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, with a focus on local governments. 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 provides property appraisal outsourcing services
for local governments and taxing authorities. Property appraisal outsourcing
services include: the physical inspection of commercial and residential
properties; data collection and processing; computer analysis for property
valuation; preparation of tax rolls; community education; and arbitration
between taxpayers and the assessing jurisdiction. On April 21, 2021 , the Company
acquired in NIC resulting a new reportable segment, as its operating results
meet the criteria as a reportable segment. The operating results of NIC are
included with the operating results of the NIC segment from the date of
acquisition.
As of January 1, 2021 , certain administrative costs related to information
technology, which were previously reported in the ES and A&T segments, were
moved to the Corporate segment to reflect changes in the way management makes
operating decisions, allocates resources, and manages the growth and
profitability of the Company. Prior year amounts for all segments have been
adjusted to reflect the segment change.
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Our total employee count increased to 6,593 at June 30, 2021 , including 993
employees from recent acquisitions, from 5,495 at June 30, 2020 .
On April 21, 2021 ("the Closing Date"), the Company acquired NIC, Inc. ("NIC")
as contemplated by the Agreement and Plan of Merger dated February 9, 2021 , (the
"Merger Agreement"). 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 total purchase price, net of
cash acquired of $331.8 million , was approximately $2 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. , for the total combined purchase price of $12.1 million .
For the three and six months ended June 30, 2021 , total revenues increased 49.1%
and 27.6%, respectively, compared to the prior year periods. Excluding the
impact of recent acquisitions, revenue increased 12.4% and 9.5% for the three
and six months ended June 30, 2021 , respectively, compared to the prior year
periods. Revenues from acquisitions completed in 2021 contributed 36.7% and
18.2% for the three and six months ended June 30, 2021 , respectively.
Subscriptions revenue grew 133.0% and 80.5% for the three and six months ended
June 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 recent
acquisitions, subscriptions revenue increased 23.6% and 24.5% for the three and
six months ended June 30, 2021 , respectively, compared to the prior year
periods. Subscription revenues from acquisitions completed in 2021 contributed
109.4% and 56.0% for the three and six months periods ended June 30, 2021 ,
respectively.
Our backlog as of June 30, 2021 , was $1.63 billion , a 5.6% increase from last
year.
Impacts of the COVID-19 Pandemic
The pandemic continues to cause delays in some government procurement processes
and 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 six months ended June 30, 2021 , excluding the impact of recent
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, in part, are attributed to slower sales cycles as government
procurement processes are delayed and contract signings have been pushed to
future periods. The software services revenue decline is attributed to delays in
implementations caused by travel restrictions in effect during the period. 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, we expect software services and appraisal services revenues to increase
for the limited number of our clients who require that all or a portion of their
services be delivered onsite. Also, we are adapting 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.
Recurring revenues from subscriptions and maintenance comprised 77% of our total
consolidated revenue for the six months ended June 30, 2021 , and include
transaction-based revenue streams such as e-filing and online payments. 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 June 30,
2021 , we had $347.1 million in cash and investments and $965 million principal
outstanding borrowings under our 2021 Credit Agreement executed on April 21,
2021 . As of June 30, 2021 , we had available borrowing capacity of $435 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.
