Tyler Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Tyler provides software and related services to public-sector customers, reported in Enterprise Software and Platform Technologies segments. Financial amounts below are in millions except per-share data.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $494.7 | $473.2 | $1,470.8 | $1,398.0 |
| Gross profit / margin | $225.2 / 45.5% | $204.7 / 43.3% | $648.2 / 44.1% | $590.5 / 42.2% |
| Operating income / margin | $63.9 / 12.9% | $60.9 / 12.9% | $170.8 / 11.6% | $173.5 / 12.4% |
| Net income | $47.0 | $53.2 | $127.0 | $133.2 |
| Diluted EPS | $1.10 | $1.26 | $2.97 | $3.14 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $233.0 | $259.6 |
- Q3 revenue grew 4.5%; nine-month revenue grew 5.2%. Subscriptions rose 16.1% in Q3 and 15.6% year to date, led by SaaS conversions and transaction-based services. Subscription revenue was $295.2 million in Q3; SaaS revenue grew 26.0% in the quarter.
- Q3 net income fell 11.7% and diluted EPS fell 12.7% year over year; nine-month net income fell 4.6%. Q3 operating income increased 5.0%, while nine-month operating income declined 1.6%.
- Recurring revenue, defined by Tyler as subscriptions plus maintenance, was $412.7 million in Q3 and $1,222.6 million for nine months. ARR was $1.65 billion at September 30, up 11.0% from a year earlier.
- Professional services revenue declined 15% in Q3 and 12% year to date, principally as pandemic-related rent-relief work wound down. Software licenses and royalties declined 48% and 41%, respectively, reflecting the shift toward subscriptions; management expects license revenue declines to accelerate as that shift continues.
- Gross margin improved 2.2 percentage points in Q3 and 1.9 points year to date, supported by subscription growth, lower pandemic-related revenue and costs, and lower acquired-software amortization. Management cited offsetting pressure from lower license and maintenance revenue, duplicate hosting costs during the public-cloud transition, and higher personnel costs.
Cash, debt and liquidity
- Cash and equivalents were $131.5 million at September 30, versus $173.9 million at December 31, 2022. Available-for-sale investments were $21.2 million; the filing also reports a $10.0 million equity investment.
- Nine-month operating cash flow was $233.0 million, down from $259.6 million. Investing used $40.6 million and financing used $234.8 million; cash declined $42.4 million. Financing outflow primarily reflected $255.0 million of term-loan repayments.
- Debt principal totaled $740.0 million: $140.0 million under the credit agreement and $600.0 million of 0.25% convertible notes due 2026. Net carrying value was $735.2 million. No revolver borrowings were outstanding, with $500.0 million of revolving capacity available. The company reported compliance with credit-agreement covenants.
- Management said available cash, operating cash flow, and credit availability were sufficient for needs over at least the next 12 months. The current credit-agreement borrowing rate is variable; a 0.25-percentage-point rate change would change annual interest expense by approximately $350,000 on the outstanding balance.
Outlook, risks and unusual items
- Management expects 2023 capital spending of $58–$60 million, including approximately $35 million for software development, and expects cash taxes to remain higher because IRC Section 174 requires capitalization and amortization of research and development costs.
- Backlog was $1.95 billion, up 3.9% year over year; approximately 47% was expected to be recognized as revenue over the following 12 months. Backlog includes deferred revenue and contracted amounts to be invoiced in future periods.
- CSI, an AI automation and indexing provider, was acquired in August for approximately $36.3 million net of cash acquired. Two additional acquisitions were completed October 31 for approximately $38 million in total consideration, after quarter-end.
- A lawsuit seeking approximately $15 million from a state-government client following a contract termination remains unresolved. Tyler says it believes payment is owed but cannot assure recovery or that it will avoid additional legal costs.
- Minimum third-party technology and service purchase commitments totaled approximately $235 million through 2031. Goodwill was approximately $2.51 billion; no goodwill or other asset impairment was recorded through September 30. Goodwill valuation depends on significant estimates and could be affected by changed conditions.
- Management identified risks including public-sector budget changes, cybersecurity incidents and service disruption, acquisition integration, client project delays, competition, inflation and interest rates, and retaining qualified personnel. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective; a new financial-management system was implemented July 1, with post-implementation controls to be monitored.
Most important facts for investors to verify
- Whether subscription and SaaS growth can offset continuing declines in professional-services and perpetual-license revenue, and whether margin gains persist as cloud-transition costs and personnel expenses evolve.
- Cash conversion and tax-payment trends, particularly the effect of IRC Section 174 and the timing of working-capital movements.
- Debt repayment plans, variable-rate exposure, and the terms and potential dilution or cash-settlement consequences of the 2026 convertible notes.
- Progress on the unresolved state-client litigation, final purchase-price allocations for recent acquisitions, and the results and funding of the October 31 acquisitions.
- Backlog conversion, public-sector customer budgets, cybersecurity readiness, and the material purchase commitments through 2031.