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, 2024, and 2023, and our Cash Flow discussion for the year ended December 2024, 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, 2024, as filed with the SEC on February 19, 2025.
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, including local, state and federal government agencies, that could negatively impact information technology spending; (2) disruption to our business and harm to our competitive position resulting from cyber-attacks, evolving use of artificial intelligence (“AI”), security vulnerabilities and software updates, or changes in our ability to access third-party software and services; (3) our ability to protect client information from security breaches or misuse through AI and to 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 actively monitor developments in AI regulation and ethical standards as we expect that future changes in the regulatory landscape may affect our product development timelines, compliance costs, and market opportunities related to AI; (7) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (8) general economic, political and market conditions, including inflation and changes in interest rates; (9) technological and market risks associated with the development of new technologies, products or services or of new versions of existing or acquired products or services; (10) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (11) the ability to attract and retain qualified personnel and dealing with rising labor costs, the loss or retirement of key members of management or other key personnel; and (12) costs of compliance and any failure to comply with government and stock exchange regulations. 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 information technology (“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 that the public sector client performs. Operating segments 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.
The Chief Operating Decision Maker (“CODM”) uses segment operating income or loss to assess performance and to allocate resources (including employees, property, and financial or capital resources) for each segment, predominantly in the annual budget and forecasting process. During the fiscal periods presented, we had no significant transactions between reportable segments. Corporate unallocated amounts are comprised of non-cash amortization of intangible assets associated with acquisitions, depreciation associated with unallocated property and equipment assets, compensation costs for the executive management team and certain shared services staff, and share-based compensation expense for the entire company. Corporate unallocated amounts also include incidental revenues and expenses related to a company-wide user conference and rental income. The accounting policies of the reportable segments are the same as those described in Note 1, “Summary of Significant Accounting Policies
See Note 2, “Segment and Related Information,” in the notes to the financial statements for additional information.
Recent Acquisitions
On December 2, 2025, we acquired Edu.Link, Inc. (“Edulink”). Edulink is a SaaS company focused on educator evaluation, performance management, professional development, and compliance tracking geared specifically to the unique needs of K-12 schools. The total cash purchase price, net of cash acquired of $716,000, was approximately $37.3 million, subject to certain post-closing adjustments, including holdbacks of $2.5 million.
On November 19, 2025, we acquired CloudGavel, LLC (“CG”). CG is a SaaS company specializing in cloud electronic warrant solutions that allows for real time interaction for judges and law enforcement personnel. The total cash purchase price, net of cash acquired of $147,000, was approximately $16.6 million, subject to certain post-closing adjustments, including holdbacks of $2.9 million.
On July 28, 2025, we acquired Emergency Networking, Inc. (“EN”). EN is a SaaS company specializing in cloud-native software for fire departments and emergency medical services agencies. The total cash purchase price, net of cash acquired of $497,000, was approximately $19.4 million, subject to certain post-closing adjustments, including holdbacks of $2.5 million.
On January 31, 2025, we acquired MyGov, LLC (“MyGov”), a provider of SaaS platform solutions for community development. The total cash purchase price, net of cash acquired of $215,000, was approximately $18.2 million.
The actual operating results of Edulink,CG, EN, and MyGov, from their respective dates of acquisition, are included in the operating results of the ES segment.
We did not complete any acquisitions during the twelve months ended December 31, 2024.
2025 Operating Results
For the twelve months ended December 31, 2025, total revenues increased 9.1% compared to the prior period, primarily due to an increase in subscription revenue.
Subscriptions revenue grew 18.1% for the twelve months ended December 31, 2025, 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 87% of our revenues in 2025. 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 2025, based on our number of clients, attrition was approximately 2%.
Annualized Recurring Revenues (“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 into the stability of our maintenance and subscription revenues to be recognized within the year.
Subscription 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 $2.06 billion and $1.86 billion for the periods ending December 31, 2025, and 2024, respectively. ARR increased approximately 11% 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 fee arrangements.
Cost of Revenues and Gross Margins – Our primary cost components are hosting costs, merchant fees, 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, 2025, our total employee count included in cost of revenues declined to 5,073 from 5,250 at December 31, 2024.
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 S&M 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 and share-based compensation expense 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. 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. As of December 31, 2025, our total employee count included in R&D expense increased to 1,368 from 870 at December 31, 2024.
