TYLER TECHNOLOGIES INC (TYL) FY 2024 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. For a comparison of our Results of Operations for the years ended December 31, 2023, and 2022, and our Cash Flow discussion for the year ended December 2023, see “Part II, Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 21, 2024.

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (2) disruption to our business and harm to our competitive position resulting from cyber-attacks, security vulnerabilities and software updates; (3) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (4) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (5) material portions of our business require the Internet infrastructure to be adequately maintained; (6) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (7) general economic, political and market conditions, including continued inflation and rising interest rates; (8) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (9) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (10) the ability to attract and retain qualified personnel and dealing with rising labor costs, the loss or retirement of key members of management or other key personnel; and (11) costs of compliance and any failure to comply with government and stock exchange regulations. These factors and other risks that affect our business are described in Item 1A, “Risk Factors”. We expressly disclaim any obligation to publicly update or revise our forward-looking statements.

OVERVIEW

General

We provide integrated information management solutions and services for the public sector. We develop and market a broad line of software products and services to address the IT needs of public sector entities. We provide subscription-based services such as software as a service (“SaaS”) and transaction-based services primarily related to digital government services and payment processing. In addition, we provide professional IT services to our clients, including software and hardware installation, data conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. Additionally, we provide property appraisal services for taxing jurisdictions.

We report our results in two reportable segments. Our reportable segments are organized on the basis of a combination of the products and services they deliver to clients and the function the public sector client performs. Business units that have met the aggregation criteria have been combined into our two reportable segments. The Enterprise Software (“ES”) reportable segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: public administration solutions, courts and public safety solutions, education solutions, and property and recording solutions. The Platform Technologies (“PT”) reportable segment provides public sector entities with platform and transformative solutions including digital solutions, payment processing, streamlined data processing, and improved operations and workflows.

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The primary financial measures used by the CODM for assessing performance and allocating resources are segment income or loss from operations. The CODM uses segment income or loss from operations before income taxes, not including gains and losses on investments, to allocate resources (including employees, property, and financial or capital resources) for each segment predominantly in the annual budget and forecasting process. Segment gross profit for our operating segments units is defined as gross profit before non-cash amortization of acquired software associated with acquisitions. Segment operating income for our reportable segments is defined as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense, and income taxes. During the fiscal periods presented, we had no significant transaction between reportable segments. Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company. Corporate segment operating loss also includes revenues and expenses related to a company-wide user conference. Certain presentation items from previous years have been adjusted to conform with current year presentation.

Recent Acquisitions

2024

We did not complete any acquisitions during the twelve months ended December 31, 2024,.

2023

On October 31, 2023, we acquired Resource Exploration, Inc. (“ResourceX”), a leading provider of budgeting software to the public sector, and ARInspect, Inc. (“ARInspect”), a leading provider of AI powered machine learning solutions for public sector field operations.

On August 8, 2023, we acquired Computing System Innovations, LLC (“CSI”), a leading provider of artificial intelligence automation, redaction, and indexing solution for courts, recorders, attorneys, and others.

The actual operating results of CSI and ResourceX are included in the operating results of the ES segment from their respective dates of acquisition. The operating results of ARInspect are included in the operating results of the PT segment since the date of acquisition.

2024 Operating Results

For the twelve months ended December 31, 2024, total revenues increased 9.5% compared to the prior period. Revenues from recent acquisitions contributed $10.4 million or 0.5%, to the total revenue increase.

Subscriptions revenue grew 15.8% for the twelve months ended December 31, 2024, primarily due to an ongoing shift toward SaaS arrangements for both new and existing clients, along with growth in certain transaction-based revenues. We monitor and analyze several key performance indicators in order to manage our business and evaluate our financial and operating performance. These indicators include the following:

Revenues – We derive our revenues from four primary sources: subscription-based arrangements from SaaS and transaction-based fees; maintenance; professional services; and software licenses and royalties. Subscriptions and maintenance are considered recurring revenue sources and comprised approximately 84% of our revenues in 2024. The number of new SaaS clients and the number of existing clients who convert from our traditional software arrangements to our SaaS model are a significant driver of our revenue growth, together with transaction-based revenues and maintenance rate increases. In addition, we also monitor our client base and attrition, which historically is very low. During 2024, based on our number of clients, attrition was approximately 2%.

