SecProbe.io

CORRESP
1
filename1.htm

corresp

December 3, 2008

VIA EDGAR

Securities and Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, DC 20549

    Attention:

    Mr. Mark Kronforst

Accounting Branch Chief

              Re:

    Tyler Technologies, Inc. (the “Company”)

Form 10-K for the Year Ended December 31, 2007

Filed February 28, 2008

Definitive Proxy Statement on Schedule 14A

Filed March 24, 2008

Form 10-Q for the Quarter Ended September 30, 2008

Filed October 27, 2008

     File No. 001-10485

Dear Mr. Kronforst:

This letter is provided in response to the Staff’s comment letter dated November 18, 2008 addressed
to Mr. John S. Marr, Chief Executive Officer and President of Tyler Technologies, Inc. (the
“Company”). We have restated each of the Staff’s comments and the Company’s response follows each
comment.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview, page 21

    1.

    Consider expanding your “Overview” to include both past and prospective discussion and
analysis of financial condition and operating performance. You should also provide insight
into material opportunities, challenges and risks, such as those presented by known material
trends and uncertainties, on which Tyler’s executives are most focused for both the short and
long term, as well as the actions they are taking to address these opportunities, challenges
and risks. Discuss any significant product releases or new services that have impacted or are
expected to impact revenues. Refer to Release 33-8350 on our website at www.sec.gov.

Securities and Exchange Commission

December 3, 2008

Page 2

Company response:

    In light of the Staff’s comments we will expand our “Overview” to the extent we identify
material opportunities, challenges or risks, including with respect to any new material trends or
uncertainties. We will also address any significant new product releases that have impacted
revenues or are expected to impact revenues in the near-term.

Financial Condition and Liquidity, page 32

    2.

    In comment number 3 of our letter dated April 26, 2007, relating to your Form 10-K for the
fiscal year ended December 31, 2006, we indicated that your discussion of operating cash flow
did not address certain material items or their impact on your cash flows. In your response
letter dated May 9, 2007, you indicated that you would expand your disclosure regarding
changes in working capital in future filings. However, we note that in your 2007 Form 10-K
you provide no discussion of operating cash flow nor do you provide any disclosure regarding
the changes in working capital and their impact on your cash flows. Please tell us how the
disclosure under this section reflects the assertion made in your May 9, 2007 letter and tell
us how you concluded that your disclosures comply with Section IV.B.1 of SEC Release 33-8350.

Company response:

    Our Forms 10-Q for the periods ending June 30, 2007; September 30, 2007; March 31, 2008;
June 30, 2008 and September 30, 2008 included expanded disclosure regarding changes in working
capital. However, in our Form 10-K for the period ending December 31, 2008 and future Form 10-K
reports we will expand our discussion similar to our Form 10-Q disclosures to include all
material components of working capital to ensure we adequately address their impact on operating
cash flows. We abbreviated this discussion in the Form 10-K for the period ending December 31,
2007 and focused on how higher deferred revenue impacted cash and short-term investments and the
reasons for higher deferred revenue levels without specifically disclosing that changes in
deferred revenue were a material factor in changes in operating cash flows. We did not mention
other factors impacting operating cash flows such as net income and depreciation and
amortization because they were identified in a separate line item in the statement of cash
flows.

    3.

    On page 33, you state that it is not your usual business practice to enter into off-balance
sheet arrangements. It is unclear from your disclosure whether you have off-balance sheet
arrangements. Please clarify.

Company response:

    We do not have any off-balance sheet arrangements. In future filings we will modify this
disclosure to state that we do not have any off-balance sheet arrangements.

Securities and Exchange Commission

December 3, 2008

Page 3

Financial Statements

Consolidated Statements of Operations, page F-3

    4.