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 $2.06 billion and $1.86 billion for the periods ending December 31, 2025, and 2024, respectively, an increase of approximately 11% 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.
CRITICAL ACCOUNTING 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. 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. The discussion below supplements Note 1, “Summary of Significant Accounting Policies,” within the notes to the consolidated financial statements.
Revenue Recognition. Our software arrangements with clients contain multiple performance obligations that include software license deliveries, installation, training, consulting, software modification and customization to meet specific client needs; hosting; and post-contract client support (“PCS”). For these contracts, 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.
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, we use all available information.
For tangible and identifiable intangible assets acquired in a business combination, management estimates the fair value of assets acquired, along with their useful lives, and liabilities assumed based on factors including 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.
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. Qualitative factors include general economic conditions, market conditions, actual or expected financial performance, a sustained decrease in share price or other changes in the reporting units that are judgmentally weighted. Quantitative factors may include estimates of future revenues, operating costs, and capital costs, growth rates, and discount rates reflecting the judgmental assessment of risk in those assumptions.
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, measured by comparison of the carrying amount to estimated undiscounted future cash flows. 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 or changes in estimates could have a significant impact on the recoverability of goodwill or other intangible assets.
RECENT ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2025, the FASB issued ASU 2025-05 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This guidance provides a practical expedient available to all entities to simplify the estimation of the expected credit losses for current accounts receivables and current contract assets arising from revenue contracts under ASC 606. It is effective for annual reporting periods beginning after December 15, 2025, and interim periods within those annual reporting periods, with early adoption permitted. As of December 31, 2025, we adopted this standard. Due to most of our clients being domestic governmental entities, we rarely incur a credit loss resulting from the inability of a client to make required payment; as such, this standard did not 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. As of January 1, 2025, we early adopted this standard, which did not 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. As of December 31, 2025, we adopted this standard and it has been applied prospectively. This change did not have a significant impact on the Company’s financial statements and disclosures. The Company’s income tax disclosures have been updated to comply with the new requirements, including enhanced disaggregation in the rate reconciliation and additional information regarding income taxes paid by jurisdiction. See Note 13, “Income Tax,” for further discussion.
RECENTLY PRONOUNCED ACCOUNTING STANDARDS
In September 2025, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2025-06 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. This update removes the prescriptive software development “project stages” and requires capitalization of software costs once (1) management authorizes and commits funding and (2) completion and use are probable. Entities must evaluate significant development uncertainty related to technological innovations or performance requirements. The amendments also require Subtopic 360-10 disclosures for all capitalized internal-use software costs and clarify that intangible asset disclosures under Subtopic 350-30 are not required. The standard is effective for annual periods beginning after December 15, 2027, and interim periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of this guidance 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.
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, 2025 and 2024:
Percent of Total Revenues
Years Ended December 31,
Revenues:
Subscriptions
Maintenance
Professional services
Software licenses and royalties
Hardware and other
Total revenues
Cost of revenues:
Subscriptions, maintenance, and professional services
Software licenses, royalties, and amortization of acquired software
Amortization of software development
Hardware and other
Sales and marketing expense
General and administrative expense
Research and development expense
Amortization of other intangibles
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax provision
Net income
2025 Compared to 2024
Revenues
Subscriptions
The following table sets forth a comparison of our subscriptions revenue for the listed years ended December 31 ($ in thousands):
Change
Total subscriptions revenue
Subscriptions revenue consists of revenues derived from our SaaS arrangements and transaction-based fees primarily related to digital government services and payment processing.
SaaS fees
The following table sets forth a comparison of our subscriptions revenue derived from SaaS fees for the listed years ended December 31 ($ in thousands):
Change
Total SaaS fees revenue
For the twelve months ended December 31, 2025, SaaS fees increased compared to the prior period. The growth is primarily attributable to new SaaS clients as well as existing on-premises clients who converted to our SaaS model. Since December 31, 2024, we have added 612 new SaaS clients, while 488 existing on-premises clients have converted to our SaaS offerings. Our new software contract mix for the twelve months ended December 31, 2025, was 11% perpetual software license arrangements and approximately 89% subscription-based arrangements, compared to approximately 12% perpetual software license arrangements and approximately 88% subscription-based arrangements for the twelve months ended December 31, 2024.
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):
Change
Total transaction-based fees revenue
For the twelve months ended December 31, 2025, 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, and price increases by certain third-party processing partners from whom we receive a share of revenues.
