ANNUAL REPORT 2023
A Letter to Our Shareholders
In 2023, we reached a significant inflection point in our
cloud transition, built strong momentum across our business,
and delivered results that surpassed our expectations. The
commitment demonstrated by our teams and the steadfast
loyalty of our clients helped position Tyler for success this
past year and have set the stage for long-term growth and
margin expansion. Our success last year once again affirms
our leadership position in public sector software. It also
reflects our commitment to empowering our clients to create
smarter, safer, and stronger communities.
2023 PERFORMANCE AT A GLANCE
We achieved our key objectives for the year and total revenues reached $1.95 billion,
representing 7.4% year-over-year organic growth. Recurring revenues grew 9.5%, or-
ganically, and comprised 83% of our total revenues. SaaS revenues increased 23.1%
on an organic basis, exceeding our near-term expectations of a 20% CAGR in SaaS
revenues through 2025. Additionally, SaaS arrangements comprised approximately
85% of total new software contract value, reflecting greater cloud adoption across
our public sector clients. We are pleased with our increased profitability in 2023,
with GAAP net income for the year of $165.9 million, or $3.88 per diluted share, up
1.0%. Non-GAAP net income was $333.7 million, or $7.80 per diluted share, up
4.9% compared to 2022. Free cash flow was strong at $327.4 million, even after
paying approximately $127 million of cash taxes related to IRC Section 174 capital-
ization rules.
We’re pleased with our results in a year that was pivotal to our cloud transition.
Our performance demonstrates the strength of our strategic plan as both new and
existing clients continue to express a preference for the long-term benefits of cloud
technology. In fact, our annual SaaS revenues surpassed our combined license and
maintenance revenues for the first time in 2023. Our focus on cloud optimization
and transitioning on-premises clients to the cloud set the stage for operating
efficiencies as we invested in innovation, client success, and talent development
to fuel our long-term growth. We expect that the financial benefits and operating
leverage from our cloud transition will result in a return to a trajectory of operating
margin expansion in 2024.
TYLER 2030 VISION
During our June 2023 investor day, we introduced our Tyler 2030 vision, which sup-
ports our drive to be the most trusted and indispensable partner for the public sector
in the digital government era. I like to describe Tyler 2030 as our “True North” as we
deliver sustainable growth and margin expansion over the next decade. This vision
becomes a reality when we continue to focus on what’s most important. Tyler 2030
aligns our organization and drives focus areas including leveraging our large installed
base, expanding into new markets, completing our cloud transition, and growing our
payments business. We will achieve these goals while building a world-class corporate
culture maintained by the best and brightest employees in the industry.
FAVORABLE MARKET ENVIRONMENT
We operated in a favorable market environment in 2023, with robust public sector
demand supported by healthy budgets. Our leading sales indicators, such as RFP
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES
volumes and sales demonstration activity, were generally at or above pre-pandemic
highs. Our growing sales pipeline also reflects the benefits of heightened sales col-
laboration across Tyler as we continue to pursue new opportunities that expand our
existing client relationships.
LONG-TERM GROWTH DRIVER: CROSS-SELLING AND UPSELLING
One of the key drivers of our long-term growth is our ability to cross-sell and upsell our
comprehensive portfolio of solutions to both existing and new clients. In 2023, we
further focused on alignment within our sales and marketing teams and sales enable-
ment strategies to encourage cross-sell and upsell behavior. The breadth and strength
of our relationships at the local, state, and federal levels provide a solid foundation to
pursue these opportunities. We are still in the early innings of this strategy, particu-
larly as it relates to our Digital Solutions Division (formerly NIC), but we have already
seen success and a diversity of deals across our product solutions. Our pipeline is
active and growing, and the value of our Data & Insights platform as a common data
foundation is influencing many deals.
Notable cross-sell and multi-suite wins we closed in 2023 include:
• An Application Platform contract with the Michigan Bureau of Elections, a Digital
Solutions Division client, to replace an existing custom solution.
• Under our state enterprise agreement with Utah, a Corrections solutions for the
Utah Department of Corrections.
• A multi-suite SaaS contract with Port Angeles, Washington, for Enterprise ERP,
Enterprise Permitting & Licensing, Cybersecurity, and Payments.
• Under our state enterprise agreement with Illinois, an Enterprise Licensing and
Recreational Licensing deal.
LONG-TERM GROWTH DRIVER: TRANSACTIONS AND PAYMENTS
Another key driver of our long-term growth is our transactions and payments business,
which expands our addressable market and drives higher recurring revenue streams.
In 2023, we unified our payments organization and integrated our payments solutions
across our product portfolio, making our solutions pre-wired for payments. As part of
the rollout of our enterprise-wide go-to-market payments strategy, we also launched a
new sales enablement initiative. This initiative enhances our ability to cross-sell our
payments solutions to existing and new clients, pursue enterprise-level opportunities,
and grow our payments volume and revenue.
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES
Notable transaction deals we closed in 2023 include:
• A landmark eight-year agreement with the California State Parks, the largest trans-
action-based arrangement in Tyler history, for Tyler’s integrated Outdoor Recre-
ation platform, including payments.
• A Tyler Disbursements win with Harris County, Texas, the third-largest county in
the U.S., to pay jurors through digital payment options, eliminating paper checks.
• An expanded relationship with the Indiana Family and Social Services Adminis-
tration to use our disbursement-as-a-service platform to improve the process for
sending Childcare and Development Fund payments to providers.
• An additional 600 new payments deals with Tyler clients, adding an estimated
$18 million in annual recurring revenues.
LONG-TERM GROWTH DRIVER: CLOUD TRANSITION
Another key achievement in 2023 was our continued progress in our cloud transition,
which is a key factor in achieving our long-term growth and profitability objectives. We
are on track to execute our planned exits from our Tyler-owned data centers in 2024
and 2025, allowing us to realize increased operational efficiencies as we consolidate
our SaaS clients at AWS. We are also nearing completion of our cloud optimization
efforts, which will enhance the cloud performance, security, and scalability of our core
products. As a result of these efforts, we have seen a steady increase in the pace of
the conversions or “flips” of existing clients to our AWS-powered SaaS solutions. We
signed agreements for nearly 340 flips in 2023, and we expect the pace to accelerate
toward our 2030 goals. These efforts have set the stage for margin expansion in 2024
and beyond.
Notable achievements related to our cloud transition in 2023 include:
• The Idaho Supreme Court became Tyler’s first statewide Courts & Justice client
to migrate from its existing on-premises environment to our next-generation
SaaS offering.
• Our Public Safety business had its strongest year since our 2015 acquisition of
New World Systems, with an improved competitive position, a significant in-
crease in cloud adoption among new clients, and the first six on-premises flips
signed in 2023.
• Progress was made on executing our planned exit of our first data center in mid-
2024, with the second scheduled in 2025.
• We signed an expanded strategic collaboration agreement with Amazon Web Ser-
vices to further enable the growing adoption of Tyler’s cloud-based mission-critical
solutions and to support our public sector clients’ digital modernization needs.
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES
CAPITAL ALLOCATION STRATEGY
With our strong free cash flow and our disciplined approach to capital allocation, we
significantly strengthened our balance sheet in 2023. A key priority under our capital
allocation strategy has been to pay down debt. In 2023, we reduced our term debt
by $345 million, and our net leverage ratio was under one times proforma EBITDA at
year-end. In fact, since our acquisition of NIC in April 2021, we have paid down more
than a billion dollars in debt.
Our capital allocation strategy also includes executing strategic acquisitions that com-
plement our existing portfolio, expand our addressable market, and add technologies
that can be leveraged across our product portfolio. In 2023, we made four acquisi-
tions for a combined purchase price of $74.5 million in cash and stock, strengthening
our position in the following areas:
• Safeground Analytics, a provider of real estate appraisals and assessments for
state, counties, and municipalities, elevates our appraisal service offerings.
• Computing System Innovations, a provider of artificial intelligence (AI) automa-
tion, redaction, and indexing solutions, brings automated data entry and docu-
ment processing options to our clients.
• ResourceX, a provider of AI-driven priority-based budgeting software for local gov-
ernments, helps our clients align their spending with their strategic goals.
• ARInspect, a provider of AI solutions for regulatory inspections, enables our cli-
ents to improve their inspection efficiency.
AWARDS AND RECOGNITION
We are proud to have been recognized by several awards for our innovation and
employee satisfaction, such as the GovTech 100 list, multiple top workplace awards,
and Newsweek’s America’s Greatest Workplaces for Diversity. These accolades are
a testament to our dedication to fostering a culture of innovation, inclusivity, and
employee engagement, all of which are integral to delivering exceptional value to our
stakeholders.
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES
2024 OUTLOOK
As we look ahead, we are excited to pursue our 2030 vision with
the same determination and innovation that have guided us over the
past 25 years. Our goals for both 2024 and the long-term are clear:
to grow recurring revenues, expand our margins, and increase our
free cash flow. We are well on our way. We know we have the right
strategy, the right team, and the right culture to achieve these ob-
jectives. We are committed to driving long-term value for our clients
and shareholders while ensuring our leadership in the public sector
software market remains unchallenged.
H. Lynn Moore Jr.
President & Chief Executive Officer
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES
Reconciliation of GAAP to NON-GAAP Financial Measures (Unaudited)
(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
Non-GAAP total revenues
RECONCILIATION OF NON-GAAP RECURRING REVENUES
GAAP recurring revenues
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue
Non-GAAP recurring revenues
RECONCILIATION OF NON-GAAP GROSS PROFIT AND MARGIN
GAAP gross profit
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue
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: Share-based compensation expense
Add: Employer portion of payroll tax related to employee stock transactions
Add: Acquisition-related costs
Add: Lease restructuring costs and other
Add: Amortization of acquired software
Add: Amortization of other 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 costs in interest expense
Less: Income tax impact
Non-GAAP net income
GAAP earnings per diluted share
Non-GAAP earnings per diluted share
DETAIL OF SHARE-BASED COMPENSATION EXPENSE
Subscriptions, maintenance and professional services
Sales and marketing expense
General and administrative expense
Total share-based compensation expense
RECONCILIATION OF FREE CASH FLOW
Net cash provided by operating activities
Less: additions to property and equipment
Less: investments in software development
Free cash flow
Free cash flow margin
2023
$1,951,751
-
$1,951,751
2022
$1,850,204
-
$1,850,204
2021
$1,592,287
2,678
$1,594,965
$1,626,173
$1,480,759
$1,258,722
-
$1,626,173
-
$1,480,759
2,678
$1,261,400
$861,099
$783,863
$709,644
-
26,607
36,062
$923,768
44.1%
47.3%
-
27,486
52,192
$863,541
42.4%
46.7%
2,678
23,705
45,601
$781,628
44.6%
49.0%
$218,537
$214,249
$180,735
-
108,338
1,873
409
8,220
36,062
74,632
$229,534
$448,071
11.2%
23.0%
-
102,985
1,571
1,971
2,782
52,192
61,363
$222,864
$437,113
11.6%
23.6%
2,678
104,726
3,437
23,495
-
45,601
44,849
$224,786
$405,521
11.4%
25.4%
$165,919
$164,240
$161,458
229,534
-
(61,792)
$333,661
$3.88
$7.80
$26,607
10,118
71,613
$108,338
$380,440
(20,519)
(32,490)
$327,431
16.8%
222,864
-
(68,999)
$318,105
$3.87
$7.50
$27,486
8,800
66,699
$102,985
$381,455
(22,529)
(27,622)
$331,304
17.9%
224,786
6,407
(96,119)
$296,532
$3.82
$7.02
$23,705
8,834
72,187
$104,726
$371,753
(33,919)
(21,693)
$316,141
19.8%
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation
or organization)
5101 Tennyson Parkway
Plano, Texas
(Address of principal executive offices)
75-2303920
(I.R.S. employer
identification no.)
75024
(Zip code)
Registrant’s telephone number, including area code: (972) 713-3700
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
COMMON STOCK, $0.01 PAR VALUE
Trading symbol
TYL
Name of each exchange
on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-
T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer", "accelerated filer”, "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Non-accelerated Filer (Do not check if smaller reporting company)
☒
☐
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
☐
☐
☐
☐
☒
☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of
the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant was $17,373,822,183 based on the reported last sale price of common stock on June 30,
2023, which is the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares of common stock of the registrant outstanding on February 20, 2024 was 42,276,136.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this annual report is incorporated by reference from the registrant’s definitive proxy statement for its annual meeting of
stockholders to be held on May 9, 2024.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 1C.
Cybersecurity
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
TYLER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
[Reserved]
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
PAGE
3
11
21
21
24
24
24
25
26
27
40
40
40
40
41
41
42
42
42
42
42
43
45
46
2
ITEM 1.
BUSINESS.
DESCRIPTION OF BUSINESS
PART I
Tyler Technologies, Inc. (“Tyler”) is a leading provider of integrated software and technology management solutions for the public
sector. Our solutions empower local, state, and federal government entities to create smarter, safer, and stronger communities. We
offer the broadest range of software solutions and services designed for every level of public sector government agency. Our solutions
deliver mission-critical technology to support the essential functions of government, including public safety, justice, public health,
taxation and budgeting, infrastructure and land use, outdoor recreation, utility and civic services, regulation, K-12 education, and
social services. We provide both the back-office systems-of-record that serve the operational needs of specific government agencies,
as well as platform technology solutions that are designed to integrate with our back-office solutions and be deployed and connected
across many agencies. Examples of transformative platform technologies include our market-leading payments platform, data
platform, low-code application development platform, and digital resident experience solutions.
We maintain deep, long-term relationships with state and local government agencies, including dedicated state-level offices in the 28
states in which we have enterprise contracts. Our professional information technology (“IT”) services include cloud-based software
deployment, data conversion, and training. We also provide continuing client support services to ensure product performance and
reliability, providing us with long-term client relationships and a significant base of recurring revenue.
MARKET OVERVIEW
The federal, state, and local public sector market is one of the largest and most decentralized IT markets in the country, consisting of
hundreds of federal agencies, all 50 states, approximately 3,000 counties, 36,000 cities and towns, and 12,600 school districts. This
market is also comprised of approximately 40,000 special districts and other agencies, each with specialized delegated responsibilities
and unique information management requirements.
Today, government agencies play an essential role in all aspects of society, including providing protection and security, delivering
public services, ensuring public health, effectively administrating public resources, developing and enforcing regulations, and
maintaining engagement with the public. In an increasingly digital world, constituents expect more transparency, frictionless service,
and better online experiences from public entities. As a result, government entities recognize the increasing value of information
management systems and services to, among other things, improve transactional revenue collection, provide transparency and
increased access to information, and streamline the delivery of services to their constituents. Government bodies recognize “digital
government” is not just a modern convenience, but a requirement for good governance. From integrated public safety and justice
information systems to systems that integrate tax, finance, infrastructure, and land use processes, many jurisdictions have benefited
significantly from the implementation of jurisdiction-wide systems that allow different agencies or government offices to share data
and provide a more comprehensive approach to information management.
Agencies at all levels of government face challenges in attracting and retaining the staff necessary to support their IT operations. As a
result, they seek to establish long-term relationships with reliable providers of high-quality IT products and services such as Tyler.
Although governments often face budgetary constraints in their operations, their primary revenue sources are usually property,
business, and sales tax revenue, as well as transactional fees and service charges, which historically tend to be relatively stable.
Government agencies increasingly rely on digital payment solutions to streamline the collection and distribution of government funds.
In addition, the acquisition of modern technology typically enables governments to operate more efficiently and securely and often
provides a measurable return on investment that justifies the purchase of software and related services.
Gartner, Inc., a leading information technology research and advisory company, estimates that: state and local government application
and vertical specific software spending are expected to grow from $31.8 billion in 2024 to $46.9 billion in 2027; professional services
and support segments of that market are expected to expand from $36.4 billion in 2024 to $46.8 billion in 2027; application and
vertical specific software sales in the primary and secondary education segments of the market are expected to expand from $6.2
billion in 2024 to $8.6 billion in 2027 while related professional services and support are expected to grow from $5.7 billion in 2024 to
$7.5 billion in 2027. For the national and international government markets, Gartner estimates that application and vertical specific
software sales are expected to expand from $48.0 billion in 2024 to $71.9 billion in 2027, while related professional services and
support are expected to grow from $71.6 billion in 2024 to $93.5 billion in 2027.
3
Tyler is a leading provider of integrated solutions for the public sector. Tyler management believes we compete based on several key
factors, including:
•
•
•
•
•
•
The breadth, depth, and quality of our product and service offerings
Deep industry expertise with proven implementation success
Technological innovation
Name recognition, reputation, and references
Value and return-on-investment
Financial strength and stability
PRODUCTS AND SERVICES
We provide a comprehensive and flexible suite of products and services that addresses the information technology needs of cities,
counties, states, schools, federal agencies, and other government entities.
We design, develop, market, and support a broad range of software solutions to serve mission-critical “back-office” functions of the
public sector. Many of our back-office software applications integrate with our transformative platform solutions, such as our unified
payments platform, data and insights platform, and digital public engagement solutions that allow for real-time public access to a
variety of information or that allow the public to transact business with governments online.
Each of our core software solutions consists of several fully integrated applications. In some of the product areas, such as financial
management and education and property appraisal and tax, we offer multiple solutions designed to meet the needs of different sized
governments.
A description of our primary suites of products and services follows:
Platform & Transformative Technology Solutions
Our platform and transformative technology solutions create the foundation for government innovation and enhance our clients’ ability
to connect with constituents, conduct business, collect and disburse funds, safeguard systems, and leverage data to its fullest. Many of
these solutions are integrated into our products, while others can be leveraged as add-on solutions. Our platform & transformative
technology solutions include:
•
•
•
•
•
•
Cybersecurity: Augments government agencies’ resources with access to advanced expertise for program design, 24/7 threat
detection and response, customized employee training, vulnerability testing, and more.
Data & Insights: Allows agencies to transform data into insights about financial, operational, and strategic outcomes by
making it easier to surface meaningful data for informing government decisions and citizens.
Digital Solutions: Provides a seamless cross-department experience so that agencies can deliver a unified citizen experience
and achieve better outcomes while helping workers and policymakers share, communicate, and leverage data more
effectively.
Payments: As the leading platform for public sector payment processes nearly half a billion transactions annually and covers
the entire payments life cycle, including billing, presentment, merchant onboarding, collections, reconciliation, and
disbursements.
Platform Technologies: A low-code application development platform purpose-built for the public sector. Enables
government workers to quickly build solutions and applications that suit their needs.
Outdoor Recreation: Designed specifically for local, state, and federal outdoor agencies, our solutions encompass campsite
reservations, activity registrations, licensing sales and renewals, and real-time data for conservation and park management.
4
Public Administration Solutions
Our public administration solutions connect the dots between departments, agencies, municipalities, and states to deliver the core
business functions of the public sector. By making it easier to manage the business side of the public sector, agencies can focus on
delivering the resources and services required to make their community a place where people want to live. Our public administration
solutions include:
•
•
•
•
Civic Services: Business management and community development solutions manage permitting, enforcement, health and
safety inspections, compliance, maintenance and work orders, 311 requests, and more.
ERP: Integrates core financial applications with human resources, revenue management, tax billing, utilities, asset
management, and payment processing.
Property & Recording: Manages all aspects of the property tax life cycle, including appraisal services, valuation, tax billing
and collections, assessment administration, and land and official records.
Regulatory: Permitting, licensing and regulatory management help local, state, and federal government agencies and
departments of any size simplify every aspect of regulatory compliance.
Courts & Public Safety Solutions
Our integrated courts and public safety solutions are used at the municipal, county, state, and federal levels to help courts, prosecutors,
defenders, jails, sheriff’s offices, police departments, and probation officers keep their communities safe. Our courts and public safety
solutions include:
•
•
•
Corrections: Connects courts, public safety, and supervision agencies to ensure safer and more efficient operations for
correctional facilities.
Courts & Justice: Provides case management and shares data with all justice partners by connecting courts, prosecutors,
public defenders, and the filing community.
Public Safety: Integrated public safety solutions designed to comply with state and federal reporting mandates, provide real-
time information and instant data sharing across jurisdictions, and promote intelligence-led responses so that help arrives
faster and more prepared.
K-12 Education Solutions
Our integrated school solutions enable districts to operate as a single system across campuses and functions. By bringing data together
and making it accessible as needed to administrators, teachers, students, bus drivers, and parents, we are able to improve everyone’s
ability to support the educational journey. Our K–12 Education solutions include:
•
•
School ERP: Manages K-12 schools’ most essential business functions by integrating financial, budgeting, and procurement
data. Our suite of human resource management tools helps schools efficiently manage payroll and employee information and
hire and retain qualified teachers, staff, and substitutes.
Student Transportation: Manages every aspect of the student transportation operation with integrated software and telematic
hardware solutions to help ensure operational efficiency and cost-effectiveness.
Health & Human Services Solutions
Our integrated solutions enable health and human service agencies to leverage data and optimize operations to better maintain the
well-being of communities. Our health & human services solutions include:
•
•
Environmental Health: Streamlines the process of issuing permits, performing health inspections, running reports, and
investigating complaints.
Disability & Benefits: Helps programs and agencies administer benefits and makes it easier to manage the complexity of
services like medical cannabis regulation, veterans’ benefits, vocational rehabilitation, workers’ compensation, and more.
Revenues
We derive our revenues from four primary sources:
•
Subscription-based services
• Maintenance and support
•
•
Professional services
Software licenses and royalties
5
Subscription-Based Services
Subscriptions revenue consists of revenues derived from our SaaS arrangements and transactions-based fees. We are able to provide
the majority of our software products through our SaaS model. The clients who choose this model typically do not wish to maintain,
update and operate these systems or make up-front capital expenditures to implement these advanced technologies. The contract terms
for these arrangements range from one to ten years but are typically contracted for initial periods of three to five years. The majority of
our SaaS or hosting arrangements include additional professional services as well as maintenance and support services. In certain
arrangements, the client may also acquire a license to the software.
Other sources of subscriptions revenue are derived from transaction-based fees primarily related to digital government services, online
payment solutions, which are sometimes offered with the assistance of third-party vendors, and online dispute resolution solutions.
Maintenance and Support
Support is provided to clients over the phone or via the Web through help desks staffed by our client support representatives. For more
complicated issues, our staff, with the clients' permission, can log on to clients’ systems remotely. We maintain our clients’ software
largely through releases that contain improvements and incremental additions of features and functionality, along with updates
necessary because of legislative or regulatory changes.
Nearly 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, with a typical fee based on a percentage of the software product’s license fee. These fees can generally be
increased on renewal and may also increase as new license fees increase. Maintenance and support fees are generally paid annually in
advance. Most maintenance contracts automatically renew unless the client or Tyler gives notice of termination prior to expiration.
Similar support is provided to our SaaS clients and is included in their subscription fees, which are classified as subscription-based
revenue.
Professional Services
We provide a variety of professional services to clients who utilize our software products. Our clients contract with us for installation,
training, and data conversion services in connection with their implementation of Tyler’s software solutions, whether through a SaaS
arrangement or on-premise software license. The complete implementation process for a typical system includes planning, design, data
conversion, set-up and testing. At the culmination of the implementation process, a data implementation team is generally onsite at the
client’s facility or available via remote video conferencing to help ensure the smooth go-live with the new system. Implementation
fees are charged separately to clients on either a fixed-fee or hourly charge basis, depending on the contract.
Both in connection with the installation of new systems and on an ongoing basis, we provide extensive training services and programs
related to our products and services. Training can be provided in our training centers, onsite at clients’ locations, at meetings and
conferences, or remotely, and can be customized to meet clients’ requirements. The vast majority of our clients contract with us for
training services, both to improve their employees’ proficiency and productivity and to fully utilize the functionality of our systems.
Training services are generally billed on an hourly or daily basis, along with travel and other expenses.
