Tyler Technologies
Annual Report 2021

Plain-text annual report

A singular purpose. Unlimited potential. A few decades – or even just a few years – ago, no one could have predicted the world would look like it does today. But our strong vision for technology’s role in creating thriving, connected communities has set us up well to respond to the unexpected turns of recent years. This year, we took a significant leap forward in turning that vision into a reality, bringing us even closer to unlocking the limitless potential of a connected public sector. We have never been more excited about the roles that our technology, solutions, and team members will play in supporting our vision for the future of the public sector. 24 YEARS FOCUSED EXCLUSIVELY ON SERVING THE PUBLIC SECTOR To our shareholders Recurring revenues 80% After the uncertainty of 2020, 2021 AT A GLANCE GROWING OUR CAPABILITIES RECORD SUBSCRIPTION GROWTH Tyler emerged stronger and better prepared than ever to meet the needs of the public sector and its constituents. H. LYNN MOORE JR. PRESIDENT & CEO 2 This year was Tyler’s most successful to date, which is We continue to be opportunistic in pursuing strategic Our cloud-first strategy, coupled with a growing public especially gratifying given the macroeconomic uncertainty acquisitions. After taking a pause in 2020, we added five sector preference for SaaS solutions, continues to drive and headwinds many companies continued to face in 2021. companies to the Tyler portfolio in 2021. significant growth in subscription revenues. In addition, the GAAP revenue rose 42.6% to $1.592 billion, while non-GAAP revenue increased 42.7% to $1.595 billion, a new record. GAAP net income for the year was $161.5 million, or $3.82 per diluted share, down 17.1% from 2020. Non-GAAP net income for the year was $296.5 million, or $7.02 per diluted share, up 29.3%. Recurring revenues grew 53.8% and comprised 79.1% of our total revenues. Cash provided by operations grew 4.7% to $371.8 million, while free cash flow was down 3.2% at $316.1 million. We finished 2021 with a backlog of $1.8 billion, up 12.6%. Our balance sheet remains very strong. Following the NIC Inc. acquisition, we ended 2021 with $1.34 billion in debt; cash and investments of $407.8 million; and net leverage of approximately 2.07 times trailing pro forma EBITDA. Most significantly, we completed the $2.3 billion cash acquisition of NIC in April 2021, our largest acquisition to date by far. Our combined public sector expertise now makes Tyler the industry leader for public sector payments. The acquisition also strengthens our relationships with state governments and federal agencies, allowing us to leverage NIC’s state-level contracts to pursue cross-selling and joint opportunities. In addition to NIC, we also augmented portfolio solutions for veterans’ benefits, schools, corrections, and public safety through the acquisitions of DataSpec, ReadySub, VendEngine, and Arx. NIC acquisition further adds to our base of subscription revenues from payments and transaction fees. Recurring revenues comprised nearly 80% of our annual revenues, led by 123.7% growth in subscription revenues. Subscription revenue growth has now exceeded 20% for 56 of the last 64 quarters. In 2021, subscription-based arrangements represented 71% of total new software contract value, up from 62% in 2020. In conjunction with the acceleration of our shift to a cloud- first approach, we are on track with our development projects aimed at optimizing our products to be efficiently deployed in the cloud. We also introduced a new Corporate Operations team to oversee our cloud initiatives, ensuring we effectively execute our multi-year cloud strategy, scale our information technology infrastructure, and ensure cybersecurity is foundational to all of our solutions and is woven into our company’s overall DNA. 3 SIGNIFICANT WINS Validating our vision of a cloud-first, interconnected public sector, many of our most significant wins this year were SaaS deals or contracts that featured multiple Tyler solutions. Notable wins include: 1,100 NEW TEAM MEMBERS ADDED TO THE TYLER FAMILY $407.8M CASH AND INVESTMENTS • A combination license and SaaS arrangement with the • A $4.1 million agreement with the Lake County Sheriff’s LOOKING AHEAD Colorado Department of Regulatory Agencies, valued at Office in Illinois for our computer-aided dispatch (CAD); approximately $9.3 million for products, including State records management system (RMS); mobile; field reporting; Regulatory, powered by Entellitrak®; Data & Insights; and Enforcement Mobile, powered by Brazos™; Civil Process, Data Collect Mobile, powered by SceneDoc™; as well as NIC’s powered by SoftCode™; and Data & Insights solutions. electronic payments solution. • A $24 million agreement with Virginia Department of Housing • A $63 million renewal and expansion of our contract with and Community Development to provide a call center and the Administrative Office of the Illinois Courts to provide digital solution for tenant, landlord, and third-party filing the eFileIL™ electronic filing solution to the Illinois Courts of rent relief program claims and payment processing If 2020 was about navigating uncertainty, 2021 was about seeing new possibilities. Not only are we now the industry leader in public sector payments, but we’ve gone from holding a limited market share in the state space to becoming one of its largest players. Thanks to our acquisitions and organic growth, we added more than 1,100 new team members to the Tyler family. We created the framework necessary to move and add our Data & Insights solution. capabilities, along with administrative dashboards from forward as a cloud-first software company, undertook an • A $98 million agreement with the Texas Office of Court our Data & Insights solutions. Administration to extend the use of Tyler’s eFileTexas™ • A $6.1 million contract with the West Virginia Division of electronic filing solution through August 2027. Motor Vehicles to provide a new digital vehicle titling and registration management system. $63M $98M $24M $6.1M ADMINISTRATIVE TEXAS OFFICE OF VIRGINIA DEPARTMENT OF WEST VIRGINIA OFFICE OF THE ILLINOIS COURT ADMINISTRATION HOUSING & COMMUNITY DMV CONTRACT COURTS RENEWAL AGREEMENT DEVELOPMENT AGREEMENT extensive process to articulate our mission, vision, and values, and expanded our ESG efforts, which we reported in our second annual corporate responsibility report. Alone, each of these accomplishments would make this one of our most notable years on record. Together, they create an inflection point that we’ll look back on as the beginning of Tyler’s next chapter. And what a chapter it will be. We remain highly competitive, as reflected by high win rates across our applications. Increases in leading indicators like requests for proposals, sales demonstrations, and bookings indicate that the public sector continues to rebound with a focus on the future. In addition, the $350 billion of aid to state and local governments and $167 billion of aid to schools under the American Rescue Plan Act give the public sector additional resources to invest in their infrastructure and services over the next few years. We understand the challenges our communities have faced, and will continue to face, as a result of the pandemic. Thanks to the hard work of our employees, I am more than confident in our ability to help communities across the country emerge even stronger. The silver lining of the pandemic is that the public sector has a clearer understanding of the definition of an essential service, inspiring a wave of digital transformation that will make government services more efficient and effective. By never losing sight of our vision, we persevered through difficult times and are exceptionally well-positioned to partner with the public sector as we move forward together. H. Lynn Moore Jr. President & Chief Executive Officer 4 5 2021 1.6B FINANCIAL YEAR IN REVIEW ANNUAL EARNINGS PER DILUTED SHARE GAAP NON-GAAP '21 '20 '19 '18 2021 $3.82 2021 $7.02 2020 $4.69 2020 $5.52 2019 $3.65 2019 $5.30 $1 $2 $3 $4 $5 $6 $7 $8 GAAP OPERATING MARGIN NON-GAAP OPERATING MARGIN 0.5B GAAP REVENUE 2021 — $1.592B 2020 — $1.117B 2019 — $1.086B 2018 — $935M NON-GAAP REVENUE 2021 — $1.595B 2020 — $1.117B 2019 — $1.091B 2018 — $940M 11.4% 25.4% $784.4M SUBSCRIPTION REVENUE, UP 123.7% 49.3% REVENUE FROM SUBSCRIPTIONS $1.8B BACKLOG, UP 12.6% $1.8B BOOKINGS, UP 41.6% $371.8M CASH FLOW FROM OPERATIONS, UP 4.7% $435.7M ADJUSTED EBITDA, UP 33.6% 6 7 Bringing the future into focus This year, we made significant progress in strengthening Tyler’s position to meet the needs of our clients, our shareholders, and our employees well into the future. From our historic acquisition of NIC to the continued execution of our cloud-first strategy to undertaking internal initiatives designed to build a stronger foundation, we have never been more prepared to deliver the technology and services the public sector depends on. 71% OF NEW CONTRACT VALUES WERE CLOUD AGREEMENTS IN 2021, RESPONDING TO INCREASING PUBLIC SECTOR DEMAND 8 99 10:20 My Wallet Balance due: 123.45 USD x3254 Tap to Pay Becoming a leader in public sector payments and state digital government solutions In April, we completed the $2.3 billion cash acquisition of NIC, the most significant acquisition in the history of Tyler. NIC is the leader in the state market, providing digital government and payments solutions across the public sector, and serving more than 8,100 federal, state, and local government agencies nationwide. NIC has extensive experience and scale in the government payments space. Together, Tyler and NIC processed more than $33 billion in payments on behalf of citizens and governments in 2021, with NIC accounting for more than $28 billion of the total. Its payment platform enables payment capture using modern payment methods such as Apple Pay® and Google Pay™, so citizens can conduct their business and pay conveniently from anywhere. NIC’s platform provides everything the public sector requires to build a world-class digital payment structure, including payment capture, invoicing, billing, reconciliation, reporting, and payout. By combining NIC’s payment expertise with our local government footprint, we accelerated our strategic payments initiative, allowing us to become the industry leader in public sector payments. Led by Elizabeth Proudfit, a 21-year veteran at the company, NIC’s capabilities significantly augment Tyler’s ability to enable payments across all our solutions. 8,100+ $33B FEDERAL, STATE, AND LOCAL PAYMENTS PROCESSED GOVERNMENT AGENCIES SERVED BY NIC FOR CITIZENS AND GOVERNMENTS IN 2021 11 Expanding our footprint In addition to leveraging NIC’s robust payment platform to expand our local government payment business, we plan to capitalize on NIC’s strong relationships under 30 state enterprise master contracts to sell and deliver Tyler’s expansive suite of products at the state level. 2021 NIC CLIENT PARTNERS TOTAL 8,173 FEDERAL AGENCIES 57 LOCAL AGENCIES 3,263 STATE AGENCIES 4,853 2021 NIC CLIENT BREAKDOWN BY VERTICAL EDUCATION FINANCE HUMAN CAPITAL PUBLIC SAFETY JUSTICE 5% 12% 4% 7% 14% HEALTH & HUMAN SERVICES REGULATORY ADMINISTRATIVE CIVIC 23% 23% 9% 3% Since the acquisition, our executive team has worked closely in the award of the South Carolina state enterprise contract with NIC’s leadership on joint growth and strategic initiatives, to Tyler after a competitive rebid process. Generating focusing on product alignment, sales channel activation, approximately $10 million in annual recurring revenue, the and identifying new market opportunities. Together, we can contract adds Tyler’s data and analytics platform to the NIC provide more value to NIC’s clients while greatly expanding suite of services to achieve the state’s vision of a modern, our market beyond the local government space where we citizen-centric digital government ecosystem. already have a market-leading presence. Since NIC became part of Tyler, we have successfully With any acquisition, we take a long-term approach when introduced Tyler’s broad portfolio of solutions to NIC state judging success. While the NIC acquisition is no different, it enterprise managers. As a result, we completed seven cross- has already allowed Tyler to pursue important opportunities divisional deals through NIC contracts in 2021, representing that would have been difficult to achieve alone. For example, $51 million in new or preserved annual revenue. a collaboration between NIC and other Tyler teams resulted 1 3 1 2 Making progress toward Connected Communities Over the past five years, our Connected Communities vision has driven us to develop solutions to bring public sector departments, agencies, and jurisdictions together. We have been hard at work creating the digital infrastructure required to connect city, county, state, and federal government services so agencies can more easily collaborate and share insights across organizational and geographic boundaries. In 2018, our acquisition of Socrata enabled us to integrate data and analytics across our entire product suite, while our 2019 acquisition of MicroPact allowed us to provide our Case Management Development Platform, powered by Entellitrak, so agencies can build their own workflows and applications. With the addition of NIC this year, Tyler took another step toward achieving our vision of Connected Communities. Tyler now offers a complete platform of solutions, analytics, and payments, enabling clients to offer a one-stop-shop citizen portal where people can engage with the government at every level. 60 8 TYLER PRODUCTS SOLUTION PORTFOLIOS 1 5 New acquisitions, new opportunities While NIC was our most significant acquisition this year, we made several other strategic purchases in order to strengthen our capabilities across specific verticals: • In March, we acquired DataSpec, a market-leading software were shared clients, allowing us to significantly increase provider for the electronic management of veterans’ claims. our school footprint while providing new opportunities for DataSpec’s web-based SaaS solution enables secure cross-selling into ReadySub’s user base. electronic claims submission to the U.S. Department of Veterans Affairs, along with reporting capabilities, scheduling, calendaring, and payments. • In August, we acquired VendEngine, a cloud-based software provider focused on technology for the corrections market. Its platform provides essential tools and services for • Also in March, we acquired ReadySub, a leader in delivering incarcerated individuals and their families, such as trust cloud-based absence and substitute teacher management accounting and video visitation services. solutions. In addition to adding new capabilities to our education portfolio, ReadySub serves approximately 1,000 school districts across the U.S. Of Tyler’s 2,000 school district clients prior to the acquisition, only a small fraction • In September, we acquired Arx, a cloud-based software platform that creates accessible technology, enabling a modern-day police force that is fully transparent and accountable to the communities it serves. 16 S O L U T I O N S N A P S H O T P U B L I C A D M I N I S T R A T I O N breaking down legacy barriers Temecula, California, has it all: wine country, popular festivals, a charming Old Town district, and year-round sunshine. As the ideal place to put down roots, the city knew it would need to move past its legacy technology to continue growing without losing what made it special in the first place. The city uses Tyler’s Enterprise Permitting & Licensing and Enterprise ERP solutions to deliver all of its land management services and processes within a single platform. This allows the city to break down barriers across departments, paving the way for open communication. By eliminating duplicate, siloed processes, the city increased business licenses by 52% while reducing permit turnaround time by up to 48 hours without adding staff. In addition, the city deployed a community portal that enables 24/7 access to city services for its constituents. 52% INCREASE IN NUMBER OF BUSINESS LICENSES BY ELIMINATING DUPLICATE, SILOED PROCESSES S O L U T I O N S N A P S H O T C O U R T S & P U B L I C S A F E T Y making justice manageable The jury staff at Collin County, Texas, has to manage the needs of the 25 courts it serves. But during the pandemic, it was no longer safe to bring hundreds of potential jurors to a central jury room. Collin County used Tyler’s Enterprise Jury Manager system to simplify the entire jury process for both in-person and virtual jury trials. This allowed staff to text jurors about changes in jury duty to eliminate having jurors come to court unnecessarily. 25 COURTS MANAGED IN COLLIN COUNTY, TX 1 8 1 PROBATE COURT 4 JUSTICE PEACE COURTS 7 COUNTY COURTS 13 DISTRICT COURTS 1 K R E L C 2 K R E L C 3 K R E L C COLLIN COUNTY COURT SYSTEM Tyler’s jury management system improves the major tasks of the three jury clerks who support the courts. All three clerks can work in the software at the same time without causing system failures. 19 Committing to a cloud-first future In 2021, the public sector continued to experience firsthand the need to provide remote access to services, improve cybersecurity, and empower a hybrid workforce. As a result, we saw a record number of new SaaS contracts, while seeing 239 clients switch from on-premises solutions to the equivalent cloud solution. Now that the cloud is approaching nearly 80% of our new software contract volume, in 2021 we took a critical step toward positioning Tyler as a cloud-first organization by creating a new Corporate Operations team. This cross-functional team allows us to significantly reduce operational silos, align business priorities, and improve our decision-making processes across the organization. By creating economies of scale, the team helps to accelerate the transition of our flagship products to the cloud through the use of a core set of common processes, practices, and roadmaps. Led by Jeff Puckett, our chief operating officer, the Corporate developing cloud-delivered products and services. Some Operations team includes four critical components: of these innovative new solutions deployed in 2021 include: • Cloud Strategy & Operations defines best practices • An enterprise permitting and licensing decision engine for cloud development, operations, and deployment to solution that helps constituents simplify the intricate enable division-level transformation. processes associated with understanding ordinances • Information Security oversees our corporate IT and navigating permits and licensing; infrastructure, products, and cloud environments • An insights platform that lets courts use data to ensure our solutions meet the needs of today’s from their information systems to create easy-to- challenging cybersecurity environment. understand dashboards for measuring court performance • Information Technology ensures that our technology and efficiency; infrastructure and hosting services continue to evolve • A data-driven digital evidence board that criminal to best serve a cloud-first organization. investigators and prosecutors can use to streamline • Corporate Development oversees our common technology strategy to align it with our cloud investigation by automatically mapping relationships between people, places, crimes, and more; and development roadmap. • An application programming interface (API) integration While we are committed to supporting our on-premises solutions, we are concentrating our innovation on the cloud moving forward. In addition to our recent acquisitions of cloud-based solutions, we are focusing our R&D on 2 0 platform that securely joins K-12 transportation applications and data together to maximize the value of the data generated by today’s transportation departments. 27% GROWTH IN SAAS REVENUES 71% CLOUD CONTRACT VALUE 239 CLIENTS WHO CHOSE TO MOVE FROM ON-PREMISES TO CLOUD SOLUTIONS S O L U T I O N S N A P S H O T H E A L T H & H U M A N S E R V I C E S improving and accelerating access Elderly and disabled residents rely on Wisconsin’s Department of Health Services for many services, including a Medicaid home- and community-based services waiver program. Under its old system, it took up to six months to review eligibility and accept new people into the program. The department now uses a cloud-based platform powered by Tyler to make all its processes and data available in a single application. This enables the department to provide clients access to services and reimbursements in as little as two months, while making it easier for staff to track activity to reduce fraud. 2 1 Reinforcing our culture While we live our mission, vision, and values every day, this year we articulated our ethos to support our company-wide strategies, new programs, ongoing practices, and every action that our employees take. By engaging with a broad, diverse cross-section of Tyler team members, we have now clearly defined what we stand for, so we can ensure our culture continues through future growth and change. Mission Vision Values We empower the public sector to create smarter, safer, and stronger communities. A transformed public sector that serves thriving, connected communities. ACCOUNTABILITY We deliver what we promise. INTEGRITY We do the right thing. FOCUS We execute with intent. INCLUSION We respect and value each other. COMMUNITY We stand together. GROWTH We invest in our future. As we continue to grow, this work will ensure that we maintain a clear sense of who we are and how we got here, building on our legacy for future team members, leadership, clients, and other stakeholders. 