Maintenance
The following table sets forth a comparison of our maintenance revenue for the listed years ended December 31 ($ in thousands):
Change
Total maintenance revenue
We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue decreased 4% compared to the prior period primarily due to the impact of 488 clients converting from on-premises license arrangements to SaaS, partially offset by maintenance price increases.
Professional services
The following table sets forth a comparison of our professional services revenue for the listed years ended December 31 ($ in thousands):
Change
Total professional services revenue
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.
Professional services revenue decreased 8% compared to the prior period. The decrease is primarily due to loss reserves related to agencies within two state governments. The remainder of the decrease in professional services revenues compared to the prior period is related to an intentional reduction in custom development work as well as efficiencies in the delivery of professional services.
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):
Change
Total software licenses and royalties revenue
Software licenses and royalties revenue decreased 51% compared to the prior period primarily due to a loss reserve for remaining exposure related to a contract dispute previously disclosed. The remainder of the decline is due to the ongoing shift in the mix of new software contracts toward more SaaS offerings. Refer to the SaaS revenue section for further details on our revenue mix shift.
We expect that software license revenues will continue to decline as we shift our model away from perpetual software license to SaaS.
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):
Change
Subscriptions, maintenance, and professional services
Software licenses and royalties
Amortization of software development
Amortization of acquired software
Hardware and other
Total cost of revenues
Subscriptions, maintenance, and professional services.
The following table sets forth a comparison of our costs of subscriptions, maintenance, and professional services for the listed years ended December 31 ($ in thousands):
Change
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, support activities, 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 2025, the cost of subscriptions, maintenance and professional services grew 3% compared to the prior period. The increase is primarily due to a $25.4 million increase in merchant fees and other third-party fees related to higher transaction volumes, a $21.0 million increase in hosting costs, and a $4.8 million increase in stock-based compensation expense. The increase was partially offset by the redeployment of resources to research and development due to continued migration of clients to our SaaS products and the consolidation of versions of on-premises software products with support obligations.
Software licenses and royalties .
The following table sets forth a comparison of our costs of software licenses and royalties for the listed years ended December 31 ($ in thousands):
Change
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, 2025, grew 28%, compared to the prior period due to higher third-party software costs.
Amortization of software development.
The following table sets forth a comparison of our amortization of software development for the listed years ended December 31 ($ in thousands):
Change
Amortization of software development
Amortization of software development costs included in cost of revenues primarily consist of personnel costs which were previously capitalized. 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 2025, amortization of software development costs increased 21% compared to the prior period due to new capitalized software development projects going into service in the past year.
Amortization of acquired software.
The following table sets forth a comparison of our amortization of acquired software for the listed years ended December 31 ($ in thousands):
Change
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 range from five to 10 years.
In 2025, amortization of acquired software increased 1% compared to the prior period due to amortization of newly acquired software from recent acquisitions completed in fiscal year 2025.
The following table sets forth a comparison of gross profit and overall gross margin for the periods presented as of December 31:
Change
Total gross profit
Overall gross margin
Overall gross margin . Our 2025 blended gross margin increased 2.7% compared to 2024. The increase in overall gross margin compared to the prior period is primarily attributed to a shift in our revenue mix toward higher-margin SaaS revenues. Also contributing to the increase in overall gross margin in 2025 is the redeployment of resources to research and development due to continued migration of clients to our SaaS products and consolidation of versions of on-premises software products with support obligations. The increase is partially offset by declines in software licenses, maintenance and professional services revenues and increases in merchant fees, hosting costs, and software development amortization expense.
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):
Change
Sales and marketing expense
S&M expense as a percentage of revenues was 6.4% in 2025 compared to 7.4% in 2024. S&M expense decreased 6% compared to the prior period. The decrease in S&M expense is primarily attributed to an increase in compensation capitalized as contract acquisition costs compared to the prior period.
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):
Change
General and administrative expense
G&A expense as a percentage of revenue was 13.6% in 2025 compared to 14.1% in 2024. G&A expense increased 5% compared to the prior period. The increase in G&A expense is primarily attributed to a $8.7 million increase in personnel expenses, a $4.9 million increase in professional fees expense, and a $4.4 million increase in share-based compensation expense due to the higher stock price for share-based awards issued in the current period. These increases are partially offset by a decline in bonus expense due to greater outperformance related to targets in 2024, compared to 2025.
