Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
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 September 30, 2022, and December 31, 2021, and operating result amounts are for the three and nine months ended September 30, 2022, and 2021, respectively, 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, 2021. 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. Certain amounts for the previous year have been reclassified to conform to the current year presentation.
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). During the three and nine months ended September 30, 2022, we had approximately $37,000 and $800,000 of other comprehensive loss, net of taxes, from our available-for-sale investment holdings and no items of other comprehensive income (loss) during the three and nine months ended September 30, 2021.
(2) Accounting Standards and Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except for the January 1, 2022, adoption of ASU 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”), there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022, that have had a material impact on our condensed consolidated financial statements and related notes. See Recently Adopted Accounting Pronouncements below.
REVENUE RECOGNITION
Nature of Products and Services
We earn revenues from software licenses, royalties, subscription-based services, professional services, post-contract customer support (“PCS” or “maintenance”), hardware, and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include professional services, such as training or installation, are evaluated to determine whether those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“SSP”) basis.
Significant Judgments:
Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and professional services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the professional services and recognized over time.
The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.
For arrangements that involve significant production, modification, or customization of the software, or where professional services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
Subscriptions revenue primarily consists of revenue derived from our SaaS arrangements. Other sources of subscription-based revenues are derived from transaction-based fees primarily related to digital government services and payment processing. We also provide electronic document filing solutions (“e-filing”) 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. For transaction-based revenues from digital government services, payments, and e-filing transaction fees, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates, additional revenues for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably, and its realization is probable.
Refer to Note 15 - “Disaggregation of Revenue” for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.
Contract Balances:
Accounts receivable and allowance for losses and sales adjustments
Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when invoicing occurs prior to revenue recognition. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
At September 30, 2022, and December 31, 2021, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $571.0 million and $535.0 million, respectively. We have recorded unbilled receivables of $137.7 million and $140.3 million at September 30, 2022 and December 31, 2021, respectively. Included in unbilled receivables are retention receivables of $7.6 million and $7.7 million at September 30, 2022 and December 31, 2021, respectively, which become payable upon the completion of the contract or completion of our appraisal fieldwork and formal hearings. Unbilled receivables expected to be collected within one year have been included with accounts receivable, current portion in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with accounts receivable, long-term portion in the accompanying condensed consolidated balance sheets.
We maintain allowances for losses and sales adjustments, which losses are recorded against revenue at the time the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a credit loss resulting from the inability of a client to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to, managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or enhancements of our software products. Our allowance for losses and sales adjustments of $14.1 million and $12.1 million at September 30, 2022, and December 31, 2021, respectively, does not include provisions for credit losses. Because we rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In October 2021, the FASB issued ASU 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. Under this "Topic 606 approach," the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. ASU 2021-08 is effective for all public business entities in annual and interim periods starting after December 15, 2022, and early adoption is permitted. An entity that early adopts should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. We early adopted as of January 1, 2022. The adoption of ASU 2021-08 resulted in no adjustments to the fair value of the deferred revenue balances assumed in our US eDirect acquisition, completed on February 8, 2022. See Note 3, “Acquisitions,” for further discussion.
(3) Acquisitions
On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.6 million, consisting of $117.9 million paid in cash and approximately $5.0 million related to indemnity holdbacks, subject to certain post-closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of US eDirect's assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of the acquisition date:
| | | | | | | | |
| Cash | | $ | 6,361 | |
| Accounts receivable | | 1,730 | |
| Other current assets | | 594 | |
| Other noncurrent assets | | 698 | |
| Goodwill and identifiable intangible assets | | 125,643 | |
| Accounts payable | | (1,881) | |
| Accrued expenses | | (357) | |
| Other noncurrent liabilities | | (742) | |
| Deferred revenue | | (688) | |
| Deferred tax liabilities, net | | (8,428) | |
| Total consideration | | $ | 122,930 | |
In connection with this transaction, we acquired total tangible assets of $9.4 million and assumed liabilities of approximately $3.7 million. We recorded goodwill of approximately $91.5 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $34.1 million. The identifiable intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted average period of approximately 13 years. We recorded net deferred tax liabilities of $8.4 million related to the tax effect of our estimated fair value allocations. Since the acquisition date, we recorded adjustments to the preliminary opening balance sheet attributed to decreases in other current assets, other noncurrent assets, identifiable intangible assets, accrued expenses, and deferred revenue, and increases in accounts receivable, accounts payable, and deferred tax liabilities, resulting in a net increase to goodwill of approximately $10.4 million.
The goodwill of approximately $91.5 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings, and cash flow by expanding our addressable market and client base.