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 professional services are otherwise not considered
distinct, we recognize revenue over time by measuring progress-to-completion using labor hours incurred as it best depicts the transfer
of control to the customer which occurs as we incur costs on our contracts.
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 revenue we are entitled to and billed on a quarterly basis in the quarter immediately following
the royalty reporting period and adjustments have not been significant.
6
STRATEGY
Our objective is to grow our revenues and earnings organically, supplemented by focused strategic acquisitions. The key components
of our business strategy are to:
•
•
•
•
•
•
Provide high quality, value–added products and services to our clients. We compete on the basis of, among other things,
delivering to clients our deep domain expertise in government operations through the high value products and services in
the market. We believe we have achieved a reputation as a premium product and service provider to the government
market.
Continue to expand our product and service offerings. While we already have what we believe to be the broadest line of
software products for the public sector, we continually strive to upgrade our core software applications and expand our
complementary product and service offerings to respond to technological advancements and the changing needs of our
clients. We regularly add new products and services to our portfolio through internal product development as well as
acquisitions. We believe that the addition of new features and applications enhances the market appeal of our core
products. We have also broadened our offerings of consulting and business process reengineering services.
Accelerate our move to the cloud. We have offered most of our core products in both an on-premises license model and a
cloud-based subscription model for several years and have seen a steady increase in the percentage of new software
clients choosing our cloud model in recent years. Beginning in late 2019, we moved our approach to sales from “cloud-
neutral” to “cloud-first,” with an increasing preference to provide our solutions in the cloud. We are making significant
investments in optimizing our products to be deployed efficiently in the public cloud and over a multi-year period are
transitioning from hosting clients in Tyler’s proprietary data centers to utilizing Amazon Web Services (“AWS”) for
cloud hosting.
Expand our client base. We seek to establish long-term relationships with new clients primarily through our sales and
marketing efforts. While we currently have clients in all 50 states, Canada, the Caribbean, the United Kingdom,
Australia, and other international locations, some of our solutions have not fully achieved nationwide geographic
penetration. We intend to continue to expand into new geographic markets by adding sales staff and targeting marketing
efforts by solutions in those areas. We also intend to continue to expand our customer base to include larger jurisdictions.
While our traditional market focus has primarily been on small and mid-sized governments, our increased size and
market presence, together with the technological advances and improved scalability of certain of our solutions, are
allowing us to achieve increasing success in selling to larger clients. We also expect to expand our presence in
international markets by leveraging our leadership position in the United States through the disciplined pursuit of
selected opportunities in other countries.
Expand our existing client relationships. Our existing customer base offers significant opportunities for additional sales
of solutions and services that we currently offer, but that existing clients do not fully utilize. Add-on sales to existing
clients typically involve lower sales and marketing expense than sales to new clients. In particular, since the acquisition
of NIC, Inc.( “NIC”) in April 2021, we have been successfully selling Tyler software products into NIC’s client base and
in turn providing NIC’s payment services to Tyler’s client base. We expect those opportunities to continue.
Grow recurring revenues. We have a large recurring revenue base from subscription-based services and maintenance and
support, which generated revenues of $1.6 billion, or 83% of total revenues, in 2023. We have historically experienced
very low customer turnover (approximately 2% annually) and recurring revenues continue to grow as the installed
customer base increases. Subscription-based revenues have been our fastest growing revenue category over the past five
years, increasing from $296.4 million in 2019 to $1.2 billion in 2023. We monitor Annualized Recurring Revenue
(“ARR”), which is calculated based on quarter-to-date end total recurring revenues multiplied by four. ARR was $1.61
billion and $1.50 billion as of December 31, 2023, and 2022, respectively. ARR increased 8% compared to the prior
period primarily due to an increase in subscriptions revenue resulting from an ongoing shift toward SaaS arrangements.
• Maximize economies of scale and take advantage of financial leverage in our business. We seek to build and maintain a
larger client base to create economies of scale, enabling us to provide value-added products and services to our clients
while expanding our operating margins. In addition, we believe that we have a marketing and administrative
infrastructure in place that can be leveraged to accommodate significant long-term growth without proportionately
increasing sales and marketing and general and administrative expenses.
•
Attract and retain highly qualified employees. We believe that the depth and quality of our management and staff is one
of our significant strengths, and that the ability to retain such employees is crucial to our continued growth and success.
We believe that our stable management team, financial strength and growth opportunities, as well as our leadership
position in the public sector market, enhance our attractiveness as an employer for highly skilled employees.
7
•
•
Pursue strategic acquisitions. We selectively pursue strategic acquisitions that provide us with one or more of the
following:
◦
◦
◦
New products and services to complement our existing offerings
Entry into new markets related to the public sector
New clients and/or geographic expansion
Establish strategic alliances. We have a strategic collaboration agreement with Amazon Web Services ("AWS") for cloud
hosting services, which brings together Tyler, the nation's largest software company exclusively focused on the public
sector, and AWS, the broadest and deepest cloud platform. Specifically, the agreement with AWS provides the
framework for development, training and collaboration in order to support next-generation applications that have the
scalability, resiliency, and security AWS offers. AWS is assisting us in accelerating innovation and the development of
strategic initiatives. These initiatives will bring the most advanced cloud-native services to Tyler clients, to help improve
the flow of information and provide a better experience for state, local, and federal governments.
SALES, MARKETING AND CLIENTS
We market our products and services primarily through direct sales and marketing personnel located throughout the United States.
Other in-house sales staff focus on add-on sales, professional services and support. For certain products we also utilize a partner
network for both sales and professional services, primarily in the state and federal markets.
Sales of new systems are typically generated from referrals from other government offices or departments within a county or
municipality, referrals from other local governments, relationships established between sales representatives and county or local
officials, contacts at trade shows, direct mailings, and direct contact from prospects already familiar with us. We are active in
numerous national, state, county, and local government associations and participate in annual meetings, trade shows, and educational
events.
Clients consist primarily of federal, state, county and municipal agencies, school districts and other local government offices. In
counties, clients include the auditor, treasurer, tax assessor/collector, county clerk, district clerk, county and district court judges,
probation officers, sheriff, and county appraiser. At municipal government sites, clients include directors from various departments,
including administration, finance, utilities, public works, code enforcement, personnel, purchasing, taxation, municipal court and
police. At the state and federal levels, clients include Chief Information Officers and agency heads. Contracts for software products
and services are generally implemented over periods of three months to one year, although some complex implementations may span
multiple years, with annually renewing maintenance and support update agreements thereafter.
COMPETITION
We compete with numerous local, regional, and national firms that provide or offer some or many of the same solutions and services
that we provide. Many of these competitors are smaller companies that may offer less expensive solutions than ours. Many of these
firms operate within a specific geographic area and / or in a narrow product or service niche. We also compete with national firms,
some of which have greater financial and technical resources than we do, including Oracle Corporation, Infor, SAP AG, Workday,
Inc., CentralSquare Technologies, Thomson Reuters Corporation, Motorola Solutions, Inc., Axon Enterprise, Inc., and Constellation
Software, Inc. In addition, we sometimes compete with consulting and systems integration firms, which develop custom systems,
primarily for larger governments. We also occasionally compete with central internal information service departments of governments,
which requires us to persuade the end-user department to discontinue service by its own personnel and outsource the service to us.
We compete on a variety of factors, including price, service, name recognition, reputation, technological capabilities, and the ability to
modify existing products and services to accommodate the individual requirements of the client. Our ability to offer an integrated
system of applications for several offices or departments is often a competitive advantage. Governmental units often are required to
seek competitive proposals through a request for proposal process and some prospective clients use consultants to assist them with the
proposal and vendor selection process.
SUPPLIERS
Substantially all of the computers, peripherals, printers, scanners, operating system software, office automation software, and other
equipment necessary for the implementation and provision of our software systems and services are presently available from several
third-party sources. Hardware is purchased on original equipment manufacturer or distributor terms at discounts from retail. We have
not experienced any significant supply problems.
8
BACKLOG
At December 31, 2023, our revenue backlog was approximately $2.03 billion compared to $1.89 billion at December 31, 2022. The
backlog generally represents signed contracts under which the revenue has not been recognized. Approximately $937 million, or 46%,
of the backlog is expected to be recognized during 2024.
SEASONALITY
Transaction-based fees are generally the result of multi-year contracts with our clients that result in fees generated by payment
transactions and digital government services and are collected on a recurring basis during the contract term. Transaction-based fees are
historically highest in the second quarter, which coincides with peak outdoor recreation seasons and statutory filing deadlines in many
jurisdictions, and lowest in the fourth quarter due to fewer business days and lower transaction volumes around holidays.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
We regard certain features of our internal operations, software, and documentation as confidential and proprietary and rely on a
combination of contractual restrictions, trade secret laws and other measures to protect our proprietary intellectual property. We
generally do not rely on patents. We believe that, due to the rapid rate of technological change in the computer software industry, trade
secrets and copyright protection are less significant than factors such as the knowledge, ability and experience of our employees,
frequent product enhancements, and timeliness and quality of support services. We typically license our software products under non-
exclusive license agreements, which are generally non-transferable and have a perpetual term.
HUMAN CAPITAL RESOURCES
Human Capital
Our experienced, collaborative team is one of the most significant contributors to our success in empowering the public sector to
create smarter, safer, and stronger communities. Our effectiveness in attracting and developing talented team members, many of whom
spend the majority of their careers at Tyler serving our public sector clients, demonstrates our commitment to providing a welcoming
and safe workplace, with a culture, benefits, and continual growth opportunities for our team members.
As of December 31, 2023, we had approximately 7,300 team members. Approximately 95% of our team members work in one of our
66 U.S. offices or remotely in the U.S. Approximately 388 of our team members are in Canada, the Philippines, or India. Race and
gender reporting are based on information provided by team members. We define leadership as positions which are one or two levels
removed from our CEO with management responsibility. The tables below represent our workforce demographics as of December 31,
2023:
Race:
Overall
Leadership
Gender:
Overall
Leadership
White
70.5%
96.4%
Asian
7.6%
1.8%
Black or
African
American
4.7%
—%
Hispanic or
Latino
Two or more
races
Native
Americans and
Other Pacific
Islanders
4.7%
—%
2.1%
—%
0.5%
1.8%
Not specified
9.9%
—%
Male
61.8%
60.0%
Female
37.2%
40.0%
Non-Binary
Not specified
0.2%
—%
0.8%
—%
We believe our efforts in managing and supporting our workforce are effective, as evidenced by current levels of applicants, team
member tenure, high levels of engagement reported through continuous survey feedback from Tyler team members, and our low
turnover.
Our team continues to work collaboratively with and for our clients and partners across multiple work arrangements: fully office-
based, fully remote and a blended approach of office-based and remote work. Prior to COVID, 40% of team members worked
remotely, primarily in sales and professional services roles. As of December 31, 2023, 63% of team members work remotely and 37%
of team members are either partially or fully office based.
9
Voluntary workforce turnover (rolling 12-month attrition) was 8% as of December 31, 2023, a decrease from 2022 turnover of 10%
and a return to pre-COVID levels of turnover at Tyler which consistently outperforms our industry peers. The average tenure of our
team members continues to be approximately seven years and approximately 28% of our employees have been employed by Tyler for
more than ten years. The most frequent factor cited by team members leaving Tyler in 2023 was career opportunities, with
compensation also cited as a factor. We continue to invest in talent development and making career opportunities clear to team
members and our 2023 efforts are discussed in further detail below.
Investments in Talent
We are committed to providing Tyler team members with career growth opportunities and the training and resources necessary to
continually strengthen their skills. Our talent assessment and development programs are designed to provide managers and employees
with the resources needed to achieve career goals, strengthen management skills and effectively lead their teams.
For example, in 2023:
•
•
•
•
823 Tyler team members participated in approximately 11,000 hours of AWS cloud certification training. There were 324
AWS accreditations and 102 certifications completed, as we continue to invest in developing cloud skills across the Tyler
workforce.
Nearly 200 Tyler managers participated in our nine-month Tyler Manager Development program which includes more than
50 hours of interactive, experiential learning, focused on developing skills managers need to lead a high performing team,
plus multiple leadership assessments, including 360-degree feedback, and a dedicated mentor to support their development.
To date, 53% of our management leads have participated in the program.
Division presidents and corporate function executives conducted annual leadership assessment and talent reviews with their
HR leaders and leadership teams to plan for succession and identify development priorities within their teams.
Tyler team members and managers completed over 30,000 hours of Tyler-sponsored AWS, management and compliance
training to support continuous learning, professional training and development.
Oversight and Management
Our human resources team is tasked with leading and supporting our organization in managing employment-related matters, including
recruiting and hiring, onboarding and training, compensation planning, talent management and development. Our executive team is
responsible for periodically reviewing team member programs and initiatives, including healthcare and other benefits, as well as our
management development and succession planning practices and our Diversity, Equity and Inclusion (“DEI”) efforts. Management
periodically reports to the Board of Directors and its committees regarding human capital measures and results that guide how we
attract, retain and develop a workforce to enable our business strategies.
Health & Safety
We invest in the well-being of Tyler team members and their families. We provide a range of offerings in support of mental and
emotional, financial, and physical health and wellness not only for our team members, but also for their family members. Our team
members continued to demonstrate elevated levels of mental, physical and financial stress in 2023. These levels increased during the
pandemic and have been slow to moderate. Given this, we enhanced mental health resources for managers and team members in 2023
and increased the level of financial education resources available to staff at Tyler.
Diversity and Inclusion
We believe in the benefits of a diverse workforce and inclusive culture, and we achieved notable improvements in several key areas
under our DEI Strategic Pillars in 2023 including:
•
•
•
Parity in female hires and three-year improvement in racial diversity from application through to hire for the first time since
we began tracking recruiting of diverse candidates;
Continued increase through the year in the depth and diversity of equity grants across Tyler with over 20% of 2023 grantees
representing first time grantees;
A decision to redesign our efforts across Tyler to elevate and accelerate our focus on inclusion in alignment with our business
objectives through the establishment of Tyler-wide Employee Resource Groups “(ERGs”) with multiple executive sponsors,
which will be implemented in 2024.
10
INTERNET WEBSITE AND AVAILABILITY OF PUBLIC FILINGS
We file annual, quarterly, current and other reports, proxy statements and other information with the Securities and Exchange
Commission, or SEC, pursuant to the Securities Exchange Act. You may read and copy any materials we file with the SEC at the
SEC’s Public Reference Room by calling the SEC at 1-800-732-0330. The SEC maintains an Internet site that contains reports, proxy
and other information statements, and other information regarding issuers, including us, that file electronically with the SEC. The
address of this site is http://www.sec.gov.
We also maintain a website at www.tylertech.com. We make available free of charge through this site our Annual Report on Form 10-
K, Quarterly Reports on Form 10-Q, Forms 4 and 5, Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to the SEC. In addition, copies of our annual report will be made available, free of charge, upon written request.
Our “Code of Business Conduct and Ethics” is also available on our website. We intend to satisfy the disclosure requirements
regarding amendments to, or waivers from, a provision of our Code of Business Conduct and Ethics by posting such information on
our website.
ITEM 1A.
RISK FACTORS.
An investment in our common stock involves a high degree of risk. Investors evaluating our company should carefully consider the
factors described below and all other information contained in this Annual Report. Any of the following factors could materially harm
our business, operating results, and financial condition. Additional factors and uncertainties not currently known to us or that we
currently consider immaterial could also harm our business, operating results, and financial condition. This section should be read in
conjunction with the Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in this Annual Report. We may make forward-looking statements from time to time, both written and
oral. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Our
actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including
those set forth below and elsewhere in this Annual Report.
Risks Associated with Our Business, Including Our Software Products
Cyber-attacks and security vulnerabilities can disrupt our business and harm our competitive position.
Threats to IT security can take, and have in the past taken, a variety of forms. Individuals and groups of hackers, and sophisticated
organizations including state-sponsored organizations, may take steps that pose threats to our clients and our IT. They have in the past
and may in the future develop and deploy malicious software to gain access to our internal networks, and/or to attack our products and
services, gain access to data centers we use to host client deployments, or act in a coordinated manner to launch distributed denial of
service or other coordinated attacks. Cyber threats are constantly evolving, thereby increasing the difficulty of detecting and
successfully defending against them. Cyber threats can have cascading impacts that unfold with increasing speed across our internal
networks and systems and those of our partners and clients. Breaches of our internal network have disrupted and could in the future
disrupt the security of our internal systems and business applications, and could impair our ability to provide services to our clients
and protect the privacy of their data, result in product development delays, compromise confidential or technical business information
harming our competitive position, result in theft or misuse of our intellectual property or other assets, require us to allocate more
resources to improve technologies, or otherwise adversely affect our business. Our business policies and internal security controls may
not keep pace with these evolving threats. Despite the network and application security, internal control measures, and physical
security procedures we employ to safeguard our systems, we may still be vulnerable to a security breach, intrusion, or loss or theft of
confidential client data, transaction data, or proprietary company information, which may harm our business, reputation and future
financial results. The lost revenue and containment, remediation, investigation, legal and other costs could be significant and may
exceed our insurance policy limits or may not be covered by insurance at all. Further, we may be subject to regulatory enforcement
actions and litigation that could result in financial judgments or the payment of settlement amounts and disputes with insurance
carriers concerning coverage.
In September 2020, we filed a Current Report on Form 8-K reporting a security incident (the "Incident") involving ransomware
disrupting access to some of our internal IT systems and telephone systems. Although we completed our investigation into the Incident
and believe we contained and recovered from the Incident, 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.
11
Disclosure of personally identifiable information and/or other sensitive client data could result in liability and harm our reputation.
We store and process increasingly large amounts of personally identifiable information and other confidential information of our
clients. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to
information security. Despite our efforts to improve security controls, it is possible our security controls over personal data, our
training of employees on data security, and other practices we follow may not prevent the improper disclosure of sensitive client data
that we store and manage. Disclosure of personally identifiable information and/or other sensitive client data has resulted in
obligations to send “data breach” notifications under applicable state laws, or to assist our clients in doing so, and/or could result in
liability and harm our reputation.
We depend on third parties with whom we engage or collaborate for certain projects, deliverables, and/or financial transaction
processes. If these parties fail to satisfy their obligations to us or we are unable to maintain these relationships, our operating results
and business prospects could be adversely affected.
To satisfy our obligations under client contracts, we often engage third parties to provide certain deliverables or fulfill certain
requirements. We may also use third parties to ensure that our services and solutions integrate with the software, systems, or
infrastructure requirements of other vendors and service providers. Our ability to serve our clients and deliver our solutions in a timely
manner depends on our ability to retain and maintain relationships with third-party vendors and service providers and the ability of
these third parties to meet their obligations in a timely manner, as well as on our effective oversight of their performance. If any third
party fails to perform on a timely basis the agreed-upon services, our ability to fulfill our obligations may be jeopardized. Third-party
performance deficiencies could result in breaches of our obligations with respect to, or the termination for default of, one or more of
our client contracts. A breach or termination for default could expose us to liability for damages and have an adverse effect on our
business prospects, results of operations, cash flows and financial condition and our ability to compete for future contracts and orders.
A global economic slowdown, the lingering of a pandemic, or similar circumstances could also adversely affect the businesses of our
third-party providers, hindering their ability to provide the services on which we rely. Our agreements with third parties typically are
non-exclusive and do not prohibit them from working with our competitors. If we are unsuccessful in establishing or maintaining our
relationships with these third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our
business, operating results or financial condition could be adversely affected.
In addition, we may act as a subcontractor to a third-party prime contractor to secure new projects. Subcontracting arrangements
where we are not the prime contractor pose unique risks to us because we may not have control over the customer relationship, and our
ability to generate revenues under such subcontracts may depend on the prime contractor, its performance and relationship with the
customer, and its relationship with us. We could suffer losses in the event a prime contract under which we serve as a subcontractor is
terminated, whether for non-performance by the prime contractor or otherwise. Upon a termination of the prime contract, our
subcontract would similarly terminate, and the resulting contract loss could have an adverse effect on our business prospects, results of
operations, cash flows, and financial condition and our ability to compete for future contracts and orders.
We rely on third-party providers—including Amazon Web Services—for hosting services and other technology-related services needed
to deliver certain of our cloud solutions. Any disruption in the services provided by such third-party providers could adversely affect
our business and subject us to liability.
A material portion of our business is provided through software hosting services, which are sometimes hosted from and use computing
infrastructure provided by third parties, including Amazon Web Services (AWS). These hosting services depend on the uninterrupted
operation of data centers and the ability to protect computer equipment and information stored in these data centers against damage
that may be caused by natural disaster, fire, power loss, telecommunications or Internet failure, acts of terrorism, unauthorized
intrusion, computer viruses, and other similar damaging events. If any of our data centers were to become inoperable for an extended
period, we might be unable to fulfill our contractual commitments. Although we take what we believe to be reasonable precautions
against such occurrences, we can give no assurance that damaging events such as these will not result in a prolonged interruption of
our services, which could result in client dissatisfaction, loss of revenues, and damage to our business.
Third-party hosting service providers have no obligation to renew their agreements with us on commercially reasonable terms or at all.
If we are unable to renew these agreements on commercially reasonable terms, we may be required to transition to a new provider and
we may incur significant costs and possible service interruption in connection with doing so. In addition, such service providers could
decide to close their facilities or change or suspend their service offerings without adequate notice to us. Moreover, any financial
difficulties, such as bankruptcy, faced by such service providers may have negative effects on our business, the nature and extent of
which are difficult to predict. Because we cannot easily switch third-party hosting service providers, any disruption with respect to our
current providers would impact our operations and our business could be adversely impacted. Problems faced by our hosting service
providers could adversely affect the experience of our customers. For example, AWS has experienced significant service outages in
the past and may do so again in the future.
12
Material portions of our business require the Internet infrastructure to be reliable.
Part of our future success continues to depend on the use of the Internet as a means to access public information and perform
transactions electronically, including, for example, electronic filing of court documents and electronic payment processing. This in
part requires ongoing maintenance of the Internet infrastructure, especially to prevent interruptions in service, as well as additional
development of that infrastructure. This requires a reliable network backbone with the necessary speed, data capacity, security, and
timely development of complementary products for providing reliable Internet access and services. If this infrastructure fails to be
sufficiently developed or be adequately maintained, our business would be harmed because users may not be able to access our
government portals. To date, any such outages have been temporary, and any business interruptions were contained and immaterial.
We employ third-party licensed software and software components for use in or with our solutions, and the inability to maintain these
licenses or the presence of errors or security vulnerabilities in the software we license could limit the functionality of our products and
result in increased costs or reduced service levels, which would adversely affect our business.
We incorporate and include third-party software into and with certain of our products and solutions. We also use third-party software
and tools in certain areas of the development process for our solutions. We anticipate that we will continue to rely on such third-party
software and development tools in the future. There can be no assurance that these third parties will continue to make their software or
tools available to us on acceptable terms, or at all, not make their products available to our competitors on more favorable terms,
invest the appropriate levels of resources in their products and services to maintain and enhance the capabilities of their software, or
remain in business. Any impairment in our relationship with these third parties or our ability to license or otherwise use their software
or tools could have a material adverse effect on our business, results of operations, cash flow, and financial condition. Although we
believe that there are commercially reasonable alternatives to the third-party software and tools we currently license, this may not
always be the case, or they may be difficult, time-consuming, or costly to replace. In addition, although we maintain a supplier
security evaluation process, if the third-party software or tools we use has or have errors, security vulnerabilities, or otherwise
malfunctions, the functionality of our solutions may be negatively impacted, our customers may experience reduced service levels, and
our business may suffer.
Certain of our solutions utilize open source software, and any failure to comply with the terms of one or more of these open source
licenses could adversely affect our business.