2 2 2 3 Holding ourselves to the highest standards From creating electronic filing solutions that save millions of pounds of paper to providing citizens with more transparency into how their government works, our solutions help the public sector do better at “doing good.” While delivering technology that creates smarter, safer, and stronger communities is one way we live our values, it’s by no means the only way. We also continually work toward our own goals to be the most sustainable and inclusive organization we can be. 93rd percentile RANKING IN DOW JONES SUSTAINABILITY INDEX BOARD OF DIRECTORS CONTINUING OUR COMMITMENT CREATING A MORE INCLUSIVE TYLER TO ESG EXCELLENCE We have built a business that reflects the millions of In 2021 we released our second annual corporate people that our products impact every day. We continue to responsibility report to bring greater transparency to increase diversity across the organization, including at the our environmental, social, and governance (ESG) efforts highest levels of leadership and on our board of directors. In and showcase our 2020 results. The report serves as 2021, this included our newest division president, Elizabeth an important communication tool for accountability and Proudfit, who joined Tyler as part of our acquisition of NIC, measuring progress against goals. and the addition of Ronnie D. Hawkins Jr. to our board. We also completed our second annual submission of ESG We also formed an executive Diversity, Equity, and Inclusion data to the Dow Jones Sustainability Index (DJSI). As a (DEI) Council to oversee development of Tyler’s strategy, widely recognized benchmark for measuring ESG progress programs, and progress related to DEI. In 2021, the council across industries, the DJSI helps investors and other was instrumental in the development of DEI strategic focus stakeholders better understand a company’s commitment areas and participated in a review of the effectiveness of to sustainable business practices. We are proud to be current Tyler talent practices in recruiting, onboarding, named to the DJSI for North America, which recognizes managing, developing, compensating, and retaining diverse the top 20% of sustainability performers among the 600 team members. largest U.S. and Canadian companies in the S&P Global Broad Market Index. Among these elite companies, Tyler ranks in the 93rd percentile of all companies in the Software and Diversified IT Services industry. In addition, our Women’s Leadership Network introduced a formal pilot mentorship program that pairs trained mentors with mentees throughout the organization. With an objective to strengthen the professional development of women at Tyler, the pilot program enabled us to pair more than a dozen female team members with experienced managers and leaders so the mentees can leverage the knowledge, advice, and relationships required to advance their careers. Due to the pilot’s success, we plan to expand the program and more than double participation in 2022. John Marr Jr. H. Lynn Moore Jr. Glenn Carter Brenda Cline Ronnie Hawkins Jr. Mary Landrieu Daniel Pope Dustin Womble Executive Chairperson 24 2 5 Virtual conference, hands-on impact 6,167 VIRTUAL CONFERENCE ATTENDEES 8M ACTIVE ATTENDEE STEPS FOR SAN ANTONIO FOOD BANK To help our clients stay safe, we held the 2021 edition of our annual client conference, Tyler Connect, entirely virtually. We featured more than 600 training sessions, which allowed us to deliver nearly 40,000 hours of content to a near-record high of 6,167 attendees. The conference also enabled a unique virtual wellness challenge to keep attendees active, resulting in more than 8 million steps that translated into a $14,000 donation to the San Antonio Food Bank. CELEBRATING A MILESTONE This year, the Tyler Foundation celebrated 50 years of supporting local nonprofits in our communities. As our endowment for charitable giving, the foundation has donated approximately $3.5 million over the past 10 years to organizations that promote health, human services, and education. In 2021, the Tyler Foundation donated $397,000 to 73 organizations across the country. WORKING FOR A BETTER WORLD We continue to closely partner with nonprofit organization BEB to provide the technical leadership, time, and resources required to keep their Children First™ software a state-of-the-art solution for moving orphans and vulnerable children from institutional care to permanent and loving families. Thanks to their software, governments around the world can see and control a process that was previously absent and left children to languish for years in destitution. This year, our support for BEB includes $271,000 in contributions by Tyler employees and the Tyler Foundation, and 980 hours contributed in software development support. In addition, Tyler’s data and insights platform has enabled BEB to empower the Government of Uganda to report complete statistics on their vulnerable children for the first time. $3.5M DONATED BY THE TYLER FOUNDATION OVER THE PAST 10 YEARS $397K DONATED TO ORGANIZATIONS NATIONWIDE IN 2021 980 hrs SOFTWARE DEVELOPMENT SUPPORT $286K MONETARY DONATIONS FROM TYLER EMPLOYEES $81K IN-KIND DONATIONS 26 2 7 S O L U T I O N S N A P S H O T T R A N S F O R M A T I V E T E C H N O L O G Y assessing greater potential Assessors are the heart of every jurisdiction’s revenue process, with their property valuations responsible for the basis on which taxes are determined to fund roads, police, schools, and more. The assessor for Ramsey County, Minnesota, knew the data his office held could be highly beneficial for the community, but struggled to overcome a manual management process. Using Tyler’s Data & Insights solutions, Ramsey County’s assessor created an open data site that makes it easy for residents, real estate professionals, and government employees to leverage interactive dashboards to self-serve data. Not only does it provide more people with more access to the correct data, but it allows people to use data visualization to create context, helping the data tell the full story of property values. 2 8 2 9 Supporting great workplaces We added more than a few new faces to our team in 2021. Thanks to the addition of NIC, our other acquisitions, and organic growth to support our continued success, we added more than 1,100 employees to the Tyler family, growing our workforce by 20% to more than 6,600 employees by the end of the year. Tyler was once again named to several “best places to work” lists from across the country, recognizing Tyler offices in Herndon, Virginia; Lakewood, Colorado; Jackson, Mississippi; Yarmouth, Falmouth, and Bangor, Maine; Troy, Michigan; and Plano, Texas. We were also excited to open a new office in Lawrenceville, Georgia, known as our Gwinnett office. To continue to strengthen our ability to attract and retain talented team members, we launched a host of new employee benefits, including paid parental leave up to 12 weeks, enhanced paid time off, additional paid holidays, and the addition of a paid volunteer day. We also enhanced our paid military leave and now provide veterans and active U.S. Armed Forces members with Veterans Day as an additional paid holiday. S O L U T I O N S N A P S H O T K - 1 2 E D U C A T I O N making transportation schedules more transparent District 214 in Arlington Heights, Illinois, gives its students the ability to take learning far outside the classroom by providing access to local college classes, internships, industrial certification programs, and community service opportunities. However, this innovative approach to learning requires an equally innovative approach to transportation to efficiently get the district’s nearly 12,000 students to and from more than 25 program locations for any class period. The district uses Tyler’s student transportation solutions to create a shuttle-based schedule to serve the entire district. By increasing transparency into shuttle schedules, students can create custom transportation schedules without contacting the transportation office. As a result, students can attend activities across the city even late into the evening without worrying about how they will get home. 3 0 3 13 1 12,000 STUDENTS THAT WE HELP MOVE THROUGHOUT THE CITY The vision to anticipate the future. The drive to make it a reality. Thanks to our strategic acquisitions, strong financial position, and our expansive portfolio of leading solutions, Tyler has never been better prepared to take advantage of the limitless potential that the future holds. Not only do we have the vision to see the possibilities for the future of the public sector, but we have the ability to make that vision a reality. As we enter 2022, we look forward to partnering with our public sector clients who are working so hard to prepare for tomorrow. We plan to be with them every step of the way. Financial information 2021 3 2 TYLER TECHNOLOGIES ANNUAL REPORT Reconciliation of GAAP to NON-GAAP Financial Measures (Unaudited) Stock Market Data (In thousands, except per share data) RECONCILIATION OF NON-GAAP TOTAL REVENUES GAAP total revenues Non-GAAP adjustments: Add: Write-downs of acquisition-related deferred revenue Add: Amortization of acquired leases Non-GAAP total revenues RECONCILIATION OF NON-GAAP GROSS PROFIT AND MARGIN GAAP gross profit Non-GAAP adjustments: Add: Write-downs of acquisition-related deferred revenue Add: Amortization of acquired leases Add: Share-based compensation expense included in cost of revenues Add: Amortization of acquired software Non-GAAP gross profit GAAP gross margin Non-GAAP gross margin RECONCILIATION OF NON-GAAP OPERATING INCOME AND MARGIN GAAP operating income Non-GAAP adjustments: Add: Write-downs of acquisition-related deferred revenue Add: Amortization of acquired leases Add: Share-based compensation expense Add: Employer portion of payroll tax related to employee stock transactions Add: Acquisition-related costs Add: COVID-19 incremental costs Add: Amortization of acquired software Add: Amortization of customer and trade name intangibles Non-GAAP adjustments subtotal Non-GAAP operating income GAAP operating margin Non-GAAP operating margin RECONCILIATION OF NON-GAAP NET INCOME AND EARNINGS PER SHARE GAAP net income Non-GAAP adjustments: Add: Total non-GAAP adjustments to operating income Add: Acquisition related cost in interest expense Less: Tax impact related to non-GAAP adjustments Non-GAAP net income GAAP earnings per diluted share Non-GAAP earnings per diluted share DETAIL OF SHARE-BASED COMPENSATION EXPENSE Cost of software services, maintenance and subscriptions Selling, general and administrative expenses Total share-based compensation expense RECONCILIATION OF FREE CASH FLOW Net cash provided by operating activities Less: additions to property and equipment Less: capitalized software development costs Free cash flow 3 4 2021 2020 2019 $ 1,592,287 $ 1,116,663 $ 1,086,427 2,678 — 478 313 4,557 372 $ 1,594,965 $ 1,117,454 $ 1,091,356 $ 709,644 $ 542,512 $ 516,900 2,678 — 23,705 45,601 478 313 18,125 31,962 4,557 372 15,002 30,642 $ 781,628 $ 593,390 $ 567,473 44.6% 49.0% 48.6% 53.1% 47.6% 52.0% $ 180,735 $ 172,926 $ 156,367 2,678 — 104,726 3,437 23,495 — 45,601 44,849 478 313 67,365 3,294 — 1,537 31,962 21,662 4,557 372 59,967 1,745 1,142 — 30,642 21,445 $ 224,786 $ 126,611 $ 119,870 $ 405,521 $ 299,537 $ 276,237 11.4% 25.4% 15.5% 26.8% 14.4% 25.3% $ 161,458 $ 194,820 $ 146,527 224,786 6,407 (96,119) 126,611 — (92,175) 119,870 — (53,819) $ 296,532 $ 229,256 $ 212,578 $ $ 3.82 7.02 $ $ 4.69 5.52 $ $ 3.65 5.30 $ 23,705 $ 18,125 $ 15,002 81,021 49,240 44,965 $ 104,726 $ 67,365 $ 59,967 $ 371,753 (33,919) $ 355,089 (22,690) $ 254,720 (37,236) (21,693) (5,776) (4,804) $ 316,141 $ 326,623 $ 212,680 Our common stock is traded on the New York Stock Exchange under the symbol “TYL”. At December 31, 2021, we had approximately 1,090 stockholders of record. Most of our stockholders hold their shares in street name; therefore, there are substantially more than 1,090 beneficial owners of our common stock. 2020 First Quarter Second Quarter Third Quarter Fourth Quarter 2021 First Quarter Second Quarter Third Quarter Fourth Quarter High Low $ 340.80 $ 247.22 382.92 374.98 466.21 275.38 319.58 346.45 $ 479.79 $ 372.80 457.30 498.98 557.55 384.38 450.20 452.26 We did not pay any cash dividends in 2021 or 2020. 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 do not anticipate paying a cash dividend in the foreseeable future. 3 5 Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues Cost and expenses: Cost of revenues Selling, general and administrative expenses Research and development expense Amortization of customer and trade name intangibles Operating income Interest expense Other income, net Income before income taxes Income tax (benefit) provision Net income Net earnings per diluted share Weighted average diluted shares STATEMENT OF CASH FLOWS DATA: Cash flows provided by operating activities Cash flows used by investing activities Cash flows (used) provided by financing activities BALANCE SHEET DATA: Total assets Revolving line of credit Term loans, net Convertible senior notes due 2026, net Shareholders’ equity For the Years Ended December 31, 2021 2020 2019 $ 1,592,287 $ 1,116,663 $ 1,086,427 882,643 390,579 93,481 44,849 574,151 259,561 88,363 21,662 569,527 257,746 81,342 21,445 180,735 172,926 156,367 (23,298) 1,544 (1,013) 3,129 158,981 175,042 (2,477) (19,778) (2,027) 5,498 159,838 13,311 161,458 194,820 146,527 $ 3.82 $ 4.69 $ 3.65 42,244 41,526 40,105 $ 371,753 $ 355,089 $ 254,720 (2,090,935) (98,320) (245,015) 1,424,730 114,172 88,698 $ 4,732,161 $ 2,607,274 $ 2,191,614 — 748,511 592,765 2,324,032 — — — — — — 1,986,111 1,617,058 The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report on Form 10-K. For a comparison of our Results of Operations for the years ended December 31, 2020, and 2019, and our Cash Flow discussion for the year ended December 2020, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report for the year ended December 31, 2020. 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 opinion only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Readers should carefully review the risk factors described in documents we file from time to time with the Securities and Exchange Commission. When used in this Annual Report, the words “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases 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. We develop and market a broad line of software products and services to address the IT needs of cities, counties, states, schools, federal agencies, and other government entities. In addition, we provide professional IT services to our clients, including software and hardware installation, data conversion, training and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. We also provide subscription- based services such as software as a service (“SaaS”), transaction and payment processing solutions, and electronic document filing solutions (“e-filing”), which simplify the filing and management of court related documents. We also provide property appraisal outsourcing services for taxing jurisdictions. Our products generally automate nine major functional areas: (1) financial management and education, (2) courts and justice, (3) public safety, (4) property appraisal and tax, (5) planning, regulatory and maintenance, (6) land and vital records management, (7) data and insights, (8) platform technologies, and (9) NIC digital government and payments. We report our results in three segments. The Enterprise Software (“ES”) segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management; courts and justice processes; public safety; planning, regulatory and maintenance; data analytics; and platform technologies. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as provides 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. On April 21, 2021, the Company acquired NIC, Inc. (“NIC”) resulting a new reportable segment, as its operating results meet the criteria as a reportable segment. The operating results of NIC are included with the operating results of the NIC segment from the date of acquisition. As of January 1, 2021, certain administrative costs related to information technology, which were previously reported in the ES and A&T segments, were moved to the Corporate segment to reflect changes in the way management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for all segments have been adjusted to reflect the segment change. See Note 15, “Segment and Related Information,” in the notes to the consolidated financial statements for additional information. 3 6 3 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations Recent Acquisitions On September 9, 2021, we acquired all the equity interest of Ultimate Information Systems, Inc. (dba Arx). Arx is a cloud-based platform which creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves. The total purchase price, net of cash acquired, was approximately $12.8 million, of which $12.4 million was paid in cash and approximately $0.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments. On September 1, 2021, we acquired VendEngine, Inc (VendEngine) as contemplated by the Agreement and Plan of Merger dated June 3, 2021. As result of the merger, VendEngine became a direct subsidiary of the Company. VendEngine is a cloud-based software provider focused on financial technology for the corrections market. The total purchase price, net of cash acquired of $1.7 million, was approximately $83.8 million, consisting of $80.2 million paid in cash, and approximately $5.4 million related to indemnity holdbacks, subject to certain post-closing adjustments. On April 21, 2021 (“the Closing Date”), we acquired NIC as contemplated by the Agreement and Plan of Merger dated February 9, 2021. As result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries. NIC is a leading digital government solutions and payment company that primarily serves federal and state government agencies. The total purchase price, net of cash acquired of $331.8 million, was approximately $2.0 billion, consisting of cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards, subject to post-closing adjustments. On March 31, 2021, we completed two acquisitions, Glass Arc, Inc. (dba ReadySub) and DataSpec, Inc. (DataSpec), for the combined purchase price of $12.1 million. 2021 Credit Agreement In connection with the completion of the acquisition of NIC, on the Closing Date we, as borrower, entered into a new $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026. The 2021 Credit Agreement replaces and terminates the Company’s previous $400 million credit facility pursuant to the Credit Agreement dated as of September 30, 2019 (the “2019 Credit Agreement”). The Company’s previously announced commitment from Goldman Sachs Bank USA for a $1.6 billion 364-day senior unsecured bridge loan facility also terminated on the Closing Date. The net proceeds from the borrowings under the 2021 Credit Agreement were $1.1 billion, net of debt discounts of $7.2 million and debt issuance costs of $4.9 million and $6.4 million of commitment fees paid related to the terminated $1.6 billion unsecured bridge loan facility. As of December 31, 2021, we had $755.0 million in outstanding principal and available borrowing capacity of $500 million under our 2021 Credit Agreement. 0.25% Convertible Senior Notes On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 in the aggregate principal amount of $600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million. The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased, redeemed or converted. As of December 31, 2021, we had outstanding an aggregate principal amount of $600 million of our Convertible Senior Notes. 2021 Operating Results For the twelve months ended December 31, 2021, total revenues increased 42.6% compared to the prior year. Excluding the impact of acquisitions, total revenues increased 8.9% compared to prior year. Revenues from acquisitions contributed 33.7% of growth for the twelve months ended December 31, 2021. Subscriptions revenue grew 123.7% for the twelve months ended December 31, 2021, due to an ongoing shift toward a cloud-based, software as a service business model, as well as the inclusion of transaction-based revenues from NIC’s digital government and payments processing businesses. Excluding the impact of recent acquisitions, subscriptions revenue increased 23.4% for the twelve months ended December 31, 2021. Our backlog at December 31, 2021 was $1.80 billion, a 12.6% increase from last year. 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 and royalties; subscription-based arrangements; software services; maintenance; and appraisal services. Subscriptions and maintenance are considered recurring revenue sources and comprised approximately 79.1% of our revenue in 2021. The number of new SaaS clients and the number of existing clients who convert from our traditional software arrangements to our SaaS model are a significant driver of our revenue growth, together with new software license sales and maintenance rate increases. In addition, we also monitor our customer base and turnover, which historically is very low. During 2021, based on our number of customers, 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 clients. 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 and royalties, subscription-based services, and maintenance and support. Our appraisal projects are cyclical 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, 2021, our total employee count increased to 6,778 from 5,536 at December 31, 2020, including 1,063 employees who joined Tyler through acquisitions in 2021. Selling, General and Administrative (“SG&A”) Expenses — The primary components of SG&A expenses are administrative and sales personnel salaries and commissions, share-based compensation expense, marketing expense, rent and professional fees. Sales commissions typically fluctuate with revenues and share-based compensation expense generally increases as the market price of our stock increases. 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 discretionary purchases of treasury stock. 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 clients in advance of revenue being earned. In recent years, we have also received significant amounts of cash from employees exercising stock options and contributing to our Employee Stock Purchase Plan. Balance Sheet — Cash, accounts receivable and days sales outstanding and deferred revenue balances are important indicators of our business. 