Tyler Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Tyler provides software and services primarily to public-sector entities, especially local governments. Results are compared with Q1 2020.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date | Change |
|---|---|---|---|
| Revenue | $294.8 million | $276.5 million | +6.6% |
| Gross profit / margin | $144.2 million / 48.9% | $129.1 million / 46.7% | Margin +2.2 percentage points |
| Operating income / margin | $38.2 million / 13.0% | $33.9 million / 12.2% | Income +12.7% |
| Net income | $37.0 million | $47.6 million | -22.2% |
| Diluted EPS | $0.88 | $1.16 | -24.1% |
| Operating cash flow | $71.7 million | $56.7 million | +26.4% |
| Cash and cash equivalents | $1,250.8 million | $603.6 million at Dec. 31, 2020 | + $647.1 million |
| Investments | $171.9 million | — | Cash and investments totaled about $1.4 billion |
| Debt | $600 million principal of 0.25% convertible notes; no revolver borrowings | No convertible notes reported | Notes issued March 9, 2021 |
Revenue growth was led by subscriptions, up 25.4% to $102.5 million, and maintenance, up 4.2% to $119.1 million. Software licenses and royalties fell 20.3% to $14.9 million, while software services declined 8.6% to $47.6 million. Recurring subscriptions and maintenance represented 75% of revenue. Backlog was $1.55 billion, up 3% year over year; approximately 47% was expected to be recognized in the next 12 months.
Net income fell despite higher revenue and operating income, principally reflecting the prior-year period’s larger stock-based compensation tax benefits. The effective tax rate was 3.4%, versus negative 36.3% in Q1 2020; excluding excess tax benefits from stock awards, the rates were 26.4% and 27.0%, respectively. SG&A rose 17%, including higher share-based compensation, a $3.2 million litigation accrual, and $813,000 of NIC transaction costs.
Operating cash flow was $71.7 million. Investing activities used $39.7 million, including acquisitions and capital spending; financing activities provided $615.1 million, primarily from the convertible-note issuance. Current assets were $1.70 billion and current liabilities $525.4 million at March 31, 2021.
Material changes and transactions
- Subscription growth reflected increased SaaS adoption, new clients, and higher transaction-based online-payment revenue. In Q1, Tyler added 84 SaaS clients and 39 existing on-premises clients converted to SaaS.
- COVID-19-related procurement delays and implementation restrictions reduced license and software-services revenue. Virtual delivery improved professional-services utilization and helped support margins.
- On March 31, Tyler acquired ReadySub and DataSpec for approximately $12.2 million combined, net of cash acquired.
- On April 21, 2021, after quarter-end, Tyler completed its approximately $2.3 billion cash acquisition of NIC. Funding included $900 million of term loans, $250 million drawn on a new revolving facility, cash, and convertible-note proceeds. The new credit agreement provides up to $1.4 billion in facilities; Tyler reported initial borrowing of $1.15 billion.
Outlook, risks, and unusual items
- Management anticipated 2021 capital spending of $39–$40 million, including approximately $17 million of capitalized software development. It stated that existing cash, operating cash flow, and available credit were expected to fund needs for at least the next 12 months, before considering subsequent NIC acquisition financing.
- Management expected software-services and appraisal-services revenue to benefit as travel restrictions ease, while noting that COVID-19 could continue to delay procurement, implementations, and customer payments. No numerical revenue or earnings guidance is provided in the supplied filing text.
- The September 2020 ransomware incident disrupted some internal IT and telephone systems. The company said investigation and remediation were complete; Q1 recorded $215,000 of related expenses and approximately $573,000 of accrued insurance recoveries. Cybersecurity and operational disruption remain risks.
- Debt-related risks increased following the convertible-note issuance and NIC financing, including variable-rate exposure, covenant requirements, potential cash settlement or repurchase obligations, and possible shareholder dilution. A 0.25-percentage-point rate change was estimated to affect annual interest expense by $2.9 million on the initial $1.15 billion of new-credit-agreement borrowings.
- Tyler reported no material legal proceedings beyond routine matters, but recorded the $3.2 million litigation accrual noted above. It reported no goodwill impairment at March 31, while warning that pandemic and market uncertainty could change future impairment judgments.
Investor verification priorities
- Track whether delayed government procurement and implementation work converts into license, services, and backlog revenue, and whether backlog is recognized on the expected timetable.
- Assess SaaS and recurring-revenue growth alongside the mix-driven decline in perpetual license revenue and the effect on margins and cash flows.
- Review NIC integration, acquisition-related costs and synergies, and post-acquisition debt, leverage, interest expense, and covenant headroom.
- Monitor litigation exposure, the ransomware incident’s residual costs and insurance recoveries, and any effect on client confidence or operations.
- Separate reported earnings changes from stock-award tax benefits and share-based compensation; verify the sustainability of margins and operating cash flow.