The operating results of US eDirect are included with the operating results of the Platform Technologies segment since its date of acquisition. The impact of the US eDirect acquisition on our operating results, assets, and liabilities is not material. For the nine months ended September 30, 2022, we incurred fees of approximately $1.2 million for financial advisory, legal, accounting, due diligence, valuation, and other various services necessary to complete acquisitions. These costs were expensed in 2022 and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
As of September 30, 2022, the purchase price allocation for US eDirect is not final; therefore, certain preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables, and related deferred taxes are subject to change as valuations are finalized. Our balance sheet as of September 30, 2022, reflects the allocation of the purchase price to the net assets acquired based on their estimated fair value at the date of the acquisition. The fair value of the assets and liabilities acquired are based on valuations using Level 3 unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following unaudited pro forma consolidated operating results information has been prepared as if the acquisition of US eDirect had occurred on January 1, 2021, after giving effect to certain adjustments, including amortization of intangibles, transaction costs, and tax effects.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | | $ | 473,191 | | | $ | 464,608 | | | $ | 1,399,205 | | | $ | 1,172,575 | |
| Net income | | 53,233 | | | 43,851 | | | 121,416 | | | 105,950 | |
| Basic earnings per share | | $ | 1.28 | | | $ | 1.07 | | | $ | 2.92 | | | $ | 2.60 | |
| Diluted earnings per share | | $ | 1.26 | | | $ | 1.04 | | | $ | 2.86 | | | $ | 2.51 | |
The pro forma information above does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period.
(4) Debt
The following table summarizes our total outstanding borrowings related to the 2021 Credit Agreement and Convertible Senior Notes:
| | | | | | | | | | | | | | | | | | | | | | | |
| Rate | | Maturity Date | | September 30, 2022 | | December 31, 2021 |
| 2021 Credit Agreement | | | | | | | |
| Revolving credit facility | L + 1.50% | | April 2026 | | $ | — | | | $ | — | |
| Term Loan A-1 | L + 1.50% | | April 2026 | | 380,000 | | | 585,000 | |
| Term Loan A-2 | L + 1.25% | | April 2024 | | 105,000 | | | 170,000 | |
| Convertible Senior Notes due 2026 | 0.25% | | March 2026 | | 600,000 | | | 600,000 | |
| Total borrowings | | | | | 1,085,000 | | | 1,355,000 | |
| Less: unamortized debt discount and debt issuance costs | | | | | (8,808) | | | (13,724) | |
| Total borrowings, net | | | | | 1,076,192 | | | 1,341,276 | |
| | | | | | | |
| Less: current portion of debt | | | | | (30,000) | | | (30,000) | |
| Carrying value | | | | | $ | 1,046,192 | | | $ | 1,311,276 | |
2021 Credit Agreement
In connection with the completion of the acquisition of NIC on April 21, 2021, we, as borrower, entered into a new $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any LIBOR breakage costs. In addition to the required amortization payments on the Term Loan A-1 of 5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility will be required (i) upon the issuance or incurrence of additional debt not otherwise permitted under the 2021 Credit Agreement and (ii) upon the occurrence of certain asset sales and insurance and condemnation recoveries, subject to certain thresholds, baskets, and reinvestment provisions as provided in the 2021 Credit Agreement.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%. The margin in each case is based upon the Company’s total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. The 2021 Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, currently 0.25% per annum, ranging from 0.15% to 0.3% based upon the Company’s total net leverage ratio.
The 2021 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of September 30, 2022, we were in compliance with those covenants.
Convertible Senior Notes due 2026
On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 in the aggregate principal amount of $600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million.
The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased, redeemed, or converted.
Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only upon the occurrence of certain events. Under the terms of the Indenture, the Convertible Senior Notes are convertible into common stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances:
•during any calendar quarter commencing after the calendar quarter ended September 30, 2021, if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
•during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the indenture, for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
•upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a “Fundamental Change” (as defined in the Indenture);
•upon the occurrence of specified corporate events; or
•on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, March 15, 2026.
With certain exceptions, upon a change of control or other fundamental change (both as defined in the Indenture governing the Convertible Senior Notes), the holders of the Convertible Senior Notes may require us to repurchase all or part of the principal amount of the Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of September 30, 2022, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.
From and including September 15, 2025, holders of the Convertible Senior Notes may convert their Convertible Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of common stock, at our election. However, upon conversion of any Convertible Senior Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted.