3 8 3 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations Impacts of the COVID-19 Pandemic Recent Accounting Guidance not yet Adopted Although market activity improved throughout 2021 in most sectors of our business and continues to trend to near or above pre-pandemic levels, the pandemic continues to delay some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue. We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations. For the twelve months ended December 31, 2021, excluding the impact of 2021 acquisitions, the impact of the COVID-19 pandemic resulted in lower revenues from software services. Software services revenues have been affected by a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site. Lower revenues compared to prior periods were partially offset by continued cost savings attributed to lower spend on travel and user conferences and trade show expenses. As travel restrictions are relaxed, software services and appraisal services revenues are increasing. Also, we have adapted the way we do business by encouraging web and video conferencing, conducting virtual sales demonstrations and delivering professional services remotely, which result in increases in staff utilization rates and billable time. For the twelve months ended December 31, 2021, total revenues include COVID-related subscriptions revenue and software services revenues of $75.0 million from NIC’s TourHealth, pandemic unemployment services, and Virginia rent relief offerings. We currently expect that these low margin COVID-related revenues from TourHealth and pandemic unemployment will wind down in the first half of 2022, while revenues from the Virginia rent relief program are expected to continue through 2022. Revenues from subscriptions and maintenance, which we consider recurring in nature, comprised 79.1% of our total consolidated revenue for the twelve months ended December 31, 2021, and include transaction-based revenue streams such as transaction and payment processing, e-filing, and digital government services. As of December 31, 2021, we had $407.8 million in cash and investments and available borrowing capacity of $500.0 million under our 2021 Credit Agreement. We had outstanding an aggregate principal amount of $600 million of our Convertible Senior Notes, and $755 million outstanding under our 2021 Credit Agreement as of December 31, 2021. During the fourth quarter of 2021, we completed our annual assessment of goodwill which did not result in an impairment charge. Therefore, we have recorded no impairment as of and for the period ended December 31, 2021. We identified no indicators of impairment to long-lived and other assets and therefore, no impairment was recorded as of and for the period ended December 31, 2021. However, due to significant uncertainty surrounding COVID-19 and market conditions, there are no assurances conditions will not deteriorate in the future. Recent adoption of new accounting pronouncements In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06 — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. This standard will be effective for the Company’s fiscal years beginning in the first quarter of 2022, with early adoption permitted. The Company has elected to early adopt this standard as of January 1, 2021. Our accounting and disclosures related to our Convertible Senior Notes issued on March 9, 2021, reflect the requirements of this standard. For further information, please refer to Note 6, “Debt.” In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, (“ASU 2019-12”) which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements. In October 2021, the FASB issued ASU 2021-08 — Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. Under this “Topic 606 approach,” the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. ASU 2021-08 is effective for all public business entities in annual and interim periods starting after December 15, 2022, and early adoption is permitted. We early adopted as of January 1, 2022. Adopting this standard could have a material impact on revenue associated with an acquired business. Outlook The local government software market continues to be active with sales activity trending at or near pre-pandemic levels in most sectors of our business, and our backlog at December 31, 2021 reached $1.80 billion, a 12.6% increase from the prior year. We expect to continue to achieve solid growth in revenue and earnings. With our strong financial position and cash flow, we plan to continue to make significant investments in product development and accelerating our move to the cloud to better position us to continue to expand our addressable market and strengthen our competitive position over the long term. The expenses associated with the cloud transition are expected to pressure operating margins in 2022 and 2023. 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 progress toward completion methods of revenue recognition, estimated standalone selling price (“SSP”) for distinct performance obligations, 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 earn revenue from software licenses, royalties, subscription-based services, software services, post-contract customer support (“PCS” or “maintenance”), hardware, and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps: Identification of the contract, or contracts, with a customer Identification of the performance obligations in the contract • • • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, we satisfy a performance obligation 4 0 41 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include software services, such as training or installation, are evaluated to determine whether the customer can benefit from the services either on their own or together with other resources readily available to the customer and whether the services are separately identifiable from other promises in the contract. Many of our software arrangements involve “off-the-shelf” software. We recognize the revenue allocable to “off-the-shelf” software licenses and specified upgrades at a point in time when control of the software license transfers to the customer, unless the software is not considered distinct. We consider off-the-shelf software to be distinct when it can be added to an arrangement with minor changes in the underlying code, it can be used by the customer for the customer’s purpose upon installation, and remaining services such as training are not considered highly interdependent or highly interrelated to the product’s functionality. For arrangements that involve significant production, modification or customization of the software, or where software services are otherwise not considered distinct, we recognize revenue over time by measuring progress-to-completion. We measure progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. These arrangements are often implemented over an extended 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. When software services are distinct, the fee allocable to the service element is recognized over the time we perform the services and is billed on a time and material or milestones basis. Subscription-based services consist of revenues derived from SaaS arrangements, which primarily utilize the Tyler private cloud, transaction and payment processing, electronic filing transactions, and digital government services. Revenue from subscription-based services is generally recognized over time on a ratable basis over the contract term, beginning on the date that our service is made available to the customer. For SaaS arrangements, we evaluate whether the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third-party to host the software. We allocate contract value to each performance obligation of the arrangement that qualifies for treatment as a distinct element based on estimated SSP. We recognize SaaS arrangements ratably over the terms of the arrangements, which range from one to ten years, but are typically for periods of three to five years. For software services associated with certain SaaS arrangements, we have concluded that the services are not distinct, and we recognize the revenue ratably over the remaining contractual period once we have provided the customer access to the software. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met. For transaction and payments revenue and e-filing transaction fees, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the ‘as invoiced’ practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates, additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities. We maintain allowances for losses and sales adjustments, which losses are recorded against revenue at the time the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a credit loss resulting from the inability of a client to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to, managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or enhancements of our software products. Our allowance for losses and sales adjustments of $12.1 million and $9.3 million at December 31, 2021, and December 31, 2020, respectively, does not include provisions for credit losses. As of January 1, 2020, we adopted ASU 2016-13, Financial Instruments — Credit Losses, and primarily evaluated our historical experience with credit losses related to trade and other receivables. Because we rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses. 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. We review 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 subscriptions and maintenance billings for which payments are made in advance and the revenue is ratably earned over the subscription or 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 have not been met. On a periodic basis, we review by customer the detail components of our deferred revenue to ensure our accounting remains appropriate. Business Combinations. Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information. For tangible and identifiable intangible assets acquired in a business combination, management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants. Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain new information about facts and circumstances that existed as of the closing date. If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination as well as the estimated useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations. 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, leases and goodwill. These intangible assets (other than goodwill) are amortized over their estimated useful lives. We currently have no intangible assets with indefinite lives other than goodwill. 42 4 3 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the quantitative assessment described below. When testing goodwill for impairment quantitatively, we first compare the fair value of each reporting unit with its carrying amount. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. 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 have historically performed our annual assessment of goodwill impairment as of April 1. During the second quarter of 2021, we voluntarily changed the date of our annual assessment of goodwill to October 1 for all reporting units. The change in testing date for goodwill impairment is a change in accounting principle, which management believes is preferable as the new date of the assessment better aligns with our annual planning process. The change in the assessment date did not delay or avoid a potential impairment charge nor did it change our requirement to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present. To ensure that no lapse in an assessment occurred since the prior period, we performed qualitative assessments as of April 1, for all reporting units except for the data and insights and platform technologies reporting units. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill associated with our data and insights and platform technologies reporting units as of April 1, 2021. As a result of our interim qualitative and quantitative assessments, we concluded no impairment existed. During the fourth quarter, as part of our annual impairment test as of October 1, we performed qualitative assessments for all reporting units except for recently acquired businesses. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill associated with our recently acquired businesses, data and insights, NIC, and platform technologies reporting units, and concluded no impairment existed as of our annual assessment date. The data and insights, NIC, and platform technologies business units combined goodwill was $1.6 billion, or 68%, of total goodwill as of December 31, 2021. Our annual goodwill impairment analysis did not result in an impairment charge. During 2021, we have recorded no impairment to goodwill as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end. Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Changes in market conditions or other factors outside of our control, such as the COVID-19 pandemic, could cause us to change key assumptions and our judgment about a reporting unit’s prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge. All intangible assets (other than goodwill) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of other intangible assets is 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. During 2021, we did not identify any triggering events that would indicate that the carrying amount of our intangible assets may not be recoverable. Share-Based Compensation. We have a stock incentive plan that provides for the grant of stock options, restricted stock units and performance stock units to key employees, directors and non-employee consultants. We estimate the fair value of share-based awards on the date of grant. 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 weighted-average period the stock options are expected to be outstanding based primarily on the options’ vesting terms, remaining contractual life and the employees’ expected exercise based on historical patterns. 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, 2021, 2020 and 2019. Years Ended December 31, Revenues: Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Total revenues Operating expenses: Cost of software licenses, royalties and acquired software Cost of subscriptions, software services and maintenance Cost of appraisal services Cost of hardware and other Selling, general and administrative expenses Research and development expense Amortization of customer and trade name intangibles Operating income Interest expense Other income, net Income before income taxes Income tax (benefit) provision Net income Percentage of Total Revenues 2021 2020 2019 4.6% 6.5% 9.2% 49.3 13.2 29.8 1.7 1.4 31.4 16.7 41.9 1.9 1.6 27.3 19.6 39.6 2.2 2.1 100.0 100.0 100.0 3.2 50.3 1.2 0.8 24.5 5.9 2.8 11.3 (1.5) 0.1 9.9 (0.2) 3.2 45.8 1.4 1.1 23.2 7.9 1.9 15.5 (0.1) 0.3 15.7 (1.8) 3.2 46.2 1.4 1.6 23.7 7.5 2.0 14.4 (0.2) 0.5 14.7 1.2 10.1% 17.5% 13.5% 4 4 4 5 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations 2021 Compared to 2020 Revenues Acquisitions Subscriptions. The following table sets forth a comparison of our subscriptions revenue for the years ended December 31: On April 21, 2021, we acquired NIC and as result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries. NIC is a leading digital government solutions and payment company that serves federal, state and local government agencies. The following table details revenue (in thousands) for NIC for the period from acquisition through December 31, 2021, which is included in our consolidated statements of income from the date of acquisition. The results of NIC are included with the operating results of the NIC segment from the date of acquisition. ($ in thousands) ES A&T NIC Total subscriptions revenue Change 2021 2020 $ $ 406,494 33,249 344,692 $ 326,284 24,364 — $ 80,210 8,885 344,692 $ 784,435 $ 350,648 $ 433,787 % 25% 36 100 124% Revenues: Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Total revenues Software licenses and royalties. 2021 $ — 344,692 23,665 560 — — $ 368,917 The following table sets forth a comparison of our software licenses and royalties revenue for the years ended December 31: ($ in thousands) ES A&T NIC Total software licenses and royalties revenue Change 2021 2020 $ $ 68,101 6,351 — $ 64,200 8,964 — $ 74,452 $ 73,164 $ 3,901 (2,613) — $ 1,288 % 6% (29) — 2% Software licenses and royalties revenue increased 2% compared to the prior year. The growth is primarily attributed to several large on-premise sales of our courts and justice, enterprise, and platform technologies solutions partially offset by the shift in the mix of new software contracts toward more subscription-based agreements compared to the prior year. Our mix of new software contracts in 2021 was approximately 33% perpetual software license arrangements and approximately 67% subscription-based arrangements compared to total new client mix in 2020 of approximately 38% perpetual software license arrangements and approximately 62% subscription- based arrangements. Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our longer-term software license growth rate to be negatively impacted by a growing number of customers choosing our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-based arrangements result in lower software license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract. Subscription-based revenue primarily consists of revenue derived from our SaaS arrangements. As part of our subscription-based services, we also provide electronic document filing solutions (“e-filing”) that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements. Other sources of subscription-based services are derived from transaction-based fees primarily related to digital government services and payment processing. Subscription-based revenue increased 124% compared to 2020, primarily due to the inclusion of NIC’s revenues from the date of acquisition. Excluding the impact of revenue from 2021 acquisitions of $351.7 million, subscriptions revenue increased 23.4%. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscription revenue increase. In 2021, we added 533 new SaaS clients and 239 existing clients elected to convert to our SaaS model. Also, transaction-based fees contributed $19.1 million to the increase in subscription revenue due to the increased volumes of online payments and slightly increased e-filing services volumes in 2021. Software services. The following table sets forth a comparison of our software services revenue for the years ended December 31: ($ in thousands) 2021 2020 $ ES A&T NIC Total software services revenue $ 167,065 18,661 23,665 $ 164,520 21,889 — $ 209,391 $ 186,409 $ 2,545 (3,228) 23,665 $ 22,982 % 2% (15) 100 12% Change Software services revenue primarily consists of professional services billed in connection with implementing our software, converting client data, training client personnel, custom development activities and consulting. New clients who purchase our proprietary software licenses or subscriptions generally also contract with us to provide for the related software services. Existing clients also periodically purchase additional training, consulting and minor programming services. Software services revenue increased 12% compared to the prior year period, primarily due to the inclusion of NIC’s revenues from the date of acquisition. Excluding the impact of revenue from 2021 acquisitions of $23.8 million, software services revenue declined 0.5%. The decline in software services revenue is primarily attributed to a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site. Also contributing to the decline is the increase of clients selecting our cloud solutions instead of our on-premises license arrangements which typically require more professional services. 4 6 47 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations Maintenance. The following table sets forth a comparison of gross margin percentage by revenue type for the years ended December 31: The following table sets forth a comparison of our maintenance revenue for the years ended December 31: ($ in thousands) 2021 2020 $ Change ES A&T NIC Total maintenance revenue $ 438,726 35,001 560 $ 429,224 38,289 — $ 9,502 (3,288) 560 $ 474,287 $ 467,513 $ 6,774 % 2% (9) 100 1% We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue was essentially flat and grew 1% compared to the prior year. Maintenance revenue increased mainly due to contributions of maintenance revenue from recent acquisitions and completing the recognition of the majority of acquisition-related deferred maintenance revenue that was fair valued at rates below Tyler’s average maintenance rate in prior periods. The remainder of the increase is attributed to annual maintenance rate increases and growth in our installed customer base from new software license sales, offset by attrition, the impact of customers selecting our SaaS solutions instead of on-premises solutions, and clients converting from on-premises license arrangements to subscriptions. Appraisal services. The following table sets forth a comparison of our appraisal services revenue for the years ended December 31: ($ in thousands) ES A&T NIC Total appraisal services revenue Change 2021 2020 $ $ — 27,788 — $ — 21,127 — $ 27,788 $ 21,127 $ — 6,661 — $ 6,661 % —% 32 — 32% In 2021, appraisal services revenue increased 32% compared to the prior year primarily due to relaxed travel restrictions allowing for the ramp-up of appraisal services for several new revaluation contracts which started in recent quarters. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states. Cost of Revenues and Gross Margins The following table sets forth a comparison of the key components of our cost of revenues for the years ended December 31: ($ in thousands) Software licenses and royalties Acquired software Subscriptions, software services and maintenance Appraisal services Hardware and other Total cost of revenues Change 2021 2020 $ $ 5,877 $ 3,339 $ 2,538 45,601 799,158 19,061 12,946 31,962 510,504 15,945 12,401 13,639 288,654 3,116 545 % 76% 43 57 20 4 $ 882,643 $ 574,151 $ 308,492 54% Gross margin percentage Software licenses, royalties and acquired software Subscriptions, software services and maintenance Appraisal services Hardware and other Overall gross margin 2021 2020 Change 30.9% 51.8% (20.9)% 45.6 31.4 41.0 49.2 24.5 30.3 (3.6) 6.9 10.7 44.6% 48.6% (4.0)% Software licenses, royalties and acquired software. Cost of software licenses, royalties and acquired software is primarily comprised of amortization expense for acquired software and third-party software costs. We do not have any direct costs associated with royalties. The gross margin decrease of 20.9% is due to the increased amortization expense related to acquired software from acquisitions completed in 2021. Subscriptions, software services and maintenance. Cost of subscriptions, software services and maintenance primarily consists of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities and various other services such as custom client development, on-going operation of SaaS, digital government, and other transaction-based services such as e-filing. Other costs included are interchange fees required to process credit/debit card transactions and bank fees to process automated clearinghouse transactions related to our payments business. In 2021, the subscriptions, software services and maintenance gross margin declined 3.6% compared to the prior year primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from 2021 acquisitions, gross margin was 49.0% in 2021, a decrease of 0.2%, primarily due to higher employee headcount. Our implementation and support staff grew by 125 employees since December 31, 2020, as we increased hiring to ensure that we are well-positioned to deliver our current backlog and anticipated new business. The decline in margin is partially offset by improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation services. Appraisal services. Appraisal services revenue comprised approximately 1.7% of total revenue. The appraisal services gross margin increase of 6.9% compared to 2020 is primarily due to ramping of several new revaluation projects and cost savings attributed to lower travel expenses associated with appraisal projects. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states. Gross Margin. Our 2021 blended gross margin decreased 4.0% compared to 2020, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from 2021 acquisitions, overall gross margin was 48.5% in the current year period. The slight decrease of 0.1% in overall gross margin is attributed to increased amortization expense related to acquired software from recent acquisitions, partially offset by a reduction in software services revenue from reimbursable travel that has little to no margin, as well as improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation 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 costs. The following table sets forth a comparison of our SG&A expenses for the years ended December 31: ($ in thousands) 2021 2020 $ % Selling, general and administrative expenses $ 390,579 $ 259,561 $ 131,018 50% Change 4 8 49 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations SG&A as a percentage of revenue was 24.5% in 2021 compared to 23.2% in 2020. SG&A expense increased approximately 50% compared to the prior year period, primarily due to the inclusion NIC’s SG&A expenses. Excluding the impact of SG&A expense from 2021 acquisitions of $49.1 million, SG&A increased 31.6% compared to prior year periods. The increase in SG&A is attributed to transaction costs related to recent acquisitions, higher stock compensation expense, higher bonus and commission expense due to improved operating results and other administrative expenses compared to prior periods. In 2021, SG&A includes $23.5 million of transaction expenses related to acquisitions completed in 2021. We also incurred $1.6 million of expense related to a separation agreement with NIC’s former Chief Executive Officer. During 2021, stock compensation expense rose $31.8 million compared to prior periods, primarily due to an increase in share-based awards issued in connection with our stock compensation plan coupled with the higher fair value of each share-based award due to the increase in our stock price. SG&A expense also included $3.2 million related to an accrual for litigation. Research and Development Expense Research and development expense consists primarily of salaries, employee benefits and related overhead costs associated with new product development. The following table sets forth a comparison of our research and development expense for the years ended December 31: ($ in thousands) 2021 2020 $ Research and development expense $ 93,481 $ 88,363 $ 5,118 % 6% Change Research and development expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue. Research and development expense increased 6% in 2021 compared to the prior year period, mainly due to a number of new Tyler product development initiatives across our product suites, including increased investments in research and development at recently acquired businesses. To support these initiatives, our research and development staff grew by 107 since December 31, 2020. 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, leases 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 operating expense. The estimated useful lives of both customer and trade name intangibles range from five to 25 years. The following table sets forth a comparison of amortization of customer and trade name intangibles for the years ended December 31: Estimated annual amortization expense relating to customer, trade name, and lease acquisition intangibles, excluding acquired software for which the amortization expense is recorded as cost of revenues, for the next five years and thereafter is as follows (in thousands): 2022 2023 2024 2025 2026 Thereafter Interest Expense $ 55,044 54,971 54,421 53,769 52,801 556,138 The following table sets forth a comparison of interest expense for the years ended December 31: ($ in thousands) Interest expense Change 2021 2020 $ % $ (23,298) $ (1,013) $ (22,285) 2,200% Interest expense is primarily comprised of interest expense and commitment and other fees associated with our borrowings. The change in interest expense compared to the prior period is attributable to higher levels of borrowings related to the 2021 Credit Agreement and Convertible Senior Notes, including $6.4 million related to the senior unsecured bridge loan facility commitment fee in 2021. Other Income, Net The following table sets forth a comparison of other income, net for the years ended December 31: ($ in thousands) Other income, net Change 2021 2020 $ % $ 1,544 $ 3,129 $ (1,585) (51)% Other income is comprised of interest income from invested cash. The decrease in other income, net compared to the prior period is attributable to the significant decrease in interest rates on invested cash balances since March 2020, partially offset by higher levels of invested cash. Income Tax Provision ($ in thousands) 2021 2020 $ % Amortization of customer and trade name intangibles $ 44,849 $ 21,662 $ 23,187 107% Amortization of customer and trade name intangibles increased due to the impact of intangibles added with several acquisitions completed in 2021. ($ in thousands) Income tax (benefit) provision Effective income tax rate Change 2021 2020 $ % $ (2,477) $ (19,778) $ 17,301 (87)% (1.6)% (11.3)% Change The following table sets forth a comparison of our income tax provision for the years ended December 31: The increase in the income tax provision and the effective income tax rate in 2021 compared to the prior year is primarily due to a decrease in excess tax benefits from share-based compensation in 2021. The share-based exercise and vesting activity in 2021 generated $47.7 million of excess tax benefits, while exercise and vesting activity in 2020 generated $60.2 million of excess tax benefits. Excluding the impact of the excess tax benefits, our income tax provision and effective tax rate in 2021 would have been $45.2 million and 28.4% and in 2020, would have been $40.4 million and 23.1%, respectively. The effective income tax rates in both 2021 and 2020 differed from the United States federal statutory corporate income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards, the tax benefit of research tax credits and the release of reserves for unrecognized income tax benefits resulting from expiration of the statutes of limitations for certain tax years, offset by state income taxes and non-deductible business expenses. 5 0 51 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION AND LIQUIDITY As of December 31, 2021, we had cash and cash equivalents of $309.2 million compared to $603.6 million at December 31, 2020. We also had $98.7 million invested in investment grade corporate bonds, municipal bonds and asset-backed securities as of December 31, 2021, compared to $154.8 million at December 31, 2020. These investments mature from 2022 through 2027. During the fourth quarter, Management determined that our investment portfolio would no longer be held to maturity. The impact to the financial statements in the current year is not material. Cash and cash equivalents consist of cash on deposit with several domestic banks and money market funds. As of December 31, 2021, we had $748.5 million outstanding borrowings under our 2021 Credit Agreement and one outstanding letter of credit totaling $2.0 million in favor of a client contract. We believe our cash on hand, cash from operating activities, availability under our revolving line of credit, and access to the credit markets provide us with sufficient flexibility to meet our long-term financial needs. The following table sets forth a summary of cash flows for the years ended December 31: ($ in thousands) Cash flows provided (used) by: Operating activities Investing activities Financing activities Net (decrease) increase in cash and cash equivalents 2021 2020 2019 $ 371,753 $ 355,089 $ 254,720 (2,090,935) 1,424,730 (98,320) 114,172 (245,015) 88,698 $ (294,452) $ 370,941 $ 98,403 Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other potential capital resources include cash on hand, public and private issuances of debt or equity securities, and bank borrowings. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors. We currently believe that our cash on hand, cash provided by operating activities, and available credit are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, and share repurchases for at least the next twelve months. In 2021, operating activities provided cash of $371.8 million compared to $355.1 million in 2020. Operating activities that provided cash were primarily comprised of net income of $161.5 million, non-cash depreciation and amortization charges of $135.6 million, non-cash share- based compensation expense of $104.7 million and non-cash decrease in operating lease right-of-use assets of $10.2 million. Working capital, excluding cash, decreased approximately $43.1 million due to mainly due to timing of payments to and receipts from our government partners and end-user consumers, timing of prepaid expenses, timing of payments of payroll related taxes and vendor invoices, and deferred taxes associated with stock option activity during the period. These increases were offset by the timing of tax payments and an increase in deferred revenue during the period. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings. Our renewal dates occur throughout the year, but our largest renewal billing cycles occur in the second and fourth quarters. In addition, subscription renewals are billed throughout the year. Days sales outstanding in accounts receivable were 108 days at December 31, 2021, compared to 121 days at December 31, 2020. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days. The decrease in DSO compared to December 31, 2020, is attributed to improved collection efforts and a reduction in unbilled receivables related to contracts under which revenue is being recognized on the percentage of completion basis. Investing activities used cash of $2.1 billion in 2021 compared to $98.3 million in 2020. We invested $77.5 million and received $131.4 million in proceeds from investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates ranging from 2022 through 2027. On March 31, 2021, we completed two acquisitions with the total purchase price, net of cash acquired, of $12.1 million paid in cash. On April 21, 2021, we completed the acquisition of NIC for the total purchase price of $2.0 billion, net of cash acquired of $331.8 million, including cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards. On September 1, 2021, we acquired VendEngine for the total purchase price, net of cash acquired of $1.7 million, of approximately $83.8 million consisting of $80.2 million paid in cash and approximately $5.4 million related to indemnity holdbacks, subject to certain post- closing adjustments. On September 9, 2021, we acquired all of the equity interest of Arx for the total purchase price, net of cash acquired, of approximately $12.8 million, of which $12.3 million was paid in cash and approximately $0.5 million was accrued for indemnity holdbacks. Approximately $33.9 million was invested in property and equipment, including $12.8 million related to real estate. In addition, approximately $21.7 million of software development was capitalized in 2021. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, with the majority associated with our data centers supporting growth in our cloud-based offerings. These expenditures were funded from cash generated from operations. Investing activities used cash of $98.3 million in 2020. We invested $156.6 million and received $82.7 million in proceeds from investment grade corporate bonds, municipal bonds and asset-backed securities. During 2020, we received $15.0 million in proceeds from the sale of the investment in convertible preferred stock representing a 20% interest in Record Holdings to BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V.L.P. During the same period, we purchased $10.0 million in common stock representing a 18% interest in BFTR, LLC. We paid $1.3 million in working capital and indemnity holdbacks in connection with the 2019 acquisition of Courthouse Technologies, Ltd. Approximately $22.7 million was invested in property and equipment, including $9.9 million related to real estate. In addition, approximately $5.8 million of software development was capitalized in 2020. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings. These expenditures were funded from cash generated from operations. Financing activities provided cash of $1.4 billion in 2021 compared to $114.2 million in 2020. Financing activities in 2021 were primarily comprised of proceeds from the issuance of the Convertible Senior Notes and the 2021 Credit Agreement. On March 9, 2021, we issued $600 million aggregate principal amount of Convertible Senior Notes. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million. On April 21, 2021, in connection with the completion of the NIC acquisition, the Company, as borrower, entered into a new 2021 Credit Agreement with various lenders consisting of an unsecured revolving credit facility of up to $500 million and unsecured term loans totaling $900 million. The net proceeds from the borrowings under the 2021 Credit Agreement were $1.1 billion, net of debt discounts of $7.2 million and debt issuance costs of $4.9 million and $6.4 million of commitment fees paid related to the terminated $1.6 billion unsecured bridge loan facility. During the twelve months ended December 31, 2021, we repaid $250.0 million of the unsecured revolving credit facility and $145.0 million of the unsecured term loans. The remainder of the financing activities comprised of receipts of $109.9 million from stock option exercises and employee stock purchase plan activity. We also purchased approximately 33,000 shares of our common stock for an aggregate purchase price of $13.0 million. Financing activities provided cash of $114.2 million in 2020. Financing activities in 2020 were primarily comprised of receipts of $135.3 million from stock option exercises and employee stock purchase plan activity. We also purchased approximately 59,000 shares of our common stock for an aggregate purchase price of $15.5 million. In February 2019, our board of directors authorized the repurchase of an additional 1.5 million shares of Tyler common stock. The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended at various times from 2003 through 2019. As of February 23, 2022, we had remaining authorization to repurchase up to 2.4 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions influence the timing of the buybacks and the number of shares repurchased, as well as the volume of employee stock option exercises. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time. As of December 31, 2021, we had $755.0 million in outstanding principal and available borrowing capacity of $500 million under our 2021 Credit Agreement and an aggregate principal amount of $600 million of our Convertible Senior Notes. We paid interest of $17.7 million, including $6.4 million related to the senior unsecured bridge loan facility commitment fee in 2021, $0.6 million in 2020, and $1.8 million in 2019. See Note 6, “Debt,” to the Consolidated Financial Statements for discussions of the Convertible Senior Notes and the 2021 Credit Agreement. 52 5 3 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations We paid income taxes, net of refunds received, of $2.2 million in 2021, $3.3 million in 2020, and $21.3 million in 2019. In 2021, we experienced significant stock option exercise activity that generated net tax benefits of $47.7 million and reduced tax payments accordingly. In 2020 and 2019, excess tax benefits were $60.2 million and $29.8 million, respectively. We anticipate that 2022 capital spending will be between $65 million and $70 million, including approximately $7 million related to real estate and approximately $36 million of capitalized software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending 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 for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements and they expire from one year to 10 years. Some of these leases include options to extend for up to 10 years. CAPITALIZATION At December 31, 2021, our capitalization consisted of $1.3 billion of outstanding debt and $2.3 billion of shareholders’ equity. 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. As of December 31, 2021, we had $755.0 million in outstanding principal under our 2021 Credit Agreement and available borrowing capacity under the 2021 Credit Agreement was $500.0 million. Borrowings under the Revolving Credit Facility and the Term Loan A-1 will bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 will bear interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, or six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%. During the year ended December 31, 2021 our effective average interest rate for our borrowings was 1.84%. As of December 31, 2021, our interest rate was 1.55% for our outstanding borrowings. Based on the debt under the 2021 Credit Agreement, the aggregate outstanding principal as of December 31, 2021 is $755.0 million, and each quarter point change in interest rates would result in a $1.9 million change in annual interest expense. CONTROLS AND PROCEDURES. 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, 2021. 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, 2021. 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, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on our assessment, we concluded that, as of December 31, 2021, Tyler’s internal control over financial reporting was effective based on those criteria. Tyler’s internal control over financial reporting as of December 31, 2021, 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 58 hereof. Changes in Internal Control Over Financial Reporting — During the quarter ended December 31, 2021, there were no changes in our internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f), that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 5 4 5 5 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Tyler Technologies, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill impairment tests Description of the Matter As of December 31, 2021, the Company’s goodwill asset balance of $2.4 billion was attributable to multiple reporting units. As disclosed in Note 1 to the consolidated financial statements, goodwill is assessed annually for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. If it is determined through the evaluation of events or circumstances that the carrying value may not be recoverable, the Company performs a quantitative analysis comparing an estimated fair value of the reporting unit to its carrying value. Auditing management’s quantitative analyses for goodwill impairment was complex and highly judgmental due to the significant judgement required to determine the fair value of these reporting units. In particular, the Company’s fair value estimates for these reporting units were sensitive to significant assumptions, such as weighted average cost of capital and revenue growth rates, which are forward looking and affected by expectations about future market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s review process for quantitative goodwill impairment assessments, including controls over management’s review of the significant assumptions described above. To test the estimated fair value of the applicable reporting units, we performed audit procedures that included, among others, assessing the methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analyses. We evaluated management’s forecasted revenue to identify, understand and evaluate changes as compared to historical results and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. We also involved internal valuation specialists to assist in evaluating management’s methodologies and significant assumptions applied in developing the fair value estimates. Valuation of Acquired Intangible Assets in a Business Combination Description of the Matter As described in Note 2 to the consolidated financial statements, the Company acquired NIC, Inc. (NIC) during 2021 for a total purchase price, net of cash acquired of $2.0 billion. The transaction was accounted for as a business combination. Auditing the Company’s accounting for its acquisition of NIC was complex due to the significant size of the transaction and the estimation uncertainty in the Company’s determination of the fair value of identified intangible assets related to customer relationships and developed technology which aggregated to $777 million. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the significant underlying assumptions required in the valuation models used to value the intangible assets and the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company valued customer relationships using a discounted cash flow model. The significant assumptions used in this model included the customer attrition rate, weighted average cost of capital, existing customer revenue growth and operating margins. The Company valued the developed technology using the relief-from-royalty method. The significant assumptions used in this method included the royalty rate, obsolescence rate and weighted average cost of capital. These are forward looking assumptions which are affected by expectations about future market or economic conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over its accounting for the valuation of these intangible assets. For example, we tested controls over the Company’s process to identify and value acquired intangible assets as well as controls over management’s review of the valuation models and the significant assumptions described above used to develop such estimates. To test the estimated fair values of the acquired customer relationships and developed technology, we performed audit procedures that included, among others, evaluating the Company’s selection of the valuation methodologies, evaluating the significant assumptions used in the Company’s valuation calculations and testing the completeness and accuracy of the underlying data supporting the significant assumptions. We involved our valuation specialists to assist with our evaluation of the methodologies used by the Company and significant assumptions included in the fair value estimates. Additionally, we performed sensitivity analyses and compared significant assumptions to forecasts and to historical financial results of both the Company and the acquiree, among other procedures. We have served as the Company’s auditor since 1966. Dallas, Texas February 23, 2022 5 6 5 7 Report of Independent Registered Public Accounting Firm Consolidated Statements of Comprehensive Income To the Shareholders and the Board of Directors of Tyler Technologies, Inc. Opinion on Internal Control over Financial Reporting We have audited Tyler Technologies, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Tyler Technologies, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 23, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’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 Management’s 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control Over Financial Reporting 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. For the years ended December 31, (In thousands, except per share amounts) Revenues: Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Total revenues Cost of revenues: Software licenses and royalties Acquired software Subscriptions, software services and maintenance 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 Operating income Interest expense Other income, net Income before income taxes Income tax (benefit) provision Net income Earnings per common share: Basic Diluted See accompanying notes. Dallas, Texas February 23, 2022 5 8 2021 2020 2019 $ 74,452 $ 73,164 $ 100,205 784,435 209,391 474,287 27,788 21,934 350,648 186,409 467,513 21,127 17,802 296,352 213,061 430,318 23,479 23,012 1,592,287 1,116,663 1,086,427 5,877 45,601 3,339 31,962 799,158 510,504 19,061 12,946 15,945 12,401 882,643 574,151 3,938 30,642 502,138 15,337 17,472 569,527 709,644 542,512 516,900 390,579 259,561 93,481 44,849 88,363 21,662 257,746 81,342 21,445 180,735 172,926 156,367 (23,298) 1,544 158,981 (2,477) (1,013) 3,129 175,042 (19,778) (2,027) 5,498 159,838 13,311 $ 161,458 $ 194,820 $ 146,527 $ $ 3.95 3.82 $ $ 4.87 4.69 $ $ 3.79 3.65 59 Consolidated Balance Sheets December 31, (In thousands, except par value and share amounts) ASSETS Current assets: Cash and cash equivalents Accounts receivable (less allowance for losses and sales adjustments of $12,086 in 2021 and $9,255 in 2020) Short-term investments Prepaid expenses Income tax receivable Other current assets Total current assets Accounts receivable, long-term Operating lease right-of-use assets Property and equipment, net Other assets: Software development costs, net Goodwill Other intangibles, net Non-current investments Other non-current assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities Operating lease liabilities Deferred revenue Current portion of term loans Total current liabilities Revolving line of credit Term loans, net Convertible senior notes due 2026, net Deferred revenue, long-term Deferred income taxes Operating lease liabilities, long-term Other long-term liabilities Commitments and contingencies Total liabilities 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 2021 and 2020 Additional paid-in capital Accumulated other comprehensive loss, net of tax Retained earnings Treasury stock, at cost; 6,832,640 and 7,608,627 shares in 2021 and 2020, respectively Total shareholders’ equity See accompanying notes. 6 0 2021 2020 For the years ended December 31, 2021 2020 2019 Consolidated Statements of Cash Flows $ 309,171 521,059 $ 603,623 382,319 52,300 55,513 18,137 8,151 72,187 30,864 21,598 2,479 (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization Share-based compensation expense Provision for losses and sales adjustments – accounts receivable Operating lease right-of-use assets – non cash Deferred income tax benefit 964,331 1,113,070 Changes in operating assets and liabilities, exclusive of effects of acquired companies: 13,937 39,720 21,417 18,734 181,193 168,004 28,489 2,359,674 1,052,493 46,353 45,971 9,121 838,428 322,068 82,640 33,792 $ 4,732,161 $ 2,607,274 $ 119,988 158,424 10,560 510,529 30,000 829,501 — 718,511 592,765 38 228,085 36,336 2,893 — $ 14,011 83,084 5,904 461,278 — 564,277 — — — 100 40,507 16,279 — — 2,408,129 621,163 — 481 — 481 1,075,650 905,332 (46) 1,273,614 (25,667) 2,324,032 (46) 1,112,156 (31,812) 1,986,111 $ 4,732,161 $ 2,607,274 Accounts receivable Income tax receivable Prepaid expenses and other current assets Accounts payable Operating lease liabilities Accrued liabilities Deferred revenue Increase in other long-term liabilities Net cash provided by operating activities Cash flows from investing activities: Additions to property and equipment Purchase of marketable security investments Proceeds from marketable security investments Purchase of investment in common shares Proceeds from the sale of investment in preferred shares Investment in software Cost of acquisitions, net of cash acquired Other Net cash used by investing activities Cash flows from financing activities: Net borrowings on revolving credit facility Payment on term loans Proceeds from term loans Proceeds from issuance of convertible senior notes Payment of debt issuance costs Purchase of treasury shares Payment of contingent consideration Proceeds from exercise of stock options Contributions from employee stock purchase plan Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See accompanying notes. $ 161,458 $ 194,820 $ 146,527 135,624 104,726 2,831 10,216 (13,271) 17,608 10,258 (23,863) (44,947) (6,952) (24,822) 44,874 (1,987) 81,657 67,365 3,517 5,782 (7,936) (10,733) (15,117) (8,304) (967) (6,549) 2,870 76,672 59,967 1,636 5,397 (6,088) (65,738) (1,925) (8,976) 7,403 (6,113) 1,516 48,684 44,442 — — 371,753 355,089 254,720 (33,919) (77,450) 131,449 — — (21,693) (2,089,706) 384 (22,690) (156,618) 82,742 (10,000) 15,000 (5,776) (1,292) 314 (37,236) (54,742) 70,796 — — (4,804) (218,734) (295) (2,090,935) (98,320) (245,015) — (145,000) 900,000 600,000 (27,165) (12,977) — 96,714 13,158 1,424,730 (294,452) 603,623 — — — — — (15,484) (5,619) 124,363 10,912 114,172 370,941 232,682 — — — — — (17,786) — 96,908 9,576 88,698 98,403 134,279 $ 309,171 $ 603,623 $ 232,682 61 Consolidated Statements of Shareholders’ Equity Notes to Consolidated Financial Statements For the years ended December 31, 2021, 2020, and 2019 (Tables in thousands, except per share data) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Shares Amount Total Shareholders’ Equity (In thousands) Balance at December 31, 2018 48,148 Net income Retained earnings adjustment-adoption of Topic 842 Leases, net of taxes Issuance of shares pursuant to stock compensation plan Employee taxes paid for withheld shares upon equity award settlement Stock compensation Issuance of shares pursuant to employee stock purchase plan Treasury stock purchases — — — — — — — Balance at December 31, 2019 48,148 Net income Exercise of stock options and vesting of restricted stock units Employee taxes paid for withheld shares upon equity award settlement Stock compensation Issuance of shares pursuant to employee stock purchase plan Treasury stock purchases — — — — — — Balance at December 31, 2020 48,148 Net income Exercise of stock options and vesting of restricted stock units Employee taxes paid for withheld shares upon equity award settlement Stock compensation Issuance of shares pursuant to employee stock purchase plan Treasury stock purchases Purchase consideration for conversion of unvested restricted stock awards — — — — — — — Balance at December 31, 2021 48,148 See accompanying notes. $ 481 — — $ 731,435 $ (46) $ 771,925 (9,872) $ (178,949) $ 1,324,846 — — — 146,527 — (1,116) — — — — 146,527 (1,116) — (52,833) — — 1,075 149,741 96,908 — — — — 481 — — — — — — 481 — — — — — — — $ 481 90,636 — — 1,283 33,727 124,363 — 59,967 909 — 739,478 — — — — — (46) — — 67,365 7,853 — 905,332 — — — — — (46) — 50,831 — — 104,726 12,889 — — — — — 1,872 — — — — — (23) — 53 (72) (5,361) — (5,361) 59,967 8,667 (14,289) 9,576 (14,289) 1,617,058 194,820 917,336 (8,839) (40,191) 194,820 — — — — — — (34) — 40 (59) (12,923) — (12,923) 67,365 3,059 (15,484) 10,912 (15,484) 1,986,111 161,458 1,112,156 (7,609) (31,812) 161,458 — — — — — — — — 832 45,883 96,714 (58) — 35 (33) — (27,030) (27,030) — 104,726 269 (12,977) 13,158 (12,977) — 1,872 $ 1,075,650 $ (46) $ 1,273,614 (6,833) $ (25,667) 2,324,032 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS We provide integrated software systems and related services for the public sector. We develop and market a broad line of software solutions and services to address the information technology (“IT”) needs primarily of cities, counties, states, schools, federal agencies, and other 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 software as a service (“SaaS”) arrangements, digital government services, payment processing, and electronic document filing (“e-filing”) solutions. In addition, we provide property appraisal outsourcing services for taxing jurisdictions. On April 21, 2021, we acquired NIC, Inc. (“NIC”) as contemplated by the Agreement and Plan of Merger dated February 9, 2021. NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office. NIC digital government services designs, builds, and operates digital government services on an enterprise-wide basis on behalf of state and local governments desiring to provide access to government information and to complete secure government-based transactions through multiple digital channels. These digital government services consist of websites and applications NIC has built that allow consumers, such as businesses and citizens, to access government information, complete transactions and make electronic payments. NIC also provides payment processing services, software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments. The results of NIC are include in consolidated financial statements since the date of acquisition. See Note 2, “Acquisitions,” for further information. Impacts of the COVID-19 Pandemic Although market activity improved throughout 2021 in most sectors of our business and continues to trend to near or above pre-pandemic levels, the pandemic continues to delay some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue. We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations. For the twelve months ended December 31, 2021, excluding the impact of 2021 acquisitions, the impact of the COVID-19 pandemic resulted in lower revenues from software services. Software services revenues have been affected by a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site. Lower revenues compared to prior periods were partially offset by continued cost savings attributed to lower spend on travel and user conferences and trade show expenses. As travel restrictions are relaxed, software services and appraisal services revenues are increasing. Also, we have adapted the way we do business by encouraging web and video conferencing, conducting virtual sales demonstrations and delivering professional services remotely, which result in increases in staff utilization rates and billable time. For the twelve months ended December 31, 2021, total revenues include COVID-related subscriptions revenue and software services revenues of $75.0 million from NIC’s TourHealth, pandemic unemployment services, and Virginia rent relief offerings. We currently expect that these low margin COVID-related revenues from TourHealth and pandemic unemployment will wind down in the first half of 2022, while revenues from the Virginia rent relief program are expected to continue through 2022. Revenues from subscriptions and maintenance, which we consider recurring in nature, comprised 79% of our total consolidated revenue for the twelve months ended December 31, 2021, and include transaction-based revenue streams such as digital government services, payment processing, and e-filing. As of December 31, 2021, we had $407.8 million in cash and investments and available borrowing capacity of $500.0 million under our 2021 Credit Agreement. We had an aggregate principal amount of $600 million of our Convertible Senior Notes outstanding, and $755 million under our 2021 Credit Agreement as of December 31, 2021. During the fourth quarter of 2021, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, we identified no indicators of impairment to long- lived and other assets and therefore, no impairment was recorded as of and for the period ended December 31, 2021. However, due to significant uncertainty surrounding COVID-19 and market conditions, there are no assurances conditions will not deteriorate in the future. 62 6 3 PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our parent company and 60 subsidiaries, which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and includes all components of net income and other comprehensive income. We did not have material items of other comprehensive income during the years ended December 31, 2021, 2020, and 2019. 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 cash on deposit with several banks and money market funds. Cash and cash equivalents are stated at cost, which approximates market value. REVENUE RECOGNITION Nature of Products and Services We earn revenue from software licenses, royalties, subscription-based services, software services, post-contract customer support (“PCS” or “maintenance”), hardware and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps: Identification of the contract, or contracts, with a customer Identification of the performance obligations in the contract • • • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, we satisfy a performance obligation Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities. Software Arrangements: Software Licenses and Royalties Many of our software arrangements involve “off-the-shelf” software. We recognize the revenue allocable to “off-the-shelf” software licenses and specified upgrades at a point in time when control of the software license transfers to the customer, unless the software is not considered distinct. We consider “off-the-shelf” software to be distinct when it can be added to an arrangement with minor changes in the underlying code, it can be used by the customer for the customer’s purpose upon installation, and remaining services such as training are not considered highly interdependent or interrelated to the product’s functionality. For arrangements that involve significant production, modification or customization of the software, or where software services are otherwise not considered distinct, we recognize revenue over time by measuring progress-to-completion. We measure progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. These arrangements are often implemented over an extended 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. Software license fees are billed in accordance with the contract terms. Typically, a majority of the fee is due when access to the software license is made available to the customer and the remainder of the fee due over a passage of time stipulated by the contract. 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. We recognize royalty revenue when the sale occurs under the terms of our third-party royalty arrangements. Currently, our third-party royalties are recognized on an estimated basis and adjusted if needed, when we receive notice of amounts we are entitled to receive. We typically receive notice of royalty revenues we are entitled to and billed on a quarterly basis in the quarter immediately following the royalty reporting period. Software Services As noted above, some of our software arrangements include services considered highly interdependent or highly interrelated or require significant customization to meet the customer’s desired functionality. For these software arrangements, both the software licenses and related software services revenue are not distinct and are recognized over time using the progress-to-completion method. We measure progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Contract fees are typically billed on a milestone basis as defined within contract terms. 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. When software services are distinct, the fee allocable to the service element is recognized over the time we perform the services and is billed on a time and material basis. Post-Contract Customer Support Our customers generally enter into PCS agreements when they purchase our software licenses. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. PCS is considered distinct when purchased with our software licenses. Our PCS agreements are typically renewable annually. PCS is recognized over time on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred. Computer Hardware Equipment Revenue allocable to computer hardware equipment is recognized at a point in time when control of the equipment is transferred to the customer. Subscription-Based Services: Subscription-based services consist primarily of revenues derived from SaaS arrangements, typically utilizing the Tyler private cloud, digital government services, payment processing, and e-filing. For SaaS arrangements, we evaluate whether the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third-party to host the software. We allocate contract value to each performance obligation of the arrangement that qualifies for treatment as a distinct element based on estimated SSP. We recognize SaaS services ratably over the term of the arrangement, which range from one to ten years, but are typically for a period of three to five years. For software services associated with certain SaaS arrangements, we have concluded that the services are not distinct, and we recognize the revenue ratably over the remaining contractual period once we have provided the customer access to the software. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met. 6 4 6 5 Notes to Consolidated Financial StatementsNotes to Consolidated Financial StatementsTransaction-based fees primarily relate to digital government services and online payment services, which are sometimes offered with the assistance of third-party vendors. In general, when we are the principal in a transaction, we record the revenue and related costs on a gross basis. Otherwise, we net the cost of revenue associated with the service against the gross revenue (amount billed to the customer) and record the net amount as revenue. E-filing transaction fees primarily pertain to documents filed with the courts by attorneys and other third-parties via our e-filing services and retrieval of filed documents via our access services. For each document filed with a court, the filer generally pays a transaction fee and a court filing fee to us and we remit a portion of the transaction fee and the filing fee to the court. We record as revenue the transaction fee, while the portion of the transaction fee remitted to the courts is recorded as cost of revenues as we are acting as a principal in the arrangement. Court filing fees collected on behalf of the courts and remitted to the courts are recorded on a net basis and thus do not affect the statement of comprehensive income. For e-filing transaction fees and transaction-based revenues from digital government services and online payments, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates, additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable. Costs of performing services under subscription-based arrangements are expensed as incurred, except for certain direct and incremental contract origination and set-up costs associated with SaaS arrangements. Such direct and incremental costs are capitalized and amortized ratably over the useful life. Appraisal Services: For our property appraisal projects, we recognize revenue using the progress-to-completion method since many of these projects are executed over one to three-year periods and consist of various unique activities. Appraisal services require a significant level of integration and interdependency with various individual service components; therefore, the service components are not considered distinct. Appraisal services are recognized over time by measuring progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. These arrangements are often executed over an extended 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. Contract fees are typically billed on a milestone basis as defined within contract terms. 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. Significant Judgments: Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software services and recognized over time. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach. For arrangements that involve significant production, modification or customization of the software, or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress- to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide 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 margin 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. Refer to Note 16 — “Disaggregation of Revenue” for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories. Contract Balances: Accounts receivable and allowance for losses and sales adjustments Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses. In connection with our appraisal services contracts and certain software services contracts, we may perform work prior to when the software and services are billable and/or payable pursuant to the contract. 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 value of products delivered or services performed in the event of early termination. 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 progress-to-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 normally occurs subsequently and may span another accounting period; (2) software services contracts accounted for using progress-to-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 recognized revenue at the point in time when the software is made available to the customer but the billing has not yet been submitted to the customer; (4) some of our contracts which provide for an amount to be withheld from a progress billing (generally between 5% and 15% retention) until final and satisfactory project completion is achieved; and (5) in a limited number of cases, extended payment terms, which may be granted to customers with whom we generally have a long-term relationship and favorable collection history. As of December 31, 2021, and December 31, 2020, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $535.0 million and $403.7 million, respectively. We have recorded unbilled receivables of $140.3 million and $140.8 million at December 31, 2021, and December 31, 2020, respectively. Included in unbilled receivables are retention receivables of $7.7 million and $13.1 million at December 31, 2021, and December 31, 2020, respectively, which become payable upon the completion of the contract or completion of our fieldwork and formal hearings. Unbilled receivables expected to be collected within one year have been included with accounts receivable, current portion in the accompanying consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with accounts receivable, long-term portion in the accompanying consolidated balance sheets. 