Certain of our solutions include software covered by open source licenses. The terms of various open source licenses have not been
interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions
or restrictions on our ability to market our solutions. It is possible under the terms of certain open source licenses, if we combine our
proprietary software with open source software in a certain manner, that we could be required to release the source code of our
proprietary software and make our proprietary software available under open source licenses. In the event that portions of our
proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected
portions of our source code, re-engineer all or a portion of our solutions, or otherwise be limited in the licensing of our solutions, each
of which could reduce or eliminate the value of our solutions. In addition to risks related to license requirements, use of open source
software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide
warranties or controls on the origin of the software. Many of the risks associated with the use of open source software cannot be
eliminated and could adversely affect our business.
We run the risk of errors or defects with new products or enhancements to existing products.
Our software products are complex and have in the past, and may in the future, contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Any such defects could result in a loss of revenues or delay market
acceptance. Our license agreements typically contain provisions designed to limit our exposure to potential liability. However, it is
possible we may not always successfully negotiate such provisions in our client contracts or the limitation of liability provisions may
not be effective due to existing or future federal, state, or local laws, ordinances, or judicial decisions. Although we maintain errors
and omissions and general liability insurance, and we try to structure contracts to limit liability, we cannot guarantee that a successful
claim could not be made or would not have a material adverse effect on our future operating results.
13
We must timely respond to technological changes to be competitive.
The market for our products is characterized by technological change, evolving industry standards in software technology, changes in
client requirements, and frequent new product introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. As a result, our
future success will depend, in part, upon our ability to enhance existing products and develop and introduce new products that keep
pace with technological developments, satisfy increasingly sophisticated client requirements, and achieve market acceptance. We
cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a
timely and cost-effective manner. The products, capabilities, or technologies developed by others could also render our products or
technologies obsolete or noncompetitive. Our business may be adversely affected if we are unable to develop or acquire new software
products or develop enhancements to existing products on a timely and cost-effective basis, or if such new products or enhancements
do not achieve market acceptance.
We may be unable to protect our proprietary rights.
Many of our product and service offerings incorporate proprietary information, trade secrets, know-how, and other intellectual
property rights. We rely on a combination of contracts, copyrights, and trade secret laws to establish and protect our proprietary rights
in our technology. We cannot be certain that we have taken all appropriate steps to deter misappropriation of our intellectual property.
There has also been an apparent evolution in the legal standards and regulations that courts and the U.S. patent office may apply in
favorably evaluating software patent rights. We are not currently involved in any material intellectual property litigation; however, we
may be a party to such litigation in the future to protect our proprietary information, trade secrets, know-how, and other intellectual
property rights. We cannot assure you that third parties will not assert infringement or misappropriation claims against us with respect
to current or future products. Any claims or litigation, with or without merit, could be time-consuming, costly, and a diversion to
management. Any such claims and litigation could also cause product shipment delays or require us to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Therefore,
litigation to defend and enforce our intellectual property rights could have a material adverse effect on our business, regardless of the
final outcome of such litigation.
Clients may elect to terminate our maintenance contracts and manage operations internally.
It is possible that our clients may elect to not renew maintenance contracts for our software, trying instead to maintain and operate the
software themselves using their perpetual license rights (excluding software applications that we provide on a hosted or software as a
service basis). Alternatively, clients may elect to drop maintenance on certain modules that they ultimately decide not to use. This
could adversely affect our revenues and profits. Additionally, they may inadvertently allow our intellectual property or other
information to fall into the hands of third parties, including our competitors, which could adversely affect our business.
Risks Associated with Selling Products and Services into the Public Sector Marketplace
Selling products and services into the public sector poses unique challenges.
We derive substantially all of our revenues from sales of software and services to state, county, and city governments, other federal or
municipal agencies, and other public entities. We expect that sales to public sector clients will continue to account for substantially all
of our revenues in the future. We face many risks and challenges associated with contracting with governmental entities, including:
•
•
•
•
•
•
•
Resource limitations caused by budgetary constraints, which may provide for a termination of executed contracts due to
a lack of future funding
Long and complex sales cycles
Contract payments at times are subject to achieving implementation milestones, and we may have differences with
clients as to whether milestones have been achieved
Political resistance to the concept of contracting with third parties to provide IT solutions
Legislative changes affecting a local government’s authority to contract with third parties
Varying bid procedures and internal processes for bid acceptance
Various other political factors, including changes in governmental administrations and personnel
Each of these risks is outside our control. If we fail to adequately adapt to these risks and uncertainties, our financial performance
could be adversely affected.
14
Global health crises, such as a pandemic, may adversely affect our business and results of operations.
We expect that a public health crisis, such as a pandemic, may negatively impact our business and financial results. As seen with a
pandemic, certain infection rates or virus strains may result in government authorities imposing measures to contain the virus,
including travel bans and restrictions, quarantines, and business limitations and shutdowns. While we are unable to accurately predict
the full impact that a health crisis or pandemic would have on our results from operations, financial condition, liquidity and cash flows
due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and associated
compliance, a pandemic may negatively impact our revenues and other financial results.
Because an increasing portion of our revenues are recurring, the effect of public health-related shutdown on our results of operations
may also not be fully reflected for some time. We may see some more immediate impact on our business should there be new delays
in government procurement processes and uncertainty around public sector budgets, or new delays in implementations caused by
travel restrictions, closed offices, or clients shifting focus to more pressing issues.
Appraisal projects and software implementations may be delayed if clients put projects on hold or slow projects by extending go-live
dates. While we have the ability to deliver most of our professional services remotely, some of our professional services, including
appraisal assessments, are more effective when performed on-site, and certain clients may continue to insist on on-site services in any
event. In addition, our delivery of some professional services requires the availability of client personnel. There may be a negative
impact on our revenues if we are unable to deliver these services. Also, we expect software licenses and subscriptions revenues to be
negatively affected if there are delays in procurement processes. Some clients could request changes to payment terms, negatively
impacting the timing of collections of accounts receivables in future periods.
We have historically evaluated goodwill for impairment annually as of October 1, or more frequently if impairment indicators arose.
Subsequent to our annual goodwill impairment analysis, we monitor for any events or changes in circumstances, such as significant
adverse changes in business climate or operating results, changes in management’s business strategy, an inability to successfully
introduce new products in the marketplace, an inability to successfully achieve internal forecasts or significant declines in our stock
price, which may represent an indicator of impairment. The occurrence of any of these events, which could be caused or impacted by a
public health crisis similar to the COVID-19 pandemic, may require us to record future goodwill impairment charges.
A prolonged economic slowdown could harm our operations.
A prolonged economic slowdown or recession could reduce demand for our software products and services. Governments may face
financial pressures that could in turn affect our growth rate and profitability in the future. There is no assurance that government
spending levels will be unaffected by declining or stagnant general economic conditions, and if budget shortfalls occur, they may
negatively impact government IT spending and could adversely affect our business.
The open bidding process creates uncertainty in predicting future contract awards.
Many governmental agencies purchase products and services through an open bidding process. Generally, a governmental entity will
publish an established list of requirements requesting potential vendors to propose solutions for the established requirements. To
respond successfully to these requests for proposals, we must accurately estimate our cost structure for servicing a proposed contract,
the time required to establish operations for the prospective client, and the likely terms of any other third-party proposals submitted.
We cannot guarantee that we will win any bids in the future through the request for proposal process, or that any winning bids will
ultimately result in contracts on favorable terms. Our failure to secure contracts through the open bidding process, or to secure such
contracts on favorable terms, may adversely affect our revenues and gross margins.
We face significant competition from other vendors and potential new entrants into our markets.
We believe we are a leading provider of integrated software solutions for the public sector.
Our market is highly fragmented with a large number of competitors that vary in size, product platform, and product scope. Our
competitors include consulting firms, publicly held companies that focus on selected segments of the public sector market, and a
significant number of smaller, privately held companies. Certain competitors have greater technical, marketing, and financial
resources than we do. We cannot assure you that such competitors will not develop products or offer services that are superior to our
products or services or that achieve greater market acceptance.
We also compete with internal, centralized IT departments of governmental entities, which requires us to persuade the end-user to stop
the internal service and outsource to us. In addition, our clients and prospective clients could elect to provide information management
services internally through new or existing departments, which could reduce the market for our services.
15
We could face additional competition as other established and emerging companies enter the public sector software market and new
products and technologies are introduced. Increased competition could result in pricing pressure, fewer client orders, reduced gross
margins, and loss of market share. Current and potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our
prospective clients. It is possible that new competitors or alliances may emerge and rapidly gain significant market share. We cannot
assure you that we will be able to compete successfully against current and future competitors, and the failure to do so would have a
material adverse effect upon our business.
Fixed-price contracts may affect our profits.
Some of our contracts are structured on a fixed-price basis, which can lead to various risks, including:
•
•
•
The failure to accurately estimate the resources and time required for an engagement
The failure to effectively manage our clients’ expectations regarding the scope of services delivered for a fixed fee
The failure to timely and satisfactorily complete fixed-price engagements within budget
If we do not adequately assess and manage these and other risks, we may be subject to cost overruns and penalties, which may harm
our financial performance.
Changes in the insurance markets may affect our business.
Some of our clients, primarily those for our property appraisal services, require that we secure performance bonds before they will
select us as their vendor. In addition, we have in the past been required to provide letters of credit as security for the issuance of a
performance bond. We cannot guarantee that we will be able to secure such performance bonds in the future on terms that are
favorable to us, if at all. Our inability to obtain performance bonds on favorable terms or at all could impact our future ability to win
some contract awards, particularly large property appraisal services contracts, which could negatively impact revenues. In addition, the
general insurance markets may experience volatility and/or restrictive coverage trends, which may lead to future increases in our
general and administrative expense and negatively impact our operating results.
Risks Related to Our Indebtedness
Servicing our indebtedness requires a significant amount of cash. We may not have sufficient cash flow from our business to pay our
indebtedness, and we may not otherwise have the ability to raise the funds necessary to settle for cash conversions of the Convertible
Senior Notes or to repurchase the Convertible Senior Notes upon a fundamental change, or to repay our indebtedness obligations
under our 2021 Credit Agreement, each of which could adversely affect our business and results of operations.
As of December 31, 2023, we had outstanding an aggregate principal amount of $600 million of our Convertible Senior Notes and $50
million under our 2021 Credit Agreement. In April 2021, we entered into the 2021 Credit Agreement with significantly increased
borrowing capacity of up to $1.4 billion, and on the closing of the acquisition of NIC Inc. (“NIC”) on April 21, 2021, we borrowed
initial loans in the aggregate principal amount of $1.15 billion. The 2021 Credit Agreement also has an option to increase the amount
available up to an additional $500 million subject to our leverage and other factors. The proceeds from the issuance of our Convertible
Senior Notes and from loans under the 2021 Credit Agreement were used as sources of funding for the acquisition of NIC. Our
indebtedness may increase our vulnerability to any generally adverse economic and industry conditions, and we and our subsidiaries
may, subject to the limitations in the terms of our existing and future indebtedness, incur additional debt, secure existing or future debt
or recapitalize our debt. If we incur additional indebtedness, the risks related to our business would increase and our ability to service
or repay our indebtedness may be adversely impacted.
16
Pursuant to their terms, holders may convert their Convertible Senior Notes at their option prior to the scheduled maturities of their
Convertible Senior Notes under certain circumstances. Upon conversion of the Convertible Senior Notes, unless we elect to deliver
solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will
be obligated to make cash payments. In addition, holders of our Convertible Senior Notes will have the right to require us to
repurchase their Convertible Senior Notes upon the occurrence of a fundamental change (as defined in the Indenture, dated as of
March 9, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”) (the “Indenture”)), at a
repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid
interest, if any. Although it is our intention, and we currently expect to have the ability, to settle the Convertible Senior Notes in cash,
there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make
repurchases of Convertible Senior Notes surrendered or Convertible Senior Notes being converted. In addition, our ability to make
payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to
repurchase Convertible Senior Notes at a time when the repurchase is required by the Indenture or to pay any cash payable on future
conversions of the Convertible Senior Notes as required by the Indenture would constitute a default under the Indenture. A default
under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other existing or
future indebtedness. If the repayment of other indebtedness were to be accelerated after any applicable notice or grace periods, we may
not have sufficient funds to repay the other indebtedness and repurchase the Convertible Senior Notes or make cash payments upon
conversions thereof.
Our ability to make scheduled payments of the principal and interest on our indebtedness when due or to make payments upon
conversion or repurchase demands with respect to our Convertible Senior Notes, or to refinance our indebtedness as we may need or
desire, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control.
Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our
existing indebtedness, and any future indebtedness we may incur, and to make necessary capital expenditures. If we are unable to
generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital
expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our
ability to refinance existing or future indebtedness will depend on the capital markets and our financial condition at such time. We
may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on
our existing or future indebtedness and have a material adverse effect on our business, results of operations, and financial condition.
Covenant restrictions under our indebtedness may limit our ability to operate our business and may adversely affect our financial
condition, results of operations, and earnings per share.
The Indenture governing the Convertible Senior Notes and the 2021 Credit Agreement do contain, and our future indebtedness
agreements may contain covenants that may restrict our ability to finance future operations or capital needs or to engage in other
business activities. Subject to customary carve-outs, thresholds and baskets, the 2021 Credit Agreement (and the Indenture by means
of a cross-default) restricts, absent consent of the agent and lenders under the 2021 Credit Agreement, our ability and the ability of our
restricted subsidiaries to, among other things:
•
•
Incur additional indebtedness,
Permit liens on our assets,
• Make certain investments, acquisitions and dispositions,
• Make certain specified fundamental changes, and
• Make certain restricted payments.
In addition, the 2021 Credit Agreement (and the Indenture by means of a cross-default) contains other customary affirmative and
negative covenants, and events of default. The 2021 Credit Agreement is unsecured but requires us to maintain certain financial ratios
regarding our total leverage and interest coverage and other financial conditions in addition to the restrictions described above. Events
beyond our control, including changes in general economic and business conditions, may result in a breach of any of these covenants
and result in a default under the 2021 Credit Agreement that may, in turn, result in a default under the Indenture. If an event of default
under the 2021 Credit Agreement occurs, the lenders could terminate all commitments to lend and elect to declare all amounts
outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, the
lenders could proceed against the guarantees by our direct and indirect material domestic subsidiaries. Should the lenders proceed
against the guarantees, we cannot give assurance that we would have sufficient assets to pay amounts due on the 2021 Credit
Agreement and the Convertible Senior Notes.
17
Variable rate indebtedness subjects the Company to interest rate risk, which could cause our debt service obligations to increase
significantly.
Our borrowings under the 2021 Credit Agreement are, and are expected to continue to be, at variable rates of interest and expose us to
interest rate risk. If interest rates continue to increase, our debt service obligations on the variable rate indebtedness would increase
even though the amount borrowed remained the same, and our net income would decrease. Revolving credit facility loans and Term
A-1 Loans under the 2021 Credit Agreement bear interest at a per annum rate equal to, at our option, 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 SOFR rate plus a margin of 1.125% to 1.75%.
Our Term A-2 Loans bear interest, at our 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-, six-, or, subject to approval by all lenders, twelve-month SOFR rate plus a margin of 0.875% to 1.5%. The margin in each
case is based upon our total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. Based on the debt under the
2021 Credit Agreement, the aggregate principal outstanding balance as of December 31, 2023 is $50.0 million, and each quarter of a
point change in interest rates would result in a $125,000 change in annual interest expense.
In January 2023, we amended our 2021 Credit Agreement to replace the LIBOR reference rate with the SOFR reference rate.
The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and
results of operations.
In the event the conditional conversion feature of the notes is triggered, holders of our Convertible Senior Notes will be entitled to
convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their
Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other
than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation
through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their
Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding
principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Transactions relating to our Convertible Senior Notes may affect the value of our common stock.
Our Convertible Senior Notes may become convertible in the future at the option of their holders under certain circumstances. If
holders of our Convertible Senior Notes elect to convert their notes, we may settle our conversion obligation by delivering to them a
significant number of shares of our common stock, which would cause dilution to our existing shareholders.
Inflation and interest rates.
Our liquidity and ongoing access to capital could be materially and negatively affected by increased volatility in the financial and
securities markets, including increased inflation and interest rates. ∙ Our continued access to sources of liquidity depends on multiple
factors, including global macroeconomic conditions, the condition of global financial markets, the availability of sufficient amounts of
financing and our operating performance. There has been increased volatility in the financial and securities markets, as well as
increased inflation and interest rates, which generally has made access to capital less certain and has increased the cost of obtaining
new capital. We may need to obtain equity, equity-linked, or debt financing in the future to fund our operations, including our
acquisition strategy, and there is no guarantee that such debt financing will be available in the future, or that it will be available on
commercially reasonable terms, in which case we may need to seek other sources of funding.
18
Risks Associated with Our Periodic Results and Stock Price
Fluctuations in quarterly revenues could adversely impact our operating results and stock price.
Our revenues and operating results can be difficult to predict and may fluctuate substantially from quarter to quarter for a variety of
reasons, including:
•
•
•
•
The size of license transactions can vary significantly
Clients may unexpectedly postpone or cancel procurement processes due to changes in strategic priorities, project
objectives, budget, or personnel
Client purchasing processes vary significantly and a client’s internal approval, expenditure authorization, and contract
negotiation processes can be difficult and time consuming to complete, even after selection of a vendor
The number, timing, and significance of software product enhancements and new software product announcements by us
and our competitors may affect purchase decisions
• We may have to defer revenues under our revenue recognition policies and GAAP
In each fiscal quarter, our expense levels, operating costs, and staffing levels are based to some extent on projections of future
revenues and are relatively fixed. If our actual revenues fall below expectations, we could experience a reduction in earnings. Also, if
actual revenues or earnings for any given quarter fall below expectations, it may lead to a decline in our stock price.
Increases in our investment in research and development could decrease overall margins.
An important element of our corporate strategy is to continue to dedicate a significant amount of resources to research and
development and related product and service opportunities, both through internal investments and the acquisition of intellectual
property from companies that we have acquired. We believe that we must continue to dedicate a significant amount of resources to our
research and development efforts to maintain our competitive position, and research and development expense could adversely affect
operating margins.
Our stock price may be volatile.
The market price of our common stock may be volatile. Examples of factors that may significantly impact our stock price include:
•
•
•
•
•
•
•
Actual or anticipated fluctuations in our operating results
Announcements of technological innovations, new products, or new contracts by us or our competitors
Developments with respect to patents, copyrights, or other proprietary rights
Conditions and trends in the software and other technology industries
Changes in financial estimates by securities analysts
Changes in interest rates
General economic and market conditions and other factors
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly
affected the market prices of technology company stocks and may in the future adversely affect the market price of our stock.
Sometimes, securities class action litigation is filed following periods of volatility in the market price of a particular company’s
securities. We cannot assure you that similar litigation will not occur in the future with respect to us. Such litigation could result in
substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect upon our
financial performance.
Our financial outlook may not be realized.
From time to time, in press releases and otherwise, we may publish forecasts or other forward-looking statements regarding our
results, including estimated revenues or earnings. Any forecast of our future performance reflects various assumptions. These
assumptions are subject to significant uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further,
the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of
which are beyond our control. As a result, we cannot be certain that our performance will be consistent with any management
forecasts or that the variation from such forecasts will not be material and adverse. Current and potential stockholders are cautioned
not to base their entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize our entire
publicly available mix of historical and forward-looking information, as well as other available information regarding us, our products
and services, and the software industry when evaluating our prospective results of operations.
19
Risks Associated with Our Growth Strategy and Other General Corporate Risks
We may experience difficulties in executing our acquisition strategy.
A material portion of our historical growth has resulted from strategic acquisitions. Although our current focus is on organic internal
growth, we will continue to identify and pursue strategic acquisitions with suitable candidates. These transactions involve significant
challenges and risks, including risks that a transaction does not advance our business strategy; that we do not achieve the expected
return on our investment; that we have difficulty integrating business systems and technology; that we have difficulty retaining or
integrating new employees; that the transactions distract management from our other businesses; that we acquire unforeseen liabilities;
and other unanticipated events. Our future success will depend, in part, on our ability to successfully integrate future acquisitions into
our operations. It may take longer than expected to realize the full benefits of these transactions, such as increased revenue, enhanced
efficiencies, or increased market share, or the benefits may be ultimately less than we expected. Although we conduct due diligence
reviews of potential acquisition candidates, we may not identify all material liabilities or risks related to acquisition candidates. There
can be no assurance that any such strategic acquisitions will be accomplished on favorable terms or will result in profitable operations.
Our failure to properly manage growth could adversely affect our business.
We continue to expand our operations by pursuing existing and potential market opportunities. This growth places significant
demands on management and operational resources. In order to manage growth effectively, we must implement and improve our
operational systems, procedures, and controls on a timely basis. If we fail to implement these systems, our business may be materially
adversely affected.
Increases in labor costs, including wages, and an overall tightening of the labor market, could adversely affect our business, results of
operations or financial condition.
The labor costs associated with our business are subject to several external factors, including unemployment levels and the quality and
the size of the labor market, prevailing wage rates, minimum wage laws, wages and other forms of remuneration and benefits offered
to prospective employees by competitor employers, health insurance costs and other insurance costs and changes in employment and
labor legislation or other workplace regulation. If we are unable to mitigate wage rate increases driven by increases to the competitive
labor market through automation and other labor savings initiatives, our labor costs may increase. Furthermore, high inflation rates
could also push up our labor costs. There is no assurance that our revenues will increase at the same rate as these labor cost increases
to maintain the same level of profitability.
In the event we must offer increased wages or other competitive benefits and incentives to attract and retain qualified personnel and
fail to do so, the quality of our workforce could decline, causing certain aspects of our business to suffer. Increases in labor costs could
force us to increase our prices, which could adversely impact sales. Although we have not experienced any material labor shortage to
date, we have observed an overall tightening and increasingly competitive labor market and have recently experienced and expect to
continue to experience some labor cost pressures. If we are unable to hire and retain capable employees, manage labor cost pressures,
or if mitigating measures we take in response to increased labor costs, have unintended negative effects, including on client service or
retention, our business would be adversely affected. If competitive pressures or other factors prevent us from offsetting increased labor
costs, our profitability may decline and could have an adverse effect on our business, results of operations or financial condition.
We may be unable to hire, integrate, and retain qualified personnel.
Our continued success will depend upon the availability and performance of our key management, sales, marketing, client support, and
product development personnel. The loss of key management or technical personnel could adversely affect us. We believe that our
continued success will depend in large part upon our ability to attract, integrate, and retain such personnel. We have at times
experienced and continue to experience challenges in recruiting qualified personnel. Competition for qualified software development,
sales, and other personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. In
addition, competitive job markets may increase our costs relating to compensation packages due to higher salary expectations and
pressures.
Compliance with changing regulation of corporate governance may result in additional expenses.
Changing laws, regulations, and standards relating to corporate governance, compliance, and public disclosure can create uncertainty
for public companies. The costs required to comply with such evolving laws across the various states and at the federal level are
difficult to predict and/or harmonize. To maintain high standards of corporate governance, compliance, and public disclosure, we
intend to invest all reasonably necessary resources to comply with evolving standards. This investment may result in an unforeseen
increase in general and administrative expense and a diversion of management’s time and attention from revenue-generating activities,
which may harm our operating results.
20
We do not foresee paying dividends on our common stock.
We have not declared nor paid a cash dividend since we entered the software business in 1998. We intend to retain earnings for use in
the operation and expansion of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable
future.
Provisions in our certificate of incorporation, bylaws, and Delaware law could deter takeover attempts.
Our Board of Directors may issue up to 1,000,000 shares of preferred stock and may determine the price, rights, preferences,
privileges, and restrictions, including voting and conversion rights, of these preferred shares. These determinations may be made
without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock
may make it more difficult for a third-party to acquire a majority of our outstanding voting stock. In addition, some provisions of our
Certificate of Incorporation, Bylaws, and the Delaware General Corporation Law could also delay, prevent, or make more difficult a
merger, tender offer, or proxy contest involving us.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 1C.