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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 June 30, Six Months Ended
2021 2020 2021 2020
Revenues:
Software licenses and royalties 4.4 % 6.3 % 4.7 % 6.5 % Subscriptions 49.4 31.6 43.2 30.6 Software services 13.1 16.1 14.4 17.5 Maintenance 29.6 43.1 34.2 42.2 Appraisal services 1.6 1.7 1.8 1.9 Hardware and other 1.9 1.2 1.7 1.3 Total revenues 100.0 100.0 100.0 100.0 Cost of revenues: Software licenses, royalties and acquired software 3.3 3.4 3.2 3.3 Subscriptions, software services and maintenance 49.4 45.8 47.8 46.8 Appraisal services 1.1 1.5 1.3 1.5 Hardware and other 1.1 0.9 1.0 0.9 Selling, general and administrative expenses 27.0 23.1 26.9 23.7 Research and development expense 5.8 8.1 6.5 8.1 Amortization of customer and trade name intangibles 2.8 2.0 2.4 2.0 Operating income 9.5 15.2 10.9 13.7 Other (expense) income including interest expense, net (3.0) 0.2 (1.7) 0.3 Income before income taxes 6.5 15.4 9.2 14.0 Income tax provision (benefit) 0.1 (4.5) 0.3 (4.5) Net income 6.4 % 19.9 % 8.9 % 18.5 % Revenues Acquisitions OnApril 21, 2021 , the Company 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 six months endedJune 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. 29 --------------------------------------------------------------------------------
Three Months Ended June Six Months Ended
30, June 30,
2021 2021
Revenues:
Software licenses and royalties $ - $ -
Subscriptions 93,281 93,281
Software services 5,643 5,643
Maintenance 155 155
Appraisal services - -
Hardware and other - -
Total revenues $ 99,079 $ 99,079
On March 31, 2021 , we completed two acquisitions, Glass Arc, Inc. (dba ReadySub)
and DataSpec, Inc. , for the total combined purchase price of $12.1 million . The
impact of these 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 of June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 15,779 $ 14,683 $ 1,096 7 % $ 28,826 $ 30,634 $ (1,808) (6) %
A&T 1,825 2,342 (517) (22) 3,711 5,128 (1,417) (28)
NIC - - - - - - - -
Total software licenses
and royalties revenue $ 17,604 $ 17,025 $ 579 3 % $ 32,537 $ 35,762 $ (3,225) (9) %
Software licenses and royalties revenue increased 3% and decreased 9% for the
three and six months ended June 30, 2021 , respectively, compared to the prior
year periods. The increase in software license and royalties revenue for the
three months ended June 30, 2021 , is attributed to several large on-premise
sales of our courts and justice and public safety solutions partially offset by
more clients choosing our SaaS offering, rather than purchasing the software
under a traditional perpetual software arrangement. The decline in software
licenses and royalties revenue for the six months ended June 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 six months ended June 30, 2021 , was approximately 35%
perpetual software license arrangements and approximately 65% subscription-based
arrangements, compared to total new contract value mix for the six months ended
June 30, 2020 , of approximately 36% perpetual software license arrangements and
approximately 64% subscription-based arrangements. Also contributing to the
decline in software licenses and royalty revenue are slower sales cycles as
government procurement processes are delayed and contract signings have been
pushed to future periods.
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.
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--------------------------------------------------------------------------------Subscriptions
The following table sets forth a comparison of our subscriptions revenue for the
periods presented as of
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 98,407 $ 79,128 $ 19,279 24 % $ 193,238 $ 155,772 $ 37,466 24 %
A&T 7,870 6,510 1,360 21 15,518 11,589 3,929 34
NIC 93,281 - 93,281 100 93,281 - 93,281 100
Total subscriptions
revenue $ 199,558 $ 85,638 $ 113,920 133 % $ 302,037 $ 167,361 $ 134,676 80 %
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
payment services.