6 6 67 Notes to Consolidated Financial StatementsNotes to Consolidated Financial StatementsPayment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises term licenses that are invoiced annually with revenue recognized upfront. We maintain allowances for losses and sales adjustments, which losses are recorded against revenue at the time the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a credit loss resulting from the inability of a client to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to, managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or enhancements of our software products. Our allowance for losses and sales adjustments of $12.1 million and $9.3 million at December 31, 2021, and December 31, 2020, respectively, does not include provisions for credit losses. As of January 1, 2020, we adopted ASU 2016-13, Financial Instruments — Credit Losses, and primarily evaluated our historical experience with credit losses related to trade and other receivables. Because we rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses. The following table summarizes the changes in the allowance for losses and sales adjustments: Years Ended December 31, Balance at beginning of year Provisions for losses and sales adjustments – accounts receivable Collections of accounts previously written off Balance at end of year Deferred Revenue 2021 2020 $ 9,255 2,831 — $ 12,086 $ 5,738 3,517 — $ 9,255 The majority of deferred revenue consists of deferred subscription-based services 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 maintenance, software licensing, software and appraisal services, and hardware installation. Refer to Note 17 — “Deferred Revenue and Performance Obligations” for further information, including deferred revenue by segment and changes in deferred revenue during the period. Deferred Commissions Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to seven years. We utilized the “portfolio approach” practical expedient, which allows entities to apply the guidance to a portfolio of contracts with similar characteristics because the effects on the financial statements of this approach would not differ materially from applying the guidance to individual contracts. Using the “portfolio approach”, we determined the period of benefit by taking into consideration our customer contracts, our technology life-cycle and other factors. Sales commissions for renewal contracts are generally not paid in connection with the renewal of a contract. In the small number of instances where a commission is paid on a renewal, it is not commensurate with the commission paid on the initial sale and is recognized over the term of renewal, which is generally one year. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying consolidated statements of income. Refer to Note 18 — “Deferred Commissions” for further information. Prepaid expenses and other current assets include direct and incremental costs such as commissions associated with arrangements for which revenue recognition has been deferred. 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 revenue recognition, determining the nature and timing of satisfaction of performance obligations, determining the SSP of performance obligations, variable consideration, and other obligations such as returns and refunds; loss contingencies; the estimated useful life of deferred commissions; the carrying amount and estimated useful lives of intangible assets; the carrying amount of operating lease right-of-use assets and operating lease liabilities; determining share-based compensation expense; the allowance for losses and sales adjustments; and determining the potential outcome of future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Actual results could differ from estimates. 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 expense of $93.5 million in 2021, $88.4 million in 2020, and $81.3 million in 2019. 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 is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be “realized”. We do not recognize a tax benefit for uncertain tax positions unless management’s assessment concludes that it is “more likely than not” that the position is sustainable based on its technical merits. If the recognition threshold is met, we recognize a tax benefit based upon the largest amount of the tax benefit that is more likely than not probable, determined by cumulative probability, of being realized upon settlement with the taxing authority. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of income. SHARE-BASED COMPENSATION We have a share-based award plan that provides for the grant of stock options, restricted stock units, and performance share units to key employees, directors and non-employee consultants. Stock options generally vest after three to six years of continuous service from the date of grant and have a contractual term of 10 years. Restricted stock unit grants generally vest ratably over three to five years of continuous service from the date of grant. Each performance share unit represents the right to receive one share of our common stock based on our achievement of certain financial performance targets during applicable performance periods, which generally cliff vest in one or three 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. 6 8 69 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements BUSINESS COMBINATIONS Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information. For tangible and identifiable intangible assets acquired in a business combination, management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants. Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain new information about facts and circumstances that existed as of the closing date. If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination as well as the estimated useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations. See Note 2, “Acquisitions,” to our consolidated financial statements for further details. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including identifiable intangible assets, in connection with our business combinations. Upon acquisition, goodwill is assigned to the reporting unit that is expected to benefit from the synergies of the business combination, which is the reporting unit to which the related acquired technology is assigned. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by executive management. We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the quantitative assessment described below. When testing goodwill for impairment quantitatively, we first compare the fair value of each reporting unit with its carrying amount. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. 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 have historically performed our annual assessment of goodwill impairment as of April 1. During the second quarter of 2021, we voluntarily changed the date of our annual assessment of goodwill to October 1 for all reporting units. The change in testing date for goodwill impairment is a change in accounting principle, which management believes is preferable as the new date of the assessment better aligns with our annual planning process. The change in the assessment date did not delay or avoid a potential impairment charge nor did it change our requirement to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present. To ensure that no lapse in an assessment occurred since the prior period, we performed qualitative assessments in the second of 2021, for all reporting units except for the data and insights and platform technologies reporting units. As a result of these qualitative assessments, we determined that it was not more likely that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill for our data and insights and platform technologies reporting units as of April 1, 2021. As a result of our interim qualitative and quantitative assessments, we concluded no impairment existed. During the fourth quarter, as part of our annual impairment test as of October 1, we performed qualitative assessments for all reporting units except for recently acquired businesses. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill associated with our recently acquired businesses, data and insights, NIC, and platform technologies reporting units, and concluded no impairment existed as of our annual assessment date. For most of our reporting units, goodwill relates to a combination of legacy and acquired businesses and as a result those units have fair values that substantially exceed their underlying carrying values. For other reporting units, in particular our data and insights, NIC, and platform technologies business units, goodwill entirely relates to recently acquired businesses, and as a result those reporting units do not have significant excess fair values over carrying values. The data and insights, NIC, and platform technologies business units combined goodwill was $1.6 billion, or 68%, of total goodwill as of December 31, 2021. Our annual goodwill impairment analysis did not result in an impairment charge. During 2021, we have recorded no impairment to goodwill as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end. Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Changes in market conditions or other factors outside of our control, such as a worsening of expected impact of COVID-19, could cause us to change key assumptions and our judgment about a reporting unit’s prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge. There have been no impairments to goodwill in any of the periods presented. See Note 4, “Goodwill and Other Intangible Assets,” for additional information. 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 and acquired software each comprise approximately half 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. 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 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. There was no impairment of long-lived assets in any of the periods presented. 70 7 1 Notes to Consolidated Financial StatementsNotes to Consolidated Financial StatementsCOSTS OF COMPUTER SOFTWARE INDEMNIFICATION We capitalize software development costs upon the establishment of technological feasibility and prior to the availability of the product for general release to customers for software sold to third parties and for application development costs of software developed for internal use. Software development costs primarily consist of personnel costs and rent for related office space. During the twelve months period ended December 31, 2021 and 2020, respectively, we capitalized approximately $21.7 million and $5.8 million of software development costs. We begin to amortize capitalized costs when a product is available for general release to customers and internal use software is ready for its intended use. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the software’s remaining estimated economic life of, generally, five years. Amortization of software development costs was approximately $2.3 million in 2021, $1.2 million in 2020, and $0.3 million in 2019, and is included in cost of software license revenue in the accompanying consolidated statements of comprehensive income. CONTINGENT PURCHASE CONSIDERATION Contingent future cash payments related to acquisitions are recognized at fair value as of the acquisition date and included in the determination of the acquisition date purchase price. Subsequent changes in the fair value of the contingent future cash payments are recognized in earnings in the period that the change occurs. We have no contingent consideration outstanding as of December 31, 2021. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable from trade customers, and investments in marketable securities. Our cash and cash equivalents primarily consist of operating account balances and money market funds, which are maintained at several major domestic financial institutions and the balances often exceed insured amounts. As of December 31, 2021, we had cash and cash equivalents of $309.2 million. We perform periodic evaluations of the credit standing of these financial institutions. 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, 2021. We maintain allowances for losses and sales adjustments, which losses are recorded against revenue at the time the loss is incurred. Since most of our 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 the carrying amount for the allowances for losses and sales adjustments may require revision include, but are not limited to, 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. LEASES We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, and operating lease liabilities, current and long-term, on our consolidated balance sheets. We currently do not have any finance lease arrangements. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. 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 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. We maintain directors’ and officers’ liability 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. RECLASSIFICATIONS Certain amounts for previous years have been reclassified to conform to the current year presentation. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06 — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. This standard will be effective for the Company’s fiscal years beginning in the first quarter of 2022, with early adoption permitted. The Company has elected to early adopt this standard as of January 1, 2021. Our accounting and disclosures related to our Convertible Senior Notes issued on March 9, 2021, reflect the requirements of this standard. For further information, please refer to Note 6, “Debt.” In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, (“ASU 2019-12”) which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements. NEW ACCOUNTING PRONOUNCEMENTS In October 2021, the FASB issued ASU 2021-08 — Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805) (“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. Under this “Topic 606 approach,” the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. ASU 2021-08 is effective for all public business entities in annual and interim periods starting after December 15, 2022, and early adoption is permitted. We early adopted as of January 1, 2022. Adopting this standard could have a material impact on revenue associated with an acquired business. 72 73 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements(2) ACQUISITIONS 2021 On September 9, 2021, we acquired all the equity interest of Ultimate Information Systems, Inc. (dba Arx). Arx is a cloud-based platform which creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves. The total purchase price, net of cash acquired, was approximately $12.8 million, of which $12.4 million was paid in cash and approximately $0.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments. On September 1, 2021, we acquired VendEngine, Inc. (VendEngine) as contemplated by the Agreement and Plan of Merger dated June 3, 2021. As result of the merger, VendEngine became a direct subsidiary of the Company. VendEngine is a cloud-based software provider focused on financial technology for the corrections market. The total purchase price, net of cash acquired of $1.7 million, was approximately $83.8 million, consisting of $80.2 million paid in cash, and approximately $5.4 million related to indemnity holdbacks, subject to certain post- closing adjustments. In connection with this transaction, we acquired total tangible assets of $5.8 million and assumed liabilities of approximately $3.0 million. We recorded goodwill of approximately $54.5 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $37.9 million. The $37.9 million of intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted average period of approximately 16 years. We recorded net deferred tax liabilities of $9.6 million related to the tax effect of our estimated fair value allocations. In the twelve months ended December 31, we recorded adjustments to the preliminary opening balance sheet attributed to a decrease to accounts receivable, accounts payable, deferred income taxes, and an adjustment to the accrual for indemnity holdbacks and increases in identifiable intangible assets and accrued expenses resulting in a net decrease to goodwill of approximately $4.2 million. VendEngine provides a suite of financial and communications applications ranging from deposit technologies for commissary, ordering, and warehouse technology to a host of informational, electronic communications, security, accounting, and financial trust management components for more than 300 correctional facilities across 32 states and the Caribbean. Therefore, the goodwill of approximately $54.5 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base. On April 21, 2021 (the “Closing Date”), we acquired NIC as contemplated by the Agreement and Plan of Merger dated February 9, 2021. As result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries. NIC is a leading digital government solutions and payment company that primarily serves federal and state government agencies. The total purchase price, net of cash acquired of $331.8 million, was approximately $2.0 billion, consisting of cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards. We have performed a preliminary valuation analysis of the fair market value of NIC’s assets and liabilities. The following table sum marizes the preliminary allocation of the purchase price as of the acquisition date: (In thousands) Cash Accounts receivable Other current assets Other noncurrent assets Identifiable intangible assets Goodwill Accounts payable Accrued expenses Other noncurrent liabilities Deferred revenue Deferred tax liabilities, net Total consideration $ 331,783 149,515 12,988 20,974 777,000 1,446,868 (150,099) (63,543) (11,103) (3,294) (190,596) $ 2,320,492 In connection with this transaction, we acquired total tangible assets of $515.3 million and assumed liabilities of approximately $228.0 million. We recorded goodwill of approximately $1.4 billion, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $777.0 million. The $777.0 million of intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted average period of approximately 17 years. We recorded net deferred tax liabilities of $190.6 million related to the tax effect of our estimated fair value allocations. In the twelve months ended December 31, 2021, we recorded adjustments to the preliminary opening balance sheet attributed to a decrease to accounts receivable and increases in identifiable intangible assets, deferred revenue and related deferred taxes resulting in a net decrease to goodwill of approximately $17.2 million. NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office. In addition, NIC has extensive expertise and scale in the government payments arena which will accelerate our strategic payments initiatives. Therefore, the goodwill of approximately $1.4 billion arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base. The following unaudited pro forma consolidated operating results information has been prepared as if the acquisition of NIC had occurred on January 1, 2020, after giving effect to certain adjustments, including amortization of intangibles, interest, transaction costs, and tax effects. Years Ended December 31, Revenues Net income Basic earnings per share Diluted earnings per share 2021 2020 $ 1,755,592 $ 161,448 $ $ 3.95 3.82 $ 1,577,117 $ 183,994 $ $ 4.60 4.43 The pro forma information above does not include acquisitions that are not considered material to our results of operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period. 