The initial conversion rate is 2.0266 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which represents an initial conversion price of approximately $493.44 per share of common stock. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Convertible Senior Notes are redeemable, in whole or in part, at our option at any time, and from time to time, on or after March 15, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price of the Notes on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. In addition, calling any Note for redemption constitutes a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
Effective Interest
The weighted average interest rates for the borrowings under the 2021 Credit Agreement and Convertible Senior Notes due 2026 were 4.56% and 0.25%, as of September 30, 2022, respectively. During the nine months ended September 30, 2022, the effective interest rates for our borrowings were 3.28% and 0.54% for the 2021 Credit Agreement and the Convertible Senior Notes, respectively. The following sets forth the interest expense recognized related to the borrowings under the 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Contractual interest expense - Revolving Credit Facility | $ | (320) | | | $ | (391) | | | $ | (948) | | | $ | (925) | |
| Contractual interest expense - Term Loans | (5,234) | | | (3,492) | | | (12,603) | | | (6,153) | |
| Contractual interest expense - Convertible Senior Notes | (375) | | | (379) | | | (1,125) | | | (838) | |
| Amortization of debt discount and debt issuance costs | (3,329) | | | (1,134) | | | (5,600) | | | (2,176) | |
| Interest expense and amortization of debt issuance costs - terminated 2019 Credit Agreement and Senior Unsecured Bridge loan facility | — | | | — | | | — | | | (8,219) | |
| Total | $ | (9,258) | | | $ | (5,396) | | | $ | (20,276) | | | $ | (18,311) | |
As of September 30, 2022, we had $600 million in outstanding principal for the Convertible Senior Notes due 2026. Under our 2021 Credit Agreement, we had $485 million in outstanding principal for the Term Loans, no outstanding borrowings under the 2021 Revolving Credit Facility, and an available borrowing capacity of $500 million as of September 30, 2022. As of September 30, 2022, we had one outstanding standalone letter of credit totaling $1.5 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of 2026. For the nine months ended September 30, 2022, we repaid $270.0 million of the Term Loans under the 2021 Credit Agreement.
In the nine months ended September 30, 2022, and 2021, respectively, we made interest payments of $14.7 million and $14.2 million, associated with the 2021 Credit Agreement and the Convertible Senior Notes, including payment of a $6.4 million commitment fee related to the senior unsecured bridge loan facility paid in 2021.
(5) Financial Instruments
The following table presents our financial instruments:
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Cash and cash equivalents | | $ | 185,927 | | | $ | 309,171 | |
| Held-to-maturity investments | | — | | | 98,653 | |
| Available-for-sale investments | | 61,987 | | | — | |
| Equity investments | | 10,000 | | | 10,000 | |
| Total | | $ | 257,914 | | | $ | 417,824 | |
Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we determine fair value through quoted market prices.
Our available-for-sale securities were historically classified as held-to-maturity. During the fourth quarter of 2021, management determined that our investment portfolio would be transferred from held-to-maturity to available-for-sale, in order to have the flexibility to buy and sell investments and maximize cash liquidity for potential acquisitions or for debt repayments. Accordingly, our investment portfolio is now classified as available-for-sale as of September 30, 2022. Our available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities with maturity dates through 2027. These investments are presented at fair value and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. Unrealized gains or losses associated with the investments are included in accumulated other comprehensive loss, net of tax in the accompanying condensed consolidated balance sheets and statements of comprehensive income. For our available-for-sale investments, we do not have the intent to sell, nor is it more likely than not that we would be required to sell before recovery of their cost basis.
As of September 30, 2022, we have an accrued interest receivable balance of approximately $259,000 which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period or at the time of sale of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the three and nine months ended September 30, 2022, we have recorded no credit losses for accrued interest receivables. Interest income and amortization of discounts and premiums are included in other income, net in the accompanying condensed consolidated statements of income.
The following table presents the components of our available-for-sale investments:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Amortized cost | $ | 63,122 | | | $ | — | |
| Unrealized gains | 50 | | | — | |
| Unrealized losses | (1,185) | | | — | |
| Estimated fair value | $ | 61,987 | | | $ | — | |
As of September 30, 2022, we have $39.4 million of available-for-sale debt securities with contractual maturities of one year or less and $22.6 million with contractual maturities great than one year.
The following table presents the activity on our available-for-sale investments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Proceeds from sales and maturities | $ | 14,457 | | | $ | 23,168 | | | $ | 55,052 | | | $ | 114,563 | |
| Realized losses on sales, net of tax | (72) | | | — | | | (79) | | | — | |
Our equity investments consist of an 18% interest in BFTR, LLC., a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is accounted for under the equity method because we do not have the ability to exercise significant influence over the investee; and as the securities do not have readily determinable fair values, our investment is carried at cost less any impairment write-downs.
(6) Other Comprehensive Income (Loss)
The following tables present the changes in the balances of accumulated other comprehensive loss, net of tax by component:
| | | | | | | | | | | | | | | | | |
| Unrealized Loss On Available-for-Sales Securities | | Other | | Accumulated Other Comprehensive Loss |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance as of June 30, 2022 | $ | (809) | | | $ | — | | | $ | (809) | |
| Other comprehensive loss before reclassifications | (109) | | | — | | | (109) | |
| Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity | — | | | — | | | — | |
| Reclassification adjustment for net loss on sale of available for sale securities, included in net income | 72 | | | — | | | 72 | |
| Other comprehensive loss | (37) | | | — | | | (37) | |
| Balance as of September 30, 2022 | $ | (846) | | | $ | — | | | $ | (846) | |
| | | | | | | | | | | | | | | | | |
| Unrealized Loss On Available-for-Sales Securities | | Other | | Accumulated Other Comprehensive Loss |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance as of December 31, 2021 | $ | (46) | | | $ | — | | | $ | (46) | |
| Other comprehensive loss before reclassifications | (852) | | | — | | | (852) | |
| Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity | (27) | | | — | | | (27) | |
| Reclassification adjustment for net loss on sale of available for sale securities, included in net income | 79 | | | — | | | 79 | |
| Other comprehensive loss | (800) | | | — | | | (800) | |
| Balance as of September 30, 2022 | $ | (846) | | | $ | — | | | $ | (846) | |
(7) Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:
•Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.
•Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.
•Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.
The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.
The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Available-for-sale investments | $ | — | | | $ | 61,987 | | | $ | — | | | $ | 61,987 | |
| Equity investments | — | | | — | | | 10,000 | | | 10,000 | |
| 2021 Credit Agreement | | | | | | | |
| Revolving Credit Facility | — | | | — | | | — | | | — | |
| Term Loan A-1 | — | | | 377,611 | | | — | | | 377,611 | |
| Term Loan A-2 | — | | | 104,527 | | | — | | | 104,527 | |
| Convertible Senior Notes due 2026 | — | | | 574,032 | | | — | | | 574,032 | |
Assets that are Measured at Fair Value on a Recurring Basis
Cash and cash equivalents, accounts receivable, accounts payable, short-term obligations, and certain other assets at cost approximate fair value because of the short maturity of these instruments.
As of September 30, 2022, we have $62.0 million in available-for-sale investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates through 2027. The fair values of these securities are considered Level 2 as they are based on inputs from quoted prices in markets that are not active or other observable market data.
Assets that are Measured at Fair Value on a Nonrecurring Basis
As of September 30, 2022, we have an 18% interest in BFTR, LLC. Periodically, our equity method investments are assessed for impairment. We do not reassess the fair value of equity method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes in circumstances have occurred during the period that require reassessment. There has been no impairment of our equity method investment for the periods presented. This investment is included in other assets in the accompanying condensed consolidated balance sheets.
We assess goodwill for impairment annually on October 1. In addition, we review goodwill, property and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. We identified no indicators of impairment to long-lived and other assets and therefore, no impairment was recorded as of and for the three and nine months ended September 30, 2022.
Financial instruments measured at fair value only for disclosure purposes
The fair value of our borrowing under our 2021 Credit Agreement would approximate book value as of September 30, 2022, because our interest rates reset approximately every 30 days or less.
The carrying amount of the Revolving Credit Facility and Term Loans is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is included in the accompanying condensed consolidated statements of income.
The fair value of our Convertible Senior Notes due 2026 is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. See Note 4, “Debt,” for further discussion.
The carrying amount of the Convertible Senior Notes is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in the accompanying condensed consolidated statements of income.
The following table presents the fair value and carrying value, net, of the 2021 Credit Agreement and our Convertible Notes due 2026):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value at | | Carrying Value at |
| September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
| 2021 Credit Agreement | | | | | | | |
| Revolving Credit Facility | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Term Loan A-1 | 377,611 | | | 580,515 | | | 377,611 | | | 580,515 | |
| Term Loan A-2 | 104,527 | | | 167,996 | | | 104,527 | | | 167,996 | |
| Convertible Notes due 2026 | 574,032 | | | 736,662 | | | 594,054 | | | 592,765 | |
| | $ | 1,056,170 | | | $ | 1,485,173 | | | $ | 1,076,192 | | | $ | 1,341,276 | |
(8) Income Tax Provision
We had an effective income tax rate of negative 2.8% and 13.5% for the three and nine months ended September 30, 2022, respectively, compared to 13.8% and 7.7% for the three and nine months ended September 30, 2021, respectively. The changes in the effective tax rate for the three and nine months ended September 30, 2022, as compared to the same period in 2021, was principally driven by an increase in research tax credit benefits, entirely offset for the three month period and somewhat offset for the nine month period by a corresponding liability for uncertain tax positions and the decrease in the excess tax benefits related to stock incentive awards.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards and the tax benefits of research tax credits, offset by an increase in liabilities for uncertain tax positions related to research tax credits, state income taxes, and non-deductible expenses. The excess tax benefits related to stock incentive awards realized were $1.3 million and $6.0 million for the three and nine months ended September 30, 2022, respectively, as compared to $6.3 million and $21.5 million for the three and nine months ended September 30, 2021, respectively. The tax benefits of research tax credits were $21.7 million and $24.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $1.4 million and $3.3 million for the three and nine months ended September 30, 2021, respectively. The changes in net liabilities for uncertain tax positions were $6.1 million and $6.9 million for the three and nine months ended September 30, 2022, respectively, as compared to negative $1.2 million for both the three and nine months ended September 30, 2021. Excluding the excess tax benefits related to stock incentive awards, research tax credit benefits, and net liabilities for uncertain tax positions, the effective tax rate was 29.8% and 28.8% for the three and nine months ended September 30, 2022, respectively, compared to 31.1% and 30.2% for the three and nine months ended September 30, 2021, respectively.
