Tyler Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the same 2019 periods unless noted. Tyler provides software, services and appraisal solutions primarily to public-sector entities and local governments.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $285.7 million | $275.4 million | $833.4 million | $797.6 million |
| Gross profit / margin | $143.5 million / 50.2% | $130.7 million / 47.5% | $403.8 million / 48.5% | $374.6 million / 47.0% |
| Operating income / margin | $49.7 million / 17.4% | $40.1 million / 14.5% | $124.9 million / 15.0% | $111.2 million / 13.9% |
| Net income | $39.3 million | $40.4 million | $140.7 million | $99.7 million |
| Diluted EPS | $0.94 | $1.00 | $3.39 | $2.49 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $266.3 million | $178.5 million |
Revenue grew 3.8% in Q3 and 4.5% year to date. Subscriptions rose 18.6% in Q3 and 18.8% year to date; maintenance increased 7% and 10%, respectively. Software licenses and royalties declined 21% in Q3 and 18% year to date, while software services fell 13% and 11%. Appraisal services decreased 10% and 9%.
Q3 operating income improved 24% year over year, but net income declined about 3%, reflecting a substantially higher tax provision than in Q3 2019. For the nine months, the effective tax rate was negative 11.1%, including $48.0 million of excess tax benefits from stock awards; the filing reports that these benefits materially affected the period’s tax results.
At September 30, cash and cash equivalents were $518.7 million, and investment-grade bonds totaled $130.9 million. The company reported $649.6 million in cash and investments, no revolver borrowings, and $400 million of available revolving credit. Nine-month investing cash use was $68.2 million and financing cash provided was $87.8 million. Deferred revenue was $436.6 million. Backlog was $1.55 billion, up 9.2% year over year; about 49% was expected to be recognized within 12 months. Subscriptions and maintenance represented 73% of nine-month revenue.
Material changes and management commentary
- Growth increasingly reflects subscription and cloud adoption. New-client mix shifted to 62% subscription arrangements in the first nine months of 2020, versus 54% in 2019. Management cautions that subscription arrangements generally yield less initial-year license revenue but more revenue over the contract term.
- COVID-19 delayed public-sector procurement, contract signings and implementations, and reduced on-site services and appraisal work. Lower travel, conference and other employee-related costs partly offset revenue pressure. Management expected the pandemic to negatively affect fiscal 2020 results, but did not provide numerical revenue or earnings guidance.
- Management expected fiscal 2020 capital spending of $30–$31 million, including about $10 million for real estate and $6 million for capitalized software development.
- Q3 gross margin increased to 50.2%, supported by greater subscription mix, virtual service delivery and utilization, lower travel costs, and cancellation of the user conference. License and acquired-software gross margin weakened because of lower license revenue and higher acquired-software amortization.
- Enterprise Software Q3 revenue was $261.9 million versus $246.9 million; Appraisal and Tax revenue was $29.0 million versus $32.5 million. Segment operating income was $79.9 million and $8.3 million, respectively, compared with $62.5 million and $9.2 million.
Risks, contingencies and unusual items
- A ransomware incident disclosed on September 29 disrupted some internal IT and telephone systems. Tyler reported no evidence that client-hosting environments were affected and said hosted services were not interrupted. The company estimated approximately $1.5 million of Q3 revenue loss, primarily software services; related insurance recovery would be recognized only when received. Investigation and remediation continued, and further costs or business interruption could adversely affect results.
- COVID-19 could continue to delay customer decisions, implementations and collections, and impair revenues and margins. Management also noted potential future goodwill impairment if business conditions or forecasts deteriorate; no goodwill or other asset impairment was recorded through September 30.
- The company was in compliance with its credit facility covenants. No material legal proceedings were reported beyond routine litigation.
Important facts for investors to verify
- Whether delayed government procurements and implementations recover, and whether backlog converts to revenue on the expected schedule.
- Subscription growth, renewal and conversion trends, and the effect of subscription mix on near-term license revenue and margins.
- The final financial, operational and insurance effects of the ransomware incident, including whether additional costs, losses or claims arise.
- Whether the unusually favorable nine-month tax result, driven by stock-award tax benefits, is repeatable; it should not be assumed to represent a normalized tax rate.
- Progress against the stated fiscal 2020 capital-spending range and the company’s liquidity, investment holdings and unused credit capacity.