TYLER TECHNOLOGIES, INC.
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) the effects of the COVID-19 pandemic, including
its potential effects on the economic environment, our customers and our
operations, as well as any changes to federal, state or local government laws,
regulations or orders in connection with the pandemic; (2) changes in the
budgets or regulatory environments of our clients, primarily local and state
governments, that could negatively impact information technology spending; (3)
disruption to our business and harm to our competitive position resulting from
cyber-attacks and security vulnerabilities (4) our ability to protect client
information from security breaches and provide uninterrupted operations of data
centers; (5) our ability to achieve growth or operational synergies through the
integration of acquired businesses, while avoiding unanticipated costs and
disruptions to existing operations; (6) material portions of our business
require the Internet infrastructure to be adequately maintained; (7) 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; (8) general economic, political and market conditions;
(9) technological and market risks associated with the development of new
products or services or of new versions of existing or acquired products or
services; (10) 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; (11) the ability to attract and retain qualified personnel and
dealing with the loss or retirement of key members of management or other key
personnel; and (12) costs of compliance and any failure to comply with
government and stock exchange regulations. A detailed discussion of these
factors and other risks that affect our business are described in Item 1A, "Risk
Factors". We expressly disclaim any obligation to publicly update or revise our
forward-looking statements.
GENERAL
We provide integrated information management solutions and services for the
public sector. We develop and market a broad line of software products and
services to address the IT needs of public sector entities. In addition, we
provide professional IT services to our clients, including software and hardware
installation, data conversion, training, and for certain clients, product
modifications, along with continuing maintenance and support for clients using
our systems. We also provide subscription-based services such as software as a
service ("SaaS") and electronic document filing solutions ("e-filing"), which
simplify the filing and management of court related documents. Revenues for
e-filing are derived from transaction fees and, in some cases, fixed fee
arrangements. Also included in subscription-based services are other
transaction-based fees primarily related to online payment services. We also
provide property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate nine major functional areas: (1) financial
management and education, (2) courts and justice, (3) public safety,
(4) property appraisal and tax, (5) planning, regulatory and maintenance, (6)
land and vital records management, (7) data and insights, (8) platform
technologies, and (9) NIC digital government and payments. We report our results
in three segments. The Enterprise Software ("ES") segment provides public sector
entities with software systems and services to meet their information technology
and automation needs for mission-critical "back-office" functions such as:
financial management; courts and justice processes; public safety; planning,
regulatory and maintenance; data analytics; and platform technologies. The
Appraisal and Tax ("A&T") segment provides systems and software that automate
the appraisal and assessment of real and personal property, land and vital
records management, as well as property appraisal outsourcing services for local
governments and taxing authorities. Property appraisal outsourcing services
include: the physical inspection of commercial and residential properties; data
collection and processing; computer analysis for property valuation; preparation
of tax rolls; community education; and arbitration between taxpayers and the
assessing jurisdiction. On April 21, 2021 , the Company acquired NIC resulting in
a new reportable segment, as its operating results meet the criteria as a
reportable segment. The operating results of NIC are included with the operating
results of the NIC segment from the date of acquisition.
As of January 1, 2021 , certain administrative costs related to information
technology, which were previously reported in the ES and A&T segments, were
moved to the Corporate segment to reflect changes in the way management makes
operating decisions, allocates resources, and manages the growth and
profitability of the Company. Prior year amounts for all segments have been
adjusted to reflect the segment change.
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Our total employee count increased to 6,718 at September 30, 2021 , including
1,046 employees from 2021 acquisitions, from 5,511 at September 30, 2020 .
On September 9, 2021 , we acquired all the equity interest of Ultimate
Information Systems, Inc. (dba Arx). Arx is a cloud-based platform which creates
accessible technology to enable a modern-day police force that is fully
transparent, accountable, and a trusted resource to the community it serves. The
total purchase price, net of cash acquired, was approximately $12.8 million , of
which $12.4 million was paid in cash and approximately $0.5 million was accrued
for indemnity holdbacks, subject to certain post-closing adjustments.
On September 1, 2021 , we acquired VendEngine, Inc (VendEngine) as contemplated
by the Agreement and Plan of Merger dated June 3, 2021 . As result of the merger,
VendEngine became a direct subsidiary of the Company. VendEngine is a
cloud-based software provider focused on financial technology for the
corrections market. The total purchase price, net of cash acquired of
$3.0 million , was approximately $83.1 million , consisting of $80.2 million paid
in cash, and approximately $5.9 million related to indemnity holdbacks, subject
to certain post-closing adjustments.