We made tax payments of $35.3 million and $1.7 million in the nine months ended September 30, 2022, and 2021, respectively.
(9) Shareholders’ Equity
The following table details activity in our common stock (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| Purchases of treasury shares | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | (32) | | | $ | (12,975) | |
| Stock option exercises | | 39 | | | 4,990 | | | 103 | | | 17,045 | | | 140 | | | 21,213 | | | 313 | | | 46,433 | |
| Employee stock plan purchases | | 16 | | | 4,458 | | | 9 | | | 3,557 | | | 36 | | | 12,614 | | | 26 | | | 9,757 | |
| Restricted stock units vested, net of withheld shares upon award settlement | | 4 | | | (585) | | | 5 | | | (1,451) | | | 132 | | | (20,915) | | | 104 | | | (17,461) | |
As of September 30, 2022, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock.
(10) Share-Based Compensation
The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to ASC 718, Stock Compensation:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Subscriptions, professional services and maintenance | | $ | 7,181 | | | $ | 6,303 | | | $ | 20,820 | | | $ | 17,212 | |
| Selling, general and administrative expenses | | 19,731 | | | 23,158 | | | 57,171 | | | 63,148 | |
| Total share-based compensation expense | | $ | 26,912 | | | $ | 29,461 | | | $ | 77,991 | | | $ | 80,360 | |
(11) Earnings Per Share
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Numerator for basic and diluted earnings per share: | | | | | | | |
| Net income | $ | 53,233 | | | $ | 44,170 | | | $ | 133,163 | | | $ | 106,676 | |
| Denominator: | | | | | | | |
| Weighted-average basic common shares outstanding | 41,600 | | | 40,888 | | | 41,523 | | | 40,805 | |
| Assumed conversion of dilutive securities: | | | | | | | |
| Stock awards | 807 | | | 1,398 | | | 902 | | | 1,391 | |
| Convertible Senior Notes | — | | | — | | | — | | | — | |
Denominator for diluted earnings per share - Adjusted weighted-average shares | 42,407 | | | 42,286 | | | 42,425 | | | 42,196 | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 1.28 | | | $ | 1.08 | | | $ | 3.21 | | | $ | 2.61 | |
| Diluted | $ | 1.26 | | | $ | 1.04 | | | $ | 3.14 | | | $ | 2.53 | |
For the three and nine months ended September 30, 2022, and 2021, stock awards, representing the right to purchase common stock of approximately 361,000 shares and 354,000 shares and 109,000 shares and 147,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
We have used the if-converted method for calculating any potential dilutive effect of the Convertible Senior Notes due 2026 on our diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period being presented and interest expense, net of tax, recorded in connection with the Convertible Senior Notes is not added back to the numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million remaining resulting common shares related to the Notes are not included in the dilutive weighted-average common shares outstanding calculation for the three and nine months ended September 30, 2022, and 2021, as their effect would be antidilutive given none of the conversion features have been triggered. See Note 4, "Debt" for discussion on the conversion features related to the Convertible Senior Notes.
(12) Leases
We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements with original maturities between one to 12 years from the execution date. Some of these leases include options to extend for up to six years. We have no finance leases and no related party lease agreements as of September 30, 2022. Right-of-use lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheets.
The components of operating lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lease Costs | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease cost | | $ | 4,601 | | | $ | 3,291 | | | $ | 10,609 | | | $ | 7,770 | |
| Short-term lease cost | | 578 | | | 547 | | | 1,572 | | | 1,759 | |
| Variable lease cost | | 276 | | | 378 | | | 850 | | | 1,305 | |
| Net lease cost | | $ | 5,455 | | | $ | 4,216 | | | $ | 13,031 | | | $ | 10,834 | |
Supplemental information related to leases is as follows:
| | | | | | | | | | | | | | |
| Other Information | | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Cash flows: | | | | |
| Cash amounts paid included in the measurement of lease liabilities: | | | | |
| Operating cash outflows from operating leases | | $ | 10,247 | | | $ | 7,856 | |
| | | | |
| Right-of-use assets obtained in exchange for lease obligations (non-cash): | | | | |
| Operating leases | | $ | 23,821 | | | $ | 17,633 | |
| | | | |
| Lease term and discount rate: | | | | |
| Weighted average remaining lease term (years) | | 7.3 | | 5.9 |
| Weighted average discount rate | | 1.57 | % | | 1.91 | % |
Rental Income from third parties
We own office buildings in Bangor, Falmouth, and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2022 and 2027, and some have options to extend the lease for up to 10 years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.
