tyl-10q_20150630.htm

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The number of shares of common stock of registrant outstanding on July 17, 2015 was 33,864,000.

	Three months ended June 30,					Six months ended June 30,
	2015		2014			2015		2014
Revenues:
Software licenses and royalties	$	14,586	$	12,083		$	28,886	$	23,315
Subscriptions		26,949		20,934			52,237		41,441
Software services		34,563		30,128			65,367		54,435
Maintenance		59,463		51,951			116,811		102,191
Appraisal services		6,691		5,444			12,780		10,295
Hardware and other		4,043		3,831			5,180		5,320
Total revenues		146,295		124,371			281,261		236,997

Cost of revenues:
Software licenses and royalties		483		343			1,036		874
Acquired software		456		444			912		925
Software services, maintenance and subscriptions		69,678		58,274			135,055		113,273
Appraisal services		4,278		3,665			8,413		6,976
Hardware and other		3,147		3,087			3,713		3,861
Total cost of revenues		78,042		65,813			149,129		125,909

Gross profit		68,253		58,558			132,132		111,088

Selling, general and administrative expenses		30,396		27,419			58,941		52,786
Research and development expense		7,110		6,389			14,114		12,561
Amortization of customer and trade name intangibles		1,151		1,128			2,303		2,257

Operating income		29,596		23,622			56,774		43,484

Other income (expense), net		185		(216	)		366		(475	)
Income before income taxes		29,781		23,406			57,140		43,009
Income tax provision		10,945		8,666			21,031		16,386
Net income	$	18,836	$	14,740		$	36,109	$	26,623

Earnings per common share:
Basic	$	0.56	$	0.45		$	1.07	$	0.81
Diluted	$	0.52	$	0.42		$	1.00	$	0.75

Comprehensive income	$	18,836	$	14,740		$	36,109	$	26,623

	June 30,
	2015			December 31,
	(unaudited)			2014
ASSETS
Current assets:
Cash and cash equivalents	$	204,103		$	206,167
Accounts receivable (less allowance for losses of $1,361 in 2015 and $1,725 in 2014)		152,178			112,660
Prepaid expenses		18,979			17,851
Other current assets		10,590			358
Deferred income taxes		9,674			9,674
Total current assets		395,524			346,710

Accounts receivable, long-term portion		391			1,761
Property and equipment, net		67,908			65,910
Other assets:
Goodwill		131,960			124,142
Other intangibles, net		31,507			34,722
Cost method investment		15,000			—
Other non-current assets		3,744			737
	$	646,034		$	573,982

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,385		$	4,119
Accrued liabilities		34,810			39,508
Deferred revenue		201,549			189,212
Total current liabilities		240,744			232,839

Deferred income taxes		4,673			4,170

Commitments and contingencies

Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2015 and 2014		481			481
Additional paid-in capital		221,838			201,389
Accumulated other comprehensive loss, net of tax		(46	)		(46	)
Retained earnings		297,259			261,150
Treasury stock, at cost; 14,294,303 and 14,678,782 shares in 2015 and 2014, respectively		(118,915	)		(126,001	)
Total shareholders' equity		400,617			336,973
	$	646,034		$	573,982

	Six months ended June 30,
	2015			2014
Cash flows from operating activities:
Net income	$	36,109		$	26,623
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization		7,484			7,281
Share-based compensation expense		8,861			7,002
Excess tax benefit from exercises of share-based arrangements		(8,827	)		(3,206	)
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable		(36,624	)		(38,203	)
Income taxes		2,735			7,746
Prepaid expenses and other current assets		(549	)		(2,069	)
Accounts payable		(371	)		51
Accrued liabilities		(5,685	)		(4,237	)
Deferred revenue		11,680			27,840
Net cash provided by operating activities		14,813			28,828