Annualized Recurring Revenue (“ARR”) - Subscriptions and maintenance are considered recurring revenue sources. ARR is calculated by annualizing the current quarter’s recurring revenues from maintenance and subscriptions as reported in our statement of income. Management believes ARR is an indicator of the annual run rate of our recurring revenues, as well as a measure of the effectiveness of the strategies we deploy to drive revenue growth over time. ARR is a metric widely used by companies in the technology sector and by investors, which we believe offers insight to the stability of our maintenance and subscription revenues to be recognized within the year.

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Subscriptions revenues primarily consist of revenues derived from our SaaS arrangements and transaction-based fees. These revenues are considered recurring because revenues from these sources are expected to re-occur in similar annual amounts for the term of our relationship with the client. Transaction-based fees are generally the result of multi-year contracts with our clients that result in fees generated by payment transactions and digital government services and are collected on a recurring basis during the contract term. Transaction-based revenues are historically highest in the second quarter, which coincides with peak outdoor recreation seasons and statutory filing deadlines in many jurisdictions, and lowest in the fourth quarter due to fewer business days and lower transaction volumes around holidays. Because ARR is an annualized revenue amount, the metric can fluctuate from quarter to quarter due to this seasonality. ARR was $1.86 billion and $1.61 billion as of December 31, 2024, and 2023, respectively. ARR increased approximately 15% compared to the prior period primarily due to an increase in subscriptions revenue resulting from an ongoing shift toward SaaS arrangements for both new and existing clients and expansion in transaction-based fees.

Cost of Revenues and Gross Margins – Our primary cost components are hosting costs and personnel expenses in connection with providing software implementation, subscription-based services and maintenance and support to our clients. We can improve gross margins by controlling headcount and related costs and by expanding our revenue base, especially from those products and services that produce incremental revenue with relatively low incremental cost, such as subscription-based services, maintenance and support and software licenses and royalties. Continued migration of clients to our SaaS products and consolidation of versions of on-premises software products with support obligations could decrease support costs with resources redeployed toward development. As of December 31, 2024, our total employee count included in cost of revenues increased to 5,250 from 5,129 at December 31, 2023.

Sales and Marketing (“S&M”) Expense – The primary components of S&M expense include sales personnel salaries and share-based compensation expense, sales commissions, travel-related expenses, advertising and marketing materials, and allocated depreciation, facilities, and IT support. Sales commissions typically fluctuate with revenues and share-based compensation expense generally increases based on increased levels of awards issued during the period and as the market price of our stock increases. Other administrative expenses tend to grow at a slower rate than revenues.

General and Administrative (“G&A”) Expense – The primary components of G&A expense include personnel salaries and share-based compensation expense for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, third-party professional fees, travel-related expenses, insurance, allocation of depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses. Share-based compensation expense generally increases based on increased level of awards issued during the period and as the market price of our stock increases. Other administrative expenses tend to grow at a slower rate than revenues.

Research and development (“R&D”) expense – These costs include compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to researching and developing new solutions or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs. As of December 31, 2024, our total employee count included in R&D expense increased to 870 from 830 at December 31, 2023

Liquidity and Cash Flows – The primary driver of our cash flows is net income. Uses of cash include acquisitions, capital investments in property and equipment and software development, debt repayment and discretionary purchases of treasury stock. Our working capital needs are fairly stable throughout the year with the significant components of cash inflows representing collection of accounts receivable and cash receipts from clients in advance of revenue being earned, offset by cash outflows, primarily payment of personnel expenses. In recent years, we have also received significant amounts of cash from employees exercising stock options and contributing to our Employee Stock Purchase Plan.