    Your revenue recognition policy on page F-8 indicates that revenues from certain
multiple-element arrangements are recognized over the period services are performed due to a
lack of VSOE of fair value of certain elements. We also note that you have arrangements
accounted for under SOP 81-1. Please tell us where you classify these revenues and related
costs in your Consolidated Statements of Operations. If you classify these revenues and
related costs in a single line item or allocate between products and services please explain
your basis of presentation or allocation methodology, why you believe such presentation is
reasonable and confirm to us that this presentation has been consistently applied. Assuming
that your presentation of revenues and cost of revenues is considered reasonable for purposes
of complying with Rule 5-03(b)(1) and (2) of Regulation S-X, please ensure that your MD&A
Critical Accounting Policies and Estimates and footnote disclosures include a discussion of
your basis of presentation or allocation methodology and discuss the reasons for such
presentation or allocation.

Company response:

    We disclosed on page F-8 that for software arrangements for which sufficient VSOE does not exist
and the only undelivered element is services that do not involve significant modification or
customization of the software, the entire fee is recognized over the period during which the
services are expected to be performed. These types of arrangements are extremely rare and not
material to our financial statements. However, in this case, we allocate the revenue between
products and services by referring to similar products and services provided by the Company for
which we have established VSOE of fair value.

    With respect to arrangements accounted for under SOP 81-1, we allocate revenues between products
and services based on their relative VSOE of fair values, or in instances where we have VSOE of
fair value for all of the elements except license fees, we first allocate revenue to the
elements for which VSOE of fair value exists and the residual is allocated to license fees.

    The related costs associated with the aforementioned arrangements are classified in the income
statement according to the nature of the expense. For example, labor costs associated with
services are captured in the income statement in “Cost of Revenues — Software services,
maintenance and subscriptions” while amortization expense associated with capitalized software
is classified in “Cost of Revenues – Software licenses.”

    We believe our allocation methodology and basis of presentation are reasonable, in accordance
with Generally Accepted Accounting Principles and have been consistently disclosed and applied
in our financial statements.

Securities and Exchange Commission

December 3, 2008

Page 4

    In future filings, we will add the following language as additional clarification regarding
allocation of revenue on the statement of operations:

    In our consolidated statements of operations, we allocate revenue to software licenses, software
services, maintenance and hardware and other based on the VSOE of fair value for elements in
each revenue arrangement and the application of the residual method for arrangements in which we
have established VSOE of fair value for all undelivered elements. In arrangements where we are
not able to establish VSOE of fair value for all undelivered elements, revenue is first
allocated to any undelivered elements for which VSOE of fair value has been established. We
then allocate revenue to any undelivered elements for which VSOE of fair value has not been
established based upon management’s best estimate of fair value of those undelivered elements
and apply a residual method to determine the license fee. Management’s best estimate of fair
value of undelivered elements for which VSOE of fair value has not been established is based
upon the VSOE of similar offerings and other objective criteria.

Consolidated Statements of Cash Flows, page F-6

    5.

    Please tell us how you considered paragraphs 23(c) of SFAS No. 95 and paragraph A96 of SFAS
No. 123R. In this regard, we note that you have not disclosed the amount of excess tax
benefits as a separate line item within operating cash flows.

Company response:

    In the past, the excess tax benefit impact in the operating cash flow section was netted
with income tax payable because we did not believe it was material for presentation as a separate
line item in the amount of $614,000 in 2006 increasing to $1,891,000 in 2007 as compared to
operating cash flows of $26,804,000 in 2006 and $34,111,000 in 2007. However, in light of the
Staff’s comment we will present the excess tax benefit as a separate line item within operating
cash flows in future filings.

Securities and Exchange Commission

December 3, 2008

Page 5

Definitive Proxy Statement on Schedule 14A

Compensation Discussion and Analysis, page 16

General

    6.

    Please provide an expanded analysis of how you arrived at and why you paid each particular
level of compensation for 2007. For example, we note minimal discussion and analysis of how
the Committee determined specific cash bonus amounts and specific stock option award. We
would expect to see a more focused discussion that provides substantive analysis and insight
into how the Committee made actual payout determinations for the fiscal year for which
compensation is being reported. Refer to paragraphs (b)(1)(iii) and (v) of Item 402 of
Regulation S-K. You should provide complete discussions of the specific factors considered by
the Committee in ultimately approving this and other forms of compensation, including the
reasons why the Committee believes that the amounts paid to each named executive officer are
appropriate in light of the various items it considered in making specific compensation
decisions.