CYBERSECURITY.
Tyler is committed to remaining vigilant in an ever-changing security environment. Our public sector clients are attractive, data-rich
targets for threat actors. We partner closely with our clients to assist them in following evolving best practices, and constantly evaluate
our own policies and procedures to help ensure that we are implementing safeguards that protect their data and ours.
The same cybersecurity threats that predominate across most industries challenge Tyler and our clients as well. These threats range
from crude phishing attempts to distributed denial-of-service disruptions to sophisticated malware and ransomware, among others. We
are acutely aware that these same threats exist for our acquisition targets, our suppliers, and our third-party business partners, and a
cybersecurity incident or vulnerability experienced by any of these entities could also materially and/or adversely impact our business
operations and/or performance, both operational and financial, and could harm our reputation and/or competitive position. Given the
criticality of a strong cybersecurity posture, we continuously and conscientiously invest in our security infrastructure, tooling, and
related resources.
Cyber Risk Management Strategy
The Board of Directors is responsible for overseeing Tyler’s senior management in the execution of its risk-management
responsibilities and for assessing Tyler’s overall approach to risk management. The Board exercises these responsibilities periodically
as part of its meetings and through its committees, each of which examines various components of enterprise risk. The Audit
Committee oversees management of financial risks, as well as Tyler’s policies with respect to risk assessment and risk management,
including but not limited to information security risk.
Tyler’s Chief Information Security Office (“CISO”) leads the information security responsibility at Tyler. He has spent his career in
information security, joining Tyler in 2018 and previously working in the payments and semiconductor manufacturing industries. He
is a Certified Information Systems Security Professional (“CISSP”) and a Certified Data Privacy Solutions Engineer (“CDPSE”).
The CISO reports directly to Tyler’s Chief Operations Officer (“COO”), who in turn reports to the President & Chief Executive
Officer. Tyler believes this organizational structure provides a holistic and collaborative approach to cybersecurity risk management,
as the COO also oversees Tyler’s information technology, technology, and cloud operations teams, with whom the CISO works
regularly and closely. The CISO also has a dotted line to the Chair of the Audit Committee.
The CISO leads a full-time Security Risk & Compliance team that assesses, identifies and manages material risks from cybersecurity
threats and oversees our Information Security Risk Management Program. These efforts include the identification, assessment, and
treatment of potential harms to Tyler’s technology, data, and intellectual property. The team continually monitors the potential for
harm to help manage the level of risk.
To help protect client information and Tyler data, Tyler leverages both internal and external resources, including third-party
assessments, to work to identify and respond to information security risks. For example:
21
Internal Resources: Our full-time information security team focuses on managing incoming security risks and developing preventative
responses to potential future risks, using tools targeted at people, processes, and technology. These efforts include security training for
all employees at hire and on an annual basis thereafter, unannounced security testing (particularly on topics such as phishing), and
periodic security alert messages for education or urgent security communications.
We repeatedly test our software, during the development cycle and once out in the field, including internal assessments of our flagship
solutions. We work closely with Tyler’s Data Privacy Officer and her team to educate Tyler team members on complementary
privacy-by-design principles. We continuously iterate on access management policies for both technological and physical resources.
Tyler staffs an internal incident response team designed to launch when a potential or suspected security incident is reported to or
identified by Tyler. That team is composed of a multi-disciplinary group of Tyler team members, including representatives from the
security, privacy, communications, and relevant business unit teams, as well as outside forensic and legal advisors that are called on as
needed. The incident response team’s goal is to confirm, contain, mitigate, and remediate the incident, as applicable, and conducts a
“lessons learned” process when the incident response is completed.
To help ensure disaster recovery and business continuity, Tyler maintains a business continuity plan with comprehensive procedures
designed to recover Tyler and client assets quickly and effectively following a service disruption. Tyler’s policies and procedures with
respect to disaster recovery, as well as its process to help recover critical technology platforms, data center infrastructure, and
operations, are updated regularly, tested annually, and reviewed by third-party auditors. We also partner with our Internal Audit team
to regularly assess and respond to evolving risk management findings.
External resources: Tyler leverages third-party assessments, audits, and reporting obligations to provide additional layers of
accountability, monitoring and testing. This includes a bug reporting program that we publish that invites any third party to report a
security vulnerability they have identified. We also use a Qualified Security Assessor to perform an annual Payment Card Industry
Data Security Standards assessment that tests our credit card data controls, and we undergo an annual System & Organizational
Control audit to generate a report of our key compliance controls and objectives, among other things. Given our technology in the
courts and public safety markets, we also manage compliance with Criminal Justice Information Systems security standards that are
established by the Federal Bureau of Investigation (“FBI”), and we partner with our clients and third-party Criminal Justice
Information Services (“CJIS”) compliance consultants to ensure that we adhere to the requirements applicable to us.
Technology: Tyler also utilizes technology to help harden our environment from internal and external threats. We leverage a third-
party endpoint detection management solution and threat intelligence software, as well as web-filtering tools, a multi-factor
authentication tool, and related tools that support our “defense-in-depth” strategy. These tools are operated by subject-matter experts
that report to the CISO, and Tyler employees are educated on the tooling to the extent applicable.
Third Parties: Our management of third-party security risks is an area of heightened focus for us. Over the past several years, we have
worked to formalize our security due diligence process for each acquisition target, such that security is a formally embedded
component of our due diligence and typically involves our independent testing of the target technology prior to closing the acquisition.
Where a vulnerability or risk is identified, we generally require remediation by the target or attempt to ensure a remediation path post-
closing, with contractual protections and liability parameters set forth in the purchase agreement.
We strive to enhance our vendor risk analysis, with a goal of universalizing the use of form cybersecurity questionnaires and/or
security addenda where applicable. We consider the results of a security and privacy review of material vendor contracts, as well as
our material contracts with business partners. Our goal is to proactively identify and manage potential security risks and
vulnerabilities, and to clearly articulate the responsibility – whether shared, divided, flow-down, or otherwise – of Tyler, our
acquisition targets, our vendors, and/or our business partners. We expect third parties – including our clients – to report cybersecurity
incidents to us so that we can assess the impact of the incident on us.
Cybersecurity Governance
In 2022, we formalized a multi-layered security governance structure, with the goal of ensuring that responsibilities are clear,
information is effectively communicated, priorities are coordinated, and proper oversight is provided. Each “layer” of the governance
structure has unique meeting, reporting, and action cadences to help ensure consistent communication between our security working
groups, our leadership team, and our Board of Directors.
On at least a quarterly basis, Tyler’s CISO provides a formal report to the Audit Committee and to the Board of Directors. Our Audit
Committee Chair and CISO also communicate on an as-needed basis between those quarterly reports. In 2022, Tyler’s Lead
Independent Director completed the requirements to receive the CERT Certificate in Cybersecurity Oversight from the Software
Engineering Institute at Carnegie Mellon University. Another Tyler director possesses more than 37 years of Department of Defense
experience in cyberspace operations and major computer network architectures.
22
Tyler’s governance practices are supported by several segments of Tyler’s senior leadership, management, and teams. This includes
security working groups and a security governance committee. The security governance committee, which meets on a quarterly basis
to review the threat landscape and security initiatives at Tyler, is led by the CISO and includes senior leadership from Tyler’s legal
and operational teams, as well as the president of each of Tyler’s three operating groups and Tyler’s President & CEO.
Operationalizing Cybersecurity Risk Management
We firmly believe – and communicate regularly – that all Tyler team members have a vital role to play in cybersecurity risk
management. We identify their responsibilities as falling into three key areas:
•
•
•
Participating in training to identify and promptly report risks;
Staying informed by reading all pertinent information and security communications; and
Actively engaging in ongoing training initiatives.
We observe Cybersecurity Awareness month with interactive weekly training, workshops, and additional resources on strong
cybersecurity practices. In addition to Cybersecurity Awareness month, additional cybersecurity training and awareness initiatives
occur throughout the calendar year, including annual security compliance training; a monthly Cybersecurity Awareness Series
composed of articles and training highlighting current cybersecurity concerns; company-wide communication as necessary to alert
team members of potential threats; and weekly security-related videos with opportunities to win prizes through participation. We track
participation in training events and boast high participation rates, with continuous reflection on strategies for driving participation yet
higher.
In 2022, we expanded our Security Champions Program to identify a resource on our various application teams who proactively
operationalizes security best practices on their team. This program helps to ensure that security measures are built into our programs
from development to deployment. We have over 100 security champions who can collaboratively advocate security tools throughout
the lifecycle of our applications.
Measuring Cybersecurity Risks
In order to evaluate whether a cybersecurity risk is material to Tyler, we take a multi-disciplinary approach to assessing qualitative and
quantitative factors. The cross-functional team includes senior leadership from Tyler’s information security, legal, finance, and
accounting teams, as well as senior leadership from the impacted business unit(s).
When an incident is reported, Tyler assembles its incident response team and initiates its incident response process as soon as possible.
Working with the incident response team, the CISO aims to take an initial measurement of qualitative and quantitative metrics,
typically within 24 hours of the incident report, to help determine whether Tyler’s Chief Financial Officer (“CFO”) and Chief
Accounting Officer (“CAO”) should be engaged to do a deeper analysis of quantitative factors. The CFO and CAO are expected to
engage with the Company’s Chief Legal Officer (“CLO”) and Audit Chair to evaluate, holistically, not just the quantitative factors but
the qualitative factors as well. If that team determines that the incident may represent a risk of national security, the CLO may contact
the US attorney general for a disclosure delay of up to 30 days, or if applicable the team may coordinate to prepare and publish an 8-
K, if management believes the materiality threshold has been reached. Whether or not the incident is deemed material, the incident
response team will monitor the incident on an ongoing basis to attempt to ensure containment, mitigation, and remediation, as well as
to monitor for evolving factors that subsequently push the incident to a materiality threshold that requires disclosure and reporting.
Quantitative metrics for evaluating a security incident include the potential or actual financial loss, the costs of impacted data records,
remediation costs, and/or third-party expenses. Qualitative factors include potential or actual impacts to Tyler’s reputation and/or
competitiveness, disruptions to Tyler’s business, and/or risk of litigation or regulatory action. In evaluating an incident, Tyler also
works to assess whether the incident is related to another recent incident and whether the incident may represent a threat to national
security. Tyler does not expect an incident to rise to that level unless Tyler infrastructure is deemed “critical infrastructure” by the
Cybersecurity and Infrastructure Security Agency (“CISA”).
Notwithstanding these ongoing efforts and our multi-layered approach to cybersecurity, we may not be successful in preventing or
mitigating a cybersecurity incident that could have a material adverse effect on us. While Tyler maintains cybersecurity insurance, the
costs related to cybersecurity threats or disruptions may not be fully insured.
Please see Item 1A, “Risk Factors,” for a discussion of cybersecurity risks.
23
ITEM 2.
PROPERTIES.
We occupy a total of approximately 1.3 million square feet of office space, of which approximately 762,000 square feet is in various
office facilities we own. We own or lease offices for our major operations in the states of Arkansas, Arizona, California, Colorado,
Connecticut, Georgia, Illinois, Indiana, Kansas, Massachusetts, Maine, Michigan, Missouri, Montana, North Carolina, New York,
Ohio, Tennessee, Texas, Virginia, Washington, Washington D.C., Wisconsin, Ontario and British Columbia, Canada, the Philippines
and India.
ITEM 3.
LEGAL PROCEEDINGS.
During the first quarter of 2022, we received a notice of termination for convenience under a contractual arrangement with a state
government client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and
sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience.
The client was unresponsive to our outreach for several months. On August 23, 2022, we filed a lawsuit to enforce our rights and
remedies under the applicable contractual arrangement, and since then have been engaged directly with the client on payment
resolution. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are
entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We can provide no
assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
24
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the New York Stock Exchange under the symbol “TYL”. At December 31, 2023, we had
approximately 1,039 stockholders of record. Most of our stockholders hold their shares in street name; therefore, there are
substantially more than 1,039 beneficial owners of our common stock.
We did not pay any cash dividends in 2023 or 2022. 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.
The following table summarizes certain information related to our stock incentive plan, restricted stock units and our employee stock
purchase plan. There are no warrants or rights related to our equity compensation plans as of December 31, 2023.
Plan Category
Equity compensation plans approved by security
shareholders:
2018 Incentive Stock Plan
Employee Stock Purchase Plan
Equity compensation plans not approved by security
shareholders
Number of securities to
be issued upon exercise
of outstanding options,
warrants, purchase rights
and vesting of restricted
stock units as of
December 31, 2023
Weighted average
exercise price of
outstanding options
and unvested restricted
stock units
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in initial column
as of December 31, 2023)
1,870,812
9,997
—
1,880,809 $
283.09
355.4
—
283.47
456,556
525,881
—
982,437
As of December 31, 2023, we had authorization to repurchase up to approximately 2.3 million additional shares of Tyler common
stock. During 2023, we did not purchase any shares of our common stock.
A summary of the repurchase activity during 2023 is as follows:
Period
Three months ended March 31
Three months ended June 30
Three months ended September 30
October 1 through October 31
November 1 through November 30
December 1 through December 31
Total number of
shares repurchased
Additional number
of shares authorized
that may be
repurchased
Average price paid
per share
Maximum number of
shares that may be
repurchased under
current authorization
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,270,091
2,270,091
2,270,091
2,270,091
2,270,091
2,270,091
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. There is no expiration date specified for the authorization, and we may repurchase stock under
the program from time to time.
As of February 21, 2024, we had remaining authorization to repurchase up to 2.3 million additional shares of our common stock.
25
Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the
Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the
Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by
reference into such filing.
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, 2018. 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
$375
$300
$225
$150
$75
$0
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
Tyler Technologies, Inc.
S&P 500 Stock Index
S&P 600 Information Technology Index
Company / Index
Tyler Technologies, Inc.
S&P 500 Stock Index
S&P 600 Information Technology Index
ITEM 6. [RESERVED]
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
100
100
100
161.46
131.49
139.59
234.92
155.68
178.41
289.50
200.37
226.31
173.51
164.08
175.70
225.01
207.21
212.50
This section has been eliminated as a result of adopting the November 19, 2020, amendment to Item 301 of Regulation S-K.
26
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes
included in Item 8 of this Annual Report on Form 10-K. For a comparison of our Results of Operations for the years ended
December 31, 2022, and 2021, and our Cash Flow discussion for the year ended December 2022, see “Part II, Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report on Form 10-K for the year ended
December 31, 2022, as filed with the SEC on February 21, 2023.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends,
expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often
contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,”
“may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our
business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable
basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ
materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be
among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) changes in the
budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information
technology spending; (2) disruption to our business and harm to our competitive position resulting from cyber-attacks and security
vulnerabilities; (3) our ability to protect client information from security breaches and provide uninterrupted operations of data
centers; (4) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding
unanticipated costs and disruptions to existing operations; (5) material portions of our business require the Internet infrastructure to be
adequately maintained; (6) our ability to achieve our financial forecasts due to various factors, including project delays by our clients,
reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for
service agreements; (7) general economic, political and market conditions, including continued inflation and rising interest rates; (8)
technological and market risks associated with the development of new products or services or of new versions of existing or acquired
products or services; (9) competition in the industry in which we conduct business and the impact of competition on pricing, client
retention and pressure for new products or services; (10) the ability to attract and retain qualified personnel and dealing with rising
labor costs, the loss or retirement of key members of management or other key personnel; and (11) costs of compliance and any failure
to comply with government and stock exchange regulations. These factors and other risks that affect our business are described in Item
1A, “Risk Factors”. We expressly disclaim any obligation to publicly update or revise our forward-looking statements.
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 public sector entities. We provide subscription-based services such as
software as a service (“SaaS”) and transaction-based fees primarily related to digital government services and online payment
processing. In addition, we provide professional IT services to our clients, including software and hardware installation, data
conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using
our systems. Additionally, we provide property appraisal outsourcing services for taxing jurisdictions.
In accordance with ASC 280-10, Segment Reporting, we report our results in two reportable segments. Business units that have met
the aggregation criteria have been combined into our two reportable segments. The Enterprise Software ("ES") reportable segment
provides public sector entities with software systems and services to meet their information technology and automation needs for
mission-critical “back-office” functions such as: public administration solutions; courts and public safety solutions; education
solutions, and property and recording solutions. The Platform Technologies ("PT") reportable segment provides public sector entities
with software solutions to platform and transformative solutions including digital solutions, payment processing, streamline data
processing, and improve operations and workflows.
As of January 1, 2023, our data and insights solutions business unit was integrated into the remaining business units across both
reportable segments with no material change to the results of the reportable segments.
27
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We
define segment operating income for our business units as income before non-cash amortization of intangible assets associated with
their acquisitions, interest expense, and income taxes. Segment operating income includes intercompany transactions. The majority of
intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement.
Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services
staff, and share-based compensation expense for the entire company. Corporate segment operating loss also includes revenues and
expenses related to a company-wide user conference.
Certain amounts for previous years have been reclassified to conform to the current year presentation. Beginning January 1, 2023, we
no longer report the appraisal services revenue and related costs as separate categories in the statement of income due to less
significance on our overall operating results. Therefore, we have combined the appraisal services revenue category with the
professional services revenue category; and the related cost of revenue category for appraisal services is now combined with the cost
of revenue category related to subscriptions, maintenance and professional services on the consolidated statements of income for all
reporting periods presented.
Recent Acquisitions
2023
On October 31, 2023, we acquired Resource Exploration, Inc. (“ResourceX”), a leading provider of budgeting software to the public
sector. The total purchase price, net of cash acquired of $48,000, was approximately $16.3 million, consisting of $9.1 million paid in
cash, $5.7 million of common stock and $1.5 million related to working capital and indemnity holdbacks, subject to certain post-
closing adjustments.
On October 31, 2023, we acquired ARInspect, Inc. (“ARInspect”), a leading provider of AI powered machine learning solutions for
public sector field operations. The total purchase price, net of cash acquired of $1.0 million, was approximately $20.5 million,
consisting of $19.1 million paid in cash and $2.4 million related to working capital and indemnity holdbacks, subject to certain post-
closing adjustments.
On August 8, 2023, we acquired Computing System Innovations, LLC (“CSI”), a leading provider of artificial intelligence automation,
redaction, and indexing solution for courts, recorders, attorneys, and others. The total purchase price, net of cash acquired of
$415,000, was approximately $36.2 million, consisting of $33.4 million paid in cash and $3.3 million related to working capital and
indemnity holdbacks, subject to certain post-closing adjustments.
The actual operating results of CSI and ResourceX, from their respective dates of acquisition, are included in the operating results of
the ES segment. The operating results of ARInspect are included in the operating results of the PT segment since the date of
acquisition.
2022
On October 31, 2022, we acquired Rapid Financial Solutions, LLC (“Rapid”), a provider of reliable, scalable, and secure payments
with best-in-class card issuance and digital disbursement capabilities. The total purchase price, net of cash acquired of $2.2 million,
was approximately $67.4 million, consisting of $51.5 million paid in cash and, $18.2 million of common stock.
On February 8, 2022, we acquired US eDirect Inc. (“US eDirect”), a leading provider of technology solutions for campground and
outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.5 million,
consisting of $122.9 million paid in cash.
The actual operating results of Rapid and US eDirect, from their respective dates of acquisition, are included in the operating results of
the PT segment.
2023 Operating Results
For the twelve months ended December 31, 2023, total revenues increased 5.5% compared to the prior period. Revenues from recent
acquisitions comprised $22.3 million or 1.2%, of the increase.
Subscription revenues grew 14.5% for the twelve months ended December 31, 2023, primarily due to an ongoing shift to SaaS in the
mix of new arrangements; an increase in revenues associated with the conversion of on-premises clients to SaaS; and growth in our
transaction-based revenues such as e-filing and payments, offset by the absence of COVID pandemic related transaction-based
revenue. Subscription revenues from recent acquisitions comprised $18.3 million or 1.8%, of the increase. 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:
28
Revenues – We derive our revenues from four primary sources: subscription-based arrangements from SaaS and transaction-based
fees; maintenance; professional services; and software licenses and royalties. Subscriptions and maintenance are considered
recurring revenue sources and comprised approximately 83% of our revenues in 2023. 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 transaction-based revenues and maintenance rate increases. In addition, we also monitor our
client base and attrition, which historically is very low. During 2023, based on our number of customers, attrition was
approximately 2%.
Annualized Recurring Revenue - The majority of our revenues are comprised of revenues from subscriptions and maintenance,
which we consider to be recurring revenues sources. Annualized recurring revenue (ARR) is calculated by annualizing the current
quarter's recurring revenues from maintenance and subscriptions as reported in our statement of income. Management believes
ARR is an indicator of the annual run rate of our recurring revenues, as well as a measure of the effectiveness of the strategies we
deploy to drive revenue growth over time. ARR is a metric we believe is widely used by companies in the technology sector and
by investors, which we believe offers insight to the stability of our maintenance and subscription revenues to be recognized within
the year, which are considered recurring in nature, with some seasonality.
Subscription revenues primarily consists of revenues derived from our SaaS arrangements and transaction-based fees, which
relate to digital government services, including e-filing transactions and payment processing. These revenues are considered
recurring because revenues from these sources are expected to reoccur in similar annual amounts for the term of our relationship
with the client. Transaction-based fees are generally the result of multi-year contracts with our clients that result in fees generated
by payment transactions and digital government services and are collected on a recurring basis during the contract term.
Transaction-based fees are historically highest in the second quarter, which coincides with peak outdoor recreation seasons and
statutory filing deadlines in many jurisdictions, and lowest in the fourth quarter due to fewer business days and lower transaction
volumes around holidays. Because ARR is an annualized revenue amount, the metric can fluctuate from quarter to quarter due to
this seasonality. ARR was $1.61 billion and $1.50 billion as of December 31, 2023, and 2022, respectively. ARR increased 8%
compared to the prior period primarily due to an increase in subscriptions revenue resulting from an ongoing shift toward SaaS
arrangements.
Cost of Revenues and Gross Margins – Our primary cost component is personnel expenses in connection with providing software
implementation, subscription-based services and maintenance and support 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 relatively low incremental cost, such as software licenses and royalties, subscription-based
services, and maintenance and support. As of December 31, 2023, our total employee count included in cost of revenues increased
to 5,129 from 5,021 at December 31, 2022, including 61 employees who joined us through acquisitions completed since
December 31, 2022.
Sales and Marketing (“S&M”) Expense – The primary components of S&M expense include sales personnel salaries and share-
based compensation expense, sales commissions, travel-related expenses, advertising and marketing materials, and allocated
depreciation, facilities, and IT support. Sales commissions typically fluctuate with revenues and share-based compensation
expense generally increases based on increased levels of awards issued during the period and as the market price of our stock
increases. Other administrative expenses tend to grow at a slower rate than revenues.
General and Administrative (“G&A”) Expense – The primary components of G&A expense include personnel salaries and share-
based compensation expense for general corporate functions, including senior management, finance, accounting, legal, human
resources and corporate development, third-party professional fees, travel-related expenses, insurance, allocation of depreciation,
facilities and IT support costs, acquisition-related expenses and other administrative expenses. Share-based compensation expense
generally increases based on increased level of awards issued during the period and 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 software development, 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 deferred revenue balances are important indicators of our business.
29
Outlook
The local government software market continues to be active with sales activity indicators generally trending at or above pre-
pandemic levels in most sectors of our business, and our backlog at December 31, 2023 reached $2.03 billion, an 8% increase from the
prior period. We expect to continue to achieve solid growth in revenues and earnings. With our strong financial position and cash
flow, we plan to continue to make significant investments in product development and continue to accelerate 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.