Research and development expense
Research and development expense consists primarily of salaries, employee benefits and related overhead costs associated with new product development. Research and development expense consists mainly of costs associated with development of new products and new functionality in our current SaaS products. The following table sets forth a comparison of our research and development expense for the listed years ended December 31 ($ in thousands):
Change
Research and development expense
Research and development expense as a percentage of revenue was 8.8% in 2025 compared to 5.5% in 2024. Research and development expense increased 73% in 2025 compared to the prior period, with the majority of the increase due the redeployment of resources to research and development resulting from the continued migration of clients to our SaaS products and version consolidation of on-premises software products with support obligations, together with increased investments in a number of new Tyler product development initiatives across our product suites including investments in artificial intelligence. The remainder of the increase is attributed to a $16.7 million increase in share-based compensation expense in 2025 compared to the prior period.
Amortization of other intangibles
Other intangibles represents the portion of the purchase price allocated to the identified intangible assets for client-related intangibles, trade names, and leases acquired. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of other intangibles is recorded as operating expense. The estimated useful lives of other intangibles range from one to 25 years. The following table sets forth a comparison of amortization of other intangibles for the listed years ended December 31 ($ in thousands):
Change
Amortization of other intangibles
In 2025, amortization of other intangibles decreased 5% 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 2024, partially offset by the impact of amortization of new other intangibles from acquisitions completed in 2025.
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):
Thereafter
Segment Operating Income
The following table sets forth a comparison of the operating income by reportable segments for the listed years ended December 31 ($ in thousands):
Segment Operating Income (loss):
Change
The increase of 21% in the ES segment operating income in 2025 is primarily due to the $215.0 million increase in subscription revenues as a result of the ongoing shift toward SaaS arrangements for both new and existing clients, along with growth in certain transaction-based revenues from new and existing customers. The increase is partially offset by lower revenues of $34.0 million compared to prior period from software licenses, maintenance, and professional services, including a loss reserve of approximately $9.7 million of remaining exposure related to a contract dispute previously disclosed. Also partially offsetting the increase in segment operating income is an increase in total personnel expense of $22.1 million and an increase in total hosting costs of $18.2 million compared to the prior period.
The decrease of 9% in the PT segment operating income in 2025 is primarily due to loss reserves of approximately $10.7 million for two state contracts, primarily impacting lower revenue from professional services, as well as higher merchant fees. Somewhat offsetting the decline in the PT segment operating income is an increase in subscription revenues compared to prior period.
See Note 2 “Segment and Related Information” for a reconciliation between our operating segment and consolidated financial results for the periods presented.
Interest expense
The following table sets forth a comparison of our interest expense for the listed years ended December 31 ($ in thousands):
Change
Interest expense
Interest expense is comprised of interest expense and non-usage and other fees associated with our borrowings . Interest expense decreased 16% compared to the prior period primarily due to a reduction in 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):
Change
Other income, net
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 2025 compared to 2024. Also contributing to the increase in other income is dividend income of $1.8 million received in 2025; no dividend income received in 2024.
Income tax provision
The following table sets forth a comparison of our income tax provision for the listed years ended December 31 ($ in thousands):
Change
Income tax provision
Effective income tax rate
The increase in the income tax provision in 2025 compared to the prior period is primarily due to higher income before taxes and state income taxes and decreases in excess tax benefits from share-based compensation and research tax credits, offset by lower uncertain tax positions. The increase in the effective income tax rate in 2025 is driven by lower excess tax benefits from share-based compensation and research tax credit benefits and an increase in state taxes, offset by lower uncertain tax positions. The tax benefits related to research tax credits totaled $18.4 million in 2025 compared to $22.1 million in 2024. The tax expense related to uncertain tax positions in 2025 was $2.1 million compared to $10.1 million in 2024. The share-based exercise and vesting activity in 2025 generated $15.0 million of excess tax benefits, while exercise and vesting activity in 2024 generated $21.1 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.