On April 21, 2021 , we acquired NIC as contemplated by the Agreement and Plan of
Merger dated February 9, 2021 . As result of the merger, NIC became a direct
subsidiary of the Company and NIC's subsidiaries became indirect subsidiaries.
NIC is a leading digital government solutions and payment company that primarily
serves federal and state government agencies. The total purchase price, net of
cash acquired of $331.8 million , was approximately $2.0 billion , consisting of
cash paid of $2.3 billion and $1.9 million of purchase consideration related to
the conversion of unvested restricted stock awards.
On March 31, 2021 , we completed two acquisitions, Glass Arc, Inc. (dba ReadySub)
and DataSpec, Inc. (DataSpec), for the total combined purchase price of $12.1
million .
For the three and nine months ended September 30, 2021 , total revenues increased
60.9% and 39.0%, respectively, compared to the prior year periods. Excluding the
impact of 2021 acquisitions, revenue increased 7.6% and 8.4% for the three and
nine months ended September 30, 2021 , respectively, compared to the prior year
periods. Revenues from acquisitions completed in 2021 contributed 53.4% and
30.7% for the three and nine months ended September 30, 2021 , respectively.
Subscriptions revenue grew 183.3% and 116.2% for the three and nine months ended
September 30, 2021 , respectively, compared to the prior year periods, primarily
due the impact of the NIC acquisition, as well as an ongoing shift toward SaaS
arrangements, along with growth in our transaction-based revenues such as
e-filing and online payment services. Excluding the impact of 2021 acquisitions,
subscriptions revenue increased 21.8% and 23.6% for the three and nine months
ended September 30, 2021 , respectively, compared to the prior year periods.
Subscription revenues from acquisitions completed in 2021 contributed 161.4% and
92.7% for the three and nine months periods ended September 30, 2021 ,
respectively.
Our backlog as of September 30, 2021 , was $1.77 billion , a 14.3% increase from
last year.
Impacts of the COVID-19 Pandemic
The pandemic continues to delay some government procurement processes and is
expected to impact our ability to complete certain implementations, negatively
impacting our revenue. Because an increasing portion of our revenues are
recurring, the effect of COVID-19 on our results of operations may also not be
fully reflected for some time. It could also negatively impact the timing of
client payments to us. We continue to monitor these trends in order to respond
to the ever-changing impact of COVID-19 on our clients and Tyler's operations.
For the nine months ended September 30, 2021 , excluding the impact of 2021
acquisitions, the impact of the COVID-19 pandemic resulted in lower revenues
from software licenses and software services. Lower software licenses compared
to prior periods are in part attributed to slower sales cycles as some
government procurement processes have been delayed and contract signings have
been pushed to future periods. Software services revenue have been affected by a
decline in billable travel revenue, as most services are now being delivered
virtually rather than on-site. Lower revenues compared to prior periods were
partially offset by cost savings attributed to lower spend on travel, user
conferences and trade show expenses, health claims and other employee-related
expenses. As travel restrictions are relaxed, software services and appraisal
services revenues are increasing. Also, we have adapted the way we do business
by encouraging web and video conferencing, conducting virtual sales
demonstrations and delivering professional services remotely, which result in
increases in staff utilization rates and billable time.
For the three and nine months ended September 30, 2021 , total revenues include
subscriptions revenue and software services revenues of $43.3 million and
$58.4 million ,respectively, from NIC's TourHealth and pandemic unemployment
services offerings. We currently expect these COVID-related revenues to decrease
significantly in the fourth quarter of 2021 and wind down in the first half of
2022.
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Recurring revenues from subscriptions and maintenance comprised 79% of our total
consolidated revenue for the nine months ended September 30, 2021 , and include
transaction-based revenue streams such as e-filing, online payments, and digital
government services. On March 9, 2021 , we issued 0.25% Convertible Senior Notes
due 2026 (the "Convertible Senior Notes") in the aggregate principal amount of
$600 million . As of September 30, 2021 , we had $348.4 million in cash and
investments and $842.5 million of outstanding borrowings under our 2021 Credit
Agreement executed on April 21, 2021 . As of September 30, 2021 , we had available
borrowing capacity of $500 million under our 2021 Credit Agreement.
