Tyler Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Tyler provides software, subscriptions, services and property appraisal solutions primarily to public-sector clients, particularly local governments. Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $275.1 | $236.1 | $522.2 | $457.2 |
| Gross profit / margin | $127.9 / 46.5% | $109.3 / 46.3% | $243.9 / 46.7% | $212.1 / 46.4% |
| Operating income / margin | $36.7 / 13.3% | $37.1 / 15.7% | $71.2 / 13.6% | $76.0 / 16.6% |
| Net income | $32.0 | $39.2 | $59.3 | $77.0 |
| Diluted EPS | $0.80 | $0.97 | $1.49 | $1.91 |
| Operating cash flow | Not separately stated | Not separately stated | $48.5 | $67.2 |
- Q2 revenue increased 16.5% year over year; first-half revenue rose 14.2%. Subscriptions grew 38.6% in Q2 and 37.9% in the first half. Maintenance revenue increased 11.0% and 8.9%, respectively.
- Q2 net income fell about 18% year over year and first-half net income fell about 23%. Operating income declined about 1% in Q2 and 6% in the first half. Higher SG&A, research and development, and acquired-intangible amortization weighed on operating results.
- Gross margin edged up, supported by subscription mix and operating leverage in services, maintenance and subscriptions. This was partly offset by lower software-license margins and increased acquired-software amortization.
- At June 30, cash and equivalents were $11.2, versus $134.3 at December 31, 2018; short-term investments were $31.2. The company also reported $68.1 of investment-grade corporate and municipal bonds across short- and long-term investments, which it intends to hold to maturity.
- Revolving-credit borrowings were $15.0, with $285.0 available under the $300 million facility. The facility matures in November 2020; Tyler reported covenant compliance. Current liabilities of $453.7 were approximately equal to current assets of $453.6.
- First-half investing cash outflow was $195.5, chiefly reflecting acquisitions; financing provided $24.0. Cash declined by $123.1 during the half. Capital expenditures were $24.1, including $11.9 related to real estate.
Material changes and business developments
- Revenue mix continued shifting from perpetual licenses to subscriptions. New-contract value was approximately 72% subscription-based in the first half of 2019, versus 44% in the comparable 2018 period. Tyler said subscription contracts initially produce less license revenue but higher overall revenue over the contract term.
- Excluding acquisitions, subscription revenue grew 29% in Q2 and 26% in the first half. Tyler added 154 new SaaS clients in Q2 and 282 in the first half; 27 and 40 existing on-premises clients, respectively, converted to SaaS.
- Tyler acquired MicroPact on February 28, 2019, for approximately $204 million net of cash acquired, including contingent consideration and holdbacks; the purchase-price allocation remained preliminary. MicroPact contributed $14.6 of Q2 revenue and recorded a $3.2 net loss for the quarter. Tyler also acquired MyCivic for $3.7 in cash; its results were not significant.
- Backlog was $1.4 billion at June 30, up 17% year over year; management expected approximately 49% to be recognized as revenue over the following 12 months.
- Accounts receivable rose to $401.9 from $314.9 at year-end, and days sales outstanding increased to 125 from 111 at December 31, 2018. Management attributed the DSO increase to billing-cycle seasonality and higher unbilled receivables.
Outlook, risks and other notable items
- Management did not provide a specific revenue or earnings forecast in the supplied filing text. It anticipated 2019 capital spending of $48–$50 million, including about $23 million for real estate and $6 million for capitalized software development.
- Management said operating cash flow, cash on hand and available credit should fund working capital, capital expenditures, taxes and share repurchases for at least the next 12 months, while noting that future access to capital and credit markets could be limited by economic conditions or other factors.
- Key disclosed risks include changes in government-client budgets or regulation; cybersecurity, data-center and internet-infrastructure reliability; acquisition integration and unanticipated costs; project delays, renewals and sales activity; product-development and technology risks; competition; and attracting and retaining qualified personnel.
- Tyler repurchased approximately 72,000 shares for $14.3 million in the first half. Up to 2.6 million additional shares remained authorized for repurchase.
- The effective tax rate was 12.1% for Q2 and 17.0% for the first half, versus negative 3.9% and 0.2% in 2018. Management attributed the increase mainly to lower excess tax benefits from stock awards; excluding those benefits, the rates were 26.9% and 26.8%.
- Adoption of lease accounting Topic 842 added operating-lease right-of-use assets and liabilities; the opening retained-earnings adjustment was $1.1 million. No material legal proceedings beyond routine litigation were reported, and management reported effective disclosure controls.
Important facts for investors to verify
- Whether subscription growth and the contract mix shift continue to offset declining perpetual-license revenue and its initial-period revenue impact.
- Whether MicroPact integration, preliminary purchase accounting, acquired-asset amortization and the acquisition’s reported losses affect future margins and earnings as expected.
- Whether elevated receivables, unbilled balances and DSO convert to cash in subsequent periods, and whether operating cash flow recovers from the prior-year comparison.
- Whether the $1.4 billion backlog converts on the expected schedule and supports management’s growth outlook.
- Whether planned capital spending, share repurchases and any further acquisitions are funded without materially increasing borrowing or constraining liquidity.