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, estimation for revenue recognition and
multiple performance obligation arrangements, and the recoverability of goodwill and other intangible assets and estimated useful
lives of intangible assets. 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 the majority of our revenues from subscription-based services and post-contract customer support
(“PCS” or “maintenance”). Other sources of revenue are professional services, software licenses and royalties, and hardware and
other. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the
consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the
following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Our software arrangements with customers contain multiple performance obligations that range from software licenses, installation,
training, and consulting related to software modification and customization to meet specific customer needs (services), hosting, and
PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether
separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include
professional services, such as training or installation, are evaluated to determine whether 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.
30
For arrangements that involve significant production, modification or customization of the software, or where professional 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
professional 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 primarily of revenues derived from SaaS arrangements and transactions from digital government
services; payment processing; and electronic filing (‘‘e-filing”). 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 professional
services associated with certain SaaS arrangements, we have concluded that the services are not distinct, and we recognize the revenue
ratably over the remaining contractual period once we have provided the customer access to the software. We record amounts that
have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria
have been met.
For transaction-based revenues, 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 stand- alone selling price (“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. Revenue is recognized net of
allowances for losses and 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 revenues 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 $22.8 million and $14.8 million at December 31, 2023, and December 31, 2022, respectively, does not include
provisions for credit losses. 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 billing 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.
31
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.
Goodwill and Other Intangible Assets. We assess goodwill for impairment annually, or more frequently whenever events or changes
in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of the likelihood of
impairment of each reporting unit. If the conclusion of this assessment is that it is more likely than not that a reporting unit's fair value
is more than its carrying value, we are not required to perform a quantitative impairment test. When testing goodwill for impairment
quantitatively, we first compare the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a
reporting unit exceeds the fair value of that reporting unit, an impairment loss is recognized. The fair values calculated in our
impairment tests are determined using discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions
that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We base our
fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.
During the fourth quarter, as part of our annual impairment test as of October 1, we performed only qualitative assessments for
reporting units that have significant excess fair value over carrying value. As a result of these qualitative assessments, we determined
that it was more likely than not that the fair value exceeded the carrying value; therefore, we did not perform a Step 1 quantitative
impairment test. However, we did perform a quantitative assessment for the platform technologies reporting unit and concluded no
impairment existed as of our annual assessment date. Approximately $1.7 billion, or 67%, of total goodwill as of December 31, 2023,
relates to this reporting unit, which, as a result of the recency of the acquisitions comprising the reporting unit, does not have
significant excess fair value over carrying value. Our annual goodwill impairment analysis did not result in an impairment charge.
During 2023, we recorded no impairment to goodwill because no triggering events or change in circumstances indicating a potential
impairment had 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, such as weighted average cost of capital and revenue growth rates which are forward looking and
affected by expectations about future market or economic conditions. Similarly, in a specific period, a reporting unit could significantly
underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different
estimate of the fair value of our reporting units, and a consequent future impairment charge.
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 2023, we did not identify any triggering events that would indicate that the carrying amount of our
intangible assets may not be recoverable.
32
Recent Accounting Guidance not yet Adopted
In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07 - Segment Reporting (Topic 280), Improvements
to Reportable Segment Disclosures. ASU 2023-07 enhances the disclosures required for reportable segments in annual and interim
consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods
within fiscal years beginning after December 15, 2024, and early adoption is permitted. We are currently evaluating the impact that the
new guidance will have on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09 – Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the
transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate
reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the
effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early
adoption permitted. We do not expect that this guidance will have a material impact upon our financial position and results of
operations.
Reclassifications
As of January 1, 2023, we have elected to no longer report the appraisal services revenue and related costs as separate categories in the
statement of income due to less significance on our overall operating results. Therefore, we have combined the appraisal services
revenue category with the professional services revenue category; and the related cost of revenue category for appraisal services is
now combined with the cost of revenue category related to subscriptions, maintenance, and professional services on the consolidated
statements of income for all reporting periods presented.
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, 2023, 2022 and 2021.
Revenues:
Subscriptions
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Total revenues
Cost of revenues:
Subscriptions, maintenance, and professional services
Software licenses, royalties, and amortization of acquired software
Amortization of software development
Hardware and other
Sales and marketing expense
General and administrative expense
Research and development expense
Amortization of other intangibles
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax provision (benefit)
Net income
33
Percentage of Total Revenues
Years Ended December 31,
2023
2022
2021
59.4 %
54.7 %
49.3 %
23.9
12.8
2.0
1.9
100.0
51.3
2.4
0.6
1.5
7.7
15.8
5.6
3.8
11.3
(1.2)
0.2
10.3
1.7
25.3
15.0
3.2
1.8
100.0
52.9
3.1
0.4
1.3
7.3
14.4
5.7
3.3
11.6
(1.5)
0.1
10.2
1.3
8.6 %
8.9 %
29.8
14.9
4.6
1.4
100.0
51.5
3.1
0.1
0.8
7.4
17.1
5.9
2.8
11.3
(1.5)
0.1
9.9
(0.2)
10.1 %
2023 Compared to 2022
Revenues
Subscriptions.
The following table sets forth a comparison of our subscriptions revenues for the years ended December 31 ($ in thousands):
ES
PT
Total subscriptions revenues
Change
2023
2022
$
%
$
634,262 $
526,323 $
107,939
525,250
485,981
39,269
$
1,159,512 $
1,012,304 $
147,208
21 %
8 %
15 %
Subscriptions revenues consist of revenues derived from our SaaS arrangements and transaction-based fees. Subscriptions revenue
grew 15% compared to 2022, primarily due to an ongoing shift toward SaaS arrangements with both new and existing clients, along
with growth in our transaction-based revenues. Subscription revenues from recent acquisitions comprised $18.3 million or 1.8% of the
increase.
Total subscriptions revenues derived from SaaS arrangements fees was $528.0 million and $428.5 million for the twelve months
ended December 31, 2023 and 2022, respectively. SaaS fees grew $99.5 million, or 23% compared to prior period. New SaaS clients
as well as existing on-premises clients who converted to our SaaS model provided the majority of the SaaS revenues increase. In 2023,
we added 632 new SaaS clients and 338 on-premises existing clients elected to convert to our SaaS model. Our mix of new software
contracts in 2023 was approximately 83% subscription-based arrangements and 17% perpetual software license arrangements
compared to total new client mix in 2022 of approximately 77% subscription-based arrangements and 23% perpetual software license
arrangements.
Total subscriptions revenues derived from transaction-based fees was $631.5 million and $583.8 million for the twelve months ended
December 31, 2023 and 2022, respectively. The increase of $47.8 million or 8% is primarily attributable to the increase of $22.7
million from transaction-based fees from online payments and e-filing services and the 2023 impact of transaction-based fees from
recent acquisitions of $17.6 million. The increase in transaction-based fees was offset by the decline of $10.8 million in COVID
pandemic related transaction-based revenues compared to prior period.
Maintenance.
The following table sets forth a comparison of our maintenance revenues for the years ended December 31 ($ in thousands):
ES
PT
Total maintenance revenues
Change
2023
2022
$
%
$
$
442,781 $
444,143 $
(1,362)
23,880
24,312
(432)
466,661 $
468,455 $
(1,794)
— %
(2)
— %
We provide maintenance and support services for our on-premises software products and certain third-party software. Maintenance
revenue declined slightly compared to the prior period, mainly due to clients converting from on-premises license arrangements to
SaaS. The decline was partially offset by annual maintenance rate increases and maintenance associated with new software license
sales.
Professional services.
The following table sets forth a comparison of our professional services revenues for the years ended December 31 ($ in thousands):
ES
PT
Total professional services revenues
Change
2023
2022
$
%
$
$
209,727 $
204,970 $
4,757
40,249
72,655
(32,406)
249,976 $
277,625 $
(27,649)
2 %
(45)
(10) %
34
Professional services revenues primarily consist of professional services provided 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 the related professional services. Existing
clients also periodically purchase additional training, consulting and minor programming services.
Professional services revenues decreased 10%, primarily due to the absence of revenues generated from COVID pandemic-related rent
relief services, which totaled $40.2 million in 2022 and ended in December 2022. Also contributing to the decline is the lower
requirement for professional services associated with many of our cloud implementations. The decline is partially offset by increased
billable travel revenue as onsite services have increased post-pandemic.
Software licenses and royalties.
The following table sets forth a comparison of our software licenses and royalties revenues for the years ended December 31 ($ in
thousands):
ES
PT
Total software licenses and royalties revenues
Change
2023
2022
$
%
$
$
32,709 $
55,158 $
(22,449)
5,387
4,248
1,139
38,096 $
59,406 $
(21,310)
(41) %
27
(36) %
Software licenses and royalties revenues decreased 36% compared to the prior period. The decline is primarily attributed to the shift in
the mix of new software contracts toward more subscription-based agreements compared to the prior period.
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 software license revenues will decline over the next several years as we continue to focus our sales efforts
on SaaS arrangements. Subscription-based arrangements generally result in lower revenue in the initial year as compared to perpetual
software license arrangements but generate higher overall revenue over the term of the contract.
Cost of revenues and overall gross 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):
2023
2022
$
%
Change
Subscriptions, maintenance, and professional services
$
1,001,221 $
977,885 $
23,336
2 %
Software licenses and royalties
Amortization of software development
Amortization of acquired software
Hardware and other
Total cost of revenues
10,821
12,625
36,062
29,923
6,083
6,507
52,192
23,674
4,738
6,118
(16,130)
6,249
78
94
(31)
26
$
1,090,652 $
1,066,341 $
24,311
2 %
Subscriptions, maintenance, and professional services. Cost of subscriptions, maintenance and professional services 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 development; costs related to our SaaS operations, including hosting costs; and costs related to
providing digital government services. Other costs included are merchant and interchange fees required to process credit/debit card
transactions and bank fees to process automated clearinghouse transactions related to our payments business.
In 2023, the cost of subscriptions, maintenance and professional services grew 2% compared to the prior period. $13 million or 1% of
the increase is attributed to the 2023 impact of recent acquisitions and the remaining increase of 1% is due to higher personnel costs
and duplicate hosting costs as we transition from our proprietary data centers to the public cloud. Excluding employees from recent
acquisitions, our professional services staff grew by 47 employees since December 31, 2022, as we increased hiring to accommodate
growth. The increase is partially offset by lower costs related to COVID-related services that ended in 2022.
Software licenses and royalties. Costs of software licenses and royalties primarily consist of direct third-party software costs. We do
not have any direct costs associated with royalties. The cost of software licenses and royalties for the twelve months ended December
31, 2023, increased $4.7 million or 78% compared to the prior period due to higher third-party software costs.
35
Amortization of software development. Software development costs included in cost of revenues primarily consist of personnel costs.
We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is
determined on a product-by-product basis at a rate not less than straight-line basis over the software’s remaining estimated economic
life generally, three to five years.
In 2023, amortization of software development costs increased $6.1 million or 94%, respectively, compared to the prior period and is
attributable to new capitalized software development projects going into service in the past year.
Amortization of acquired software. Amortization expense related to acquired software attributed to business combinations is included
with cost of revenues. The estimated useful lives of acquired software intangibles range from five to 10 years.
In 2023, amortization of acquired software declined $16.1 million or 31% compared to the prior period due to assets becoming fully
amortized in 2022, offset by amortization of newly acquired software from recent acquisitions completed in 2022 and 2023.
The following table sets forth a comparison of overall gross margin for the periods presented as of December 31:
Overall gross margin
2023
2022
Change
44.1 %
42.4 %
1.7 %
Overall gross margin. Our 2023 blended gross margin increased 1.7% compared to 2022. The increase in overall gross margin
compared to the prior period is due to growth in subscription revenues and the decline in low margin COVID-related revenues and
related costs and the decline in amortization of acquired software expense compared to the prior period. The margin increases are
partially offset by lower revenue from software licenses and maintenance, duplicate hosting costs as we transition from our proprietary
data centers to the public cloud, and higher personnel costs. Also an increase of merchant fees related to our payments business that
were recorded as cost of revenue from $144.5 million in 2022 to $157.5 million in 2023 negatively impacted overall margin.
Sales and marketing expense
Sales and marketing (“S&M”) expense consists primarily of salaries, employee benefits, travel, share-based compensation expense,
commissions and related overhead costs for sales and marketing employees, as well as professional fees, trade show activities,
advertising costs and other marketing costs. The following table sets forth a comparison of our S&M expense for the years ended
December 31 ($ in thousands):
2023
2022
$
%
Change
Sales and marketing expense
$
149,770 $
135,743 $
14,027
10 %
S&M as a percentage of revenue was 7.7% in 2023 compared to 7.3% in 2022. S&M expense increased approximately 10% compared
to the prior period. Higher S&M expense is due to higher bonus and commission expense relating to sales growth and improved
operating results, an increase in trade show and user conference expenses, travel-related expenses, and share-based compensation
expense.
General and administrative expense
General and administrative (“G&A”) expense consists primarily of personnel salaries and share-based compensation expense for
general corporate functions including senior management, finance, accounting, legal, human resources and corporate development,
third-party professional fees, travel-related expenses, insurance, allocation of depreciation, facilities and IT support costs, acquisition-
related expenses and other administrative expenses. The following table sets forth a comparison of our G&A expense for the years
ended December 31 ($ in thousands):
2023
2022
$
%
Change
General and administrative expense
$
308,575 $
267,324 $
41,251
15 %
G&A as a percentage of revenue was 15.8% in 2023 compared to 14.4% in 2022. G&A expense increased approximately 15%
compared to the prior period. The increase in G&A is primarily attributed to increases in amortization of software development for
internal use, travel-related expenses and other administrative costs; higher personnel costs from increased employee headcount and
increased costs of health benefits; higher bonus expense due to improved operating results; and increased share-based compensation
expense. Our G&A headcount grew by 34 employees since December 31, 2022. In 2023, G&A expense also included $6.4 million
related to lease restructuring and other asset write-offs.
36
Research and development expense
Research and development (“R&D”) expense consists primarily of salaries, employee benefits and related overhead costs associated
with new product development. R&D expense consists mainly of costs associated with development of new products and technologies
from which we do not currently generate significant revenue. The following table sets forth a comparison of our R&D expense for the
years ended December 31 ($ in thousands):
2023
2022
$
%
Change
Research and development expense
$
109,585 $
105,184 $
4,401
4 %
R&D expense as a percent of total revenue was 5.6% in 2023, compared to 5.7% in 2022. R&D expense increased 4% in 2023
compared to the prior 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.
Amortization of other intangibles
Other intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired that are allocated
to acquired software and customer related, trade name, and leases acquired 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 related, trade name, and leases acquired intangibles is recorded as operating
expense. The estimated useful lives of other intangibles range from one to 25 years. The following table sets forth a comparison of our
amortization of other intangibles for the years ended December 31 ($ in thousands):
2023
2022
$
%
Change
Amortization of other intangibles
$
74,632 $
61,363 $
13,269
22 %
Amortization of other intangibles increased 22% primarily due to the accelerated amortization of certain trade name intangibles due to
branding changes in 2023 and the impact of intangibles added with several acquisitions completed in 2023 and late 2022.
Estimated annual amortization expense relating to customer related, trade name, and leases acquired 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):
2024
2025
2026
2027
2028
Thereafter
$
59,278
55,672
55,044
54,429
53,766
481,132
Interest expense
The following table sets forth a comparison of our interest expense for the years ended December 31 ($ in thousands):
Interest expense
2023
2022
$
%
$
(23,629) $
(28,379) $
4,750
(17)%
Change
Interest expense is comprised of interest expense and non-usage and other fees associated with our borrowings. The change in interest
expense compared to the prior period is primarily attributable to lower interest incurred as a result of our accelerated repayment of
term debt, offset by accelerated amortization expense related to debt issuance costs and an increase in interest rates in 2023 compared
to 2022.
37
Other income, net
The following table sets forth a comparison of our other income, net for the years ended December 31 ($ in thousands):
Other income, net
2023
2022
$
$
3,328 $
1,723 $
1,605
%
93%
Change
Other income, net, is primarily comprised of interest income from invested cash. The change in other income, net, compared to the
prior period is due to increased interest income generated from invested cash as a result of higher interest rates in 2023 compared to
2022.
Income tax provision
The following table sets forth a comparison of our income tax provision for the years ended December 31 ($ in thousands):
Income tax provision (benefit)
2023
2022
$
%
$
32,317
$
23,353
$
8,964
38 %
Change
Effective income tax rate
16.3 %
12.4 %
The increase in the income tax provision and the effective income tax rate in 2023, compared to the prior period, is principally driven
by a decrease in research tax credit benefits, offset by a decrease in liabilities for uncertain tax positions and state taxes and an increase
in excess tax benefits from share-based compensation. The tax benefits related to research tax credits totaled $20.5 million in 2023
compared to $31.3 million in 2022, as a result of completing a multiyear research and development tax credit study during 2022. The
tax expense related to uncertain tax positions in 2023 was $7.6 million compared to $8.3 million in 2022. The share-based exercise
and vesting activity in 2023 generated $9.3 million of excess tax benefits, while exercise and vesting activity in 2022 generated $7.8
million of excess tax benefits.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21%
primarily due to the tax benefits of research tax credits and excess tax benefits from share-based compensation, offset by liabilities for
uncertain tax positions, state income taxes, and non-deductible business expenses.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 2023, we had cash and cash equivalents of $165.5 million compared to $173.9 million at December 31, 2022. We
also had $17.4 million invested in investment grade corporate bonds, municipal bonds and asset-backed securities as of December 31,
2023. These investments have varying maturity dates through 2027 and are held as available-for-sale. As of December 31, 2023, we
had $50.0 million outstanding borrowings under our amended 2021 Credit Agreement and one outstanding letter of credit totaling
$750,000 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 capital markets provide us with sufficient flexibility to meet our long-term financial needs.
The following table sets forth a summary of cash flows for the years ended December 31 (in thousands):
Cash flows provided (used) by:
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
2023
2022
2021
$
380,440 $
381,455 $
371,753
(76,960)
(172,530)
(2,090,935)
(311,844)
(344,239)
1,424,730
$
(8,364) $
(135,314) $
(294,452)
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.
38
In 2023, operating activities provided cash of $380.4 million, compared to $381.5 million in 2022. Operating activities that provided
cash were primarily comprised of net income of $165.9 million, non-cash depreciation and amortization charges of $154.1 million,
non-cash share-based compensation expense of $108.3 million and non-cash amortization of operating lease right-of-use assets of
$16.7 million. Working capital, excluding cash, decreased approximately $73.3 million mainly due to timing of higher tax payments
and deferred taxes associated with IRC Section 174, timing of payments to and receipts from our government partners, timing of
prepaid expenses and deferred taxes associated with stock option activity during the period. These decreases were offset by the timing
of payments of payroll expense and vendor invoices 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. Subscription renewals are billed
throughout the year.
Investing activities used cash of $77.0 million in 2023 compared to $172.5 million in 2022. Investing activities included payments for
acquisitions of $62.8 million, net of cash acquired. We also invested $10.6 million and received $49.4 million in proceeds from
investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates ranging from 2024 through 2027.
Approximately $32.5 million of software development costs were capitalized. Approximately $20.5 million was invested in property
and equipment, including $16.0 million related to real estate. The remaining additions were for computer equipment and furniture and
fixtures in support of growth.
Financing activities used cash of $311.8 million in 2023 compared to $344.2 million in 2022, primarily attributable to repayment of
$345.0 million of term debt, partially offset by payments received from stock option exercises, net of withheld shares for taxes upon
equity award and employee stock purchase plan activity.
In February 2019, our Board of Directors authorized the repurchase of an additional 1.5 million shares of our common stock. The
repurchase program, which was approved by our Board of Directors, was originally announced in October 2002 and was amended at
various times from 2003 through 2019. As of February 21, 2024, we have authorization from our Board of Directors to repurchase up
to 2.3 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion.
Market conditions, as well as the volume of employee stock option exercises, influence the timing of the buybacks and the number of
shares repurchased. 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, 2023, we had $600 million in outstanding principal for the Convertible Senior Notes due 2026. Under our
amended 2021 Credit Agreement, we had $50 million in outstanding principal for the Term Loans, no outstanding borrowings under
the 2021 Revolving Credit Facility, and an available borrowing capacity of $500 million as of December 31, 2023. As of
December 31, 2023, we had one outstanding letter of credit totaling $750,000. The letter of credit, which guarantees our performance
under a client contract, renews automatically annually unless canceled in writing and expires in the third quarter of 2026.
We paid interest of $19.2 million in 2023 and $21.3 million in 2022. See Note 10, “Debt,” to the consolidated financial statements for
discussions of the Convertible Senior Notes and the Credit Agreement.
We paid income taxes, net of refunds received, of $142.8 million in 2023, $38.5 million in 2022. In 2023, stock option exercise
activity generated net tax benefits of $9.3 million and reduced tax payments accordingly, as compared to $7.8 million in 2022. The tax
benefits related to research tax credits totaled $20.5 million in 2023 compared to $31.3 million in 2022, as a result of completing a
multiyear research and development tax credit study during 2022. For tax years beginning on or after January 1, 2022, the Tax Cuts
and Jobs Act of 2017 (“TCJA”) eliminates the option to currently deduct research and development expenses and requires taxpayers to
capitalize and amortize them over five years for research activities performed in the United States and 15 years for research activities
performed outside the United States pursuant to IRC Section 174. The requirement temporarily increases our U.S. federal and state
cash tax payments and reduces cash flows in fiscal year 2023 and future years until the amortization deduction normalizes.
We anticipate that 2024 capital spending will be between $46 million and $48 million, including approximately $27 million of
software development. We expect the majority of the other capital spending will consist of computer equipment and software for
infrastructure replacements and expansion. We also expect cash tax payments continue to be impacted as a result of IRC Section 174.
Capital spending and cash tax payments are 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 with remaining terms of one to 11 years. Some of these leases include options to extend for up
to six years.
39
Our estimated future obligations consist of debt, uncertain tax positions, leases, and purchase commitments as of December 31, 2023.
Refer to Note 10, “Debt,” Note 14, “Income Tax,” Note 18, “Leases,” and Note 21, “Commitment and Contingencies,” to the
consolidated financial statements for related discussions.
CAPITALIZATION
At December 31, 2023, our capitalization consisted of $646.0 million of outstanding debt and $2.9 billion of shareholders’ equity.
ITEM 7A.
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, 2023, we had $50.0 million of outstanding borrowings under our amended 2021 Credit Agreement and available
borrowing capacity under the amended 2021 Credit Agreement was $500.0 million.
In accordance with our amended 2021 Credit Agreement, the 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 SOFR rate plus a margin of 1.125% to 1.75%. As of December 31, 2023, we have
fully repaid amounts due under Term Loan A-2.
For the twelve months ended December 31, 2023, the effective interest rate for our borrowings was 7.63%. Based on the aggregate
outstanding principal balance under the amended 2021 Credit Agreement as of December 31, 2023, of $50.0 million, each quarter of a
point change in interest rates would result in a $125,000 change in annual interest expense.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The reports of our independent registered public accounting firm and our financial statements, related notes, and supplementary data
are included as part of this Annual Report beginning on page F-1.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
ITEM 9A.
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, 2023. 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, 2023.
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, 2023. 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, 2023, Tyler’s internal control
over financial reporting was effective based on those criteria.
40
Tyler’s internal control over financial reporting as of December 31, 2023 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 F-1 hereof.
Changes in Internal Control over Financial Reporting
The Company has implemented new accounting and financial management software effective July 1, 2023, which is expected to
improve the efficiency of certain financial and related business processes. The implementation of our new system was not made in
response to any identified deficiency or weakness in our internal controls over financial reporting. The implementation was subject to
various testing and review procedures prior to and after execution. We have updated our internal controls over financial reporting, as
necessary, to accommodate any modifications to our business processes or accounting procedures due to the implementation.
Management will continue to monitor, test and evaluate the operating effectiveness of internal controls related to the new accounting
and financial management software during the post-implementation period to ensure that effective controls over financial reporting
continue to be maintained.