Subscriptions revenue grew 133% and 80% for the three and six months ending
June 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 recent acquisitions of $93.7 million , subscriptions revenue
increased 23.6% and 24.5% for the three and six months ended June 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 six months ending June 30, 2021 , we added 170 new SaaS clients and 62
existing on-premises clients converted to our SaaS model. Since June 30, 2020 ,
we have added 486 new SaaS clients while 197 existing on-premises clients
converted to our SaaS model. Also excluding the impact of revenue from recent
acquisitions, transaction-based fees contributed $5.1 million and $10.0 million
to the increase in subscriptions revenue for the three and six months ended
June 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 of June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 42,972 $ 38,899 $ 4,073 10 % $ 85,532 $ 83,848 $ 1,684 2 %
A&T 4,722 4,755 (33) (1) 9,802 11,939 (2,137) (18)
NIC 5,643 - 5,643 100 5,643 - 5,643 100
Total software
services revenue $ 53,337 $ 43,654 $ 9,683 22 % $ 100,977 $ 95,787 $ 5,190 5 %
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 22% and 5% for the three and six months ended June 30, 2021 ,
respectively, compared to the prior year periods. Excluding the impact of
revenue from recent acquisitions of $5.6 million , software services increased
9.2% and declined 0.5% for the three and six months ended June 30, 2021 ,
respectively. The increased software services revenue for the three months ended
June 30, 2021 is attributed to improved utilization of our professional services
staff resulting from the shift to virtual delivery of most implementation
services as a result of the COVID-19 pandemic. The decline for six months ended
June 30, 2021 in software services revenue is attributed a decline in billable
travel revenue, as most services are now being delivered virtually rather than
on-site.
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--------------------------------------------------------------------------------Maintenance
The following table sets forth a comparison of our maintenance revenue for the
periods presented as of
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 110,010 $ 107,336 $ 2,674 2 % $ 219,793 $ 212,177 $ 7,616 4 %
A&T 9,456 9,424 32 - 18,785 18,948 (163) (0.9)
NIC 155 - 155 100 155 - 155 100
Total maintenance
revenue $ 119,621 $ 116,760 $ 2,861 2 % $ 238,733 $ 231,125 $ 7,608 3 %
We provide maintenance and support services for our software products and
certain third-party software. Maintenance revenue grew 2% and 3% for the three
and six months ended June 30, 2021 , respectively, compared to the prior year
periods. 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 June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ - $ - $ - - % $ - $ - $ - - %
A&T 6,265 4,696 1,569 33 12,730 10,459 2,271 22
NIC - - - - - - - -
Total appraisal
services revenue $ 6,265 $ 4,696 $ 1,569 33 % $ 12,730 $ 10,459 $ 2,271 22 %
Appraisal services revenue for the three and six months ended June 30, 2021 ,
increased by 33% and 22%, respectively, compared to the prior year primarily due
to the addition of several new revaluation contracts which started during the
fourth quarter of 2020. 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 June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Software licenses and
royalties $ 1,368 $ 1,130 $ 238 21 % $ 2,604 $ 1,870 $ 734 39 %
Acquired software 11,823 8,006 3,817 48 19,787 16,033 3,754 23
Subscriptions, software
services and maintenance 199,771 124,287 75,484 61 334,091 256,066 78,025 30
Appraisal services 4,429 3,976 453 11 9,046 8,361 685 8
Hardware and other 4,623 2,489 2,134 86 7,081 4,968 2,113 43
Total cost of revenues $ 222,014 $ 139,888 $ 82,126 59 % $ 372,609 $ 287,298 $ 85,311 30 %
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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 Six Months Ended
2021 2020 Change 2021 2020 Change
Software licenses, royalties and
acquired software 25.1 % 46.3 % (21.2) % 31.2 % 49.9 % (18.7) %
Subscriptions, software services and
maintenance 46.4 49.5 (3.1) 47.9 48.2 (0.3)
Appraisal services 29.3 15.3 14.0 28.9 20.1 8.8
Hardware and other 39.9 25.0 14.9 40.3 30.4 9.9
Overall gross margin 45.1 % 48.4 % (3.3) % 46.7 % 47.5 % (0.8) %
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 six months ended June 30, 2021 , our software
licenses, royalties and acquired software gross margin decreased 21.2% and
18.7%, respectively, compared to the prior year periods due to lower revenue
from software licenses and increased amortization expense related to acquired
software from recent acquisitions.