We have recorded no impairment to goodwill or other assets as of the balance
sheet date. Due to significant uncertainty surrounding the pandemic and market
conditions, management's judgment regarding this could change in the future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements. These condensed
consolidated financial statements have been prepared following the requirements
of GAAP for the interim period and require us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates, including those related to revenue recognition
and amortization and potential impairment of intangible assets and goodwill and
share-based compensation expense. As these are condensed financial statements,
one should also read expanded information about our critical accounting policies
and estimates provided in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", included in our Form 10-K for
the year ended December 31, 2020 . Except for the accounting policies for
convertible senior notes updated as a result of adopting Debt-Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging-Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"),
there have been no material changes to our critical accounting policies and
estimates from the information provided in our Form 10-K for the year ended
December 31, 2020 .
ANALYSIS OF RESULTS OF OPERATIONS
Percent of Total Revenues
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenues:
Software licenses and royalties 4.9 % 7.0 % 4.8 % 6.7 %
Subscriptions 55.0 31.2 47.9 30.8
Software services 11.9 16.8 13.4 17.2
Maintenance 25.6 41.3 30.8 41.9
Appraisal services 1.6 1.9 1.7 1.9
Hardware and other 1.0 1.8 1.4 1.5
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses, royalties and acquired
software 3.1 3.2 3.2 3.2
Subscriptions, software services and
maintenance 52.6 44.0 49.7 46.0
Appraisal services 1.0 1.2 1.2 1.4
Hardware and other 0.6 1.3 0.8 1.0
Selling, general and administrative
expenses 22.1 23.4 25.0 23.6
Research and development expense 5.2 7.6 6.0 7.9
Amortization of customer and trade name
intangibles 3.1 1.9 2.7 1.9
Operating income 12.2 17.4 11.5 15.0
Interest expense (1.2) (0.1) (1.6) (0.1)
Other income, net 0.1 0.2 0.1 0.3
Income before income taxes 11.1 17.5 10.0 15.2
Income tax provision (benefit) 1.5 3.7 0.8 (1.7)
Net income 9.6 % 13.8 % 9.2 % 16.9 %
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Revenues
Acquisitions
OnApril 21, 2021 , we acquired NIC and as result of the merger, NIC became a direct subsidiary of the Company and NIC's subsidiaries became indirect subsidiaries of the Company. NIC is a leading digital government solutions and payment company that serves federal, state and local government agencies. The following table details revenue for NIC for the three and nine months endedSeptember 30, 2021 , which is included in our condensed consolidated statements of income from the date of acquisition. The results of NIC are included with the operating results of the NIC segment from the date of acquisition. Three Months Ended Nine Months Ended September 30, September 30, 2021 2021 Revenues: Software licenses and royalties $ - $ - Subscriptions 142,346 235,627 Software services 8,035 13,679 Maintenance 202 358 Appraisal services - - Hardware and other - - Total revenues $ 150,583 $ 249,664 OnSeptember 9, 2021 , we acquired all of equity interest of Arx, a cloud-based platform which creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves. OnSeptember 1, 2021 , we acquired VendEngine, a cloud-based software provider focused on financial technology for the corrections market. OnMarch 31, 2021 , we completed two acquisitions, ReadySub and DataSpec. The impact of the Arx, VendEngine, ReadySub and DataSpec acquisitions on our operating results is not considered material and is not included in the table above. The results of these acquisitions are included with the operating results of the ES segment from their dates of acquisition. Software licenses and royalties The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as ofSeptember 30 : Three Months Ended Change Nine Months Ended Change 2021 2020 $ % 2021 2020 $ % ES$ 21,238 $ 17,798 $ 3,440 19 %$ 50,064 $ 48,432 $ 1,632 3 % A&T 1,435 2,139 (704) (33) 5,146 7,267 (2,121) (29) NIC - - - - - - - - Total software licenses and royalties revenue$ 22,673 $ 19,937 $ 2,736 14 %$ 55,210 $ 55,699 $ (489) (1) % Software licenses and royalties revenue increased 14% and decreased 1% for the three and nine months endedSeptember 30, 2021 , respectively, compared to the prior year periods. The increase in software licenses and royalties revenue for the three months endedSeptember 30, 2021 , is attributed to several large on-premise sales of our enterprise and courts and justice solutions partially offset by more clients choosing our SaaS offering, rather than purchasing the software under a traditional perpetual software arrangement. Slower sales cycles as government procurement processes were delayed and contract signings were pushed to future periods also negatively affected software licenses and royalties revenue. The decline in software licenses and royalties revenue for the nine months endedSeptember 30, 2021 , is primarily attributed to a shift in the mix of new software contracts from on-premise license sales to SaaS services compared to the prior year. Our total contract value mix for the nine months endedSeptember 30, 2021 , was approximately 34% perpetual software license arrangements and approximately 66% subscription-based arrangements, compared to total new contract value mix for the nine months endedSeptember 30, 2020 , of approximately 42% perpetual software license arrangements and approximately 58% subscription-based arrangements. Also contributing to the decline in software licenses and royalty revenue were slower sales cycles as government procurement processes were delayed and contract signings were pushed to future periods. 