Balance Sheet – Cash, accounts receivable and deferred revenue balances are important indicators of our business.

Outlook

ARR was $1.86 billion and $1.61 billion as of December 31, 2024, and 2023, respectively, an increase of approximately 15% compared to the prior period. The public sector software market continues to experience heightened activity. We expect to continue to achieve solid growth in revenues and earnings. With our strong financial position and cash flow, we plan to continue to make significant investments in product development and continue to accelerate our move to the cloud to better position us to continue to expand our addressable market and strengthen our competitive position over the long term.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements. These financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) 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. The Notes to the Financial Statements included as part of this Annual Report describe our significant accounting policies used in the preparation of the financial statements. Significant items subject to such estimates and assumptions include the recoverability of goodwill and other intangible assets and estimated useful lives of intangible assets, the application of the progress toward completion methods of revenue recognition, estimation for revenue recognition and multiple performance obligation arrangements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition. We earn the majority of our revenues from subscription-based services and post-contract client support (“PCS” or “maintenance”). Other sources of revenue are professional services, software licenses and royalties, and hardware and other. Our software arrangements with clients contain multiple performance obligations that range from software licenses, installation, training, consulting, software modification and customization to meet specific client needs; hosting; and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include professional services, such as training or installation, are evaluated to determine whether those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“SSP”) basis.

For arrangements that involve significant production, modification or customization of the software, or where professional services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the client over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.

Business Combinations. Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information.

For tangible and identifiable intangible assets acquired in a business combination, management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants.

Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain new information about facts and circumstances that existed as of the closing date. If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination as well as the estimated useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations.

Goodwill and Other Intangible Assets. We perform an impairment assessment annually on October 1, or more frequently if indicators of potential impairment exist, which includes evaluating qualitative and quantitative factors to assess the likelihood of an impairment of each reporting unit’s goodwill. If the conclusion of an impairment assessment is that it is more likely than not that the fair value of the reporting unit is more than its carrying value, goodwill is not considered impaired, and we are not required to perform the quantitative goodwill impairment test. If the conclusion of an impairment assessment is that it is more likely than not that the fair value is less than its carrying value, we perform the quantitative goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. Impairments, if any, are based on the excess of the carrying amount over the fair value. There have been no impairments to goodwill in any of the periods presented. See Note 8, “Goodwill and Other Intangible Assets,” for additional information.

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All intangible assets (other than goodwill) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of other intangible assets is measured by comparison of the carrying amount to estimated undiscounted future cash flows. The assessment of recoverability or of the estimated useful life for amortization purposes will be affected if the timing or the amount of estimated future operating cash flows is not achieved. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and reductions in growth rates. In addition, products, capabilities, or technologies developed by others may render our software products obsolete or non-competitive. Any adverse change in these factors could have a significant impact on the recoverability of goodwill or other intangible assets. During 2024, we did not identify any triggering events that would indicate that the carrying amount of our intangible assets may not be recoverable.

Recent adoption of new accounting pronouncements

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (ASU) 2023-07 - Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. ASU 2023-07 enhances the disclosures required for reportable segments in annual and interim consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. As of December 31, 2024, we adopted the new standard which has been applied retrospectively by the Company. This change did not have a significant impact on the Company’s financial statements and disclosures. See Note 2, “Segment and Related Information,” for further discussion.

New accounting pronouncements

In January 2025, the FASB issued ASU 2025-01 - Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date. This update clarifies that all public business entities must adopt the guidance in ASU 2024-03 for annual reporting periods beginning after December 15, 2026, and for interim periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s financial statements.

In November 2024, the FASB issued ASU 2024-04 - Debt - Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. This guidance clarifies the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. It is effective for annual reporting periods beginning after December 15, 2025, and interim periods within those annual reporting periods, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s financial statements.

