Tyler Technologies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Tyler provides software, related services, and property appraisal services primarily to local governments, schools, and other public-sector clients. Results are unaudited and presented in thousands of dollars except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $135.0 million | $112.6 million | +19.8% |
| Gross profit / gross margin | $63.9 million / 47.3% | $52.5 million / 46.6% | Margin +0.7 percentage point |
| Operating income / operating margin | $27.2 million / 20.1% | $19.9 million / 17.6% | Income +36.8% |
| Net income | $17.3 million | $11.9 million | +45.4% |
| Diluted EPS | $0.48 | $0.33 | +45.5% |
| Operating cash flow | $(2.1) million | $16.6 million | Down $18.7 million |
Revenue growth was broad-based: software licenses and royalties rose 27% to $14.3 million; subscriptions rose 23% to $25.3 million; software services rose 27% to $30.8 million; maintenance rose 14% to $57.3 million; and appraisal services rose 26% to $6.1 million. Hardware and other revenue declined to $1.1 million from $1.5 million.
Enterprise Software Solutions (ESS) revenue was $120.9 million, versus $100.8 million; segment operating income was $32.3 million, versus $25.4 million. Appraisal and Tax Software Solutions and Services (ATSS) revenue was $15.0 million, versus $12.3 million; segment operating income was $3.1 million, versus $1.8 million. Segment operating income is a company-defined measure and excludes specified items, including acquired-intangible amortization, interest, and taxes.
Liquidity, cash flow, and balance sheet
Cash and cash equivalents were $194.7 million at March 31, 2015, compared with $206.2 million at December 31, 2014. The company reported no debt and a $2.0 million letter of credit, which management did not expect to be drawn and said would expire in mid-2015. Current assets were $327.8 million and current liabilities were $197.7 million. Deferred revenue was $164.7 million, down from $189.2 million at year-end.
Operating activities used $2.1 million, despite $17.3 million of net income. Management attributed the cash use primarily to lower collections than in the prior-year quarter, higher bonus payments, tax-payment timing, and a $24.5 million decrease in deferred revenue. Investing activities used $17.2 million, including a $15.0 million investment in Record Holdings and $1.9 million of capital expenditures. Financing activities provided $7.9 million, mainly from stock-plan activity and related excess tax benefits. Cash declined by $11.4 million during the quarter.
Management said cash on hand, operating cash flow, and access to credit markets should cover working capital, capital expenditures, taxes, and planned share repurchases for at least the next 12 months. The company had authorization to repurchase up to 1.4 million additional shares; no shares were repurchased in the quarter. Planned 2015 capital spending, excluding acquisitions, was $13.5 million to $14.5 million.
Management outlook, risks, and notable items
- Management described local-government market activity as having returned to normal, pre-recession levels and expected another year of “very solid revenue and earnings growth” in 2015. It anticipated some pressure on margin expansion from staffing onboarding costs, product investment, and continued SaaS and e-filing growth; no specific revenue or earnings forecast was provided.
- Subscriptions growth included approximately $1.7 million of increased e-filing revenue, largely associated with four statewide contracts. The company added 32 new SaaS customers and had 19 existing on-premises customers convert to SaaS during the quarter.
- Tyler invested $15.0 million for a 20% interest in privately held Australian company Record Holdings Pty Limited. It accounted for the investment under the cost method, stating it lacked significant influence over day-to-day activities.
- The company’s contractual research and development commitment for public-sector functionality in Microsoft Dynamics AX expires with the release of Dynamics AX 7. Discussions with Microsoft about further commitments were ongoing; absent an agreement, Tyler said it would continue sustained engineering and technical support.
- Management identified risks including public-sector budget or regulatory changes, security breaches and data-center interruptions, project delays and renewal-rate declines, product-development and integration challenges, competition, and retaining qualified personnel. It reported no material change in the risk factors disclosed in its 2014 Form 10-K.
- No material legal proceedings beyond routine litigation were reported. The company was assessing the financial impact of the new revenue-recognition standard and expected adoption in fiscal 2018 under the proposed deferral; it could not yet estimate the impact or determine its adoption method.
Important facts for investors to verify
- Whether strong revenue and earnings growth converts into operating cash flow, given the quarter’s cash use and changes in receivables, accrued liabilities, and deferred revenue.
- Whether SaaS and e-filing growth, implementation capacity, and staffing costs develop as expected and how they affect margins.
- The performance, valuation, and strategic implications of the $15.0 million Record Holdings investment.
- The outcome of discussions with Microsoft concerning Dynamics AX development commitments and the related ongoing support and royalty arrangements.
- The eventual financial and reporting effects of adopting the new revenue-recognition standard, as well as progress against planned capital spending.