Other than as described in the preceding paragraph, there have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended December 31, 2023, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION.
(c) Trading Plans.
None
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
41
See the information under the following captions in Tyler’s definitive Proxy Statement, which is incorporated herein by reference.
Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such
incorporation by reference does not include the Compensation Discussion and Analysis, the Compensation Committee Report or the
Audit Committee Report, which are included in the Proxy Statement.
PART III
Headings in Proxy Statement
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND
CORPORATE GOVERNANCE.
“Tyler Management” and “Corporate Governance Principles and
Board Matters”
ITEM 11.
EXECUTIVE COMPENSATION.
“Executive Compensation”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
“Security Ownership of Certain Beneficial Owners and
Management”
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
"Executive Compensation" and
“Certain Relationships and Related Transactions”
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required under this item may be found under the section captioned “Proposals For Consideration – Proposal Two – Ratification of
Our Independent Auditors for Fiscal Year 2023” in our Proxy Statement when filed.
42
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this Annual Report:
(a)
(1) The financial statements are filed as part of this Annual Report.
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022, and 2021
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023, 2022, and 2021
Notes to Consolidated Financial Statements
(2) Financial statement schedules:
There are no financial statement schedules filed as part of this Annual Report, since the required information is included in
the financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not
present.
(3) Exhibits
Certain of the exhibits to this Annual Report are hereby incorporated by reference, as specified:
Page
F-1
F-4
F-5
F-6
F-7
F-9
F-10
43
Exhibit
Number
3.1
Restated Certificate of Incorporation of Tyler Three, as amended through May 14, 1990, and Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1990, and incorporated by
reference herein).
Description
3.2
Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated February 19, 1998,
and incorporated by reference herein).
3.3
Amended and Restated By-Laws of Tyler Technologies Inc., dated May 11, 2023, (filed as Exhibit 3.1 to our Form 8-K dated May
15, 2023, and incorporated by reference herein).
3.4
Certificate of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for
the year ended December 31, 2000, and incorporated by reference herein).
4.1
Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our registration statement no. 33-33505 and incorporated by reference
herein).
4.2
Third Amendment to the Credit Agreement dated January 27, 2023, among Tyler Technologies, Inc. and Wells Fargo Bank, N. A. as
Administrative Agent and other lenders party hereto (filed as Exhibit 4.2 to our Form 10-K dated February 22, 2023, and incorporated
by reference herein).
4.3
Credit Agreement dated April 21, 2021, among Tyler Technologies, Inc. and Wells Fargo Bank, N. A. as Administrative Agent and
other lenders party hereto (filed as Exhibit 10.1 to our Form 8-K dated April 21, 2021, and incorporated by reference herein).
4.4
4.5
Agreement and Plan of Merger, dated February 9, 2021 by and among Tyler Technologies, Inc., Topos Acquisition, Inc., and NIC,
Inc.(filed as Exhibit 2.1 to our Form 8-K, dated February 10, 2021, and incorporated by reference herein).
Indenture, dated as of March 9, 2021, between Tyler Technologies, Inc. and U.S. Bank National Association, as trustee, relating to the
0.25% Convertible Senior Notes due 2026. (filed as Exhibit 4.1 to our Form 8-K, dated March 9, 2021, and incorporated by reference
herein.)
10.1
Employee Stock Purchase Plan (filed as Exhibit 10.1 to our registration statement 333-182318 dated June 25, 2012 and incorporated
by reference herein).
10.2
Amended and Restated Executive Employment Agreement, effective as of May 12, 2022, by and between Tyler Technologies, Inc.
and John S. Marr, Jr.(filed as Exhibit 10.1 to our Form 8-K dated May 18, 2022 and incorporated by reference herein).
10.3
10.4
10.5
10.6
10.7
Amended and Restated Executive Employment Agreement, effective as of May 12, 2022, by and between Tyler Technologies, Inc.
and H. Lynn Moore, Jr. (filed as Exhibit 10.2 to our Form 8-K dated May 18, 2022 and incorporated by reference herein).
Amended and Restated Executive Employment Agreement, effective as of May 12, 2022, by and between Tyler Technologies, Inc.
and Brian K. Miller (filed as Exhibit 10.3 to our Form 8-K dated May 18, 2022 and incorporated by reference herein).
Executive Employment Agreement, effective as of May 12, 2022, by and between Tyler Technologies, Inc. and Jeffrey D. Puckett
(filed as Exhibit 10.4 to our Form 8-K dated May 18, 2022 and incorporated by reference herein).
Code of Business Conduct and Ethics of Tyler Technologies, Inc. dated October 30, 2020 (filed as Exhibit 99.1 to our form 8-K dated
March 31, 2023, and incorporated by reference herein).
Revised Insider Trading Policy of Tyler Technologies, Inc., dated July 20, 2023,(filed as exhibit 10.1 to our Form 10-Q dated July 26,
2023, and incorporated by reference herein).
44
Exhibit
Number
10.8
10.9
Description
Agreement and plan of merger by and among Tyler Technologies, Inc. TMP Subsidiary, Inc., MP Holding Parent, Inc. (filed as
Exhibit 10.7 to our Form 10-K dated February 20, 2019 and incorporated by reference herein).
Tyler Technologies, Inc. 2018 Stock Option Plan effective as of May 9, 2018 (filed as Appendix A to the registrant's Proxy Statement
filed with the Commission on March 28, 2018 and incorporated by reference herein).
*21.1
Subsidiaries of Tyler Technologies, Inc.
*23
Consent of Independent Registered Public Accounting Firm.
*31.1
Rule 13a-14(a) Certification by Principal Executive Officer.(a) Certification by Principal Executive Officer.
*31.2
Rule 13a-14(a) Certification by Principal Financial Officer.
*32.1
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
*101.INS
Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags,
including Cover Page XBRL tags, are embedded within the Inline XBRL Document.
*101.SCH
Inline XBRL Taxonomy Extension Schema Document.
*101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
*101.LAB
Inline XBRL Extension Labels Linkbase Document.
*101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
*101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
— Filed herewith.
A copy of each exhibit may be obtained at a price of 15 cents per page, with a $10.00 minimum order, by writing Investor Relations,
5101 Tennyson Parkway, Plano, Texas 75024.
ITEM 16.
FORM 10-K SUMMARY
None.
45
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 21, 2024
TYLER TECHNOLOGIES, INC.
By:
/s/ H. Lynn Moore, Jr.
H. Lynn Moore, Jr.
President and Chief Executive Officer
(principal executive officer)
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints H. Lynn Moore,
Jr. and Brian K. Miller, and each of them, as his attorney-in-fact, with the power of substitution, for him in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on February 21, 2024.
46
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in
the capacities and on the dates indicated have signed this report below.
Date: February 21, 2024
By:
/s/ John S. Marr, Jr.
John S. Marr, Jr.
Executive Chairman of the Board
Director
Date: February 21, 2024
By:
/s/ H. Lynn Moore, Jr.
H. Lynn Moore, Jr.
President and Chief Executive Officer
(principal executive officer)
Date: February 21, 2024
By:
/s/ Brian K. Miller
Brian K. Miller
Executive Vice President and Chief Financial Officer
(principal financial officer)
Date: February 21, 2024
By:
/s/ Jason P. Durham
Jason P. Durham
Chief Accounting Officer
(principal accounting officer)
Date: February 21, 2024
By:
/s/ Glenn A. Carter
Glenn A. Carter
Director
Date: February 21, 2024
By:
/s/ Brenda A. Cline
Brenda A. Cline
Director
Date: February 21, 2024
By:
/s/ Ronnie D. Hawkins, Jr.
Ronnie D. Hawkins, Jr.
Director
Date: February 21, 2024
By:
/s/ Mary Landrieu
Mary Landrieu
Director
Date: February 21, 2024
By:
/s/ Daniel M. Pope
Daniel M. Pope
Director
Date: February 21, 2024
By:
/s/ Dustin R. Womble
Dustin R. Womble
Director
47
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, 2023
and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the
three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2023, 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, 2023, 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 21, 2024 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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the
critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the account or
disclosure to which it relates.
F-1
Goodwill impairment tests
Description of
the Matter
As of December 31, 2023, the Company’s goodwill balance of $2.5 billion was attributable to multiple
reporting units. As disclosed in Note 1 to the consolidated financial statements, goodwill is assessed for
impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying
value may not be recoverable. As part of its annual impairment test as of October 1, the Company performed
a quantitative assessment for the platform technologies reporting unit which includes $1.7 billion, or 67%, of
total goodwill as of December 31, 2023. The Company concluded that no impairment existed as of their
annual assessment date.
Auditing management’s quantitative assessment for goodwill impairment was complex and highly judgmental
due to the significant judgment required to determine the fair value of this reporting unit. In particular, the
Company’s fair value estimate for this reporting unit was 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 the quantitative goodwill impairment assessment, including controls over
management’s review of the significant assumptions described above.
To test the estimated fair value of the applicable reporting unit, 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 analysis. 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 unit 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.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1966.
Dallas, Texas
February 21, 2024
F-2
Report of Independent Registered Public Accounting Firm
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, 2023, 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, 2023, 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, 2023 and 2022, the related consolidated statements of
income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31,
2023, and the related notes and our report dated February 21, 2024 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.
/s/ Ernst & Young LLP
Dallas, Texas
February 21, 2024
F-3
Tyler Technologies, Inc.
Consolidated Statements of Income
For the years ended December 31,
(In thousands, except per share amounts)
Revenues:
Subscriptions
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Total revenues
Cost of revenues:
2023
2022
2021
$
1,159,512 $
1,012,304 $
466,661
249,976
38,096
37,506
468,455
277,625
59,406
32,414
784,435
474,287
237,179
74,452
21,934
1,951,751
1,850,204
1,592,287
Subscriptions, maintenance and professional services
1,001,221
977,885
818,219
Software licenses and royalties
Amortization of software development
Amortization of acquired software
Hardware and other
Total cost of revenues
10,821
12,625
36,062
29,923
6,083
6,507
52,192
23,674
3,552
2,325
45,601
12,946
1,090,652
1,066,341
882,643
Gross profit
861,099
783,863
709,644
Sales and marketing expense
General and administrative expense
Research and development expense
Amortization of other intangibles
149,770
308,575
109,585
74,632
135,743
267,324
105,184
61,363
118,624
271,955
93,481
44,849
Operating income
218,537
214,249
180,735
Interest expense
Other income, net
Income before income taxes
Income tax provision (benefit)
Net income
Earnings per common share:
Basic
Diluted
See accompanying notes.
(23,629)
(28,379)
(23,298)
3,328
198,236
32,317
1,723
187,593
23,353
1,544
158,981
(2,477)
$
165,919 $
164,240 $
161,458
$
$
3.95 $
3.88 $
3.95 $
3.87 $
3.95
3.82
F-4
Tyler Technologies, Inc.
Consolidated Statements of Comprehensive Income
For the years ended December 31,
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Securities available-for-sale and transferred securities:
Change in net unrealized holding gains (losses) on available for sale securities during
the period
Reclassification adjustment of unrealized losses on securities transferred from held-
to-maturity
Reclassification adjustment for net loss on sale of available for sale securities,
included in net income
Other comprehensive income (loss), net of tax
Comprehensive income
See accompanying notes.
2023
2022
2021
$
165,919 $
164,240 $
161,458
518
—
—
518
(850)
(27)
79
(798)
—
—
—
—
$
166,437 $
163,442 $
161,458
F-5
Tyler Technologies, Inc.
Consolidated Balance Sheets
(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 $22,829 in 2023 and
$14,761 in 2022)
Short-term investments
Prepaid expenses
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
Current income tax payable
Deferred revenue
Current portion of term loans
Total current liabilities
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
Total liabilities
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares
issued in 2023 and 2022
Additional paid-in capital
Accumulated other comprehensive loss, net of tax
Retained earnings
Treasury stock, at cost; 5,858,476 and 6,364,991 shares in 2023 and 2022, respectively
Total shareholders' equity
See accompanying notes.
F-6
December 31, 2023
December 31, 2022
$
165,493 $
173,857
619,704
10,385
54,700
10,303
860,585
8,988
39,039
169,720
67,124
2,532,109
928,870
7,046
63,182
4,676,663 $
146,339 $
158,558
11,060
2,466
632,914
49,801
1,001,138
—
596,206
291
78,590
39,822
22,621
577,257
37,030
50,859
8,239
847,242
8,271
50,989
172,786
48,189
2,489,308
1,002,164
18,508
49,960
4,687,417
104,813
131,941
10,736
43,667
568,538
30,000
889,695
362,905
594,484
2,037
148,891
48,049
16,967
$
$
1,738,668
2,063,028
—
—
481
1,354,787
(326)
1,603,773
(20,720)
2,937,995
$
4,676,663 $
—
—
481
1,209,725
(844)
1,437,854
(22,827)
2,624,389
4,687,417
Tyler Technologies, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
Losses from sale of investments
Share-based compensation expense
Provision for losses and sales adjustments - accounts receivable
Amortization of operating lease right-of-use assets
Deferred income tax benefit
Other
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable
Income tax payable
Prepaid expenses and other current assets
Accounts payable
Operating lease liabilities
Accrued liabilities
Deferred revenue
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 and maturities from marketable security investments
Investment in software development
Cost of acquisitions, net of cash acquired
Other
Net cash used by investing activities
Cash flows from financing activities:
Payment on term loans
Proceeds from term loans
Proceeds from issuance of convertible senior notes
Payment of debt issuance costs
Purchase of treasury shares
Proceeds from exercise of stock options, net of withheld shares for taxes upon equity
award
Contributions from employee stock purchase plan
2023
2022
2021
$
165,919 $
164,240 $
161,458
154,079
159,072
135,624
1
108,338
8,233
16,688
45
102,985
2,781
12,969
—
104,726
2,831
10,216
(73,704)
(87,192)
(13,271)
475
—
—
(39,878)
(41,201)
(19,668)
41,485
(11,533)
13,069
58,513
(376)
380,440
(51,410)
61,940
910
(17,537)
(12,396)
(24,344)
59,460
9,932
381,455
(20,519)
(10,617)
49,412
(22,529)
(29,935)
71,034
(32,490)
(27,622)
17,608
10,258
(23,863)
(44,947)
(6,952)
(24,822)
44,874
(1,987)
371,753
(33,919)
(77,450)
131,449
(21,693)
(62,759)
(163,921)
(2,089,706)
13
443
384
(76,960)
(172,530)
(2,090,935)
(345,000)
(360,000)
(145,000)
—
—
—
—
—
—
—
—
16,960
16,196
(890)
16,651
900,000
600,000
(27,165)
(12,977)
96,714
13,158
Net cash (used) provided by financing activities
(311,844)
(344,239)
1,424,730
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying notes.
(8,364)
(135,314)
(294,452)
173,857
309,171
$
165,493 $
173,857 $
603,623
309,171
F-7
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes, net
Non-cash investing and financing activities:
Non-cash additions to property and equipment
Issuance of shares for acquisitions
Purchase consideration for conversion of unvested restricted stock awards
2023
2022
2021
$
$
19,154 $
21,256 $
142,820
38,490
3,123 $
169 $
5,675
—
18,169
—
17,728
2,212
233
—
1,872
F-8
Tyler Technologies, Inc.
Consolidated Statements of Shareholders’ Equity
For the years ended December 31, 2023, 2022, and 2021
(In thousands)
Balance at December 31, 2020
48,148 $
481 $ 905,332 $
(46) $ 1,112,156 (7,609) $ (31,812) $ 1,986,111
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Shareholders'
Equity
—
—
161,458
—
—
161,458
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
Net income
Other comprehensive loss, net of tax
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
Issuance of shares for acquisitions
—
—
—
—
—
—
—
—
—
—
—
—
50,831
—
104,726
12,889
—
—
48,148
—
1,872
481
1,075,650
—
—
—
—
—
—
—
—
—
—
—
832
45,883
96,714
(58)
(27,030)
(27,030)
—
35
—
104,726
269
13,158
(33)
(12,977)
(12,977)
—
—
—
1,872
(46) 1,273,614
(6,833)
(25,667) 2,324,032
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(798)
164,240
—
—
—
—
—
164,240
(798)
(3,218)
—
102,985
16,365
17,943
—
—
—
—
—
—
—
—
—
—
433
29,547
26,329
(70)
(27,219)
(27,219)
—
49
56
—
102,985
286
226
16,651
18,169
Balance at December 31, 2022
48,148
481
1,209,725
(844) 1,437,854
(6,365)
(22,827) 2,624,389
Net income
Other comprehensive income, net of tax
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
Issuance of shares for acquisitions
—
—
—
—
—
—
—
—
—
—
—
15,122
—
108,338
15,988
5,614
—
165,919
518
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
165,919
518
514
29,575
44,697
(74)
(27,737)
(27,737)
—
52
15
—
108,338
208
61
16,196
5,675
Balance at December 31, 2023
48,148 $
481 $ 1,354,787 $
(326) $ 1,603,773 (5,858) $ (20,720) $ 2,937,995
See accompanying notes.
F-9
Tyler Technologies, Inc.
Notes to Consolidated Financial Statements
(Tables in thousands, except per share data)
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We provide integrated software systems and related services for the public sector. 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. We provide subscription-based services such as software as a service (“SaaS”), transaction-
based fees primarily related to digital government services and online payment processing, and electronic document filing solutions
(“e-filing”), which simplify the filing and management of court related documents. 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 solutions. Additionally, we provide property appraisal outsourcing
services for taxing jurisdictions.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our parent company and 63 subsidiaries, which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation. Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and
includes all components of net income (loss) and other comprehensive income (loss). During the twelve months ended December 31,
2023 and 2022, we had approximately $518,000 of other comprehensive income, and $798,000 of other comprehensive loss, net of
taxes, from our available-for-sale investment holdings, respectively. We did not have material items of other comprehensive income
during the year ended December 31, 2021.
RECLASSIFICATIONS
Certain amounts for previous years have been reclassified to conform to the current year presentation. Beginning January 1, 2023, we
no longer report the appraisal services revenue and related costs as separate categories in the statement of income due to less
significance on our overall operating results. Therefore, we have combined the appraisal services revenue category with the
professional services revenue category; and the related cost of revenue category for appraisal services is now combined with the cost
of revenue category related to subscriptions, maintenance and professional services on the consolidated statements of income for all
reporting periods presented.
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, loss contingencies; the
recoverability of goodwill and other intangible assets and estimated useful lives of intangible assets; 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.
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.
F-10
REVENUE RECOGNITION
Nature of Products and Services
We account for revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers. We earn the majority of our revenues from subscription-based services and post-contract customer support (“PCS” or
“maintenance”). Other sources of revenue are professional services, software licenses and royalties, and hardware and other. Revenue
is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we
expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:
•
•
•
•
•
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Our software arrangements with customers contain multiple performance obligations that range from software licenses, installation,
training, and consulting related to software modification and customization to meet specific customer needs (services), hosting, and
PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether
separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include
professional services, such as training or installation, are evaluated to determine whether those services are highly interdependent or
interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative
standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives, taking into consideration market
conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and
types of users within our contracts.
Revenue is recognized net of allowances for losses and sales adjustments and any taxes collected from customers, which are
subsequently remitted to governmental authorities.
Subscription-Based Services:
Subscription-based services consist primarily of revenues derived from SaaS arrangements, 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 10 years, but are typically for a period of
three to five years. For professional services associated with certain SaaS arrangements, we have concluded that the services are not
distinct, and we recognize the revenue ratably over the remaining contractual period once we have provided the customer access to the
software. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on
whether the revenue recognition criteria have been met.
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.
For 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 revenues 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 revenues 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 period of benefit.
F-11
Software Arrangements:
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.
Professional Services
When professional 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 milestone basis. For arrangements that involve significant production, modification or
customization of the software, or where professional services are otherwise not considered distinct, we recognize revenue over time by
measuring progress-to-completion. 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.
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 professional services are otherwise not considered
distinct, we recognize revenue over time by measuring progress-to-completion.
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 revenue we are entitled to and amounts are billed on a quarterly basis in the quarter immediately
following the royalty reporting period, and adjustments have not been significant.
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.
Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or
subscription) includes both software licenses and professional 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 professional 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.
For arrangements that involve significant production, modification, or customization of the software, or where professional services
otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-
completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value
added. 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. 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.
F-12
Refer to Note 3 - "Disaggregation of Revenue” for further information, including the economic factors that affect the nature, amount,
timing, and uncertainty of revenues and cash flows of our various revenue categories.
Contract Balances:
Accounts receivable and allowance for losses and sales adjustments
Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue
is recognized prior to invoicing, or deferred revenue when invoicing occurs prior to revenue recognition. For multi-year agreements,
we generally invoice customers annually at the beginning of each annual coverage period.
In connection with certain professional 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) professional
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; (2) 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; (3) 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 (4) 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, 2023, and December 31, 2022, total current and long-term accounts receivable, net of allowance for losses and
sales adjustments, was $628.7 million and $585.5 million, respectively. We have recorded unbilled receivables of $119.2 million and
$135.4 million at December 31, 2023, and December 31, 2022, respectively. Included in unbilled receivables are retention receivables
of $9.8 million and $8.6 million at December 31, 2023, and December 31, 2022, 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.
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. Consequently, we have not recorded a reserve for credit losses. Events or changes in circumstances that
indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to,
managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or
enhancements of our software products. Our allowance for losses and sales adjustments are $22.8 million and $14.8 million at
December 31, 2023, and December 31, 2022, respectively.
The following table summarizes the changes in the allowance for losses and sales adjustments:
Balance at beginning of year
Provisions for losses and sales adjustments - accounts receivable
Collections of accounts previously written off
Balance at end of year
Years ended December 31,
2023
2022
$
$
14,761 $
8,233
(165)
22,829 $
12,086
2,781
(106)
14,761
F-13
Deferred Revenue
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, professional services, and hardware installation. Refer to Note 4 - "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 generally three to seven years. We utilize 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 determine 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 sales and marketing expense in the accompanying consolidated statements of income. Refer to Note 5 - “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.
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.
RESEARCH AND DEVELOPMENT COSTS
We expensed research and development expense of $109.6 million in 2023, $105.2 million in 2022, and $93.5 million in 2021.
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 related to unrecognized tax benefits in income tax
expense in the consolidated statements of income.
F-14
Internal Revenue Code (“IRC”) Section 174
For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to currently
deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research
activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC
Section 174. The requirement temporarily increases our U.S. federal and state cash tax payments and reduces cash flows in fiscal year
2023 and future years until the amortization deduction normalizes.
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 five 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 16, “Share-Based Compensation,” for further information.
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 6, “Acquisitions,” for further information.
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,
2023.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying
value may not be recoverable. We begin with the qualitative assessment of the likelihood of impairment of each reporting unit. If the
conclusion of this assessment is that it is more likely than not that a reporting unit's fair value is more than its carrying value, we are
not required to perform a quantitative impairment test. When testing goodwill for impairment quantitatively, we first compare the
estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds the fair value of
that reporting unit, an impairment loss is recognized. The fair values calculated in our impairment tests are determined using
discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions that are used are based upon what we
believe a hypothetical marketplace participant would use in estimating fair value. We base our fair value estimates on assumptions we
believe to be reasonable but that are unpredictable and inherently uncertain.
F-15
During the fourth quarter, as part of our annual impairment test as of October 1, we performed only qualitative assessments for
reporting units that have significant excess fair value over carrying value. As a result of these qualitative assessments, we determined
that it was more likely than not that the fair value exceeded the carrying value; therefore, we did not perform a Step 1 quantitative
impairment test. However, we did perform a quantitative assessment for the platform technologies reporting unit and concluded no
impairment existed as of our annual assessment date. Approximately $1.7 billion, or 67%, of total goodwill as of December 31, 2023,
relates to this reporting unit, which, as a result of the recency of the acquisitions comprising the reporting unit, does not have
significant excess fair value over carrying value. Our annual goodwill impairment analysis did not result in an impairment charge.
