richards3,4
Executive Vice President
Republic Title of Texas, Inc.
Dustin R. Womble1
Executive Vice President
Tyler Technologies, Inc.
1 Executive Committee
2 Audit Committee
3 Nominating and Governance Committee
4 Compensation Committee
5949 Sherry Lane
Suite 1400
Dallas, Texas 75225
972.713.3700
www.tylertech.com