30 -------------------------------------------------------------------------------- Although the mix of new contracts between SaaS-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our longer-term software license growth rate to slow as a growing number of clients choose our SaaS-based options, rather than purchasing the software under a traditional perpetual software license arrangement. SaaS-based arrangements generally do not result in license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract. Subscriptions The following table sets forth a comparison of our subscriptions revenue for the periods presented as ofSeptember 30 : Three Months Ended Change Nine Months Ended Change 2021 2020 $ % 2021 2020 $ % ES$ 102,285 $ 82,972 $ 19,313 23 %$ 295,523 $ 238,744 $ 56,779 24 % A&T 8,311 6,318 1,993 32 23,829 17,907 5,922 33 NIC 142,346 - 142,346 100 235,627 - 235,627 100 Total subscriptions revenue$ 252,942 $ 89,290 $ 163,652 183 %$ 554,979 $ 256,651 $ 298,328 116 % Subscriptions revenue primarily consists of revenue derived from our SaaS arrangements. As part of our subscription-based services, we also provide e-filing arrangements that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements. Other sources of subscription-based services are derived from transaction-based fees primarily related to online payments and digital government services. Subscriptions revenue grew 183% and 116% for the three and nine months endingSeptember 30, 2021 , respectively, compared to the prior periods, primarily due to the inclusion of NIC's revenues from the date of acquisition. Excluding the impact of revenue from 2021 acquisitions of$144.2 million and$237.8 million for the three and nine months endedSeptember 30, 2021 , respectively, subscriptions revenue increased 21.8% and 23.6% for the three and nine months endedSeptember 30, 2021 , respectively. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and nine months endingSeptember 30, 2021 , respectively, we added 144 and 398 new SaaS clients and 67 and 168 existing on-premises clients converted to our SaaS model. SinceSeptember 30, 2020 , we have added 516 new SaaS clients while 218 existing on-premises clients converted to our SaaS offerings. Also excluding the impact of revenue from 2021 acquisitions, transaction-based fees contributed$5.6 million and$15.7 million to the increase in subscriptions revenue for the three and nine months endedSeptember 30, 2021 , respectively, due to the increased volumes of online payments from utility billings. Software services The following table sets forth a comparison of our software services revenue for the periods presented as ofSeptember 30 : Three Months Ended Change Nine Months Ended Change 2021 2020 $ % 2021 2020 $ % ES$ 41,985 $ 42,640 $ (655) (2) %$ 127,517 $ 126,488 $ 1,029 1 % A&T 4,603 5,306 (703) (13) 14,405 17,245 (2,840) (16) NIC 8,036 - 8,036 100 13,679 - 13,679 100 Total software services revenue$ 54,624 $ 47,946 $ 6,678 14 %$ 155,601 $ 143,733 $ 11,868 8 % Software services revenue primarily consists of professional services delivered in connection with implementing our software, converting client data, training client personnel, custom development activities and consulting. New clients who acquire our software generally also contract with us to provide the related software services. Existing clients also periodically purchase additional training, consulting and minor programming services. Software services revenue increased 14% and 8% for the three and nine months endedSeptember 30, 2021 , respectively, compared to the prior year periods. Excluding the impact of revenue from 2021 acquisitions of$8.1 million and$17.4 million for the three and nine months endedSeptember 30, 2021 , respectively, software services declined 2.9% and 3.8% for the three and nine months endedSeptember 30, 2021 , respectively. That decline for three and nine months endedSeptember 30, 2021 , in software services revenue is primarily attributed to a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site. 31 --------------------------------------------------------------------------------
Maintenance
The following table sets forth a comparison of our maintenance revenue for the
periods presented as of
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 110,231 $ 108,270 $ 1,961 2 % $ 330,024 $ 320,447 $ 9,577 3 %
A&T 7,399 9,709 (2,310) (24) 26,184 28,657 (2,473) (8.6)
NIC 203 - 203 100 358 - 358 100
Total maintenance
revenue $ 117,833 $ 117,979 $ (146) - % $ 356,566 $ 349,104 $ 7,462 2 %
We provide maintenance and support services for our software products and
certain third-party software. Maintenance revenue was essentially flat and grew
2% for the three and nine months ended September 30, 2021 , respectively,
compared to the prior year periods. For the nine months ended September 30,
2021 , maintenance revenue increased mainly due to the completion of the
recognition of the majority of acquisition-related deferred maintenance revenue
that was fair valued at rates below Tyler's average maintenance rate in prior
periods. The remainder of the increase is attributed to annual maintenance rate
increases and growth in our installed customer base from new software license
sales, partially offset by attrition and clients converting from on-premises
license arrangements to SaaS.