Rental income from third-party tenants for the three and nine months ended September 30, 2022 totaled $456,000 and $1.2 million, respectively, and for the three and nine months ended September 30, 2021 totaled $301,000 and $891,000, respectively. Rental income is included in hardware and other revenue in the condensed consolidated statements of income. As of September 30, 2022, future minimum operating rental income based on contractual agreements is as follows:
| | | | | | | | |
| Year ending December 31, | | Amount |
| 2022 (Remaining) | | $ | 458 | |
| 2023 | | 1,858 | |
| 2024 | | 1,898 | |
| 2025 | | 1,363 | |
| 2026 | | 408 | |
| Thereafter | | 131 | |
| Total | | $ | 6,116 | |
(13) Commitments and Contingencies
Litigation
During the first quarter 2022, the Company received a notice of termination for convenience for professional services under a contractual arrangement with the state client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience. As of September 30, the total exposure in our financial statements included the remaining balance of net billed accounts receivable for licenses and services rendered under the contract of approximately $12 million.
The client was unresponsive to company outreach for several months. On August 23, 2022, the Company filed a lawsuit to enforce our rights and remedies under the applicable contractual arrangement. The client has not filed responsive pleadings and no other significant activity has occurred in the lawsuit. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We are unable to estimate the probability of a favorable or unfavorable outcome with respect to the dispute or estimate the amount of potential loss, if any, related to this matter. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.
(14) Segment and Related Information
We provide integrated information management solutions and services for the public sector.
We provide our software systems and related professional services and appraisal services through seven business units, which focus on the following products:
•financial management, education and planning, regulatory, and maintenance software solutions;
•financial management, municipal courts, planning, regulatory, and maintenance software solutions;
•courts and justice and public safety software solutions;
•data and insights solutions;
•appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services;
•development platform solutions including case management and business process management; and
•NIC digital government and payments solutions.
In accordance with ASC 280-10, Segment Reporting, we report our results in 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: financial management and education; courts and justice; public safety; planning, regulatory and maintenance; data and insights; appraisal and tax software solutions; land and vital records management software solutions; and property appraisal services. The Platform Technologies ("PT") reportable segment provides public sector entities with software solutions to perform transaction processing, streamline data processing, and improve operations and workflows. The business units presented in the PT reportable segment are the following: NIC digital government and payments solutions and development platform solutions.
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense, and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference.
As of January 1, 2022, the appraisal and tax software solutions, land and vital records management software solutions, and property appraisal service business unit, which was previously reported in the Appraisal & Tax ("A&T") reportable segment, was moved to the ES reportable segment and the NIC digital government and payments solutions and development platform solutions moved to the PT reportable segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. As a result of the changes in our reportable segments, the former A&T and NIC reportable segments are no longer considered separate segments. Prior year amounts for the ES and PT reportable segments have been adjusted to reflect the segment change.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, 2022 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Revenues | | | | | | | | |
| Software licenses and royalties | | $ | 17,165 | | | $ | 3,104 | | | $ | — | | | $ | 20,269 | |
| Subscriptions | | 135,337 | | | 119,009 | | | — | | | 254,346 | |
| Professional services | | 42,441 | | | 20,739 | | | — | | | 63,180 | |
| Maintenance | | 111,486 | | | 5,852 | | | — | | | 117,338 | |
| Appraisal services | | 8,638 | | | — | | | — | | | 8,638 | |
| Hardware and other | | 7,271 | | | — | | | 2,149 | | | 9,420 | |
| Intercompany | | 5,541 | | | — | | | (5,541) | | | — | |
| Total revenues | | $ | 327,879 | | | $ | 148,704 | | | $ | (3,392) | | | $ | 473,191 | |
| Segment operating income (loss) | | $ | 110,693 | | | $ | 33,466 | | | $ | (54,683) | | | $ | 89,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, 2021 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Revenues | | | | | | | | |
| Software licenses and royalties | | $ | 21,201 | | | $ | 1,472 | | | $ | — | | | $ | 22,673 | |
| Subscriptions | | 106,841 | | | 146,101 | | | — | | | 252,942 | |
| Professional services | | 41,169 | | | 13,455 | | | — | | | 54,624 | |
| Maintenance | | 109,480 | | | 8,353 | | | — | | | 117,833 | |
| Appraisal services | | 7,146 | | | — | | | — | | | 7,146 | |
| Hardware and other | | 4,556 | | | 11 | | | 88 | | | 4,655 | |
| Intercompany | | 5,142 | | | — | | | (5,142) | | | — | |
| Total revenues | | $ | 295,535 | | | $ | 169,392 | | | $ | (5,054) | | | $ | 459,873 | |
| Segment operating income (loss) | | $ | 102,602 | | | $ | 40,182 | | | $ | (59,521) | | | $ | 83,263 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, 2022 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Revenues | | | | | | | | |