In November 2024, the FASB issued ASU 2024-03 - Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This guidance requires public entities to disclose additional information about specific expense categories in the notes to the financial statements on an interim and annual basis. It is effective for annual reporting periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s financial statements.

In December 2023, the FASB issued ASU 2023-09 - Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 with early adoption permitted. This guidance is not expected to have a material impact on the Company’s financial statements.

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ANALYSIS OF RESULTS OF OPERATIONS AND OTHER

The following discussion compares the historical results of operations on a basis consistent with GAAP for the years ended December 31, 2024 and 2023:

2024 Compared to 2023

Revenues

Subscriptions.

The following table sets forth a comparison of our subscriptions revenue for the listed years ended December 31 ($ in thousands):

Subscriptions revenue consists of revenues derived from our SaaS arrangements and transaction-based fees primarily related to digital government services and payment processing.

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SaaS

The following table sets forth a comparison of our subscriptions revenue derived from SaaS fees for the listed years ended December 31 ($ in thousands):

For the twelve months ended December 31, 2024, the increase in SaaS fees compared to prior period is primarily attributable to new SaaS clients as well as existing on-premises clients who converted to our SaaS model. Since December 31, 2023, we have added 734 new SaaS clients, while 415 existing on-premises clients have converted to our SaaS offerings. Our new software contract mix for the twelve months ended December 31, 2024, was 12% perpetual software license arrangements and approximately 88% subscription-based arrangements, compared to approximately 17% perpetual software license arrangements and approximately 83% subscription-based arrangements for the twelve months ended December 31, 2023.

Transaction-based fees

The following table sets forth a comparison of our subscriptions revenue derived from transaction-based fees for the listed years ended December 31 ($ in thousands):

For the twelve months ended December 31, 2024, contributing to the growth in transaction-based fees compared to prior period are the new transaction clients, volume increases from online payments and e-filing services, price increases by certain third-party processing partners from whom we receive a share of revenues, and the impact of transaction-based fees from recent acquisitions of $4.2 million. These increases are partially offset by a change from the gross revenue model to the net revenue model for payments revenue under one of our state enterprise agreements that results in merchant fees recorded as a reduction in revenue rather than as cost of revenues.

Maintenance.

The following table sets forth a comparison of our maintenance revenue for the listed years ended December 31 ($ in thousands):

We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue decreased compared to prior period primarily due to the impact of clients converting from on-premises license arrangements to SaaS, partially offset by maintenance price increases.

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Professional services.

The following table sets forth a comparison of our professional services revenue for the listed years ended December 31 ($ in thousands):

Professional services revenue primarily consists of professional services billed in connection with implementing our software, converting client data, training client personnel, custom development activities, consulting, and property appraisal services. New clients who implement our software generally contract with us to provide the related professional services. Existing clients also periodically purchase additional training, consulting and minor programming services.

The increase in professional services revenues compared to prior period is primarily attributable to higher new contract volume along with increased billing rates.

Software licenses and royalties.

The following table sets forth a comparison of our software licenses and royalties revenue for the listed years ended December 31 ($ in thousands):

The decrease in software licenses and royalties revenue compared to prior period is primarily attributed to the shift in the mix of new software contracts toward more SaaS offerings.

Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect that software license revenues will continue to decline as we shift our model away from perpetual software license to SaaS. Subscription-based arrangements result in lower software license revenue in the initial year as compared to perpetual software license arrangements, but generate higher overall revenue over the term of the contract.

Cost of revenues and overall gross margins

The following table sets forth a comparison of the key components of our cost of revenues for the listed years ended December 31 ($ in thousands):

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Subscriptions, maintenance, and professional services. Cost of subscriptions, maintenance and professional services primarily consist of personnel costs related to installation of our software, conversion of client data, training client personnel, public cloud hosting costs, and support activities, including enhancing existing solutions, and various other services such as custom development, ongoing operation of our SaaS solutions, property appraisal outsourcing activities, digital government services, and other transaction-based services such as e-filing. Other costs included are merchant and interchange fees required to process credit/debit card transactions and bank fees to process automated clearinghouse transactions related to our payments business.