Appraisal services
The following table sets forth a comparison of our appraisal services revenue
for the periods presented as of September 30 :
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ - $ - $ - - % $ - $ - $ - - %
A&T 7,146 5,394 1,752 32 19,876 15,853 4,023 25
NIC - - - - - - - -
Total appraisal
services revenue $ 7,146 $ 5,394 $ 1,752 32 % $ 19,876 $ 15,853 $ 4,023 25 %
Appraisal services revenue for the three and nine months ended September 30,
2021 , increased by 32% and 25%, respectively, compared to the prior year
primarily due to relaxed travel restrictions allowing for the ramp-up of
appraisal services for several new revaluation contracts which started in recent
quarters. The appraisal services business is somewhat cyclical and driven in
part by statutory revaluation cycles in various states.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of
revenues for the periods presented as of September 30 :
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
Software licenses and
royalties $ 1,547 $ 1,177 $ 370 31 % $ 4,151 $ 3,047 $ 1,104 36 %
Acquired software 12,896 7,965 4,931 62 32,683 23,998 8,685 36
Subscriptions, software
services and maintenance 241,944 125,881 116,063 92 576,035 381,947 194,088 51
Appraisal services 4,506 3,434 1,072 31 13,552 11,795 1,757 15
Hardware and other 2,764 3,780 (1,016) (27) 9,845 8,748 1,097 13
Total cost of revenues $ 263,657 $ 142,237 $ 121,420 85 % $ 636,266 $ 429,535 $ 206,731 48 %
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The following table sets forth a comparison of gross margin percentage by
revenue type for the periods presented as of
Three Months Ended Nine Months Ended
2021 2020 Change 2021 2020 Change
Software licenses, royalties and
acquired software 36.3 % 54.1 % (17.8) % 33.3 % 51.4 % (18.1) %
Subscriptions, software services and
maintenance 43.1 50.7 (7.6) 46.0 49.0 (3.0)
Appraisal services 36.9 36.3 0.6 31.8 25.6 6.2
Hardware and other 40.6 27.3 13.3 40.4 29.1 11.3
Overall gross margin 42.7 % 50.2 % (7.5) % 45.1 % 48.5 % (3.4) %
Software licenses, royalties and acquired software. Amortization expense for
acquired software comprises the majority of costs of software licenses,
royalties and acquired software. We do not have any direct costs associated with
royalties. In the three and nine months ended September 30, 2021 , our software
licenses, royalties and acquired software gross margin decreased 17.8% and
18.1%, respectively, compared to the prior year periods due to lower revenue
from software licenses and increased amortization expense related to acquired
software from acquisitions completed in 2021.
Subscriptions, software services and maintenance. Cost of subscriptions,
software services and maintenance primarily consists of personnel costs related
to installation of our software, conversion of client data, training client
personnel and support activities and various other services such as custom
client development and ongoing operation of SaaS and e-filing arrangements. The
subscriptions, software services and maintenance gross margin in the three and
nine months ended September 30, 2021 , decreased 7.6% and 3.0%, respectively,
from the comparable prior year periods, primarily due to the inclusion of NIC's
revenues, which historically have lower margins than Tyler. Excluding the impact
from 2021 acquisitions, gross margins are 47.9% and 49.0% for the three and nine
months ended September 30, 2021 , respectively. For the three months ending
September 30, 2021 , margins declined by 2.8%, due to higher employee head count.
Excluding employees added through acquisitions, our implementation and support
staff has grown by 75 employees since September 30, 2020 . For the nine months
ended September 30, 2021 , margins remained constant due to improved utilization
of our professional services staff resulting from the shift to virtual delivery
of most implementation services. Costs related to maintenance and various other
services such as SaaS and e-filing typically grow at a slower rate than related
revenue due to leverage in the utilization of support and maintenance staff and
economies of scale.