| Software licenses and royalties | | $ | 47,893 | | | $ | 3,891 | | | $ | — | | | $ | 51,784 | |
| Subscriptions | | 384,346 | | | 371,258 | | | — | | | 755,604 | |
| Professional services | | 126,931 | | | 60,871 | | | — | | | 187,802 | |
| Maintenance | | 332,941 | | | 18,241 | | | — | | | 351,182 | |
| Appraisal services | | 25,968 | | | — | | | — | | | 25,968 | |
| Hardware and other | | 19,884 | | | — | | | 5,759 | | | 25,643 | |
| Intercompany | | 16,472 | | | — | | | (16,472) | | | — | |
| Total revenues | | $ | 954,435 | | | $ | 454,261 | | | $ | (10,713) | | | $ | 1,397,983 | |
| Segment operating income (loss) | | $ | 319,312 | | | $ | 100,500 | | | $ | (162,133) | | | $ | 257,679 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, 2021 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Revenues | | | | | | | | |
| Software licenses and royalties | | $ | 51,812 | | | $ | 3,398 | | | $ | — | | | $ | 55,210 | |
| Subscriptions | | 308,787 | | | 246,192 | | | — | | | 554,979 | |
| Professional services | | 126,064 | | | 29,537 | | | — | | | 155,601 | |
| Maintenance | | 328,764 | | | 27,802 | | | — | | | 356,566 | |
| Appraisal services | | 19,876 | | | — | | | — | | | 19,876 | |
| Hardware and other | | 13,462 | | | 29 | | | 3,027 | | | 16,518 | |
| Intercompany | | 16,039 | | | — | | | (16,039) | | | — | |
| Total revenues | | $ | 864,804 | | | $ | 306,958 | | | $ | (13,012) | | | $ | 1,158,750 | |
| Segment operating income (loss) | | $ | 301,522 | | | $ | 69,426 | | | $ | (174,567) | | | $ | 196,381 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Reconciliation of reportable segment operating income to the Company's consolidated totals: | | 2022 | | 2021 | | 2022 | | 2021 |
| Total segment operating income | | $ | 89,476 | | | $ | 83,263 | | | $ | 257,679 | | | $ | 196,381 | |
| Amortization of acquired software | | (13,622) | | | (12,896) | | | (40,882) | | | (32,683) | |
| Amortization of customer and trade name intangibles | | (14,941) | | | (14,183) | | | (43,259) | | | (31,015) | |
| Interest expense | | (9,258) | | | (5,396) | | | (20,276) | | | (18,311) | |
| Other income, net | | 131 | | | 445 | | | 712 | | | 1,249 | |
| Income before income taxes | | $ | 51,786 | | | $ | 51,233 | | | $ | 153,974 | | | $ | 115,621 | |
(15) Disaggregation of Revenue
The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenues and cash flows.
Timing of Revenue Recognition
Timing of revenue recognition by revenue category during the period is as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, 2022 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
| Revenues | | | | | | |
| Software licenses and royalties | | $ | 19,068 | | | $ | 1,201 | | | $ | 20,269 | |
| Subscriptions | | — | | | 254,346 | | | 254,346 | |
| Professional services | | — | | | 63,180 | | | 63,180 | |
| Maintenance | | — | | | 117,338 | | | 117,338 | |
| Appraisal services | | — | | | 8,638 | | | 8,638 | |
| Hardware and other | | 9,420 | | | — | | | 9,420 | |
| Total | | $ | 28,488 | | | $ | 444,703 | | | $ | 473,191 | |
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, 2021 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
| Revenues | | | | | | |
| Software licenses and royalties | | $ | 19,170 | | | $ | 3,503 | | | $ | 22,673 | |
| Subscriptions | | — | | | 252,942 | | | 252,942 | |
| Professional services | | — | | | 54,624 | | | 54,624 | |
| Maintenance | | — | | | 117,833 | | | 117,833 | |
| Appraisal services | | — | | | 7,146 | | | 7,146 | |
| Hardware and other | | 4,655 | | | — | | | 4,655 | |
| Total | | $ | 23,825 | | | $ | 436,048 | | | $ | 459,873 | |
| | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, 2022 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
| Revenues | | | | | | |
| Software licenses and royalties | | $ | 45,820 | | | $ | 5,964 | | | $ | 51,784 | |
| Subscriptions | | — | | | 755,604 | | | 755,604 | |
| Professional services | | — | | | 187,802 | | | 187,802 | |
| Maintenance | | — | | | 351,182 | | | 351,182 | |
| Appraisal services | | — | | | 25,968 | | | 25,968 | |
| Hardware and other | | 25,643 | | | — | | | 25,643 | |
| Total | | $ | 71,463 | | | $ | 1,326,520 | | | $ | 1,397,983 | |
| | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, 2021 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
| Revenues | | | | | | |
| Software licenses and royalties | | $ | 45,983 | | | $ | 9,227 | | | $ | 55,210 | |
| Subscriptions | | — | | | 554,979 | | | 554,979 | |
| Professional services | | — | | | 155,601 | | | 155,601 | |
| Maintenance | | — | | | 356,566 | | | 356,566 | |
| Appraisal services | | — | | | 19,876 | | | 19,876 | |
| Hardware and other | | 16,518 | | | — | | | 16,518 | |
| Total | | $ | 62,501 | | | $ | 1,096,249 | | | $ | 1,158,750 | |
Recurring Revenues
The majority of our revenue is comprised of revenues from maintenance and subscriptions, which we consider to be recurring revenues. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenues. That maintenance and support is generally provided under annual, or in some cases, multi-year contracts. Subscriptions revenue primarily consists of revenues derived from our SaaS arrangements and transaction-based fees, which relate to digital government services, e-filing transactions, and payment processing. Total subscriptions revenue derived from transaction-based fees included in total recurring revenues was $148.9 million and $454.3 million for the three and nine months ended September 30, 2022, respectively, and $171.2 million and $317.7 million for the three and nine months ended September 30, 2021, respectively. The contract terms for subscription arrangements range from one to 10 years but are typically for initial periods of three to five years. We consider all other revenue categories to be non-recurring revenues.