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
six months ended June 30, 2021 , decreased 3.1% and 0.3%, 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
recent acquisitions, gross margins are 49.8% and 50.0% for the three and six
months ended June 30, 2021 , respectively, increases of 0.3% and 2% for the three
and six months ended June 30, 2021 , respectively, from the comparable prior
periods primarily due to a reduction in software services revenues from
reimbursable travel that have little to no margin. Margins have also increased
from improved utilization of our professional services staff resulting from the
shift to virtual delivery of most implementation services. Excluding the impact
of recent acquisitions, our implementation and support staff has declined
slightly since June 30, 2020 . 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 1.8%
of total revenue for the three and six months ended June 30, 2021 , respectively.
The appraisal services gross margin for the three and six months ended June 30,
2021 , increased 14.0% and 8.8%, 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 six months ended June 30, 2021 , our overall gross margin
decreased 3.3% and 0.8%, respectively, compared to the prior year periods.
Excluding the impact from recent acquisitions, overall gross margins were 49.0%
and 48.9% for the three and six months ended June 30, 2021 , respectively,
increases of 0.6% and 1.4% for the three and six months ended June 30, 2021 ,
respectively, from the comparable prior periods. For the three months ended
June 30, 2021 , the increase in overall margin is attributed to a higher revenue
mix for subscription revenues compared to the prior year periods resulting in an
increase in incremental margin related to software services, maintenance and
subscriptions. Margins have also increased due 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. The increase in overall gross
margin is partially offset by lower margins from software licenses due to lower
software license revenue.
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 June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Selling, general and
administrative expenses $ 108,922 $ 62,521 $ 46,401 74 % $ 187,696 $ 130,006 $ 57,690 44 %
SG&A as a percentage of revenues was 27.0% and 26.9% for the three and six
months ended June 30, 2021 , respectively, compared to 23.1% and 23.7% for the
three and six months ended June 30, 2020 , respectively. Excluding the impact of
SG&A expense from recent acquisitions of $13.5 million , for both the three and
six months ended June 30, 2021 , SG&A increased 52.6% and 34.0% for the three and
six months ending June 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 six
months ended June 30, 2021 , SG&A includes $17.5 million and $18.3 million ,
respectively, of transaction expenses related to acquisitions completed in 2021.
We also incurred $1.6 million of expense related to a separation agreement with
NIC's former Chief Executive Officer. For the three and six months ended
June 30, 2021 , stock compensation expense rose $5.2 million and $12.9 million
compared to prior year, 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 18 SG&A employees, mainly to our sales and finance teams, since
June 30, 2020 . For the six months ended June 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 June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Research and development
expense $ 23,428 $ 21,949 $ 1,479 7 % $ 45,241 $ 44,310 $ 931 2 %
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 six months ended
June 30, 2021 , increased 7% and 2%, respectively compared to the prior periods.
Excluding the impact of R&D expense from recent acquisitions of $381,000 for
both the three and six months ended June 30, 2021 , respectively, R&D expense
increased 5.0% and 1.2% for the three and six months ending June 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 six months ended June 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 June 30 :
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Amortization of other
intangibles $ 11,420 $ 5,392 $ 6,028 112 % $ 16,832 $ 10,784 $ 6,048 56 %
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Other (Expense) Income Including Interest Expense, Net
The following table sets forth a comparison of our other (expense) income, net,
for the periods presented as of
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Other (expense) income
including interest
expense, net $ (12,199) $ 470 $ (12,669) NM $ (12,111) $ 1,460 $ (13,571) NM
Other (expense) income, net, is primarily comprised of interest income from
invested cash, net of interest expense, non-usage and other fees associated with
our borrowings. The change in other (expense) income, net, in the three and six
months ended June 30, 2021 , compared to the prior periods is attributable to
higher levels of borrowings related to the 2021 Credit Agreement and Convertible
Senior Notes and lower levels of invested cash. Below are the components of
other (expense) income, net included in the accompanying condensed consolidated