During 2023, we recorded no impairment to goodwill because no triggering events or change in circumstances indicating a potential
impairment had 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, such as weighted average cost of capital and revenue growth rates which are forward looking and
affected by expectations about future market or economic conditions. Similarly, in a specific period, a reporting unit could significantly
underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different
estimate of the fair value of our reporting units, and a consequent future impairment charge.
There have been no impairments to goodwill in any of the periods presented. See Note 8, "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.
COSTS OF COMPUTER SOFTWARE
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 capitalize application development stage costs of
software developed for internal use. Software development costs primarily consist of personnel costs. During the twelve months
period ended December 31, 2023, 2022, and 2021, respectively, we capitalized approximately $32.5 million, $27.6 million, and $21.7
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 generally, three to five years.
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, 2023, we had cash and cash equivalents of $165.5
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. As
a result, we do not believe we have any significant concentrations of credit risk as of December 31, 2023.
F-16
We maintain allowances for losses and sales adjustments, which losses are recorded against revenues 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.
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.
INDEMNIFICATION
Most of our software license agreements indemnify our customers in the event that the software sold infringes upon the intellectual
property rights of a third party. These agreements typically provide that in such event we will either modify or replace the software so
that it becomes non-infringing or procure for the customer the right to use the software. We have not recorded a 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 certain officers and our 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 not recorded a liability associated with these indemnifications. Because of our insurance
coverage, we believe the estimated fair value of these indemnification agreements is minimal.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07 - Segment Reporting (Topic 280), Improvements
to Reportable Segment Disclosures. ASU 2023-07 enhances the disclosures required for reportable segments in annual and interim
consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods
within fiscal years beginning after December 15, 2024, and early adoption is permitted. We are currently evaluating the impact that the
new guidance will have on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09 – Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the
transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate
reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the
effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early
adoption permitted. We do not expect that this guidance will have a material impact upon our financial position and results of
operations.
(2)
SEGMENT AND RELATED INFORMATION
In accordance with ASC 280-10, Segment Reporting, we report our results in two reportable segments. Business units that have met
the aggregation criteria have been combined into our two reportable segments. The Enterprise Software ("ES") reportable segment
provides public sector entities with software systems and services to meet their information technology and automation needs for
mission-critical “back-office” functions such as: public administration solutions; courts and public safety solutions; education
solutions, and property and recording solutions. The Platform Technologies ("PT") reportable segment provides public sector entities
with software solutions to platform and transformative solutions including digital solutions, payment processing, streamline data
processing, and improve operations and workflows.
As of January 1, 2023, our data and insights solutions business unit was integrated into the remaining business units across both
reportable segments with no material change to the results of the reportable segments.
F-17
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We
define segment operating income for our business units as income before non-cash amortization of intangible assets associated with
their acquisitions, interest expense, and income taxes. Segment operating income includes intercompany transactions. The majority of
intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement.
Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services
staff, and share-based compensation expense for the entire company. Corporate segment operating loss also includes revenues and
expenses related to a company-wide user conference. 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 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.
For the year ended December 31, 2023
Enterprise
Software
Platform
Technologies
Corporate
Totals
Revenues
Subscriptions:
SaaS
Transaction-based fees
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Intercompany
Total revenues
Depreciation and amortization expense
Segment operating income
Software development expenditures
Capital expenditures
Segment assets
For the year ended December 31, 2022
Revenues
Subscriptions:
SaaS
Transaction-based fees
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Intercompany
Total revenues
Depreciation and amortization expense
Segment operating income
Software development expenditures
Capital expenditures
Segment assets
$
459,544 $
68,433 $
— $
527,977
174,718
442,781
209,727
32,709
30,176
23,566
456,817
23,880
40,249
5,387
—
—
—
—
—
—
7,330
(23,566)
631,535
466,661
249,976
38,096
37,506
—
$
1,373,221 $
594,766 $
(16,236) $
1,951,751
25,445
443,756
6,619
16,788
110,354
124,446
15,840
2,380
18,280
(238,971)
10,031
1,351
154,079
329,231
32,490
20,519
$
631,117 $
426,064 $
3,619,482 $
4,676,663
Enterprise
Software
Platform
Technologies
Corporate
Totals
$
378,953 $
49,573 $
— $
428,526
147,370
444,143
204,970
55,158
26,592
21,636
436,408
24,312
72,655
4,248
—
—
—
—
—
—
5,822
(21,636)
583,778
468,455
277,625
59,406
32,414
—
$
1,278,822 $
587,196 $
(15,814) $
1,850,204
55,389
418,776
3,790
8,972
84,609
123,291
14,581
6,845
19,074
(214,263)
9,251
6,712
159,072
327,804
27,622
22,529
$
636,377 $
362,610 $
3,688,430 $
4,687,417
F-18
For the year ended December 31, 2021
Enterprise
Software
Platform
Technologies
Corporate
Totals
Revenues
Subscriptions:
SaaS
Transaction-based fees
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Intercompany
Total revenues
Depreciation and amortization expense
Segment operating income
Software development expenditures
Capital expenditures
Segment assets
$
310,416 $
31,702 $
— $
342,118
114,662
439,589
193,184
66,816
18,876
22,033
327,655
34,698
43,995
7,636
31
—
—
—
—
—
3,027
(22,033)
442,317
474,287
237,179
74,452
21,934
—
$
1,165,576 $
445,717 $
(19,006) $
1,592,287
54,011
401,382
3,504
19,213
55,539
92,582
12,332
3,696
26,074
(222,779)
5,857
11,010
135,624
271,185
21,693
33,919
$
601,390 $
359,919 $
3,770,852 $
4,732,161
Reconciliation of reportable segment operating income to the Company's consolidated totals:
Years Ended December 31,
Total segment operating income
Amortization of acquired software
Amortization of other intangibles
Interest expense
Other income, net
Income before income taxes
(3)
DISAGGREGATION OF REVENUE
2023
2022
2021
$
329,231 $
327,804 $
271,185
(36,062)
(74,632)
(23,629)
3,328
(52,192)
(61,363)
(28,379)
1,723
(45,601)
(44,849)
(23,298)
1,544
$
198,236 $
187,593 $
158,981
The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing,
and uncertainty of revenues and cash flows.
Timing of Revenue Recognition
Timing of revenue recognition by revenue category during the period is as follows:
For the year ended December 31, 2023
Revenues:
Subscriptions:
SaaS
Transaction-based fees
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Total
Products and
services transferred
at a point in time
Products and
services transferred
over time
Total
$
— $
527,977 $
—
—
—
34,516
37,506
631,535
466,661
249,976
3,580
—
527,977
631,535
466,661
249,976
38,096
37,506
$
72,022 $
1,879,729 $
1,951,751
F-19
For the year ended December 31, 2022
Revenues:
Subscriptions
SaaS
Transaction-based fees
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Total
For the year ended December 31, 2021
Revenues:
Subscriptions
SaaS
Transaction-based fees
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Total
Recurring Revenues
Products and
services transferred
at a point in time
Products and
services transferred
over time
Total
$
— $
428,526 $
—
—
—
50,302
32,414
583,778
468,455
277,625
9,104
—
428,526
583,778
468,455
277,625
59,406
32,414
$
82,716 $
1,767,488 $
1,850,204
Products and
services transferred
at a point in time
Products and
services transferred
over time
Total
$
— $
342,118 $
—
—
—
62,847
21,934
442,317
474,287
237,179
11,605
—
342,118
442,317
474,287
237,179
74,452
21,934
$
84,781 $
1,507,506 $
1,592,287
The majority of our revenues are comprised of revenues from subscriptions and maintenance, which we consider to be recurring
revenues. Subscriptions revenue primarily consists of revenues derived from our SaaS arrangements and transaction-based fees, which
relate to digital government services and payment processing. These revenues are considered recurring because revenues from these
sources are expected to recur in similar annual amounts for the term of our relationship with the client. Transaction-based fees are
generally the result of multi-year contracts with our clients that result in fees generated by payment transactions and digital
government services and are collected on a recurring basis during the contract term. The contract terms for subscription arrangements
range from one to 10 years but are typically contracted for initial periods of three to five years. Virtually all of our on-premises
software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenues.
Maintenance and support is generally provided under annual, or in some cases, multi-year contracts. We consider all other revenue
categories to be non-recurring revenues.
Recurring revenues and non-recurring revenues recognized during the period are as follows:
For the year ended December 31, 2023
Recurring revenues
Non-recurring revenues
Intercompany
Total revenues
For the year ended December 31, 2022
Recurring revenues
Non-recurring revenues
Intercompany
Total revenues
Enterprise
Software
Platform
Technologies
Corporate
Totals
$
1,077,043 $
549,130 $
— $
1,626,173
272,612
23,566
45,636
—
7,330
325,578
(23,566)
—
$
1,373,221 $
594,766 $
(16,236) $
1,951,751
Enterprise
Software
Platform
Technologies
Corporate
Totals
$
970,466 $
510,293 $
— $
1,480,759
286,720
21,636
76,903
—
5,822
369,445
(21,636)
—
$
1,278,822 $
587,196 $
(15,814) $
1,850,204
F-20
For the year ended December 31, 2021
Recurring revenues
Non-recurring revenues
Intercompany
Total revenues
Enterprise
Software
Platform
Technologies
Corporate
Totals
$
864,667 $
394,055 $
— $
1,258,722
278,876
22,033
51,662
—
3,027
333,565
(22,033)
—
$
1,165,576 $
445,717 $
(19,006) $
1,592,287
(4)
DEFERRED REVENUE AND PERFORMANCE OBLIGATIONS
Total deferred revenue, including long-term, by segment is as follows:
Enterprise Software
Platform Technologies
Corporate
Totals
Changes in total deferred revenue, including long-term, were as follows:
December 31, 2023 December 31, 2022
$
$
589,295 $
39,597
4,313
633,205 $
533,902
33,691
2,982
570,575
Balance at beginning of year
Deferral of revenue
Recognition of deferred revenue
Balance at end of year
2023
570,575
1,391,795
(1,329,165)
633,205
$
$
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, 2023 was $2.03 billion, of which we expect to recognize approximately 46% as revenue
over the next 12 months and the remainder thereafter.
(5)
DEFERRED COMMISSIONS
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer.
Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over
a period of benefit that we have determined to be generally three to seven years. Deferred commissions were $49.2 million and $43.8
million as of December 31, 2023 and 2022, respectively. Amortization expense was $18.6 million, $15.4 million, and $13.4 million
for the twelve months ended December 31, 2023, 2022, and 2021, respectively. There were no indicators of impairment in relation to
the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion
and non-current other assets for the long-term portion in the accompanying consolidated balance sheets. Amortization expense related
to deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of income.
F-21
(6)
ACQUISITIONS
2023
On October 31, 2023, we acquired Resource Exploration, Inc. (“ResourceX”), a leading provider of budgeting software to the public
sector. The total purchase price, net of cash acquired of $48,000, was approximately $16.3 million, consisting of $9.1 million paid in
cash, $5.7 million of common stock and $1.5 million related to working capital and indemnity holdbacks, subject to certain post-
closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of ResourceX’s assets and liabilities. In connection with
this transaction, we acquired total tangible assets of $388,000 and assumed liabilities of approximately $901,000. We recorded
goodwill of approximately $10.0 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible
assets of approximately $7.6 million. The goodwill 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 intangible assets of $7.6 million
are primarily attributable to customer relationships and acquired software and will be amortized over a weighted average period of
approximately nine years. We recorded net deferred tax liabilities of $748,000 related to the tax effect of our estimated fair value
allocations.
On October 31, 2023, we acquired ARInspect, Inc. (“ARInspect”), a leading provider of AI powered machine learning solutions for
public sector field operations. The total purchase price, net of cash acquired of $1.0 million, was approximately $20.5 million,
consisting of $19.1 million paid in cash and $2.4 million related to working capital and indemnity holdbacks, subject to certain post-
closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of ARInspect’s assets and liabilities. In connection with
this transaction, we acquired total tangible assets of $1.8 million and assumed liabilities of approximately $1.5 million. We recorded
goodwill of approximately $13.6 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible
assets of approximately $10.0 million. The goodwill 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 intangible assets of
$10.0 million are primarily attributable to customer relationships and acquired software and will be amortized over a weighted average
period of approximately 12 years. We recorded net deferred tax liabilities of $2.5 million related to the tax effect of our estimated fair
value allocations.
On August 8, 2023, we acquired Computing System Innovations, LLC (“CSI”), a leading provider of artificial intelligence automation,
redaction, and indexing solution for courts, recorders, attorneys, and others. The total purchase price, net of cash acquired of $415,000,
was approximately $36.2 million, consisting of $33.4 million paid in cash and $3.3 million related to working capital and indemnity
holdbacks, subject to certain post-closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of CSI’s assets and liabilities. In connection with this
transaction, we acquired total tangible assets of $1.2 million and assumed liabilities of approximately $2.4 million. We recorded
goodwill of approximately $19.4 million, all of which is expected to be deductible for tax purposes, and other identifiable intangible
assets of approximately $18.5 million. The goodwill 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 intangible assets of $18.5
million are primarily attributable to customer relationships and acquired software and will be amortized over a weighted average
period of approximately 13 years.
We also paid $2.6 million primarily related to a small acquisition completed during first quarter 2023 and holdbacks related to other
acquisitions completed in 2022.
The actual operating results of CSI and ResourceX, from their respective dates of acquisition, are included with the operating results
of the ES segment. The operating results of ARInspect are included in the operating results of the PT segment since the date of
acquisition. Also, the impact of these acquisitions on our operating results, assets, and liabilities is not material, individually or in the
aggregate. The purchase price allocation for CSI, ARInspect, and ResourceX are not final; therefore, certain preliminary valuation
estimates of fair value assumed at the acquisition date for intangible assets, receivables, and related deferred taxes are subject to
change as valuations are finalized. Our balance sheet as of December 31, 2023, reflects the allocation of the purchase price to the net
assets acquired based on their estimated fair value at the date of the 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.
In the twelve months ended December 31, 2023, we incurred fees of approximately $409,000 for financial advisory, legal, accounting,
due diligence, valuation, and other various services necessary to complete acquisitions. These costs were expensed in 2023 and are
included in general and administrative expense in the accompanying consolidated statements of income.
F-22
2022
On October 31, 2022, we acquired Rapid Financial Solutions, LLC (“Rapid”), a provider of reliable, scalable, and secure payments
with best-in-class card issuance and digital disbursement capabilities. The total purchase price, net of cash acquired of $2.2 million,
was approximately $67.4 million, consisting of $51.5 million paid in cash and, $18.2 million of common stock.
We performed a valuation analysis of the fair market value of Rapid’s assets and liabilities. In connection with this transaction, we
acquired total tangible assets of $12.9 million and assumed liabilities of approximately $10.6 million. In the first quarter of 2023, we
recorded $10.0 million for assumed liabilities related to litigation outstanding at the time of acquisition as the amount became probable
and estimable and a related $10.0 million indemnification receivable from escrowed amounts established at acquisition. We recorded
goodwill of approximately $39.8 million, all of which is expected to be deductible for tax purposes, and other identifiable intangible
assets of approximately $27.6 million. The goodwill 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 $27.6 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 10 years.
On May 31, 2022, we completed the acquisition of Quatred, LLC (“Quatred”), a systems integrator and barcode technology solutions
provider. The total cash price was approximately $637,000.
On February 8, 2022, we acquired US eDirect Inc. (“US eDirect”), a leading provider of technology solutions for campground and
outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.5 million,
consisting of $122.9 million paid in cash.
We performed a valuation analysis of the fair market value of US eDirect's assets and liabilities. The following table summarizes the
allocation of the purchase price as of the acquisition date:
Cash
Accounts receivable
Other current assets
Other noncurrent assets
Goodwill and identifiable intangible assets
Accounts payable
Accrued expenses
Other noncurrent liabilities
Deferred revenue
Deferred tax liabilities, net
Total consideration
$
$
6,361
1,730
594
698
125,541
(1,881)
(357)
(742)
(688)
(8,326)
122,930
In connection with this transaction, we acquired total tangible assets of $9.4 million and assumed liabilities of approximately $3.7
million. We recorded goodwill of approximately $91.4 million, none of which is expected to be deductible for tax purposes, and other
identifiable intangible assets of approximately $34.1 million. The goodwill 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 identifiable
intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted
average period of approximately 13 years. We recorded net deferred tax liabilities of $8.3 million related to the tax effect of our
estimated fair value allocations. Since the acquisition date, we recorded adjustments to the preliminary opening balance sheet
attributed to decreases in other current assets, other noncurrent assets, identifiable intangible assets, accrued expenses, and deferred
revenue, and increases in accounts receivable, accounts payable, and deferred tax liabilities, resulting in a net increase to goodwill of
approximately $10.3 million.
As of December 31, 2023, the purchase price allocations for Rapid, US eDirect, and Quatred are complete. The actual operating
results of Rapid and US eDirect, from their respective dates of acquisition, are included with the operating results of the Platform
Technologies segment. The operating results of Quatred are included in the operating results of the Enterprise Software segment since
the date of acquisition.
F-23
(7)
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)
2023
2022
— $
22,908 $
22,908
5-39
3-5
5
5
172,094
118,178
34,881
222
159,059
121,968
39,373
200
348,283
343,508
(178,563)
(170,722)
$
169,720 $
172,786
Depreciation expense was $25.0 million in 2023, $29.5 million in 2022, and $29.4 million in 2021.
We paid $16.0 million and $4.5 million for real estate and the expansion of existing facilities in 2023 and 2022, respectively.
Software development costs, net consists of the following at December 31:
Software development costs
Accumulated amortization
Software development costs, net
Useful
Lives
(years)
2023
2022
3-5 $
92,395 $
59,904
(25,271)
(11,715)
$
67,124 $
48,189
Amortization expense for software development costs is recorded to cost of revenues and general and administrative expense.
Amortization expense for software development costs recorded to cost of revenues was $12.6 million in 2023, $6.5 million in 2022,
and $2.3 million in 2021. Amortization expense for software development costs recorded to general and administrative expense was
$930,000 in 2023, $1.4 million expense in 2022, and no expense in 2021.
Estimated annual amortization expense related to software development costs:
2024
2025
2026
2027
2028
Thereafter
$
$
18,546
17,031
13,867
9,286
4,976
3,418
67,124
F-24
(8)
GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the two years ended December 31, 2023 are as follows:
Balance as of 12/31/2021
Goodwill acquired related to the purchase of US eDirect
Goodwill acquired related to the purchase of Rapid
Goodwill acquired related to the purchase of VendEngine
Goodwill acquired related to the purchase of other acquisitions
Balance as of 12/31/2022
Goodwill acquired related to the purchase of CSI
Goodwill acquired related to the purchase of ARInspect
Goodwill acquired related to the purchase of ResourceX
Purchase price adjustments related to the purchase of other acquisitions
Transfer from ES to PT
Balance as of 12/31/2023
Enterprise
Software
Platform
Technologies
Total
$
836,505 $
1,523,169 $
2,359,674
—
—
(204)
(1,608)
834,693
19,421
—
9,978
—
91,441
40,005
—
—
91,441
40,005
(204)
(1,608)
1,654,615
2,489,308
—
13,627
—
(225)
19,421
13,627
9,978
(225)
—
(27,090)
27,090
$
837,002 $
1,695,107 $
2,532,109
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
2023
2022
$
1,015,919 $
466,253
45,002
5,037
1,532,211
(603,341)
928,870 $
$
990,545
456,137
45,293
5,037
1,497,012
(494,848)
1,002,164
Amortization expense for acquired software is recorded to cost of revenues. Amortization expense for customer related intangibles,
trade names and leases acquired is recorded to amortization of other intangibles. Total amortization expense for other intangibles was
$111.0 million in 2023, $113.9 million in 2022, and $90.8 million in 2021.
The amortization periods of other intangible assets is summarized in the following table:
December 31, 2023
December 31, 2022
Gross
Carrying
Amount
Weighted
Average
Amortization
Period
Accumulated
Amortization
Gross
Carrying
Amount
Weighted
Average
Amortization
Period
Accumulated
Amortization
$ 2,532,109
— $
— $ 2,489,308
— $
—
Non-amortizable intangibles:
Goodwill
Amortizable intangibles:
Customer related intangibles
$ 1,015,919
18 years $
263,672 $
990,545
20 years $
209,501
Acquired software
Trade names
Leases acquired
466,253
45,002
5,037
7 years
7 years
9 years
296,704
456,137
38,838
4,127
45,293
5,037
5 years
5 years
9 years
260,642
21,059
3,646
F-25
Estimated annual amortization expense related to other intangibles:
2024
2025
2026
2027
2028
Thereafter
$
$
96,113
92,476
84,965
82,697
79,978
492,641
928,870
(9)
ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
Accrued wages, bonuses and commissions
Other accrued liabilities
(10)
DEBT
2023
2022
$
$
81,679 $
76,879
158,558 $
73,745
58,196
131,941
The following table summarizes our total outstanding borrowings related to the amended 2021 Credit Agreement and Convertible
Senior Notes:
Rate
Maturity Date
December 31,
2023
December 31,
2022
2021 Credit Agreement
Revolving credit facility
Term Loan A-1
Term Loan A-2
S + 1.25%
S + 1.25%
S + 1.00%
April 2026
April 2024
Convertible Senior Notes due 2026
0.25%
March 2026
Total borrowings
Less: unamortized debt discount and debt issuance costs
Total borrowings, net
Less: current portion of debt
Carrying value
2021 Credit Agreement
April 2026
$
— $
50,000
—
600,000
650,000
(3,993)
646,007
—
290,000
105,000
600,000
995,000
(7,611)
987,389
(49,801)
(30,000)
$
596,206 $
957,389
In connection with the completion of the acquisition of NIC, Inc. on April 21, 2021, we, as borrower, entered into a $1.4 billion Credit
Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as
Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured
revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit
and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million
(the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”)
and, together (the “Term Loans”). 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 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.
On January 28, 2023, we amended our 2021 Credit Agreement to replace the LIBOR reference rate with the Secured Overnight
Financing Rate (“SOFR”) reference rate.
F-26
In accordance with our amended 2021 Credit Agreement, the 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 SOFR 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-, six-, or,
subject to approval by all lenders, twelve-month SOFR 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 amended 2021 Credit Agreement. In addition to paying interest
on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the
average daily unused portion of the Revolving Credit Facility, currently 0.25% per annum, ranging from 0.15% to 0.3% based upon
the Company’s total net leverage ratio. As of December 31, 2023, we have fully repaid amounts due under Term Loan A-2.
The amended 2021 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and prohibits us
from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of
December 31, 2023, we were in compliance with those covenants.
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 consolidated statements of income.
Convertible Senior Notes due 2026
On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 in the aggregate principal amount of $600.0 million (“the
Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture
(the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds from the issuance of
the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of
$2.6 million.
The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured
indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively
subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv)
structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder
thereof) preferred equity, if any, of our subsidiaries.
The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually in arrears on March 15 and
September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier
repurchased, redeemed, or converted.
Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only
upon the occurrence of certain events. Under the terms of the Indenture, the Convertible Senior Notes are convertible into common
stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances:
•
•
•
•
•
during any calendar quarter commencing after the calendar quarter ended June 30, 2021, if the last reported sale price per
share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not
consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter;
during the five consecutive business days immediately after any five consecutive trading day period (such five
consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of
Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the
Indenture, for each trading day of the Measurement Period was less than 98% of the product of the last reported sale
price per share of our common stock on such trading day and the conversion rate on such trading day;
upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a
“Fundamental Change” (as defined in the Indenture);
upon the occurrence of specified corporate events; or
on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding
the maturity date, March 15, 2026.
F-27
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, 2023, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.