Recurring revenues and non-recurring revenues recognized during the period are as follows:
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| For the three months ended September 30, 2022 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Recurring revenues | | $ | 246,823 | | | $ | 124,861 | | | $ | — | | | $ | 371,684 | |
| Non-recurring revenues | | 75,515 | | | 23,843 | | | 2,149 | | | 101,507 | |
| Intercompany | | 5,541 | | | — | | | (5,541) | | | — | |
| Total revenues | | $ | 327,879 | | | $ | 148,704 | | | $ | (3,392) | | | $ | 473,191 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, 2021 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Recurring revenues | | $ | 216,321 | | | $ | 154,454 | | | $ | — | | | $ | 370,775 | |
| Non-recurring revenues | | 74,072 | | | 14,938 | | | 88 | | | 89,098 | |
| Intercompany | | 5,142 | | | — | | | (5,142) | | | — | |
| Total revenues | | $ | 295,535 | | | $ | 169,392 | | | $ | (5,054) | | | $ | 459,873 | |
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| For the nine months ended September 30, 2022 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Recurring revenues | | $ | 717,287 | | | $ | 389,499 | | | $ | — | | | $ | 1,106,786 | |
| Non-recurring revenues | | 220,676 | | | 64,762 | | | 5,759 | | | 291,197 | |
| Intercompany | | 16,472 | | | — | | | (16,472) | | | — | |
| Total revenues | | $ | 954,435 | | | $ | 454,261 | | | $ | (10,713) | | | $ | 1,397,983 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, 2021 | | Enterprise
Software | | Platform Technologies | | Corporate | | Totals |
| Recurring revenues | | $ | 637,551 | | | $ | 273,994 | | | $ | — | | | $ | 911,545 | |
| Non-recurring revenues | | 211,214 | | | 32,964 | | | 3,027 | | | 247,205 | |
| Intercompany | | 16,039 | | | — | | | (16,039) | | | — | |
| Total revenues | | $ | 864,804 | | | $ | 306,958 | | | $ | (13,012) | | | $ | 1,158,750 | |
(16) Deferred Revenue and Performance Obligations
Total deferred revenue, including long-term, by segment is as follows:
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Enterprise Software | | $ | 497,511 | | | $ | 479,048 | |
| Platform Technologies | | 31,329 | | | 29,705 | |
| Corporate | | 2,866 | | | 1,814 | |
| Totals | | $ | 531,706 | | | $ | 510,567 | |
Changes in total deferred revenue, including long-term, were as follows:
| | | | | | | | |
| | Nine months ended September 30, 2022 |
| Balance as of December 31, 2021 | | $ | 510,567 | |
| Deferral of revenue | | 940,919 | |
| Recognition of deferred revenue | | (919,780) | |
| Balance as of September 30, 2022 | | $ | 531,706 | |
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized (“backlog”), which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of September 30, 2022, was $1.88 billion, of which we expect to recognize approximately 46% as revenue over the next 12 months and the remainder thereafter.
(17) Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be generally three to seven years. Deferred commissions were $42.6 million and $38.1 million as of September 30, 2022, and December 31, 2021, respectively. Amortization expense was $4.1 million and $11.2 million for the three and nine months ended September 30, 2022, respectively, and $3.5 million and $9.6 million for the three and nine months ended September 30, 2021, respectively. There were no indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
(18) Subsequent Events
On October 26, 2022, we signed a definitive agreement to acquire a payments solution provider with a purchase price of approximately $70 million, which is expected to close in the fourth quarter of 2022.
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