Appraisal services. Appraisal services revenue was approximately 1.6% and 1.7%
of total revenue for the three and nine months ended September 30, 2021 ,
respectively. The appraisal services gross margin for the three and nine months
ended September 30, 2021 , increased 0.6% and 6.2%, respectively, compared to the
same periods in 2020. The increase in margin is primarily due to cost savings
attributed to lower travel expenses associated with appraisal projects. The
appraisal services business is somewhat cyclical and driven in part by statutory
revaluation cycles in various states.
For the three and nine months ended September 30, 2021 , our overall gross margin
decreased 7.5% and 3.4%, respectively, compared to the prior year periods,
primarily due to the inclusion of NIC's revenues, which historically have lower
margins than Tyler. Excluding the impact from 2021 acquisitions, overall gross
margins were 48.3% and 48.5% for the three and nine months ended September 30,
2021 , respectively. For the three months ended September 30, 2021 , the decrease
in gross margin compared to the prior year period is due to lower revenue from
software licenses and increased amortization expense related to acquired
software from recent acquisitions, partially offset by a reduction in software
services revenue from reimbursable travel that has little to no margin, as well
as improved utilization of our professional services staff resulting from the
shift to virtual delivery of most implementation services. Costs related to
maintenance and various other services such as SaaS and e-filing typically grow
at a slower rate than related revenue due to leveraging utilization of support
and maintenance staff and economies of scale.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries, employee benefits, travel, share-based compensation expense,
commissions and related overhead costs for administrative and sales and
marketing employees, as well as professional fees, trade show activities,
advertising costs and other marketing related costs.
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The following table sets forth a comparison of our SG&A expenses for the periods
presented as of
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
Selling, general and
administrative expenses $ 101,847 $ 66,819 $ 35,028 52 % $ 289,543 $ 196,825 $ 92,718 47 %
SG&A as a percentage of revenues was 22.1% and 25.0% for the three and nine
months ended September 30, 2021 , respectively, compared to 23.4% and 23.6% for
the three and nine months ended September 30, 2020 , respectively. Excluding the
impact of SG&A expense from 2021 acquisitions of $17.2 million and $30.7
million , for the three and nine months ended September 30, 2021 , respectively,
SG&A increased 26.6% and 31.5% for the three and nine months ending
September 30, 2021 , respectively, compared to prior year periods. The increase
in SG&A is attributed to acquisition costs related to recent acquisitions,
higher stock compensation expense, increased staff levels and other
administrative expenses compared to prior periods. For the three and nine months
ended September 30, 2021 , SG&A includes $2.9 million and $22.7 million ,
respectively, of transaction expenses related to acquisitions completed in 2021.
For the nine months ended September 30, 2021 , we also incurred $1.6 million of
expense related to a separation agreement with NIC's former Chief Executive
Officer. For the three and nine months ended September 30, 2021 , stock
compensation expense rose $9.3 million and $22.2 million , respectively compared
to prior periods, primarily due to an increase in share-based awards issued in
connection with our stock compensation plan coupled with the higher fair value
of each share-based award due to the increase in our stock price. We have added
13 SG&A employees, mainly to our sales and finance teams, since September 30,
2020 . For the nine months ended September 30, 2021 , SG&A expense also includes
$3.2 million related to an accrual for litigation. These increases in SG&A were
partially offset by lower travel expenses associated with administrative, sales
and marketing activities, including trade shows, as a result of COVID-19 travel
restrictions.
Research and Development Expense
The following table sets forth a comparison of our research and development
expense for the periods presented as of September 30 :
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
Research and development
expense $ 24,002 $ 21,642 $ 2,360 11 % $ 69,243 $ 65,952 $ 3,291 5 %
Research and 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. R&D expense in the three and nine months ended
September 30, 2021 , increased 11% and 5%, respectively, compared to the prior
periods. Excluding the impact of R&D expense from 2021 acquisitions of $557,000
and $938,000 for both the three and nine months ended September 30, 2021 ,
respectively, R&D expense increased 8.3% and 3.6% for the three and nine months
ending September 30, 2021 , respectively, compared to prior year periods, mainly
due to a number of new Tyler product development initiatives across our product
suites offset by a shift of some development resources to certain projects which
meet the criteria for capitalization.
Amortization of Other Intangibles
Acquisition 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 and trade name intangibles. The remaining excess purchase
price is allocated to goodwill that is not subject to amortization. Amortization
expense related to acquired software is included with cost of revenues while
amortization expense of customer and trade name intangibles is recorded as
operating expense. For the three and nine months ended September 30, 2021 ,
amortization expense increased compared to prior periods due to acquisitions
completed in fiscal year 2021.