Cash flows from investing activities:
Purchase of cost method investment		(15,000	)		—
Purchase of held-to-maturity securities		(6,449	)		—
Cost of acquisitions, net of cash acquired		(6,447	)		—
Additions to property and equipment		(6,126	)		(6,477	)
(Increase) decrease in other		(9	)		343
Net cash used by investing activities		(34,031	)		(6,134	)

Cash flows from financing activities:
Purchase of treasury shares		(645	)		(22,815	)
Proceeds from exercise of stock options		6,729			4,117
Contributions from employee stock purchase plan		2,243			2,014
Excess tax benefit from exercises of share-based arrangements		8,827			3,206
Net cash provided (used) by financing activities		17,154			(13,478	)

Net (decrease) increase in cash and cash equivalents		(2,064	)		9,216
Cash and cash equivalents at beginning of period		206,167			78,876
Cash and cash equivalents at end of period	$	204,103		$	88,092

We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of June 30, 2015 and December 31, 2014 and operating result amounts are for the three months and six months ended June 30, 2015 and 2014, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2014. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

On May 29, 2015, we acquired all of the capital stock of Brazos Technology Corporation (“Brazos”), which provides mobile hand-held solutions primarily to law enforcement agencies for field accident reporting and electronically issuing citations. The purchase price, net of cash acquired of $312,000 and including debt assumed of $733,000, was $6.1 million in cash and 12,500 shares of Tyler common stock valued at $1.5 million. As of June 30, 2015, the purchase price allocation of Brazos is in process mainly due to completing the valuation of the acquired intangible assets. We currently expect to finalize the allocation of the purchase price in the next quarter. The impact of this acquisition on our operating results is not material.

Cash and cash equivalents consist of cash on deposit with several domestic banks and money market funds.

In June 2015, we invested $6.4 million in investment grade corporate and municipal bonds with maturity dates ranging from 2015 through mid-2017. We intend to hold these bonds to maturity and have classified them as such. We believe cost approximates fair value because of the relatively short duration of these investments. The fair value of these securities are considered Level II as they are based on inputs from quoted prices in markets that are not active or other observable market data. These investments are included in other current assets and other non-current assets.

On January 30, 2015, we made a $15.0 million investment in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited (“Record Holdings”), a privately held Australian company specializing in digitizing the spoken word in court and legal settings. We do not believe we have the ability to significantly influence the day-to-day activities of Record Holdings and are accounting for this investment under the cost method.

As of June 30, 2015, we had authorization from our board of directors to repurchase up to 1.4 million additional shares of Tyler common stock.

For the three months and six months ended June 30, 2015, we had an effective income tax rate of 36.8% compared to an effective income tax rate of 37.0% and 38.1% for the three and six months ended months June 30, 2014, respectively. The effective income tax

rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs.

We made federal and state tax payments of $18.3 million during the six months ended June 30, 2015 compared to $8.6 million in net payments for the same period in the prior year.

The following table details the reconciliation of basic earnings per share to diluted earnings per share:

	Three months ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share:
Net income	$	18,836	$	14,740	$	36,109	$	26,623
Denominator:
Weighted-average basic common shares outstanding		33,751		32,918		33,756		32,876
Assumed conversion of dilutive securities:
Stock options		2,346		2,243		2,340		2,413
Denominator for diluted earnings per share - Adjusted weighted-average shares		36,097		35,161		36,096		35,289
Earnings per common share:
Basic	$	0.56	$	0.45	$	1.07	$	0.81
Diluted	$	0.52	$	0.42	$	1.00	$	0.75

For the three and six months ended June 30, 2015, stock options representing the right to purchase common stock of approximately 492,000 shares and 570,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect. For the three and six months ended June 30, 2014, stock options representing the right to purchase common stock of approximately 669,000 shares and 485,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

The following table summarizes share-based compensation expense related to share-based awards recorded in the statements of comprehensive income, pursuant to ASC 718, Stock Compensation:

We are a major provider of integrated information management solutions and services for the public sector, with a focus on local governments.