74 7 5 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements On March 31, 2021, we acquired all the equity interest of Glass Arc, Inc. (dba ReadySub). ReadySub is a cloud-based platform that assists school districts with absence tracking, filling substitute teacher assignments, and automating essential payroll processes. The total cash price was approximately $6.2 million, net of cash acquired. On March 31, 2021, we acquired substantially all assets of DataSpec, Inc. (DataSpec), a provider of a SaaS solution that allows for secure electronic claims submission to the federal Department of Veterans Affairs and reporting capabilities, in addition to scheduling, calendaring, and payments. The total cash purchase price was approximately $5.8 million. The operating results of Arx, DataSpec, ReadySub, and VendEngine are included with the operating results of the Enterprise Software segment since their date of acquisition. The impact of the Arx, DataSpec, ReadySub, and VendEngine acquisitions, individually and in the aggregate, on our operating results, assets and liabilities is not material. The operating results of NIC are disclosed separately as a reportable segment. Revenues from NIC included in Tyler’s results of operations totaled approximately $368.9 million and net income was approximately $37.2 million from the date of acquisition through December 31, 2021. In 2021, we incurred fees of approximately $23.5 million for financial advisory, legal, accounting, due diligence, valuation and other various services necessary to complete these acquisitions. The Company also incurred $1.6 million of expense related to a separation agreement with NIC’s former Chief Executive Officer. These costs were expensed in 2021 and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income. As of December 31, 2021, the purchase price allocations for DataSpec and ReadySub are complete, while the purchase price allocations for Arx, NIC, and VendEngine are substantially complete; therefore, certain preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables, deferred revenue and related deferred taxes are subject to change as valuations are finalized. Our balance sheet as of December 31, 2021, reflects the allocation of the purchase price to the net assets acquired based on their estimated fair value at the date of each acquisition. The fair value of the assets and liabilities acquired are based on valuations using Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 2020 No acquisitions occurred in 2020. (3) PROPERTY AND EQUIPMENT, NET AND SOFTWARE DEVELOPMENT COSTS, NET Property and equipment, net consists of the following at December 31: Land Building and leasehold improvements Computer equipment and purchased software Furniture and fixtures Transportation equipment Accumulated depreciation and amortization Property and equipment, net Useful Lives (years) 2021 2020 — 5-39 3-5 5 5 $ 22,523 $ 18,653 154,222 109,691 35,932 207 322,575 (141,382) 147,729 108,571 30,666 295 305,914 (137,910) $ 181,193 $ 168,004 Depreciation expense was $29.4 million in 2021, $25.5 million in 2020, and $23.4 million in 2019. We paid $12.8 million and $9.9 million for real estate and the expansion of existing buildings in 2021 and 2020, respectively. Software development costs, net consists of the following at December 31: Software development costs Accumulated amortization Software development costs, net Useful Lives (years) 2021 2020 5 $ 32,274 (3,785) $ 28,489 $ 10,581 (1,460) $ 9,121 Amortization expense for capitalized software development costs is recorded to cost of revenues. Amortization expense for software development costs was $2.3 million in 2021, $1.2 million in 2020, and $296,000 in 2019. Estimated annual amortization expense related to capitalized software development costs: 2022 2023 2024 2025 2026 Thereafter $ 3,442 3,285 3,212 2,501 1,339 14,710 $ 28,489 (4) GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the two years ended December 31, 2021 are as follows: Balance as of 12/31/2019 Purchase price adjustments related to CHT acquisition Balance as of 12/31/2020 Goodwill acquired related to the purchase of NIC Goodwill acquired related to the purchase of VendEngine Goodwill acquired related to other acquisitions Balance as of 12/31/2021 Enterprise Software Appraisal and Tax NIC Total $ 825,949 $ 14,168 $ (1,689) — 824,260 14,168 — — — — 54,456 19,922 — — — 1,446,868 — — $ 840,117 (1,689) 838,428 1,446,868 54,456 19,922 $ 898,638 $ 14,168 $ 1,446,868 $ 2,359,674 Other intangible assets and related accumulated amortization consists of the following at December 31: Gross carrying amount of other intangibles: Customer related intangibles Acquired software Trade names Leases acquired Accumulated amortization Total other intangibles, net 2021 2020 $ 949,844 $ 322,619 433,800 45,353 5,037 1,434,034 (381,541) 262,286 22,905 5,037 612,847 (290,779) $ 1,052,493 $ 322,068 Amortization expense for acquired software is recorded to cost of revenues. Amortization expense for customer relationships and trade names are recorded to selling, general and administrative expenses. Amortization expense related to acquired leases is recorded as a reduction to hardware and other revenue. Total amortization expense for other intangibles was $90.8 million in 2021, $53.9 million in 2020, and $52.5 million in 2019. 76 7 7 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements The amortization periods of other intangible assets is summarized in the following table: Non-amortizable intangibles: Goodwill Amortizable intangibles: Customer related intangibles Acquired software Trade names Leases acquired December 31, 2021 December 31, 2020 Gross Carrying Amount Weighted Average Amortization Accumulated Amortization Period Gross Carrying Amount Weighted Average Amortization Accumulated Amortization Period $ 2,359,674 — $ — $ 838,428 — $ — $ 949,844 433,800 45,353 5,037 21 years 7 years 10 years 9 years $ 157,077 $ 322,619 208,451 13,064 2,949 262,286 22,905 5,037 16 years 7 years 11 years 9 years $ 116,609 162,378 9,366 2,426 Estimated annual amortization expense related to other intangibles included in the table below: 2022 2023 2024 2025 2026 Thereafter (5) ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31: Accrued wages, bonuses and commissions Other accrued liabilities (6) DEBT 2021 Credit Agreement $ 105,244 87,249 86,699 86,016 78,165 609,120 $ 1,052,493 2021 2020 $ 88,696 69,728 $ 158,424 $ 63,814 19,270 $ 83,084 In connection with the completion of the acquisition of NIC, on the Closing Date the Company, as borrower, entered into a new $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any LIBOR breakage costs. In addition to the required amortization payments on the Term Loan A-1 of 5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility will be required (i) upon the issuance or incurrence of additional debt not otherwise permitted under the 2021 Credit Agreement and (ii) upon the occurrence of certain asset sales and insurance and condemnation recoveries, subject to certain thresholds, baskets, and reinvestment provisions as provided in the 2021 Credit Agreement. Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, or six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%. The margin in each case is based upon the Company’s total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. The 2021 Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, initially 0.25% per annum, ranging from 0.15% to 0.3% based upon the Company’s total net leverage ratio. The net proceeds from the borrowings under the 2021 Credit Agreement were $1.1 billion, net of debt discounts of $7.2 million and debt issuance costs of $4.9 million and $6.4 million of commitment fees paid related to the terminated $1.6 billion unsecured bridge loan facility. On the Closing Date, the Company paid approximately $2.3 billion in cash for the purchase of NIC. The Term Loans of $900 million and a portion of the proceeds of the Revolving Credit Facility, in the amount of $250 million, together with cash available to the Company of $609 million and the net proceeds of its Convertible Senior Notes of $594 million, were used to complete the acquisition and pay fees and expenses in connection with the acquisition and the 2021 Credit Agreement. The remaining portion of the Revolving Credit Facility may be used for working capital requirements, acquisitions, and capital expenditures of the Company and its subsidiaries. The 2021 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of December 31, 2021, we were in compliance with those covenants. The following table summarizes the Company’s total outstanding borrowings related to the 2021 Credit Agreement (in thousands): Revolving Credit Facility Term Loan A-1 Term Loan A-2 Total borrowings under the 2021 Credit Agreement Less: unamortized debt discount and debt issuance costs related to term loans Total borrowings, net Less: current portion of debt Carrying value as of December 31, 2021 December 31, 2021 Maturity Date April 20, 2026 April 20, 2026 April 20, 2024 $ — 585,000 170,000 755,000 (6,489) $ 748,511 $ (30,000) $ 718,511 The carrying amount is the par value of the Revolving Credit Facility and Term Loans less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is included in the accompanying condensed consolidated statements of income. The effective interest rate for the borrowings under the 2021 Credit Agreement is 1.84% as of December 31, 2021. The following sets forth the interest expense recognized related to the borrowings under the 2021 Credit Agreement included in interest expense in the accompanying condensed consolidated statements of income (in thousands): For the year ended Contractual interest expense – Revolving Credit Facility Contractual interest expense – Term Loans Amortization of debt discount and debt issuance costs Total 2021 $ (618) (9,341) (2,542) $ (12,501) As of December 31, 2021, we had no outstanding borrowings under the 2021 Revolving Credit Facility, and our available borrowing capacity was $500.0 million. In addition, as of December 31, 2021, we had one outstanding standalone letter of credit totaling $2.0 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of 2026. 78 79 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements Terminated Debt Agreements The 2021 Credit Agreement replaces and terminates the Company’s previous $400.0 million credit facility pursuant to the Credit Agreement dated as of September 30, 2019 (the “2019 Credit Agreement”). The Company’s previously announced commitment from Goldman Sachs Bank USA for a $1.6 billion 364-day senior unsecured bridge loan facility also terminated on the Closing Date. The following summarizes the interest expense and related amortization of debt issuance costs associated with the terminated debt agreements incurred through the Closing Date, included in interest expense in the accompanying condensed consolidated statements of income (in thousands). Years Ended December 31, Contractual interest expense – 2019 Credit Agreement Unsecured bridge loan facility commitment fee Amortization of debt issuance costs Total Convertible Senior Notes due 2026 2021 2020 2019 $ (313) $ (610) $ (1,565) (6,407) (1,484) — (397) — (461) $ (8,204) $ (1,007) $ (2,026) On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 in the aggregate principal amount of $600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million. The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased, redeemed or converted. Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only upon the occurrence of certain events. Under the terms of indenture, the Convertible Senior Notes are convertible into common stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances: • during any calendar quarter commencing after the calendar quarter ended June 30, 2021, if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; • during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the indenture, for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; • upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a “Fundamental Change” (as defined in the Indenture); • upon the occurrence of specified corporate events; or • on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, March 15, 2026. With certain exceptions, upon a change of control or other fundamental change (both as defined in the indenture governing the Convertible Senior Notes), the holders of the Convertible Senior Notes may require us to repurchase all or part of the principal amount of the Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest to, but excluding, the redemption date. As of December 31, 2021, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met. From and including September 15, 2025, holders of the Convertible Senior Notes may convert their Convertible Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of common stock, at our election. However, upon conversion of any Convertible Senior Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted. The initial conversion rate is 2.0266 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which represents an initial conversion price of approximately $493.44 per share of common stock. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. The Convertible Senior Notes are redeemable, in whole or in part, at our option at any time, and from time to time, on or after March 15, 2026 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price of the Notes on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. In addition, calling any Note for redemption constitutes a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. The net carrying value of the Convertible Senior Notes, net of unamortized debt discount and unamortized debt issuance costs were as follows (in thousands): December 31, Convertible Senior Notes due 2026 Less: unamortized debt discount and debt issuance costs Carrying value as of December 31, 2021 2021 $ 600,000 (7,235) $ 592,765 The carrying amount is the par value of the Convertible Senior Notes less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in the accompanying condensed consolidated statements of income. The fair value of the Convertible Senior Notes is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. As of December 31, 2021, the effective interest rate as for the Convertible Senior Notes is 0.53%. The following sets forth the interest expense recognized related to the Convertible Senior Notes (in thousands): For the year ended Contractual interest expense Amortization of debt discount and debt issuance costs Total 2021 $ (1,217) (1,382) $ (2,599) We paid interest of $17.7 million in 2021, including $6.4 million related to the senior unsecured bridge loan facility commitment fees, $0.6 million in 2020, and $1.8 million in 2019. 8 0 8 1 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements As of December 31, 2021, the required annual maturities related to the 2021 Credit Agreement and the Convertible Senior Notes due 2026 were as follows (in thousands): Year ending December 31, 2022 2023 2024 2025 2026 Total required maturities Annual Maturities $ 30,000 30,000 30,000 30,000 1,235,000 $ 1,355,000 (7) FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows: • Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities. • Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data. • Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment. The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value. Assets that are Measured at Fair Value on a Recurring Basis Cash and cash equivalents, accounts receivables, accounts payables, short-term obligations and certain other assets at cost approximate fair value because of the short maturity of these instruments. As of December 31, 2021, we have $98.7 million in investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates ranging from 2022 through 2027. We believe cost approximates fair value because of the relatively short duration of these investments. The fair values of these securities are considered Level 2 as they are based on inputs from quoted prices in markets that are not active or other observable market data. These investments are presented at amortized cost and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. As of December 31, 2021, we have an accrued interest receivable balance of approximately $467,000 which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables as such loss would not be material. We record any losses within the maturity period of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the twelve months ended December 31, 2021, we have recorded no credit losses. Interest income and amortization of discounts and premiums are included in other income, net in the accompanying consolidated statements of income. During the fourth quarter, Management determined that our investment portfolio would no longer be held to maturity. The impact to the financial statements in the current year is not material. Assets that are Measured at Fair Value on a Nonrecurring Basis Assets that are Measured at Fair Value on a Nonrecurring Basis. In 2020, we purchased $10.0 million in common stock representing a 18% interest in BFTR, LLC. The investment in common stock is accounted under the equity method because we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values. Our investment is carried at cost less any impairment write-downs. Periodically, our equity method investments are assessed for impairment. We do not reassess the fair value of equity method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes in circumstances have occurred during the period that require reassessment. There has been no impairment of our cost method investment for the periods presented. This investment is included in non-current investments and other assets in the accompanying consolidated balance sheets. We assess goodwill for impairment annually on October 1. In addition, we review goodwill, property and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. During the fourth quarter of 2021, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, we identified no indicators of impairment to long-lived and other assets and therefore, no impairment was recorded as of and for the period ended December 31, 2021. Financial instruments measured at fair value only for disclosure purposes The fair value of our borrowing under our 2021 Credit Agreement would approximate book value as of December 31, 2021, because our interest rates reset approximately every 30 days or less. The fair value of our Convertible Senior Notes due 2026 is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. See Note 6, “Debt,” for further discussion. The following table presents the fair value and carrying value, net, of the 2021 Credit Agreement and our Convertible Notes due 2026, as of December 31, 2021, and 2020 (in thousands): 2021 Credit Agreement Revolving Credit Facility Term Loan A-1 Term Loan A-2 Convertible Notes due 2026 (8) INCOME TAX Fair Value at December 31, Carrying Value at December 31, 2021 2020 2021 2020 $ — $ 580,515 167,997 736,662 $ 1,485,174 $ — — — — — $ — $ 580,515 167,996 592,765 $ 1,341,276 $ — — — — — Income tax (benefit) provision on income from operations consists of the following: Years Ended December 31, 2021 2020 2019 Current: Federal State Deferred $ 7,591 $ (10,538) $ 12,814 3,203 10,794 (13,271) (1,304) (11,842) (7,936) 6,585 19,399 (6,088) $ (2,477) $ (19,778) $ 13,311 8 2 8 3 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements Reconciliation of the U.S. statutory income tax rate to our effective income tax expense rate for operations follows: Years Ended December 31, Federal income tax expense at statutory rate State income tax, net of federal income tax benefit Net operating loss carryback Excess tax benefits of share-based compensation Tax credits Non-deductible business expenses Other, net 2021 2020 2019 $ 33,386 $ 36,759 5,594 3,391 (47,675) (4,999) 7,542 284 6,677 (3,445) (60,190) (3,867) 4,199 89 $ 33,566 6,999 — (29,819) (3,446) 6,011 — $ (2,477) $ (19,778) $ 13,311 The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are: Deferred income tax assets: Operating expenses not currently deductible Stock option and other employee benefit plans Loss and credit carryforwards Deferred revenue Total deferred income tax assets Valuation allowance Total deferred income tax assets, net of valuation allowance Deferred income tax liabilities: Intangible assets Property and equipment Prepaid expenses Total deferred income tax liabilities Net deferred income tax liabilities 2021 2020 $ 16,639 $ 9,084 19,596 18,604 4,717 59,556 — 59,556 (266,827) (12,272) (8,542) (287,641) 17,446 27,199 807 54,536 (1,490) 53,046 (76,766) (9,918) (6,869) (93,553) As of December 31, 2021, $1.9 million of the unrecognized tax benefits are reflected as a decrease in deferred income taxes and $2.7 million are included in other long-term liabilities in our consolidated balance sheets. The total amount of unrecognized tax benefits, net of federal income tax benefit of state taxes, if recognized, that would affect the effective tax rate is $4.3 million as of December 31, 2021, and $1.9 million as of December 31, 2020 and 2019, respectively. It is reasonably possible that events will occur during the next 12 months that would cause the total amount of unrecognized tax benefits to increase or decrease. However, we do not expect such increases or decreases to be material to the financial condition or results of operations. We are subject to U.S. federal income tax, as well as income tax of multiple state, local and foreign jurisdictions. We are routinely subject to income tax examinations by these taxing jurisdictions, but we do not have a history of, nor do we expect, any material adjustments as a result of these examinations. With few exceptions, major U.S. federal, state, local and foreign jurisdictions are no longer subject to examination for years before 2017. As of February 23, 2022, no significant adjustments have been proposed by any taxing jurisdiction. We recognize interest and penalties related to uncertain tax positions as a component of income tax expense in the consolidated statements of income. Accrued interest and penalty amounts were not significant at December 31, 2021. We paid income taxes, net of refunds received, of $2.2 million in 2021, $3.3 million in 2020, and $21.3 million in 2019. (9) SHAREHOLDERS’ EQUITY The following table details activity in our common stock: Stock option exercises Purchases of common stock Employee stock plan purchases Restricted stock units vested, net of withheld shares upon Years Ended December 31, 2021 2020 2019 Shares Amount Shares Amount Shares Amount 627 $ 96,714 1,174 $ 124,363 999 $ 96,908 (33) 35 (12,977) 13,158 (59) 40 (15,484) 10,912 (72) 53 (14,289) 9,576 $ (228,085) $ (40,507) award settlement 147 (25,158) 76 (12,923) 53 (5,361) As of December 31, 2021, we had federal net operating loss carryforwards of approximately $39.1 million, after-tax state net operating loss carryforwards of approximately $2.5 million, and tax credit carryforwards of approximately $9.8 million. The federal net operating loss carryforward will begin to expire in 2032, if not utilized, and a portion of the state net operating loss and tax credit carryforwards begin expiring in 2022, if not utilized. The acquired carryforwards are subject to an annual limitation but are expected to be realized. The valuation allowance disclosed in the table above was released in the current year as we determined that it is more likely than not that all deferred tax assets will be realized. 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. The following table provides a reconciliation of the gross unrecognized tax benefits from uncertain tax positions for the years ended December 31: Balance at beginning of year Additions for tax positions of prior years Reductions for tax positions of prior years Additions for tax positions of current year Settlements Expiration of statutes of limitations Balance at end of year 8 4 2021 2020 2019 $ 1,929 4,508 (10) 212 — (2,004) $ 1,929 $ 1,929 — — — — — — — — — — $ 4,635 $ 1,929 $ 1,929 As of February 23, 2022, we had authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock. (10) SHARE-BASED COMPENSATION Share-Based Compensation Plan In May 2018, stockholders approved the Tyler Technologies, Inc. 2018 Stock Incentive Plan (“the 2018 Plan”) which amended and restated the existing Tyler Technologies, Inc. 2010 Stock Option Plan (“the 2010 Plan”). Upon stockholder approval of the 2018 Plan, the remaining shares available for grant under the 2010 Plan were added to the shares authorized for grant under the 2018 Plan. Additionally, any awards previously granted under the 2010 Plan that expire unexercised or are forfeited are added to the shares authorized for grant under the 2018 Plan. During fiscal year 2021, we granted stock awards under the 2018 Plan in the form of stock options, restricted stock units and performance share units. Stock options generally vest after three to six years of continuous service from the date of grant and have a contractual term of 10 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. Restricted stock unit grants generally vest ratably over three to five years of continuous service from the date of grant. Each performance share unit represents the right to receive one share of our common stock based on our achievement of certain financial performance targets during applicable performance periods. We account for share-based compensation utilizing the fair value recognition pursuant to ASC 718, Stock Compensation. As of December 31, 2021, there were 1.9 million shares available for future grants under the 2018 Plan from the 22.9 million shares previously approved by the shareholders. 