TYLER TECHNOLOGIES INC quarterly report, Q1 FY2020

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Tyler Technologies, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Tyler provides software and services primarily to public-sector entities, especially local governments. Amounts below are in U.S. dollars.

Financial performance

  • Revenue: $276.5 million, up 11.9%. Subscriptions rose 21% to $81.7 million and maintenance rose 14% to $114.4 million. Software services increased 8% to $52.1 million; software licenses and royalties fell 14% to $18.7 million, reflecting a shift toward subscription contracts.
  • Recurring revenue: $196.1 million, or 71% of total revenue, from subscriptions and maintenance. Backlog was $1.50 billion, up 19.2% year over year; management expected approximately 48% to be recognized over the next 12 months.
  • Profit and margins: Gross profit was $129.1 million, with a 46.7% gross margin versus 47.0%. Operating income was $33.9 million, down from $34.5 million; operating margin was 12.2% versus 13.9%. Net income was $47.6 million versus $27.3 million. Diluted EPS was $1.16 versus $0.69.
  • Taxes: The income tax benefit was $12.7 million, compared with a $7.7 million provision a year earlier. The effective tax rate was negative 36.3%, primarily due to $22.1 million of excess tax benefits from stock awards. Excluding those benefits, the effective rate was 27.0%, versus 26.8%.
  • Cash flow: Operating activities provided $56.7 million, compared with $24.0 million. Investing activities used $15.0 million, versus $194.9 million, which included the prior-year MicroPact acquisition. Financing activities provided $27.6 million. Cash increased $69.3 million during the quarter.
  • Liquidity and debt: Cash and cash equivalents were $302.0 million at March 31, versus $232.7 million at year-end. Cash and investments totaled $392.6 million. There were no revolver borrowings; the $400 million facility was fully available and matures in 2024. Tyler reported compliance with its credit covenants.

Material changes and notable items

  • Subscription growth reflected new SaaS clients, conversions from on-premises systems, and growth in e-filing and online payments. New contract value mix shifted to approximately 73% subscription-based and 27% perpetual licenses, compared with 54% and 46%, respectively, in Q1 2019.
  • Overall gross margin edged down as lower license revenue and higher acquired-software amortization weighed on results; appraisal-services margin also declined amid staffing increases and lower utilization in March. Higher subscription-related revenue mix partly offset these pressures.
  • SG&A increased 17% to $67.5 million, and research and development expense increased 18% to $22.4 million, reflecting higher compensation, staffing, sales commissions, and product-development investment.
  • Accounts receivable, net, declined to $339.5 million from $396.5 million at December 31, 2019; deferred revenue declined to $366.1 million from $412.7 million. The company paid $15.5 million for share repurchases and $5.6 million in acquisition-related contingent consideration.
  • Management reclassified land and vital records management from Enterprise Software to Appraisal and Tax beginning January 1, 2020; prior-year segment figures were adjusted.

Outlook, risks, and contingencies

  • Management said COVID-19 had not materially affected Q1 results but expected it to negatively affect fiscal 2020 financial results. Anticipated risks included delayed government procurement, software implementations and project go-lives, reduced on-site appraisal work, and slower client payments. Management said the impact would emerge over time; no specific revenue or earnings guidance was provided.
  • The company had shifted the vast majority of employees able to do so to remote work and was adapting sales demonstrations and professional services for remote delivery. Management expected COVID-related disruption to pressure software-services and appraisal-services revenue and margins, and potentially software license and subscription revenue.
  • Management anticipated 2020 capital spending of $36–$38 million, including about $9 million for real estate and $7 million for capitalized software development, funded from cash and operating cash flow. It said available cash, operating cash flow, and credit were sufficient for expected needs for at least 12 months.
  • No impairment was recorded at quarter-end; management cautioned its assessment could change as pandemic uncertainty developed. Other than routine litigation, no material legal proceedings were reported. No material subsequent events were reported.

Important facts for investors to verify

  1. Whether COVID-19 delays to public-sector procurement, implementations, appraisal work, and customer payments materially affect later-quarter revenue, margins, and collections.
  2. How much reported earnings growth reflects the unusually large stock-award tax benefit, versus operating performance.
  3. Whether recurring-revenue growth and the $1.50 billion backlog convert to revenue on the expected schedule, including the expected 48% recognition within 12 months.
  4. Whether staffing, acquisition-related amortization, and product-development spending affect margins and cash generation, alongside the planned capital spending and share repurchases.