We provide our software systems and services and appraisal services through four business units, which focus on the following products:

In accordance with ASC 280-10, Segment Reporting, the financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts and land and vital records management software solutions unit; and the courts and justice software solutions unit meet the criteria for aggregation and are presented in one reportable segment, Enterprise Software Solutions (“ESS”). The ESS segment provides municipal and county governments and schools with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as financial management and courts and justice processes. The Appraisal and Tax Software Solutions and Services (“ATSS”) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.

We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before noncash amortization of intangible assets associated with their acquisition, interest expense and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Segment operating income for corporate primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference.

For the three months ended June 30, 2015
	Enterprise Software Solutions		Appraisal and Tax Software Solutions and Services		Corporate			Totals
Revenues
Software licenses and royalties	$	13,556	$	1,030	$	—		$	14,586
Subscriptions		25,733		1,216		—			26,949
Software services		31,826		2,737		—			34,563
Maintenance		54,992		4,471		—			59,463
Appraisal services		—		6,691		—			6,691
Hardware and other		1,330		11		2,702			4,043
Intercompany		979		—		(979	)		—
Total revenues	$	128,416	$	16,156	$	1,723		$	146,295
Segment operating income	$	34,408	$	3,903	$	(7,108	)	$	31,203



For the six months ended June 30, 2015
	Enterprise Software Solutions		Appraisal and Tax Software Solutions and Services		Corporate			Totals
Revenues
Software licenses and royalties	$	25,883	$	3,003	$	—		$	28,886
Subscriptions		50,042		2,195		—			52,237
Software services		60,994		4,373		—			65,367
Maintenance		108,007		8,804		—			116,811
Appraisal services		—		12,780		—			12,780
Hardware and other		2,468		11		2,701			5,180
Intercompany		1,905		—		(1,905	)		—
Total revenues	$	249,299	$	31,166	$	796		$	281,261
Segment operating income	$	66,660	$	6,971	$	(13,642	)	$	59,989

For the three months ended June 30, 2014
	Enterprise Software Solutions		Appraisal and Tax Software Solutions and Services		Corporate			Totals
Revenues
Software licenses and royalties	$	11,349	$	734	$	—		$	12,083
Subscriptions		20,124		810		—			20,934
Software services		27,420		2,708		—			30,128
Maintenance		47,765		4,186		—			51,951
Appraisal services		—		5,444		—			5,444
Hardware and other		1,361		—		2,470			3,831
Intercompany		532		—		(532	)		—
Total revenues	$	108,551	$	13,882	$	1,938		$	124,371
Segment operating income	$	27,747	$	2,934	$	(5,487	)	$	25,194



For the six months ended June 30, 2014
	Enterprise Software Solutions		Appraisal and Tax Software Solutions and Services		Corporate			Totals
Revenues
Software licenses and royalties	$	22,145	$	1,170	$	—		$	23,315
Subscriptions		39,846		1,595		—			41,441
Software services		49,607		4,828		—			54,435
Maintenance		93,858		8,333		—			102,191
Appraisal services		—		10,295		—			10,295
Hardware and other		2,850		—		2,470			5,320
Intercompany		1,005		—		(1,005	)		—
Total revenues	$	209,311	$	26,221	$	1,465		$	236,997
Segment operating income	$	53,175	$	4,766	$	(11,275	)	$	46,666



DELAWARE		75-2303920
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller Reporting Company	¨

	Three months ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
Cost of software services, maintenance and subscriptions	$	746	$	513	$	1,447	$	1,026
Selling, general and administrative expenses		3,857		3,026		7,414		5,976
Total share-based compensation expenses	$	4,603	$	3,539	$	8,861	$	7,002


x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Reconciliation of reportable segment operating	Three months ended June 30,						Six months ended June 30,
income to the Company's consolidated totals:	2015			2014			2015		2014
Total segment operating income	$	31,203		$	25,194		$	59,989	$	46,666
Amortization of acquired software		(456	)		(444	)