8 5 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements Determining Fair Value of Stock Compensation Options granted, exercised, forfeited and expired are summarized as follows: Valuation and Amortization Method. We estimate the fair value of stock option awards granted using the Black-Scholes option valuation model. For restricted stock unit and performance stock unit awards, 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. The expected life represents the weighted-average period the stock options are expected to be outstanding based primarily on the options’ vesting terms, remaining contractual life and the employees’ expected exercise based on historical patterns. 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 more than 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. Outstanding at December 31, 2020 Granted Exercised Forfeited Outstanding at December 31, 2021 Exercisable at December 31, 2021 Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value 181.63 451.94 154.26 202.55 $ 206.06 $ 173.51 6 5 $ 537,547 $ 429,336 Number of Shares 2,177 87 (627) (17) 1,620 1,178 We had unvested options to purchase approximately 445,000 shares with a weighted average grant date exercise price of $293.84 as of December 31, 2021, and unvested options to purchase approximately 752,000 shares with a weighted average grant date exercise price of $231.93 as of December 31, 2020. Other information pertaining to option activity was as follows during the twelve months ended December 31: Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record share-based compensation only for those awards that are expected to vest. Weighted average grant-date fair value of stock options granted Total intrinsic value of stock options exercised 2021 2020 2019 $ 113.18 $ 215,062 $ 98.69 $ 292,394 $ 74.54 $ 155,899 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 Share-Based Award Activity 2021 5.0 26.1% 1.0% —% 2020 2019 5.0 27.0% 0.4% —% 6.0 26.6% 1.8% —% The following table summarizes restricted stock unit and performance stock unit activity during the periods presented (shares in thousands): Unvested at December 31, 2020 Granted Conversion of Unvested Restricted Stock Awards Vested Forfeited Unvested at December 31, 2021 Weighted Average Grant Date Fair Value per Share $ 282.45 458.79 451.99 276.93 330.75 $ 355.43 Number of Shares 587 197 44 (205) (23) 600 Share-Based Compensation Expense The following table summarizes share-based compensation expense related to share-based awards which is recorded in the consolidated statements of comprehensive income: Years Ended December 31, Cost of subscriptions, software services and maintenance Selling, general and administrative expenses Total share-based compensation expenses Excess tax benefit Net decrease in net income 2021 2020 2019 $ 23,705 81,021 104,726 (47,675) $ 18,125 49,240 67,365 (60,190) $ 15,002 44,965 59,967 (29,819) $ 57,051 $ 7,175 $ 30,148 As of December 31, 2021, we had $187.7 million of total unrecognized compensation cost related to unvested options and restricted stock units, net of expected forfeitures, which is expected to be amortized over a weighted average amortization period of 3.0 years. 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, 2021, there were 629,000 shares available for future issuances under the ESPP from the 2.0 million shares previously approved by the stockholders. 8 6 8 7 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements (11) EARNINGS PER SHARE Basic earnings and diluted earnings per share data were computed as follows: Years Ended December 31, 2021 2020 2019 Numerator for basic and diluted earnings per share: Net income Denominator: Weighted-average basic common shares outstanding Assumed conversion of dilutive securities: Stock awards Convertible Senior Notes Denominator for diluted earnings per share – Adjusted weighted-average shares Earnings per common share: Basic Diluted $ 161,458 $ 194,820 $ 146,527 40,848 40,035 38,640 1,382 1,491 1,465 14 — — 42,244 41,526 40,105 $ $ 3.95 3.82 $ $ 4.87 4.69 $ $ 3.79 3.65 Share-based awards representing the right to purchase common stock of 117,000 shares in 2021, 132,000 shares in 2020, and 633,000 shares in 2019 were not included in the computation of diluted earnings per share because their inclusion would have had an anti- dilutive effect. We have used the if-converted method for calculating any potential dilutive effect of the Convertible Senior Notes on our diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period being presented and interest expense, net of tax, recorded in connection with the Convertible Senior Notes is not added back to the numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million remaining common shares related to the Notes are not included in the dilutive weighted-average common shares outstanding calculation for the twelve months ended December 31, 2021, as their effect would be anti- dilutive given none of the conversion features have been triggered. See Note 6, “Debt,” for discussion on the conversion features related to the Convertible Senior Notes. (12) LEASES We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements and they expire in one year to 10 years. Some of these leases include options to extend for up to 10 years. We had no finance leases and no related party lease agreements as of December 31, 2021. Operating lease costs were approximately $15.1 million in 2021, $10.2 million in 2020, and $9.9 million in 2019. The components of operating lease expense were as follows (in thousands): As of December 31, ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheets as follows (in thousands): Assets: Operating lease right-of-use assets Liabilities: Operating leases, short-term Operating leases, long-term Total lease liabilities Supplemental information related to leases is as follows: Other Information Cash Flows (in thousands): Cash paid amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases Right-of-use assets obtained in exchange for lease obligations (non-cash): Operating leases Lease Term and Discount Rate: Weighted average remaining lease term (years) Weighted average discount rate As of December 31, 2021, maturities of lease liabilities were as follows (in thousands): Year ending December 31, 2022 2023 2024 2025 2026 Thereafter Total lease payments Less: Interest Present value of operating lease liabilities Rental income from third parties 2021 2020 $ 39,720 $ 18,734 10,560 36,336 5,904 16,279 $ 46,896 $ 22,183 For the year ended 2021 2020 $ 11,432 $ 8,131 $ 20,140 $ 5,524 6 3 1.81% 3.28% Amount $ 12,070 9,059 7,687 5,592 3,809 11,431 49,648 (2,752) $ 46,896 Lease Costs Operating lease cost Short-term lease cost Variable lease cost Net lease cost 8 8 Years ended December 31, 2021 2020 $ 11,095 2,308 1,659 $ 15,062 $ 6,524 1,940 1,760 $ 10,224 We own office buildings in Bangor, Falmouth and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2022 and 2027, and some have options to extend the lease for up to 10 years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset. 8 9 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements Rental income from third-party tenants was $1.2 million in 2021, $1.1 million in 2020, and $1.1 million in 2019. Rental income is included in hardware and other revenue on the consolidated statements of comprehensive income. Future minimum operating rental income based on contractual agreements is as follows (in thousands): Year ending December 31, 2022 2023 2024 2025 2026 Thereafter Total Amount $ 1,519 1,557 1,589 1,047 84 7 $ 5,803 As of December 31, 2021, we had no additional significant operating or finance leases that had not yet commenced. (13) EMPLOYEE BENEFIT PLANS We provide a defined contribution plan for the majority of our employees meeting minimum service requirements. Eligible 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 operating results $15.6 million in 2021, $12.7 million in 2020, and $11.5 million in 2019. (14) COMMITMENTS AND CONTINGENCIES Security Incident As previously disclosed, we experienced a security incident in September 2020 (the “Incident”) involving ransomware disrupting access to some of our internal information technology (IT) systems and telephone systems. Although we believe we have contained and recovered from the Incident, and that we have taken and will continue to take appropriate remediation steps, we are subject to risk and uncertainties as a result of the Incident. There can be no assurance as to what the ongoing impact of the Incident will be, if any. We maintain cybersecurity insurance coverage in an amount that we believe is adequate. Litigation There are no material legal proceedings pending to which we are party or to which any of our properties are subject. (15) SEGMENT AND RELATED INFORMATION We provide integrated information management solutions and services for the public sector. We provide our software systems and services and appraisal services through seven business units, which focus on the following products: • financial management, education and planning, regulatory and maintenance software solutions; • financial management, municipal courts, planning, regulatory and maintenance software solutions; • courts and justice and public safety software solutions; • data and insights solutions; • platform technologies solutions including case management and business management processing; • NIC digital government and payments solutions; and • appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services. In accordance with ASC 280-10, Segment Reporting, we report our results in three segments. The financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts, planning, regulatory and maintenance software solutions unit; courts and justice and public safety software solutions unit; data and insights solutions; and platform technologies solutions meet the criteria for aggregation and are presented in the Enterprise Software (“ES”) reportable segment. The ES segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission- critical “back-office” functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, data and insights, and platform technologies processes. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as provides 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. On April 21, 2021, we acquired NIC, resulting in the addition of a new reportable segment, as its operating results meet the criteria of a reportable segment. The operating results of NIC are included with the operating results of the NIC segment from the date of acquisition. We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Corporate segment operating income primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference. The accounting policies of the reportable segments are the same as those described in Note 1, “Summary of Significant Accounting Policies”. Segment assets primarily consist of net accounts receivable, prepaid expenses and other current assets and net property and equipment, and capitalized software development costs. Corporate assets primarily consist of cash and investments, prepaid insurance, intangibles associated with acquisitions, deferred income taxes and net property and equipment mainly related to unallocated information and technology assets. The ES segment capital expenditures included $12.8 million in 2021 and $6.6 million in 2020 for the expansion of existing buildings and purchases of buildings. The A&T segment had no capital expenditures in 2021 and $3.3 million in 2020 for the expansion of existing buildings. The NIC segment had no capital expenditures in 2021 for the expansion of existing buildings. As of January 1, 2021, certain administrative costs related to information technology, which were previously allocated and reported in the ES and A&T segments, were moved to the Corporate segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for all segments have been adjusted to reflect the segment change. 9 0 9 1 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements For the year ended December 31, 2021 Revenues Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Intercompany Total revenues Depreciation and amortization expense Segment operating income Capitalized software expenditures Capital expenditures Segment assets For the year ended December 31, 2020 Revenues Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Intercompany Total revenues Depreciation and amortization expense Segment operating income Capitalized software expenditures Capital expenditures Segment assets For the year ended December 31, 2019 Revenues Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Intercompany Total revenues Depreciation and amortization expense Segment operating income Capitalized software expenditures Capital expenditures Segment assets Enterprise Software Appraisal and Tax NIC Corporate Totals $ 68,101 $ 6,351 $ — $ 406,494 167,065 438,726 — 18,766 22,921 33,249 18,661 35,001 27,788 141 67 344,692 23,665 560 — — — — — — — — 3,027 (22,988) $ 74,452 784,435 209,391 474,287 27,788 21,934 — $ 1,122,073 $ 121,258 $ 368,917 $ (19,961) $ 1,592,287 69,728 377,984 9,041 19,520 1,491 33,524 — 988 38,851 82,305 6,796 3,165 25,554 (222,628) 5,856 10,246 135,624 271,185 21,693 33,919 $ 965,966 $ 230,177 $ 303,146 $ 3,232,872 $ 4,732,161 Enterprise Software Appraisal and Tax NIC Corporate Totals $ 64,200 $ 8,964 $ 326,284 164,520 429,224 — 17,670 19,061 24,364 21,889 38,289 21,127 121 70 $ 1,020,959 $ 114,824 $ 67,411 337,627 5,776 11,099 1,055 33,875 — 3,823 $ 847,672 $ 94,149 Enterprise Software Appraisal and Tax $ 90,808 $ 9,397 $ 279,282 179,865 393,521 — 16,553 15,290 17,070 33,196 36,797 23,479 203 206 $ 975,319 $ 120,348 $ 64,245 970 298,305 33,730 4,804 19,283 — 8,436 $ 833,203 $ 91,343 — — — — — — — — — — — — — $ — — — — — 11 (19,1 31) $ 73,164 350,648 186,409 467,513 21,127 17,802 — $ (19,120) $ 1,116,663 13,191 81,657 (144,952) 226,550 — 6,826 5,776 21,748 $ 1,665,453 $ 2,607,274 NIC Corporate Totals — — — — — — — — — — — — — $ — — — — — 6,256 (15,496) $ 100,205 296,352 213,061 430,318 23,479 23,012 — $ (9,240) $ 1,086,427 11,457 76,672 (123,581) 208,454 — 10,379 4,804 38,098 $ 1,267,068 $ 2,191,614 Reconciliation of reportable segment operating income to the Company’s consolidated totals: 2021 2020 2019 Years ended December 31, Total segment operating income Amortization of acquired software Amortization of customer and trade name intangibles Interest expense Other income, net Income before income taxes (16) DISAGGREGATION OF REVENUE $ 271,185 $ 226,550 $ 208,454 (45,601) (44,849) (23,298) 1,544 (31,962) (21,662) (1,013) 3,129 (30,642) (21,445) (2,027) 5,498 $ 158,981 $ 175,042 $ 159,838 The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows. Timing of Revenue Recognition Timing of revenue recognition by revenue category during the period is as follows: For the year ended December 31, 2021 Revenues: Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Total For the year ended December 31, 2020 Revenues: Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Total Products and Products and services transferred services transferred at a point in time over time Total $ 62,847 $ 11,605 $ 74,452 — — — — 21,934 784,435 209,391 474,287 27,788 — 784,435 209,391 474,287 27,788 21,934 $ 84,781 $ 1,507,506 $ 1,592,287 Products and Products and services transferred services transferred at a point in time over time Total $ 62,029 $ 11,135 $ 73,164 — — — — 17,802 $ 79,831 350,648 186,409 467,513 21,127 — 350,648 186,409 467,513 21,127 17,802 $ 1,036,832 $ 1,116,663 9 2 9 3 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements For the year ended December 31, 2019 Revenues: Software licenses and royalties Subscriptions Software services Maintenance Appraisal services Hardware and other Total Recurring Revenue Products and Products and services transferred services transferred at a point in time over time Total $ 84,900 $ 15,305 $ 100,205 — — — — 23,012 296,352 213,061 430,318 23,479 — 296,352 213,061 430,318 23,479 23,012 $ 107,912 $ 978,515 $ 1,086,427 (17) DEFERRED REVENUE AND PERFORMANCE OBLIGATIONS Total deferred revenue, including long-term, by segment is as follows: December 31, Enterprise Software Appraisal and Tax NIC Corporate Totals Changes in total deferred revenue, including long-term, were as follows: The majority of our revenue is comprised of recurring revenues from maintenance and subscriptions. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenue. We generally provide maintenance and support for our on-premises clients under annual, or in some cases, multi-year contracts. The contract terms for subscription arrangements range from one to 10 years but are typically contracted for initial periods of three to five years. Non-recurring revenues are derived from all other revenue categories. Balance at beginning of year Deferral of revenue Recognition of deferred revenue Balance at end of year 2021 2020 $ 462,010 35,528 11,215 1,814 $ 422,742 36,945 — 1,691 $ 510,567 $ 461,378 2021 $ 461,378 1,177,744 (1,128,555) $ 510,567 Recurring revenues and non-recurring revenues recognized during the period are as follows: For the year ended December 31, 2021 Recurring revenues Non-recurring revenues Intercompany Total revenues For the year ended December 31, 2020 Recurring revenues Non-recurring revenues Intercompany Total revenues For the year ended December 31, 2019 Recurring revenues Non-recurring revenues Intercompany Total revenues Enterprise Software Appraisal and Tax NIC Corporate Totals $ 845,219 $ 68,250 $ 345,252 $ — $ 1,258,721 253,933 52,941 23,665 22,921 67 — 3,027 (22,988) 333,566 — $ 1,122,073 $ 121,258 $ 368,917 $ (19,961) $ 1,592,287 Enterprise Software Appraisal and Tax NIC Corporate Totals $ 755,508 $ 62,652 $ 246,390 52,102 19,061 70 $ 1,020,959 $ 114,824 $ — — — — $ — 11 (19,131) $ 818,160 298,503 — $ (19,120) $ 1,116,663 Enterprise Software Appraisal and Tax NIC Corporate Totals $ 672,804 $ 53,866 $ 287,225 66,276 15,290 206 $ 975,319 $ 120,348 $ — — — — $ — $ 726,670 6,256 (15,496) 359,757 — $ (9,240) $ 1,086,427 Transaction Price Allocated to the Remaining Performance Obligations The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized (“Backlog”), which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of December 31, 2021 was $1.80 billion, of which we expect to recognize approximately 47% as revenue over the next 12 months and the remainder thereafter. (18) DEFERRED COMMISSIONS Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be generally three to seven years. Deferred commissions were $38.1 million and $32.3 million as of December 31, 2021 and 2020, respectively. Amortization expense was $13.4 million, $11.9 million, and $11.5 million for the twelve months ended December 31, 2021, 2020, and 2019, respectively. There were no indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses in the accompanying consolidated balance sheets. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive income. (19) SUBSEQUENT EVENTS On February 8, 2022, we acquired US eDirect Inc., a market-leading provider of technology solutions for campground and outdoor recreation management. The total purchase price was approximately $123.1 million, of which $117.6 million was paid in cash and approximately $5.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments. 94 9 5 Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements 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, 2016. 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 $450 $375 $300 $225 $150 75 $0 9 6 2016 2017 2018 2019 2020 2021 100 100 100 124.01 121.83 110.28 130.15 116.49 100.43 210.14 153.17 140.19 305.75 181.35 179.18 376.79 233.41 227.28 Tyler Technologies, Inc. S&P 500 Stock Index S&P 600 Information Technology Index Corporate Officers H. Lynn Moore Jr. President & Chief Executive Officer Brian K. Miller Executive Vice President Chief Financial Officer & Treasurer Samantha B. Crosby Chief Marketing Officer Abigail M. Diaz Chief Legal Officer & Secretary Jason P. Durham Corporate Controller Bruce E. Graham Senior Strategy Advisor Jeffrey S. Green Chief Technology Officer Kevin W. Iwersen Chief Information Officer Jeffrey D. Puckett Chief Operating Officer Kelley B. Shimansky Chief Human Resources Officer W. Michael Smith Chief Accounting Officer Board of Directors John S. Marr Jr.1 Executive Chairperson of the Board Tyler Technologies, Inc. H. Lynn Moore Jr.1 President & Chief Executive Officer Tyler Technologies, Inc. Glenn A. Carter 2,3,4 Retired Chief Executive Officer DataProse, Inc. Brenda A. Cline 3,5 Executive Vice President Kimbell Art Foundation Ronnie D. Hawkins Jr.4 President Angelo State University Mary L. Landrieu 3,5 Senior Policy Advisor Van Ness Feldman LLP Daniel M. Pope 4,5 Mayor City of Lubbock, Texas Dustin R. Womble Retired Executive Vice President Tyler Technologies, Inc. Operational Leadership DATA & INSIGHTS S. Franklin Williams III President Data & Insights Division ENTERPRISE GROUP Christopher P. Hepburn President Enterprise Group Mark A. Hawkins President Appraisal & Tax Division Christopher J. Webster President ERP Division Dane L. Womble President Local Government Division JUSTICE GROUP Russell J. Smith President Justice Group Brian A. McGrath President Courts & Justice Division Bryan K. Proctor President Public Safety Division STATE & FEDERAL GROUP D. Bret Dixon President State & Federal Group Brian T. Combs President Federal Division Elizabeth M. Proudfit President NIC Division 1 Executive Committee 4 Compensation Committee 2 Lead Independent Director 5 Audit Committee 3 Nominating & Governance Committee CORPORATE HEADQUARTERS 5101 Tennyson Parkway, Plano, Texas 75024 972.713.3700 • tylertech.com TRANSFER AGENT & REGISTRAR American Stock Transfer & Trust Company 6201 15th Avenue, Brooklyn, New York 11219 800.937.5449 • help@astfinancial.com • astfinancial.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP Dallas, Texas ANNUAL MEETING OF STOCKHOLDERS Thursday, May 12, 2022 9:00 a.m. Central Time • Virtual www.virtualshareholdermeeting.com/TYL2022 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 972.713.3714 • info@tylertech.com COMMON STOCK Listed on the New York Stock Exchange under the symbol “TYL” 

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