Tyler Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Tyler provides software and related services to public-sector clients through Enterprise Software (ES) and Platform Technologies (PT).
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $471.9 million | $456.1 million | +3.5% |
| Gross profit / margin | $199.8 million / 42.4% | $192.4 million / 42.2% | Margin +0.2 percentage points |
| Operating income / margin | $45.0 million / 9.5% | $55.9 million / 12.2% | Income −19.5% |
| Net income | $30.9 million | $40.0 million | −22.8% |
| Diluted EPS | $0.73 | $0.94 | −22.3% |
| Cash from operating activities | $74.7 million | $53.5 million | +$21.2 million |
Revenue growth reflected a 14% increase in subscriptions, while maintenance fell 2%, professional services fell 13%, and software licenses and royalties fell 39%. Subscriptions and maintenance, which Tyler classifies as recurring, totaled $395.6 million, about 84% of revenue, versus $362.5 million, about 79%, a year earlier. Annualized recurring revenue was $1.58 billion, up 9.1% year over year.
ES revenue was $328.3 million versus $311.0 million; PT revenue was $148.6 million versus $150.7 million. Segment operating income declined to $72.3 million from $83.8 million. The reported consolidated operating-income figure is lower because it includes acquired-intangible amortization and other items excluded from segment operating income.
Liquidity, cash flow and debt
- Cash and cash equivalents were $130.8 million at March 31, down from $173.9 million at year-end. Available-for-sale investments were $43.4 million; cash plus these investments totaled approximately $174.2 million.
- Operating cash flow was $74.7 million. Investing activities used $0.6 million; financing activities used $117.1 million, primarily from $120.0 million of term-loan repayments. Cash declined $43.0 million during the quarter.
- Total borrowings were $875.0 million principal, or $868.5 million net carrying value, including $275.0 million under the credit agreement and $600.0 million of 0.25% convertible notes due 2026. The company had no revolving-facility borrowings and $500 million of available revolving capacity. Credit-agreement borrowings carried a 6.98% effective rate during the quarter.
- Management stated available cash, operating cash flow, credit availability and capital-market access were expected to meet financial needs, and that resources were sufficient for working capital, capital spending, taxes and share repurchases for at least 12 months. The company reported compliance with credit covenants.
Changes, outlook and risks
- Subscription growth was driven by SaaS conversions and new clients, as well as online payment and e-filing volumes. The company added 145 SaaS clients and 73 client conversions in the quarter. New contract value was approximately 87% subscription-based versus 80% in 2022.
- Management attributed lower license revenue to the shift toward subscriptions and expects the decline in perpetual-license revenue to accelerate. It said subscription deals generally produce lower initial-year license revenue but higher revenue over the contract term.
- Professional-services revenue was pressured by a $11.9 million year-over-year decline in COVID-related rent-relief services. Transaction-based revenue growth was partly offset by an $8.7 million decline in COVID-related transaction revenue.
- Cost pressures included higher personnel and share-based compensation, onboarding of professional-services employees not yet billable, and duplicate hosting costs during the transition from proprietary data centers to the public cloud. Q1 G&A also included $1.4 million of lease restructuring and other asset write-offs. Overall gross margin nevertheless rose slightly, helped by lower acquired-software amortization and reduced low-margin COVID-related activity.
- Backlog was $1.85 billion, up 5.1% year over year; approximately 46% was expected to be recognized over the next 12 months. This is a backlog disclosure, not formal revenue guidance.
- Management estimated 2023 capital spending of $63 million to $65 million, including approximately $37 million related to real estate and approximately $37 million of software development. It also expected higher cash taxes from IRC Section 174; after quarter-end, the company paid approximately $66.9 million of related income taxes.
- Risks identified include government-client budget or regulatory changes, cybersecurity and service continuity, acquisition integration, project delays, competition, staffing, inflation and interest-rate changes. A lawsuit against a state client seeks approximately $15 million for fees following a termination for convenience; the matter remained unresolved, and additional legal costs are possible. Separately, a $10 million Rapid acquisition litigation liability and a corresponding $10 million escrow indemnification receivable were recorded in Q1.
- Other obligations include approximately $254 million of minimum third-party purchase commitments through 2028. The filing reported no material changes to the risk factors in the 2022 Form 10-K and no material subsequent events.
Important facts for investors to verify
- Whether subscription growth and backlog conversion offset ongoing declines in maintenance, professional services and perpetual-license revenue.
- Whether margins recover as hiring, cloud-transition costs and acquisition-related amortization evolve.
- Cash generation and liquidity after the $66.9 million post-quarter Section 174 tax payment and planned 2023 capital spending.
- Progress on debt repayment and the effect of floating-rate debt costs; verify the $600 million convertible notes’ terms and conversion conditions.
- Resolution and potential cost or recovery from the state-client lawsuit, and final purchase accounting for Rapid.