On July 4, 2025, the reconciliation bill, commonly referred to as the One Big Beautiful Bill Act (“OBBBA”) was signed into law. The OBBBA includes a broad range of tax reform provisions that may affect our Company. The OBBBA allows an elective deduction for domestic Research and Development (“R&D”), a reinstatement of elective 100% first-year bonus depreciation, and a more favorable tax rate on Foreign-Derived Deduction Eligible Income and income from non-U.S. subsidiaries (“Net CFC Tested Income”), among other provisions. In 2025, we recognized the effects of the OBBBA, which resulted in a $72.9 million decrease in our deferred tax asset associated with capitalized research and experimental expenditures and a corresponding reduction in current income tax liabilities. The legislation did not have a material impact on our income tax expense for 2025.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 2025, we had cash and cash equivalents of $1.0 billion compared to $744.7 million as of December 31, 2024. We also had $142.5 million invested in investment grade corporate bonds, U.S. Treasuries and asset-backed securities as of December 31, 2025. 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.
The following table sets forth a summary of cash flows for the listed years ended December 31 (in thousands):
Cash flows provided (used) by:
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
In 2025, operating activities provided cash of $653.5 million, compared to $624.6 million in 2024. Operating activities that provided cash were primarily comprised of net income of $315.6 million, adjusted for non-cash depreciation and amortization charges of $138.4 million, non-cash share-based compensation expense of $151.3 million and non-cash amortization of operating lease right-of-use assets of $9.5 million. Changes in working capital, excluding cash, were approximately $24.1 million mainly due to higher accounts receivable. Also contributing to the decrease in working capital are the timing of prepaid expenses, payroll related payments, payments for operating leases and income tax payments. These decreases were offset by timing of payments to and receipts from our government partners, increases in deferred revenues and deferred taxes associated with stock option activity during the period. 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 $222.5 million in 2025 compared to $67.6 million in 2024. We invested $228.5 million and received $121.9 million in proceeds from investment grade corporate bonds, U.S. Treasuries and asset-backed securities. We capitalized approximately $16.8 million of software development costs. We invested approximately $16.0 million in property and equipment in 2025. Lastly, approximately $83.7 million, net of cash acquired, was invested in acquisitions completed during fiscal year 2025.
Financing activities used cash of $160.4 million in 2025 and provided cash of $22.2 million in 2024. During 2025, we repurchased approximately 303,000 shares of our common stock for an aggregate purchase price of $174.7 million. Net of withheld shares for taxes upon equity award settlement, we received $3.1 million from stock option exercises and received $18.8 million from employee stock purchase plan activity. We also paid $7.7 million in cash for long-term indemnity holdbacks related to prior acquisitions.
We paid interest of $2.2 million in 2025 and $3.1 million in 2024. See Note 10, “Debt,” to the consolidated financial statements for discussions of the Convertible Senior Notes and the 2024 Credit Agreement.
We paid income taxes, net of refunds received, of $40.8 million in 2025, compared to $84.2 million in 2024.
On September 25, 2024, the Company entered into a $700.0 million credit agreement with the various lender parties 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 sub-facilities 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 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 have no outstanding borrowings under the 2024 Credit Agreement, with an available borrowing capacity of $700.0 million as of December 31, 2025.
As of December 31, 2025, we had $600.0 million in outstanding principal for the Convertible Senior Notes due in 2026. We will settle any conversions of the Convertible Senior Notes in a combination of cash and shares of our common stock. 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 the principal amount of the Notes being converted. As of December 31, 2025, we have entered the Free Convertibility Period, effective on September 15, 2025 until the close of business on the second scheduled trading day immediately preceding maturity date, March 15, 2026. No conversions have occurred to date.
On February 2, 2026, we signed a definitive agreement to acquire the remaining equity interest of privately held company in which we currently hold a minority interest. The transaction, which has a cash purchase price of approximately $212.5 million, is expected to close in the first quarter of 2026, subject to the satisfaction of customary closing conditions and regulatory approvals.
On February 3, 2026, our Board of Directors authorized the repurchase of $1.0 billion of our common stock. The authorization replaced prior authorizations under our repurchase program originally announced in October 2002 and amended at various times from 2003 through 2019. 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. As of February 18, 2026, we have remaining authorization from our Board of Directors to repurchase up to $885.0 million of our common stock under the new repurchase plan.
We anticipate that 2026 capital spending will be between $24 million and $26 million, including approximately $10 million of capitalized software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending 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, 2025. Refer to Note 10, “Debt,” Note 13, “Income Tax,” Note 17, “Leases,” and Note 19, “Commitment and Contingencies,” to the consolidated financial statements for related discussions.
CAPITALIZATION
At December 31, 2025, our capitalization consisted of $599.7 million of outstanding debt and $3.7 billion of shareholders’ equity.
