Tyler Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Tyler provides software and related services primarily to public-sector entities, especially local governments. Unless otherwise noted, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $271.1 | $275.1 | $547.6 | $522.2 |
| Gross profit / margin | $131.2 / 48.4% | $127.9 / 46.5% | $260.3 / 47.5% | $243.9 / 46.7% |
| Operating income / margin | $41.3 / 15.2% | $36.7 / 13.4% | $75.2 / 13.7% | $71.2 / 13.6% |
| Net income | $53.9 | $32.0 | $101.4 | $59.3 |
| Diluted EPS | $1.30 | $0.80 | $2.44 | $1.49 |
| Operating cash flow | — | $96.5 | $48.5 |
At June 30, cash and cash equivalents were $351.3, with $121.2 of investment-grade bonds; management reported cash and investments totaling $472.5. The $400.0 revolving credit facility was undrawn, with no borrowings outstanding. Current assets were $873.9 and current liabilities $494.3. Total deferred revenue was $423.2, and backlog was $1.54 billion, up 7.4% year over year; approximately 49% was expected to be recognized within 12 months.
Changes versus the prior comparable periods
- Q2 revenue declined 1.5%, while first-half revenue rose 4.9%. Subscription revenue grew 16.6% in Q2 and 18.9% in the first half; maintenance grew 9% and 12%, respectively.
- Q2 software license and royalty revenue fell 18%, software services fell 24%, and appraisal services fell 25%. Management attributed the declines mainly to COVID-related procurement and implementation delays, travel restrictions, and the shift toward subscriptions. Hardware and other revenue also fell, partly because the 2020 Connect user conference was canceled.
- Recurring subscription and maintenance revenue represented 75% of first-half revenue. New-client mix shifted toward subscription arrangements: approximately 63% subscription versus 37% perpetual licenses in the first half of 2020, compared with 56% and 44%, respectively, in 2019.
- Operating income increased despite lower Q2 revenue, and gross margin improved. Management cited greater subscription mix and lower travel-related implementation costs, partly offset by lower software-license margins and reduced appraisal staff utilization.
- Net income growth substantially reflects unusually large stock-award tax benefits: $23.4 in Q2 and $45.5 in the first half, versus $5.4 and $7.0 in 2019. Excluding those benefits, the effective tax rate was 27.2% for Q2 and 27.1% for the first half, close to the prior-year rates.
Outlook, risks and unusual items
- Management expected COVID-19 to negatively affect fiscal 2020 revenue and other financial results, citing delayed government procurement, uncertain public-sector budgets, implementation delays, possible slower client payments, and reduced onsite service activity. No numerical revenue or earnings guidance was provided.
- Management anticipated software services and appraisal services could improve as restrictions ease and remote delivery increases staff utilization. The company continued adapting sales demonstrations and professional services for remote delivery.
- Expected 2020 capital spending was $34–$35, including approximately $10 for real estate and $6 for capitalized software development. Management said cash, operating cash flow, and available credit should fund requirements for at least the next 12 months.
- COVID-related uncertainty could affect goodwill and asset valuations. The annual goodwill assessment found no impairment; management cautioned future impairment could arise if conditions or forecasts deteriorate. No other asset impairment was recorded at quarter-end.
- Operating cash flow improved year over year, but working capital increased approximately $83.7, and days sales outstanding rose to 135 from 125 a year earlier. Management linked the increase to unbilled receivables, billing-cycle timing, and slower government collections.
- There were no material pending legal proceedings beyond routine litigation, no material subsequent events, and the company reported compliance with credit-facility covenants.
Important facts for investors to verify
- Whether COVID-related procurement, implementation, appraisal-service, and collections delays persisted or worsened after June 30.
- Whether recurring subscription and maintenance growth, backlog conversion, and subscription client additions offset pressure on licenses and professional services.
- Whether cash conversion and receivable quality improved, including DSO, unbilled receivables, and client payment timing.
- How much reported earnings growth was driven by stock-based compensation tax benefits and whether those benefits are repeatable.
- Whether goodwill assumptions, especially for recently acquired businesses, remain supportable under changing market conditions.