Tyler Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Tyler provides software, related services and property appraisal services primarily to public-sector customers. Comparative 2017 figures were retrospectively adjusted for adoption of the new revenue recognition standard (ASC 606). Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $236.1 | $208.8 | $457.2 | $408.5 |
| Gross profit / margin | $109.3 / 46.3% | $95.5 / 45.7% | $212.1 / 46.4% | $190.0 / 46.5% |
| Operating income / margin | $37.1 / 15.8% | $37.3 / 17.7% | $76.0 / 16.7% | $74.1 / 18.2% |
| Net income | $39.2 | $31.8 | $77.0 | $64.5 |
| Diluted EPS | $0.97 | $0.81 | $1.91 | $1.65 |
| Operating cash flow | Not separately stated for the quarter | $67.2 | $49.6 |
- Q2 revenue increased 13% year over year; six-month revenue rose 12%. Management reported organic growth of 11% in both periods, with acquisitions contributing 2% of Q2 growth and 1% of six-month growth.
- Subscriptions grew 31% in Q2 and 27% year to date; organic subscription growth was 25% and 24%, respectively. Maintenance grew 8% in both periods. Appraisal services declined 13% in Q2 and 16% year to date.
- Operating income was nearly flat in Q2 and increased about 2% for the six-month period, despite higher revenue. SG&A and R&D rose 22% and 33% in Q2, respectively; management cited increased staffing, share-based compensation, commissions and product-development initiatives.
- Net income growth was amplified by unusually low reported tax rates: negative 3.9% in Q2 and 0.2% for the six months, primarily reflecting excess tax benefits from stock-option exercises and the lower federal tax rate. Excluding stock-option tax benefits, the respective effective rates were 26.7% and 27.0%.
- Recurring revenue, principally subscriptions and maintenance, was $149.1 million in Q2 and $292.0 million for the six months. Backlog was $1.2 billion, up 10.9% year over year; Tyler expected approximately 51% to be recognized over the next 12 months.
Financial position and cash flow
- At June 30, cash and cash equivalents were $93.2 million, down from $185.9 million at year-end. Tyler also held $99.2 million in investment-grade corporate and municipal bonds, which it intended to hold to maturity.
- There were no revolving-credit borrowings and $300 million of borrowing capacity available under the credit facility, which matures in November 2020. Tyler reported compliance with its covenants. The facility is secured by substantially all company assets.
- Six-month operating cash flow was $67.2 million. Investing used $208.0 million, including $157.2 million for acquisitions, $14.9 million for property and equipment, and net purchases of marketable investments. Financing provided $48.1 million, mainly from stock-option exercises and employee stock-plan contributions.
- Current assets were $502.0 million and current liabilities were $373.9 million. Deferred revenue, including long-term amounts, was $316.9 million. Accounts receivable, including long-term receivables, was $311.6 million; unbilled receivables were $77.9 million. Days sales outstanding rose to 114 days from 102 at year-end, which management attributed largely to unbilled revenue and billing-cycle timing.
Material developments, outlook and risks
- Tyler acquired Socrata, a cloud-based open-data and analytics provider, and Sage Data Security, a cybersecurity services company, on April 30. Socrata contributed $3.0 million of reported revenue and a $4.0 million net loss in the period. Purchase-price allocations remained preliminary; Socrata goodwill was $78.9 million and was expected to be nondeductible for tax purposes.
- Management forecast 2018 capital spending, excluding acquisitions, of $23 million to $26 million. It said existing cash, operating cash flow and available credit were sufficient for at least the next 12 months. No specific revenue or earnings guidance was provided in this filing.
- Management described continued customer movement toward SaaS and e-filing, supported by new SaaS customers and conversions from on-premises systems. It also noted longer-term software-license growth may remain slow as more clients choose subscription arrangements.
- Risks highlighted include public-sector budget or regulatory changes; cybersecurity and data-center continuity; integration of acquisitions; dependence on internet infrastructure; project delays, contract size and renewal rates; competition; product-development execution; and attracting and retaining personnel. Management reported no material changes to the risk factors in its 2017 Form 10-K, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
- ASC 606 was adopted using the full retrospective method. Management said its effect on 2017 and 2016 total revenue was not material, but adoption materially affected retained earnings and deferred commissions. The new lease standard was expected to be adopted in fiscal 2019; Tyler had not yet estimated its financial impact.
Important facts for investors to verify
- Whether recurring subscription growth and the $1.2 billion backlog convert into revenue and cash as expected, particularly given higher DSO and unbilled receivables.
- How much earnings growth is attributable to operating performance versus stock-option tax benefits, and whether reported tax rates normalize.
- Whether margin pressure from rising SG&A, R&D and implementation staffing persists as Tyler expands capacity and shifts customers to SaaS.
- Final purchase-price allocations and subsequent operating performance of Socrata and Sage, including integration costs and realization of expected synergies.
- The cash and investment balance after acquisition spending, capital expenditures and any future acquisitions or share repurchases.