In 2024, the cost of subscriptions, maintenance and professional services grew 11% primarily due to increased hosting costs as we expand our SaaS client base and transition from our proprietary data centers to the public cloud, together with higher personnel costs. Our professional services staff grew by 121 employees since December 31, 2023, as we increased hiring to ensure that we are well-positioned to serve our growing client base. The increases were partially offset by a reduction in merchant fee expense associated with the change from the gross model to the net model for payments revenue under one of our state enterprise agreements.

Software licenses and royalties. Costs of software licenses and royalties primarily consist of direct third-party software costs. We do not have any direct costs associated with royalties. The cost of software licenses and royalties for the twelve months ended December 31, 2024, declined 42%, compared to the prior period due to lower third-party software costs.

Amortization of software development. Software development costs included in cost of revenues primarily consist of personnel costs. We begin to amortize capitalized costs when a product is available for general release to clients. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the software’s remaining estimated economic life of, generally, three to seven years.

In 2024, amortization of software development costs increased 49% compared to the prior period due to new capitalized software development projects going into service in the past year.

Amortization of acquired software. Amortization expense related to acquired software attributed to business combinations is included with cost of revenues. The estimated useful lives of acquired software ranges from three to 10 years.

In 2024, amortization of acquired software increased 3% compared to the prior period due to amortization of newly acquired software from recent acquisitions completed in fiscal year 2023, partially offset by assets becoming fully amortized in the fourth quarter 2023.

The following table sets forth a comparison of gross profit and overall gross margin for the periods presented as of December 31:

Overall gross margin. Our 2024 blended gross margin decreased 0.3% compared to 2023. The decline in the overall gross margin compared to the prior period is attributed to lower revenue from software licenses and maintenance, higher software development amortization expense, and higher personnel costs. The declines in overall gross margin were partially offset by a higher revenue mix for subscription revenues compared to the prior period, resulting in an increase in incremental margin related to subscriptions, maintenance and professional services.

Sales and marketing expense

Sales and marketing (“S&M”) expense consists primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for sales and marketing employees, as well as professional fees, trade show activities, advertising costs and other marketing costs. The following table sets forth a comparison of our S&M expense for the years ended December 31 ($ in thousands):

S&M expense as a percentage of revenues was 7.4% in 2024 compared to 7.7% in 2023. S&M expense increased approximately 5% compared to the prior period, resulting from higher personnel, bonus, commission, and trade show expenses, offset by lower professional fees related to marketing and advertising.

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General and administrative expense

General and administrative (“G&A”) expense consists primarily of personnel salaries and share-based compensation expense for general corporate functions including senior management, finance, accounting, legal, human resources and corporate development, as well as third-party professional fees, travel-related expenses, insurance, allocation of depreciation, facilities and IT support costs, amortization of software development for internal use, acquisition-related expenses and other administrative expenses. The following table sets forth a comparison of our G&A expense for the listed years ended December 31 ($ in thousands):

G&A expense as a percentage of revenue was 14.1% in 2024 compared to 15.8% in 2023. G&A expense decreased 2% compared to the prior period. The decline in G&A expense is primarily attributed to lower facilities costs resulting from lease restructurings, partially offset by higher share-based compensation costs and an increase in software and other IT support costs.

Research and development expense

Research and development expense consists primarily of salaries, employee benefits and related overhead costs associated with new product development. Research and development expense consists mainly of costs associated with development of new products and new functionality in our current SaaS products. The following table sets forth a comparison of our research and development expense for the listed years ended December 31 ($ in thousands):

Research and development expense as a percent of total revenue was 5.5% in 2024, compared to 5.6% in 2023. Research and development expense increased 8% in 2024 compared to the prior period, mainly due to a number of new Tyler product development initiatives shifting from capitalized development projects to projects that are expensed to research and development.

