Tyler Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Tyler provides software, services, and appraisal solutions primarily to local governments, schools, and other public-sector clients. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $214.1 | $194.5 | $622.8 | $562.8 |
| Gross profit | $103.4 | $93.5 | $293.6 | $262.5 |
| Operating income | $43.4 | $36.9 | $116.7 | $95.9 |
| Net income | $38.3 | $35.4 | $102.1 | $78.7 |
| Diluted EPS | $0.97 | $0.91 | $2.60 | $2.02 |
| Gross margin | 48.3% | 48.1% | 47.1% | 46.7% |
| Operating margin | 20.3% | 19.0% | 18.7% | 17.0% |
- Revenue increased 10% in Q3 and 11% for the nine-month period. Subscription revenue rose 22% and 20%, respectively; maintenance revenue rose 11% and 13%.
- Software license and royalty revenue was nearly flat in Q3 and up 2% for the nine months. Management attributed Q3 softness in part to more clients choosing subscriptions rather than perpetual licenses.
- Operating cash flow was $142.4 million for the nine months, compared with $140.1 million a year earlier. Investing activities used $75.8 million; financing activities provided $21.9 million. Cash increased $88.5 million to $124.6 million.
- At September 30, cash and cash equivalents were $124.6 million and investments were $61.7 million. There were no revolver borrowings, and available borrowing capacity was $297.8 million. Current liabilities were $359.3 million, including $297.2 million of deferred revenue.
Changes and management commentary
- Growth reflected expanding subscription and maintenance revenue, new and converted SaaS clients, e-filing activity, and implementation capacity. Tyler reported 291 new SaaS clients and 69 conversions from on-premises arrangements in the first nine months.
- Appraisal-services revenue declined 4% for both the quarter and nine months, mainly after completion of several large revaluation projects; management described this business as cyclical and influenced by statutory revaluation schedules.
- Overall gross margin improved 0.2 percentage point in Q3 and 0.4 point for the nine months. Management cited recurring-revenue mix and improved software-services, maintenance, and subscription margins; appraisal-services margins declined.
- Net income benefited from unusually low effective tax rates of 12.1% in Q3 and 12.3% year to date, principally due to excess tax benefits from stock-option exercises. Excluding those benefits, the respective rates were 32.8% and 36.0%.
- Tyler acquired Digital Health Department for $3.9 million and Modria.com for $7.0 million, net of debt assumed. Purchase-price allocations remained preliminary; the acquisitions’ effect on operating results was not material.
Outlook, risks, and contingencies
- Management estimated 2017 capital spending at approximately $54 million, including office construction and building costs. It stated that operating cash flow, cash on hand, and available credit should cover working capital, capital expenditures, taxes, and share repurchases for at least the next 12 months.
- Tyler expected to adopt the revenue-recognition standard in fiscal 2018 using the full retrospective method and anticipated a material financial-statement impact, particularly from allocation and timing of software-license revenue and capitalization of contract-acquisition costs. The lease standard was expected to be adopted in fiscal 2019; the impact was not yet reasonably estimable.
- Disclosed risks include public-sector budget or regulatory changes, cybersecurity and service-continuity issues, acquisition integration, client project delays, competition, technology and product-development risks, and retaining qualified personnel. The filing reported no material change to the risk factors in the 2016 Form 10-K.
- No material legal proceedings were reported beyond routine litigation. Tyler was in compliance with credit-facility covenants and had two letters of credit totaling $2.2 million.
Important facts for investors to verify
- How the shift toward SaaS and the anticipated 2018 revenue-standard adoption affect reported revenue timing, margins, and comparability.
- Whether subscription and maintenance growth, client renewals, and implementation capacity continue to support operating performance.
- The sustainability of earnings growth given the impact of stock-option tax benefits on reported effective tax rates.
- Execution and spending against the approximately $54 million 2017 capital-expenditure estimate, and the integration and final purchase accounting for the acquisitions.
- Exposure to local-government budgets, appraisal-project cycles, cybersecurity and service continuity, and client implementation delays.