statements of income:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Interest expense, including amortization of
debt discounts and debt issuance costs $ (12,438) $ (251) $ (12,915) $ (502)
Interest income 492 752 1,202 2,244
Other (253) (31) (398) (282)
Total other (expense) income including
interest expense, net $ (12,199) $
470
Income Tax Provision The following table sets forth a comparison of our income tax provision for the periods presented as ofJune 30 : Three Months Ended Change Six Months Ended Change 2021 2020 $ % 2021 2020 $ % Income tax provision (benefit)$ 562 $ (12,081) $ 12,643 NM$ 1,882 $ (24,748) $ 26,630 NM Effective income tax rate 2.2 % (28.9) % 2.9 % (32.3) % The change in effective tax rate for the three and six months endedJune 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 six months endedJune 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 and the tax benefit of research tax credits offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were$6.4 million and$15.2 million for the three and six months endedJune 30, 2021 , respectively, compared to$23.4 million and$45.5 million for the three and six months endedJune 30, 2020 , respectively. Excluding the excess tax benefits, the effective tax rate was 26.7% and 26.5% for the three and six months endedJune 30, 2021 , respectively, compared to 27.2% and 27.1% for the three and six months endedJune 30, 2020 , respectively. 35 -------------------------------------------------------------------------------- FINANCIAL CONDITION AND LIQUIDITY As ofJune 30, 2021 , we had cash and cash equivalents of$216.8 million compared to$603.6 million atDecember 31, 2020 . We also had$130.3 million invested in investment grade corporate and municipal bonds as ofJune 30, 2021 . These investments have varying maturity dates through 2026, and we intend to hold these investments until maturity. As ofJune 30, 2021 , we believe our cash from operating activities, revolving credit facility, cash on hand and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs. The following table sets forth a summary of cash flows for the six months endedJune 30 : 2021
2020
Cash flows provided (used) by: Operating activities$ 51,356 $ 96,520 Investing activities (1,998,692) (54,279) Financing activities 1,560,486 76,413
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 six months endedJune 30, 2021 , operating activities provided cash of$51.4 million . Operating activities that provided cash were primarily comprised of net income of$62.5 million , non-cash depreciation and amortization charges of$61.0 million , non-cash share-based compensation expense of$50.9 million and a non-cash decrease in operating lease right-of-use assets of$4.0 million . Working capital, excluding cash, increased approximately$127.1 million mainly due to higher accounts receivable because of an increase in unbilled receivables attributed to revenues recognized prior to billings and our maintenance billing cycle peaking in June, the timing of bonuses and tax payments, timing of payments to and receipts from our government partners and end-user consumers, and deferred taxes associated with stock option activity during the period. These increases were offset by 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 128 days atJune 30, 2021 , compared to 121 days atDecember 31, 2020 , and 135 days atJune 30, 2020 . The increase 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. Investing activities used cash of$2.0 billion in the six months endingJune 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. Approximately$14.2 million was invested in property and equipment, including$4.9 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$8.9 million of software development costs were capitalized. 36 -------------------------------------------------------------------------------- Financing activities provided cash of$1.6 billion in the six months endedJune 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 six months endedJune 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 ofJune 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$967,000 and$422,000 in the six months endedJune 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$48 million and$50 million , including approximately$10 million related to real estate and approximately$22 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 ofJune 30, 2021 , we had$965.0 million principal outstanding borrowings under our 2021 Credit Agreement and available borrowing capacity under the 2021 Credit Agreement was$435.0 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 six months endedJune 30, 2021 , our effective average interest rate for borrowings was 1.79%. As ofJune 30, 2021 , our interest rate was 3.5 % under theWells Fargo Bank prime rate and approximately 1.54% under the 30-day LIBOR option. Based upon initial borrowings under the 2021 Credit Agreement on the closing date in the aggregate principal amount of$1.15 billion , each quarter point change in interest rates would result in a$2.9 million change in annual interest expense under the 2021 Credit Agreement. 37
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