Company response:

    In future filings we will clarify that the only corporate objective the Compensation
Committee considers for cash bonuses is the level of achievement of earnings per share in
comparison to earnings per share goals developed in connection with our annual operating plan.
We will also disclose that stock option awards are discretionary by including a chart in the
form provided below in response to Staff comment no. 7. In addition, we will disclose that the
Chief Executive Officer provides recommendations to the Compensation Committee on annual bonus
performance targets, base salary and stock option awards. His recommendations are based on
internal pay relationships and consistency, the executives’ performance and experience, level of
responsibility, changes in responsibility, retention risk and market survey data. Our approach
is to tie a significant portion of each executive’s total compensation to achieving earnings per
share goals as well as to increasing long-term shareholder value, as reflected primarily in the
Company’s stock. In addition, the Compensation Committee using its judgment may exercise
discretion in granting additional bonus amounts as it deems appropriate.

    In the Annual Cash Bonus Program section of our compensation discussion and analysis we
disclosed that bonus payments were based on actual fully diluted earnings per share achieved
compared to fully diluted earnings per share goals. This is the only performance factor
considered in calculating bonus payments. Included in this section was the range of minimum and
maximum payout levels and guidance as to how 100% of the bonus target is earned. We further
disclosed that bonus targets are approved by the Compensation Committee based on management’s
recommendations as well as certain corporate objectives recommended by management for which the
bonus plan is based on. In light of the Staff’s

Securities and Exchange Commission

December 3, 2008

Page 6

    comment we will include the following information in future filings to clarify how the
range of minimum and maximum bonuses are earned (the 2007 Bonus Plan incentive compensation
potential was similar to the 2008 Bonus Plan):

    In February 2008, the Compensation Committee approved a 2008 Bonus Plan recommended by
management, which included incentive compensation potential for the executive officers at the
following levels:

    •

    170% of target based on achieving 146% of earnings per share goal

    •

    150% of target based on achieving 135% of earnings per share goal

    •

    130% of target based on achieving 123% of earnings per share goal

    •

    115% of target based on achieving 112% of earnings per share goal

    •

    100% of target based on achieving 100% of earnings per share goal

    •

    85% of target based on achieving 88% of earnings per share goal

    •

    70% of target based on achieving 77% of earnings per share goal

    •

    50% of target based on achieving 65% of earnings per share goal

    •

    35% of target based on achieving 54% of earnings per share goal

    •

    25% of target based on achieving 42% of earnings per share goal

    •

    0% of target based on achieving less than 42% of earnings per share goal

    We do not disclose our internal operating profit plan or earnings per share goals. This
information is confidential financial information of the Company, and the Company believes that
disclosure would cause the Company competitive harm by disclosing to competitors a key element
of our internal projections. In addition, the Compensation Committee using its judgment may
exercise discretion in granting additional bonus amounts as it deems appropriate.

    7.

    Please provide clear disclosure that addresses how each compensation component and your
decisions regarding these elements fit into your overall compensation objectives and their
impact regarding other elements. See Item 402(b)(1)(vi) of Regulation S-K. Clarify whether
you review each element of compensation independently or whether you consider each element
collectively with the other elements of your compensation program when establishing the
various forms and levels of compensation. In doing so, please provide sufficient quantitative
or qualitative disclosure as appropriate of the analyses underlying the Committee’s decision
to make specific compensation awards and how decisions regarding one type of award motivate
the Committee to award or consider other forms of compensation. Explain and place in context
how you considered each element of compensation and why determinations with respect to one
element may or may not have influenced the Committee’s decisions with respect to other
allocated or contemplated awards.

Securities and Exchange Commission

December 3, 2008

Page 7

Company response:

    In future filings we will add the following chart (which is also applicable to 2007) to our
compensation discussion and analysis:

    Form of

              Element

    Compensation

                              Purpose

                            Metric

    Base Salary

    Cash

    Provide competitive, fixed compensation to attract
and retain exceptional executive talent

    Not performance-based but salaries are set each
year based upon a review of the executive’s prior
year performance

    Incentive cash compensation
under the Bonus Plan

    Cash

    Create a strong financial incentive for achieving or
exceeding annual financial goals

    Achieving earnings per share