Amortization of other intangibles

Other intangibles represents the portion of the purchase price allocated to the identified intangible assets for client-related intangibles, trade names, and leases acquired. 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 other intangibles is recorded as operating expense. The estimated useful lives of other intangibles range from one to 25 years. The following table sets forth a comparison of amortization of other intangibles for the listed years ended December 31 ($ in thousands):

In 2024, amortization of other intangibles decreased 20% compared to the prior period due to the impact of certain trade name intangible assets becoming fully amortized as a result of accelerated amortization expense in the fourth quarter of 2023 and partially in 2024.

Estimated annual amortization expense relating to client related, trade name, and leases acquired intangibles, excluding acquired software for which the amortization expense is recorded as cost of revenues, for the next five years and thereafter is as follows (in thousands):

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Interest expense

The following table sets forth a comparison of our interest expense for the listed years ended December 31 ($ in thousands):

Interest expense is comprised of interest expense and non-usage and other fees associated with our borrowings. The change in interest expense compared to the prior period is primarily attributable to lower interest incurred as a result of our repayment of the Term Loans in early 2024.

Other income, net

The following table sets forth a comparison of our other income, net for the listed years ended December 31 ($ in thousands):

Other income, net, is primarily comprised of interest income from invested cash. The change in other income, net, compared to the prior period is due to increased interest income generated from higher invested cash balances in 2024 compared to 2023.

Income tax provision

The following table sets forth a comparison of our income tax provision for the listed years ended December 31 ($ in thousands):

The increase in the income tax provision in 2024 compared to the prior period is primarily due to higher income before taxes, increased liabilities for uncertain tax positions, and higher state income taxes. This was partially offset by an increase in excess tax benefits from share-based compensation and research tax credits and a decrease in non-deductible business expense. The decrease in the effective income tax rate in 2024, compared to the prior period is driven by higher excess tax benefits from share-based compensation and decreases in liabilities for uncertain tax positions, state income taxes, and non-deductible business expenses offset by a decrease in research tax credit benefits relative to income before taxes. The tax benefits related to research tax credits totaled $22.1 million in 2024 compared to $20.5 million in 2023. The tax expense related to uncertain tax positions in 2024 was $10.1 million compared to $7.6 million in 2023. The share-based exercise and vesting activity in 2024 generated $21.1 million of excess tax benefits, while exercise and vesting activity in 2023 generated $9.3 million of excess tax benefits.

The effective income tax rates for the periods presented are different from the statutory United States federal income tax rate of 21% primarily due to the tax benefits of research tax credits and excess tax benefits related to stock incentive awards, offset by state income taxes, liabilities for uncertain tax positions, and non-deductible business expenses.

FINANCIAL CONDITION AND LIQUIDITY

As of December 31, 2024, we had cash and cash equivalents of $744.7 million compared to $165.5 million as of December 31, 2023. We also had $34.0 million invested in investment grade corporate bonds, U.S. Treasuries and asset-backed securities as of December 31, 2024. These investments have varying maturity dates through 2027 and are held as available-for-sale. 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 our revolving credit facility. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors. We believe that our cash on hand, cash provided by operating activities, and available credit are sufficient to fund our working capital requirements and capital expenditures for at least the next twelve months.

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The following table sets forth a summary of cash flows for the listed years ended December 31 (in thousands):

In 2024, operating activities provided cash of $624.6 million, compared to $380.4 million in 2023. Operating activities that provided cash were primarily comprised of net income of $263.0 million, non-cash depreciation and amortization charges of $143.4 million, non-cash share-based compensation expense of $122.8 million and non-cash amortization of operating lease right-of-use assets of $8.9 million. Changes in working capital, excluding cash, increased cash provided by operating activities by approximately $91.7 million mainly due to timing of prepaid expenses, timing of payments for operating leases, timing of payments related to income taxes and deferred taxes associated with stock option activity during the period. These decreases were offset by an increase in deferred revenue during the period, an increase in accrued expenses due to timing of payments and increased collections from accounts receivables. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance and subscription renewal billings. Our renewal dates occur throughout the year, but our largest maintenance billing cycles occur in the second and fourth quarters. Subscription renewals are billed throughout the year.