The following table sets forth a comparison of amortization of customer and
trade name intangibles for the periods presented as of September 30 :
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
Amortization of other
intangibles $ 14,183 $ 5,392 $ 8,791 163 % $ 31,015 $ 16,176 $ 14,839 92 %
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Interest Expense
The following table sets forth a comparison of our interest expense for the
periods presented as of
Three Months Ended Change Nine Months Ended Change
2021 2020 $ % 2021 2020 $ %
Interest expense
Interest expense is primarily comprised of interest expense and non-usage and other fees associated with our borrowings. The change in interest expense in the three and nine months endedSeptember 30, 2021 , compared to the prior periods is attributable to higher levels of borrowings related to the 2021 Credit Agreement and Convertible Senior Notes. Other Income, Net The following table sets forth a comparison of our other income, net, for the periods presented as ofSeptember 30 : Three Months Ended Change Nine Months Ended Change 2021 2020 $ % 2021 2020 $ % Other income, net$ 445 $ 534 $ (89) (17)$ 1,249 $ 2,497 $ (1,248) (50) % Other income, net, is primarily comprised of interest income from invested cash. The change in other income, net, in the three and nine months endedSeptember 30, 2021 , compared to the prior periods is attributed to lower levels of invested cash and lower interest rates. Income Tax Provision The following table sets forth a comparison of our income tax provision for the periods presented as ofSeptember 30 : Three Months Ended Change Nine Months Ended Change 2021 2020 $ % 2021 2020 $ % Income tax provision (benefit)$ 7,063 $ 10,652 $ (3,589) (34)$ 8,945 $ (14,096) $ 23,041 (163) Effective income tax rate 13.8 % 21.3 % 7.7 % (11.1) % The change in effective tax rate for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was principally driven by the change in the excess tax benefits related to stock incentive awards. The effective income tax rates for the three and nine months endedSeptember 30, 2021 and 2020, were different from the statutoryUnited States federal income tax rate of 21% due to excess tax benefits related to stock incentive awards, the tax benefit of research tax credits and the release of reserves for unrecognized income tax benefits resulting from expiration of the statutes of limitations for certain tax years, offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were$6.3 million and$21.5 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to$2.5 million and$48.0 million for the three and nine months endedSeptember 30, 2020 , respectively. Excluding the excess tax benefits, the effective tax rate was 26.1% and 26.3% for the three and nine months endedSeptember 30, 2021 , respectively, compared to 26.2% and 26.7% for the three and nine months endedSeptember 30, 2020 , respectively. 35 -------------------------------------------------------------------------------- FINANCIAL CONDITION AND LIQUIDITY As ofSeptember 30, 2021 , we had cash and cash equivalents of$234.1 million compared to$603.6 million atDecember 31, 2020 . We also had$114.3 million invested in investment grade corporate and municipal bonds as ofSeptember 30, 2021 . These investments have varying maturity dates through 2027, and we intend to hold these investments until maturity. As ofSeptember 30, 2021 , we believe our cash from operating activities, revolving credit facility, cash on hand and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs. The following table sets forth a summary of cash flows for the nine months endedSeptember 30 : 2021
2020
Cash flows provided (used) by: Operating activities$ 256,743 $ 266,328 Investing activities (2,084,788) (68,163) Financing activities 1,458,550 87,838
Net (decrease) increase in cash and cash equivalents
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. For the nine months endedSeptember 30, 2021 , operating activities provided cash of$256.7 million . Operating activities that provided cash were primarily comprised of net income of$106.7 million , non-cash depreciation and amortization charges of$97.9 million , non-cash share-based compensation expense of$80.4 million and a non-cash decrease in operating lease right-of-use assets of$7.0 million . Working capital, excluding cash, increased approximately$35.2 million mainly due to timing of payments to and receipts from our government partners and end-user consumers, timing of prepaid expenses, and deferred taxes associated with stock option activity during the period. These increases were offset by the timing of tax payments and an increase in deferred revenue during the period. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings. Our renewal dates occur throughout the year, but our largest renewal billing cycles occur in the second and fourth quarters. In addition, subscription renewals are billed throughout the year. Our days sales outstanding ("DSO") was 105 days atSeptember 30, 2021 , compared to 121 days atDecember 31, 2020 , and 114 days atSeptember 30, 2020 . The decrease in DSO compared toDecember 31, 2020 , is primarily attributed to our maintenance billing cycle, which typically peaks at its highest level in June and second highest level in December of each year, followed by collections in the subsequent quarter. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days. The decrease in DSO compared toSeptember 30, 2020 , is attributed to improved collection efforts. Investing activities used cash of$2.1 billion in the nine months endingSeptember 30, 2021 . OnMarch 31, 2021 , we completed two acquisitions with the total purchase price of$12.1 million , net of cash acquired, including$12.0 million paid in cash. OnApril 21, 2021 , we completed the acquisition of NIC for the total purchase price of$2.0 billion , net of cash acquired of$331.8 million , including cash paid of$2.3 billion and$1.9 million of purchase consideration related to the conversion of unvested restricted stock awards. OnSeptember 9, 2021 , we acquired all of the equity interest of Arx for the total purchase price, net of cash acquired, of approximately$12.8 million , of which$12.4 million was paid in cash and approximately$0.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments. OnSeptember 1, 2021 , we acquired VendEngine for the total purchase price, net of cash acquired of$3.0 million , of approximately$83.1 million consisting of$80.2 million paid in cash and approximately$5.9 million related to indemnity holdbacks, subject to certain post-closing adjustments. Approximately$20.8 million was invested in property and equipment, including$8.6 million related to real estate. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings. In addition, approximately$15.0 million of software development costs were capitalized. 36 -------------------------------------------------------------------------------- Financing activities provided cash of$1.5 billion in the nine months endedSeptember 30, 2021 , and were primarily comprised of proceeds from the issuance of the Convertible Senior Notes and the 2021 Credit Agreement. OnMarch 9, 2021 , we issued$600 million aggregate principal amount of Convertible Senior Notes. The net proceeds from the issuance of the Convertible Senior Notes were$591.4 million , net of initial purchasers' discounts of$6.0 million and debt issuance costs of$2.6 million . OnApril 21, 2021 , in connection with the completion of the NIC acquisition, the Company, as borrower, entered into a new 2021 Credit Agreement with various lenders consisting of an unsecured revolving credit facility of up to$500 million and aggregate unsecured term loans totaling$900 million . The net proceeds from the borrowings under the 2021 Credit Agreement were$1.1 billion , net of debt discounts of$7.2 million and debt issuance costs of$4.9 million and$6.4 million of commitment fees paid related to the terminated$1.6 billion unsecured bridge loan facility. During the nine months endedSeptember 30, 2021 , we repaid$250 million of the unsecured revolving credit facility and$57.5 million of the unsecured term loans. During the nine months endedSeptember 30, 2021 , we repurchased approximately 33,000 shares of our common stock for an aggregate purchase price of$13.0 million , with an average price per share of$398.02 . The remainder of the financing activities were attributed to stock option exercises and employee stock purchase plan activity. InFebruary 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 inOctober 2002 and was amended at various times from 2003 through 2019. As ofSeptember 30, 2021 , we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions influence the timing of the buybacks and the number of shares repurchased, as well as the volume of employee stock option exercises. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization, and we intend to repurchase stock under the plan from time to time. We made tax payments of$1.7 million and$2.6 million in the nine months endedSeptember 30, 2021 , and 2020, respectively. See Note 7, Debt, to the Condensed Consolidated Financial Statements for discussions of the Convertible Senior Notes and the 2021 Credit Agreement. 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 anticipate that 2021 capital spending will be between$47 million and$49 million , including approximately$21 million of capitalized software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending is expected to be funded from existing cash balances and cash flows from operations. We lease office facilities, as well as transportation and other equipment used in our operations under non-cancelable operating lease agreements expiring at various dates through 2025. ITEM 3. 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 ofSeptember 30, 2021 , we had$842.5 million principal outstanding borrowings under our 2021 Credit Agreement and available borrowing capacity under the 2021 Credit Agreement was$500.0 million . Borrowings under the Revolving Credit Facility and the Term Loan A-1 will bear interest, at the Company's option, at a per annum rate of either (1) the Administrative Agent's prime commercial lending rate (subject to certain higher rate determinations) (the "Base Rate") plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 will bear interest, at the Company's option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, or six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.50%. During the nine months endedSeptember 30, 2021 , our effective average interest rate for our borrowings was 3.25%. As ofSeptember 30, 2021 , our interest rate was 1.51% for our outstanding borrowings. Based on the debt under the 2021 Credit Agreement, the aggregate principal outstanding balance as ofSeptember 30, 2021 is$842.5 million , and each quarter point change in interest rates would result in a$2.1 million change in annual interest expense. 37
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