From and including September 15, 2025, holders of the Convertible Senior Notes may convert their Convertible Senior Notes at any
time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will
settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of our common
stock, at our election. However, upon conversion of any Convertible Senior Notes, the conversion value, which will be determined
over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the
principal amount of the Notes being converted.
The initial conversion rate is 2.0266 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which
represents an initial conversion price of approximately $493.44 per share of common stock. The conversion rate and conversion price
will be subject to adjustment upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-
Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased
for a specified period of time.
The Convertible Senior Notes are redeemable, in whole or in part, at our option at any time, and from time to time, on or after
March 15, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price
equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the
redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price of the
Notes on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and
including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately
before the date we send such notice. In addition, calling any Note for redemption constitutes a Make-Whole Fundamental Change with
respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain
circumstances if it is converted after it is called for redemption.
Effective Interest Rate
The weighted average interest rates for the borrowings under the amended 2021 Credit Agreement and Convertible Senior Notes due
2026 were 6.71% and 0.25%, as of December 31, 2023, respectively. For the twelve months ended December 31, 2023, the effective
interest rate was 7.63% for borrowing under the amended 2021 Credit Agreement and 0.54% for the Convertible Senior Notes. The
following sets forth the interest expense recognized related to the borrowings under the amended 2021 Credit Agreement and
Convertible Senior Notes and is included in interest expense in the accompanying consolidated statements of income:
Years Ended December 31,
2023
2022
2021
Contractual interest expense - Revolving Credit Facility
$
(1,539) $
(1,267) $
Contractual interest expense - Term Loans
Contractual interest expense - Convertible Senior Notes
Amortization of debt discount and debt issuance costs
(16,016)
(18,583)
(1,500)
(4,574)
(1,500)
(7,029)
(1,244)
(9,341)
(1,213)
(3,297)
Interest expense and amortization of debt issuance costs - terminated 2019 Credit Agreement
and Senior Unsecured Bridge loan facility
Total
—
—
(8,203)
$
(23,629) $
(28,379) $
(23,298)
As of December 31, 2023, we had one outstanding standalone letter of credit totaling $750,000. The letter of credit, which guarantees
our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of
2026. For the twelve months ended December 31, 2023, we repaid $345 million of the Term Loans under the amended 2021 Credit
Agreement.
F-28
As of December 31, 2023, the required annual maturities related to the amended 2021 Credit Agreement and the Convertible Senior
Notes due 2026 were as follows:
Year ending December 31,
Annual Maturities
2024
2025
2026
2027
2028
$
50,000
—
600,000
—
—
Total required maturities
$
650,000
(11)
FINANCIAL INSTRUMENTS
The following table presents our financial instruments:
Cash and cash equivalents
Available-for-sale investments
Equity investments
Total
December 31, 2023
December 31, 2022
$
$
165,493 $
17,431
10,000
192,924 $
173,857
55,538
10,000
239,395
Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we
determine fair value through quoted market prices.
Our investment portfolio is classified as available-for-sale in order to have the flexibility to buy and sell investments and maximize
cash liquidity for potential acquisitions or for debt repayments. Our available-for-sale investments primarily consist of investment
grade corporate bonds, municipal bonds, and asset-backed securities with maturity dates through 2027. These investments are
presented at fair value and are included in short-term investments and non-current investments in the accompanying consolidated
balance sheets. Unrealized gains or losses associated with the investments are included in accumulated other comprehensive loss, net
of tax in the accompanying consolidated balance sheets and statements of comprehensive income. For our available-for-sale
investments, we do not have the intent to sell, nor is it more likely than not that we would be required to sell before recovery of their
cost basis.
As of December 31, 2023 and 2022, we have an accrued interest receivable balance of approximately $65,000 and $200,000,
respectively, which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest
receivables. We record any losses within the maturity period or at the time of sale of the investment and any write-offs to accrued
interest receivables are recorded as a reduction to interest income in the period of the loss. During the twelve months ended
December 31, 2023, we have recorded no credit losses for accrued interest receivables. Interest income and amortization of discounts
and premiums are included in other income, net in the accompanying consolidated statements of income.
The following table presents the components of our available-for-sale investments:
Amortized cost
Unrealized gains
Unrealized losses
Estimated fair value
December 31, 2023 December 31, 2022
$
$
17,866 $
—
(435)
17,431 $
56,670
16
(1,148)
55,538
As of December 31, 2023, we have $10.4 million of available-for-sale debt securities with contractual maturities of one year or less
and $7.0 million with contractual maturities greater than one year. As of December 31, 2023, one available-for-sale debt security with
a fair value of $3.0 million has been in a loss position for one year or less and 20 securities with a fair value of $14.2 million have
been in a loss position for greater than one year.
F-29
The following table presents the activity on our available-for-sale or held-to-maturity investments:
Proceeds from sales and maturities
Realized losses on sales, net of tax
Years Ended December 31,
2023
2022
2021
$
49,412 $
71,034 $
131,449
—
(79)
—
Our equity investments consist of an 18% interest in BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR,
LLC is a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment
in common stock is carried at cost less any impairment write-downs because we do not have the ability to exercise significant
influence over the investee and the securities do not have readily determinable fair values.
(12)
OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the changes in the balances of accumulated other comprehensive loss, net of tax by component:
Unrealized Loss on
Available-for-Sale
Securities
Other
Accumulated Other
Comprehensive
Loss
Balance as of December 31, 2021
Other comprehensive loss before reclassifications
Reclassification adjustment of unrealized losses on securities transferred
from held-to-maturity
Reclassification adjustment for net loss on sale of available-for-sale
securities, included in net income
Other comprehensive loss
Balance as of December 31, 2022
$
$
Other comprehensive income before reclassifications
Reclassification adjustment of unrealized gains (losses) on securities
transferred from held-to-maturity
Reclassification adjustment for net loss (gain) on sale of available-for-sale
securities, included in net income
Other comprehensive income
Balance as of December 31, 2023
(13)
FAIR VALUE MEASUREMENTS
(46) $
(850)
(27)
79
(798)
(844) $
518
—
—
518
— $
—
—
—
—
— $
—
—
—
—
$
(326) $
— $
(46)
(850)
(27)
79
(798)
(844)
518
—
—
518
(326)
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.
F-30
The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of
December 31, 2023:
Cash and cash equivalents
Available-for-sale securities
Equity investments
2021 Credit Agreement
Revolving Credit Facility
Term Loan A-1
Term Loan A-2
Convertible Senior Notes due 2026
Level 1
Level 2
Level 3
Total
$
165,493 $
— $
— $
165,493
—
—
—
—
—
—
17,431
—
—
49,801
—
609,168
—
10,000
—
—
—
—
17,431
10,000
—
49,801
—
609,168
The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of
December 31, 2022:
Cash and cash equivalents
Available-for-sale securities
Equity investments
2021 Credit Agreement
Revolving Credit Facility
Term Loan A-1
Term Loan A-2
Convertible Senior Notes due 2026
Level 1
Level 2
Level 3
Total
$
173,857 $
— $
— $
173,857
—
—
—
—
—
—
55,538
—
—
288,302
104,603
560,910
—
10,000
—
—
—
—
55,538
10,000
—
288,302
104,603
560,910
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, 2023, we have $17.4 million in investment grade corporate bonds, municipal bonds, and asset-backed securities
with maturity dates through 2027. The fair values of these securities are considered Level 2 as they are based on inputs from quoted
prices in markets that are not active or other observable market data.
Assets that are Measured at Fair Value on a Nonrecurring Basis
As of December 31, 2023, we have an 18% interest in BFTR, LLC. As we do not have the ability to exercise significant influence over
the investee and the securities do not have readily determinable fair values, our investment is carried at cost less any impairment write-
downs. Periodically, our investment is assessed for impairment. We do not reassess the fair value of the investments if there are no
identified events or changes in circumstances that 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 equity
method investment for the periods presented. This investment is included in other non-current 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 2023, 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 year
ended December 31, 2023.
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, 2023, because
our interest rates reset approximately every 30 days or less.
F-31
The carrying amount of the Revolving Credit Facility and Term Loans is the par value less the debt discount and debt issuance costs
that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is
included in the accompanying consolidated statements of income.
The fair value of our Convertible Senior Notes is determined based on quoted market prices for a similar liability when traded as an
asset in an active market, a Level 2 input. See Note 10, “Debt,” for further discussion.
The carrying amount of the Convertible Senior Notes is the par value less the debt discount and debt issuance costs that are amortized
to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in
the accompanying consolidated statements of income.
The following table presents the fair value and carrying value, net, of the amended 2021 Credit Agreement and our Convertible Notes
due 2026):
2021 Credit Agreement
Revolving Credit Facility
Term Loan A-1
Term Loan A-2
Convertible Notes due 2026
(14)
INCOME TAX
Fair Value at December 31,
Carrying Value at December 31,
2023
2022
2023
2022
$
— $
— $
— $
—
49,801
—
609,168
288,302
104,603
560,910
49,801
—
596,206
288,302
104,603
594,484
$
658,969 $
953,815 $
646,007 $
987,389
Income tax provision (benefit) on income from operations consists of the following:
Current:
Federal
State
Deferred
Years Ended December 31,
2022
2021
2023
$
86,218 $
84,570 $
19,803
106,021
25,975
110,545
7,591
3,203
10,794
(73,704)
(87,192)
(13,271)
$
32,317 $
23,353 $
(2,477)
Reconciliation of the U.S. statutory income tax rate to our effective income tax expense rate for operations follows:
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
Uncertain tax positions
Other, net
Years Ended December 31,
2023
2022
2021
$
41,630 $
39,395 $
33,386
6,881
—
9,197
(261)
5,594
3,391
(9,325)
(7,752)
(47,675)
(20,494)
(31,334)
5,191
7,647
787
5,425
8,338
345
(4,999)
7,542
(425)
709
$
32,317 $
23,353 $
(2,477)
F-32
The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are:
Deferred income tax assets:
Capitalized research and experimental expenditures
Operating expenses not currently deductible
Stock option and other employee benefit plans
Loss and credit carryforwards
Deferred revenue
Other
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
2023
2022
$
130,972 $
22,180
21,864
7,430
1,923
111
184,480
—
184,480
(242,522)
(8,659)
(11,889)
(263,070)
$
(78,590) $
76,731
17,263
21,373
8,589
4,405
289
128,650
—
128,650
(256,818)
(11,220)
(9,503)
(277,541)
(148,891)
As of December 31, 2023, the capitalization and amortization requirements of research and experimental expenditures pursuant to the
TCJA changes to Internal Revenue Code Section 174 resulted in a deferred tax asset of $131.0 million.
As of December 31, 2023, we had after-tax federal and state net operating loss and net tax credit carryforwards of $7.4 million, that
will begin expiring in 2033, if not utilized.
The acquired carryforwards are subject to an annual limitation but are expected to be realized. We believe it is more likely than not
that all other 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 period
Additions for tax positions of prior period
Reductions for tax positions of prior period
Additions for tax positions of current period
Settlements
Expiration of statutes of limitations
Balance at end of period
2023
2022
$
14,044 $
3,087
(338)
4,838
—
(762)
$
20,869 $
4,400
5,103
(169)
5,724
—
(1,014)
14,044
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense in the consolidated
statements of income. As of December 31, 2023 and December 31, 2022, we had uncertain tax positions of $22.1 million and $14.6
million, including interest and penalties, respectively, recorded within deferred tax liabilities, other long-term assets, and other long-
term liabilities in our consolidated balance sheets. The total amount of unrecognized tax benefits, net of the federal income tax benefit
of state taxes, if recognized, that would affect the effective tax rate is $20.1 million as of December 31, 2023, and $13.3 million and
$4.0 million as of December 31, 2022, and 2021, 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.
F-33
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 2019. As of February 21, 2024, no significant adjustments have been proposed by any
taxing jurisdiction.
(15)
SHAREHOLDERS’ EQUITY
The following table details activity in our common stock:
Purchases of treasury shares
Stock option exercises and vesting of restricted
stock units
Employee stock plan purchases
Employee taxes paid for withheld shares upon
equity award settlement
Shares issued for acquisition
Years Ended December 31,
2023
2022
2021
Shares
Amount
Shares
Amount
Shares
Amount
— $
—
— $
—
(33) $
(12,977)
265
52
175
15
44,697
16,196
(27,737)
5,675
186
49
176
56
26,329
16,651
(27,219)
18,169
627
35
147
—
96,714
13,158
(25,158)
—
As of February 21, 2024, we had authorization from our Board of Directors to repurchase up to 2.3 million additional shares of our
common stock.
(16)
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.
We grant 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 five 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, 2023, there were 457,000 shares available for future grants under the 2018 Plan from the 22.9 million shares
previously approved by the shareholders.
Determining Fair Value of Stock Compensation
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 estimate fair value as market value on the date of
grant. 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.
F-34
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.
Forfeitures. We recognize the effect of awards for which the requisite service period is not rendered when the award is forfeited (that
is, we recognize the effect of forfeitures in compensation cost when they occur). Previously recognized compensation cost for an
award is reversed in the period that the award is forfeited.
During fiscal period 2023, no stock option awards were issued; therefore no Black-Scholes model assumptions are reportable. The
following weighted average assumptions were used for options granted in prior fiscal periods:
Expected life (in years)
Expected volatility
Risk-free interest rate
Share-Based Award Activity
Stock Options
Options granted, exercised, forfeited and expired are summarized as follows:
Years Ended December 31,
2023
2022
2021
0.0
— %
— %
5.0
28.3 %
3.3 %
5.0
26.1 %
1.0 %
Outstanding at December 31, 2022
Granted
Exercised
Forfeited
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic Value
1,511
—
(265)
(21)
1,225 $
1,127 $
221.38
—
168.60
403.78
229.63
216.52
4
4
$
$
234,787
229,829
We had unvested options to purchase approximately 98,000 shares with a weighted average grant date exercise price of $380.83 as of
December 31, 2023, and unvested options to purchase approximately 267,000 shares with a weighted average grant date exercise price
of $346.14 as of December 31, 2022.
Other information pertaining to option activity was as follows during the twelve months ended December 31:
Weighted average grant-date fair value of stock options granted
Total intrinsic value of stock options exercised
2023
2022
2021
$
$
— $
108.99 $
113.18
58,261 $
43,160 $
215,062
F-35
Restricted Stock Units and Performance Stock Units
The following table summarizes restricted stock unit and performance stock unit activity during the periods presented (shares in
thousands):
Unvested at December 31, 2022
Granted
Vested
Forfeited
Unvested at December 31, 2023
Share-Based Compensation Expense
Number of Shares
Weighted Average
Grant Date Fair
Value per Share
568 $
355
(249)
(28)
646 $
376.07
374.09
349.35
384.17
384.43
The following table summarizes share-based compensation expense related to share-based awards which is recorded in the
consolidated statements of income:
Years Ended December 31,
2023
2022
2021
Subscriptions, maintenance and professional services
$
26,607 $
27,486 $
Sales and marketing expense
General and administrative expense
Total share-based compensation expense
Total tax benefit
Net decrease in net income
10,118
71,613
108,338
8,800
66,699
102,985
23,705
8,834
72,187
104,726
(32,997)
(27,599)
(63,456)
$
75,341 $
75,386 $
41,270
As of December 31, 2023, we had $191.6 million of total unrecognized compensation cost related to unvested options and restricted
stock units which is expected to be amortized over a weighted average amortization period of 2.4 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, 2023, there were 526,000 shares available for future issuances under the ESPP from the
2.0 million shares previously approved by the stockholders.
(17)
EARNINGS PER SHARE
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
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
Years Ended December 31,
2023
2022
2021
$
165,919 $
164,240 $
161,458
42,024
41,544
40,848
745
—
855
—
1,382
14
42,244
Denominator for diluted earnings per share - Adjusted weighted-average shares
42,769
42,399
Earnings per common share:
Basic
Diluted
$
$
3.95 $
3.88 $
3.95 $
3.87 $
3.95
3.82
F-36
Share-based awards representing the right to purchase common stock of 343,000 shares in 2023, 372,000 shares in 2022, and 117,000
shares in 2021, were not included in the computation of diluted earnings per share because their inclusion would have had an
antidilutive effect.
We have used the if-converted method for calculating any potential dilutive effect of the Convertible Senior Notes due 2026 on our
diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and
the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period being
presented and interest expense, net of tax, recorded in connection with the Convertible Senior Notes is not added back to the
numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million remaining resulting common shares
related to the Notes are not included in the dilutive weighted-average common shares outstanding calculation for the twelve months
ended December 31, 2023, as their effect would be antidilutive given none of the conversion features have been triggered. See Note
10, “Debt,” for discussion on the conversion features related to the Convertible Senior Notes.
(18)
LEASES
We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-
cancelable operating lease agreements with remaining terms of one to 11 years. Some of these leases include options to extend for up
to six years. We have no finance leases and one related party lessor agreement (see Note 20, "Related party transactions") as of
December 31, 2023. Right-of-use lease assets and lease liabilities for our operating leases are recorded in the consolidated balance
sheets. We incurred lease restructuring costs, resulting in an additional $6.4 million and $1.7 million of operating lease costs during
2023 and 2022, respectively.
The components of operating lease expense were as follows:
Lease Costs
Operating lease cost
Short-term lease cost
Variable lease cost
Net lease cost
Supplemental information related to leases is as follows:
Other Information
Cash flows:
Years ended December 31,
2023
2022
2021
$
19,468 $
14,743 $
11,095
2,121
1,009
2,166
1,047
2,308
1,659
$
22,598 $
17,956 $
15,062
Years ended December 31,
2023
2022
2021
Cash paid amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
12,555
$
13,562
$
11,432
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases
$
3,383
$
25,171
$
20,140
Lease term and discount rate:
Weighted average remaining lease term (years)
Weighted average discount rate
7
7
6
1.59 %
1.57 %
1.81 %
F-37
As of December 31, 2023, maturities of lease liabilities were as follows:
Year ending December 31,
Amount
$
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less: Interest
Present value of operating lease liabilities
$
Rental Income from third parties
11,482
10,059
7,551
6,232
3,919
13,960
53,203
(2,321)
50,882
We own office buildings in Bangor, Falmouth and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New
York; Moraine, Ohio; and Kingston Springs, Tennessee. We lease space in some of these buildings to third-party tenants. The property
we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the
economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2024 and
2028, and some have options to extend the lease for up to 10 years. We determine if an arrangement is a lease at inception. None of
our leases allow the lessee to purchase the leased asset.
Rental income from third-party tenants was $2.1 million in 2023, $1.7 million in 2022, and $1.2 million in 2021. Rental income is
included in hardware and other revenue on the consolidated statements of income. Future minimum operating rental income based on
contractual agreements is as follows:
Year ending December 31,
Amount
2024
2025
2026
2027
2028
Thereafter
Total
$
$
3,049
2,317
1,171
913
734
—
8,184
As of December 31, 2023, we had no additional significant operating or finance leases that had not yet commenced.
(19)
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 $18.6
million in 2023, $17.5 million in 2022, and $15.6 million in 2021.
(20)
RELATED PARTY TRANSACTIONS
In April 2023, we entered into an arm's length lessor agreement under which we lease to a company co-owned by a member of our
Board of Directors 25,000 square feet of office space in our Lubbock, Texas, facility. The lease agreement, which commenced on
April 1, 2023, has an initial term of five years with a pro-rata base rent of $25,000 per month until December 1, 2023, and a base rent
of $60,000 per month thereafter. We recognized rental income of $256,000 under this lease for the year ended December 31, 2023.
F-38
(21)
COMMITMENTS AND CONTINGENCIES
Litigation
During the first quarter of 2022, we received a notice of termination for convenience under a contractual arrangement with a state
government client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and
sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience.
The client was unresponsive to our outreach for several months. On August 23, 2022, we filed a lawsuit to enforce our rights and
remedies under the applicable contractual arrangement, and since then have been engaged directly with the client on payment
resolution. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are
entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We can provide no
assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.
Purchase Commitments
We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our
normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of December 31,
2023, the remaining aggregate minimum purchase commitment under these arrangements was approximately $678 million through
2031. Future minimum payments related to purchase commitments based on contractual agreements are as follows:
Year ending December 31,
Amount
2024
2025
2026
2027
2028
Thereafter
Total
$
$
67,888
65,696
72,990
78,043
85,936
307,809
678,362
(22)
SUBSEQUENT EVENTS
There have been no material events or transactions that occurred subsequent to December 31, 2023.
F-39
CORPORATE OFFICERS
H. Lynn Moore Jr.
President & Chief Executive Officer
Brian K. Miller
Executive Vice President
Chief Financial Officer & Treasurer
Jeffrey D. Puckett
Chief Operating Officer
Samantha B. Crosby
Chief Marketing Officer
Abigail M. Diaz
Chief Legal Officer
Jason P. Durham
Chief Accounting Officer
Russell A. Gainford
Senior Vice President, Cloud Strategy &
Operations
Bruce E. Graham
Senior Strategy Advisor
Jeffrey S. Green
Chief Technology Officer
Kevin W. Iwersen
Chief Information Officer
Kelley B. Shimansky
Chief Human Resources Officer
Jeremy M. Ward
Chief Information Security 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. Carter3,4
Retired Chief Executive Officer
DataProse, Inc.
Brenda A. Cline2,3
Chief Financial Officer
Kimbell Art Foundation
Ronnie D. Hawkins Jr. 4
President
Angelo State University
Mary Landrieu2,3
Senior Policy Advisor
Van Ness Feldman LLP
Daniel M. Pope2,4
Executive Chairman
Victory Financial Corporation
Dustin R. Womble
Founder and Managing Partner
Masked Rider Capital, LLC
Executive Committee
Audit Committee
1.
2.
3. Nominating and Governance Committee
4.
Compensation Committee
OPERATIONAL LEADERSHIP
S. Franklin Williams III
President
Data & Insights Division
STATE & FEDERAL GROUP
D. Bret Dixon
President
State & Federal Group
Brian T. Combs
President
Platform Solutions Division
Elizabeth M. Proudfit
President
Digital Solutions Division
PUBLIC ADMINISTRATION GROUP
Dane L. Womble
President
Public Administration Group
Mark A. Hawkins
President
Property & Recording Division
Sean P. Marlow
President
Municipal & Schools Division
Christopher J. Webster
President
ERP & Civic Division
JUSTICE GROUP
Russell J. Smith
President
Justice Group
Andrew B. Hittle
President
Public Safety Division
Brian A. McGrath
President
Courts & Justice Division
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES
CORPORATE HEADQUARTERS
5101 Tennyson Parkway
Plano, Texas 75024
972.713.3700
tylertech.com
Communications regarding change of
address, transfer of stock ownership,
or lost stock certificates should be
sent directly to:
Equiniti Trust Company, LLC
PO Box 500
Newark, NJ 07101
800.937.5449
helpast@equiniti.com
www.equiniti.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Dallas, Texas
ANNUAL MEETING OF
STOCKHOLDERS
Thursday, May 9, 2024
9:00 a.m. Central Time
Virtual
www.virtualshareholdermeeting.com/
TYL2024
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”
ABOUT TYLER TECHNOLOGIES, INC.
Tyler Technologies (NYSE: TYL) is a leading provider of integrated software
and technology services for the public sector. Tyler’s end-to-end solutions
empower local, state, and federal government entities to operate efficiently
and transparently with residents and each other. By connecting data and
processes across disparate systems, Tyler’s solutions transform how clients
turn actionable insights into opportunities and solutions for their communities.
Tyler has more than 44,000 successful installations across 13,000 locations,
with clients in all 50 states, Canada, the Caribbean, Australia, and other
international locations. Tyler has been recognized numerous times for growth
and innovation, including Government Technology’s GovTech 100 list. More
information about Tyler Technologies, an S&P 500 company headquartered in
Plano, Texas, can be found at tylertech.com.
ANNUAL REPORT 2023 | TYLER TECHNOLOGIES