Tyler Technologies, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Tyler provides software, SaaS, support, implementation, e-filing and property appraisal services, primarily to local governments and schools.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $840.7 million | $756.0 million | +11% |
| Gross profit / margin | $399.1 million / 47.5% | $355.4 million / 47.0% | Margin +0.5 percentage points |
| Operating income / margin | $160.9 million / 19.1% | $131.3 million / 17.4% | Income +23% |
| Income before taxes | $161.6 million | $129.3 million | +25% |
| Net income | $163.9 million | $109.9 million | +49% |
| Diluted EPS | $4.18 | $2.82 | +48% |
| Operating cash flow | $195.8 million | $191.9 million | +$3.9 million |
Maintenance revenue rose 12% to $361.6 million; subscriptions increased 22% to $173.5 million; software services grew 7% to $187.1 million. Software licenses and royalties were up 2% to $75.7 million, while appraisal services declined 5% to $25.0 million. Maintenance and subscriptions together represented approximately 64% of revenue. Overall gross-margin improvement reflected growth in recurring revenue and better margins in software services, maintenance and subscriptions; appraisal-services margin declined.
Fourth quarter: Revenue was $217.9 million versus $193.3 million a year earlier. Net income was $61.8 million versus $31.2 million, and diluted EPS was $1.56 versus $0.80. Fourth-quarter and annual earnings benefited materially from tax items described below.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $185.9 million, versus $36.2 million in 2016. Investments in corporate, municipal and asset-backed securities totaled $63.8 million.
- No revolving-credit borrowings were outstanding; approximately $299.5 million of the $300 million facility was available, subject to its terms. Tyler was in compliance with its covenants. The facility is secured by substantially all company assets.
- Shareholders’ equity was $1.17 billion. Operating cash flow was $195.8 million; investing activities used $85.4 million and financing activities provided $39.4 million.
- Capital expenditures were approximately $43.1 million. Tyler repurchased approximately 44,000 shares for $6.6 million and received $56.9 million from stock-option exercises and employee stock-plan activity.
- Accounts receivable days sales outstanding were 94 days, compared with 93 days in 2016. Deferred revenue was $309.5 million current and $1.3 million long-term.
Material changes and unusual items
- The 2017 income-tax benefit was $2.3 million, compared with tax expense of $19.5 million in 2016. The Tax Cuts and Jobs Act generated a $21.6 million benefit from remeasuring deferred tax assets and liabilities. Excess tax benefits from stock-option exercises reduced the provision by $40.6 million in 2017, versus $29.6 million in 2016. Excluding both the Tax Act impact and excess option tax benefits, management reported a 2017 effective tax rate of 37.1%.
- Subscription growth reflected new SaaS customers, conversions by existing customers and increased e-filing activity. New-client mix shifted toward subscriptions: approximately 47% chose subscription arrangements in 2017, compared with 32% in 2016. Tyler noted these arrangements typically reduce initial-year license revenue while producing higher revenue over the contract term.
- Appraisal revenue fell following completion of several large revaluation projects. Tyler made three small 2017 acquisitions for a combined cash purchase price of approximately $11.3 million; their operating impact was described as immaterial.
- Tyler adopted the new revenue-recognition standard effective January 1, 2018 using full retrospective application. Management expected a material balance-sheet and equity impact and changes to the timing and allocation of some license revenue, but had not provided a quantified impact. The company planned to adopt the new lease standard in fiscal 2019; its impact was not yet reasonably estimable.
Outlook, commentary and risks
Management described the local-government software market as active, cited year-end backlog of approximately $1.1 billion—up 18% from 2016—and said it expected continued solid revenue and earnings growth. Approximately $578.2 million, or 52% of backlog, was expected to be recognized in 2018. No specific 2018 revenue or earnings guidance was provided. Planned 2018 capital spending was $22 million to $25 million.
Principal risks include public-sector budget constraints and lengthy procurement cycles; competition and pricing pressure; cybersecurity, data privacy and hosting-service interruptions; implementation delays, contract-estimation and fixed-price risks; technology changes; and challenges integrating acquisitions and retaining qualified staff. The company reported no material pending legal proceedings beyond routine litigation. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Separate recurring operating performance from the Tax Act benefit and stock-option tax benefits when assessing 2017 net income and EPS growth.
- Review the quantified effects of the 2018 revenue-recognition adoption, including any recast comparative periods and balance-sheet adjustments.
- Track subscription and maintenance growth, SaaS customer conversions, e-filing volumes and the resulting effect on revenue mix and margins.
- Monitor backlog conversion, implementation capacity, receivables/DSO and the timing of maintenance renewals.
- Confirm capital spending, acquisition activity, share repurchases and use of the revolving facility against cash generation and covenant requirements.