Investing activities used cash of $67.6 million in 2024 compared to $77.0 million in 2023. We invested $32.4 million and received $16.0 million in proceeds from investment grade corporate bonds, U.S. Treasuries and asset-backed securities. Approximately $29.4 million of software development costs were capitalized. Approximately $20.5 million was invested in property and equipment, including $7.5 million related to real estate. The remaining additions were for computer equipment and furniture and fixtures in support of growth. We also paid approximately $1.4 million in holdbacks related to acquisitions completed in 2023.

Financing activities provided cash of $22.2 million in 2024 compared to used cash of $311.8 million in 2023, primarily attributable to cash received of $74.8 million from stock option exercises, net of withheld shares for taxes upon equity award settlement and employee stock purchase plan activity, partially offset by the repayment of $50.0 million of Term debt related to our 2021 Credit Agreement and payment of $2.6 million in debt issuances costs related to our newly signed 2024 Credit Agreement.

In February 2019, our Board of Directors authorized the repurchase of an additional 1.5 million shares of our common stock. The repurchase program, which was approved by our Board of Directors, was originally announced in October 2002 and was amended at various times from 2003 through 2019. As of February 19, 2025, we have authorization from our Board of Directors to repurchase up to 2.2 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions as well as the volume of employee stock option exercises, influence the timing of the buybacks and the number of shares repurchased. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization.

On September 25, 2024, the Company entered into a $700.0 million credit agreement with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender (the “2024 Credit Agreement”). The 2024 Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of up to $700.0 million, including subfacilities for standby letters of credit and swingline loans. The 2024 Credit Agreement matures on September 25, 2029, and loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any SOFR breakage costs. The Company incurred issuance fees of $2.6 million in connection with the 2024 Credit Agreement. The 2024 Credit Agreement replaced Tyler’s previous $500.0 million unsecured credit facility under the credit agreement dated April 21, 2021, among the Company and various lenders party thereto (the “2021 Credit Agreement”), which was scheduled to mature in April 2026.

We repaid all amounts due under the Term Loans under the 2021 Credit Agreement and have no outstanding borrowings under the 2024 Credit Agreement, with an available borrowing capacity of $700.0 million as of December 31, 2024.

As of December 31, 2024, we had $600.0 million in outstanding principal for the Convertible Senior Notes due 2026. We will settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of our common stock, at our election. As of December 31, 2024, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.

We paid interest of $3.1 million in 2024 and $19.2 million in 2023. See Note 10, “Debt,” to the consolidated financial statements for discussions of the Convertible Senior Notes and the 2024 Credit Agreement.

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We paid income taxes, net of refunds received, of $84.2 million in 2024 compared to $142.8 million in 2023.

We anticipate that 2025 capital spending will be between $32 million and $34 million, including approximately $19 million of software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending and cash tax payments are expected to be funded from existing cash balances and cash flows from operations.

From time to time we engage in discussions with potential acquisition candidates. In order to pursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisition opportunities and how such opportunities will be financed.

We lease office facilities, transportation and other equipment for use in our operations. Most of our leases are non-cancelable operating lease agreements with remaining terms of one to 10 years. Some of these leases include options to extend for up to six years.

Our estimated future obligations consist of debt, uncertain tax positions, leases, and purchase commitments as of December 31, 2024. Refer to Note 10, “Debt,” Note 13, “Income Tax,” Note 16, “Leases,” and Note 19, “Commitment and Contingencies,” to the consolidated financial statements for related discussions.

CAPITALIZATION

At December 31, 2024, our capitalization consisted of $597.9 million of outstanding debt and $3.4 billion of shareholders’ equity.