Tyler Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Tyler provides software and related services to public-sector entities through its Enterprise Software and Platform Technologies segments. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $504.3 | $468.7 | $976.1 | $924.8 |
| Gross profit / margin | $223.2 / 44.3% | $193.4 / 41.3% | $423.0 / 43.3% | $385.9 / 41.7% |
| Operating income / margin | $61.9 / 12.2% | $56.8 / 12.1% | $106.9 / 10.9% | $112.6 / 12.2% |
| Net income | $49.1 | $39.9 | $80.0 | $79.9 |
| Diluted EPS | $1.15 | $0.94 | $1.87 | $1.88 |
| Cash from operating activities | — | $55.5 | $130.2 |
- Revenue mix: Q2 subscriptions revenue was $297.8 million, up 16.4%; maintenance was $116.5 million, approximately flat; professional services was $66.4 million, down 7.7%; software licenses and royalties were $9.8 million, down 34.8%. Total Q2 revenue rose 7.6%. For the first half, revenue increased 5.6%, while subscriptions grew 15.4%.
- Cash flow and liquidity: First-half operating cash flow fell to $55.5 million from $130.2 million. Cash and equivalents were $118.8 million at June 30, down from $173.9 million at year-end; available-for-sale investments totaled $29.2 million. Management attributed weaker operating cash flow primarily to working-capital timing and higher income-tax payments.
- Debt: June 30 borrowings were $875.0 million principal, including $275.0 million under term loans and $600.0 million of 0.25% convertible notes due 2026; carrying value was $869.1 million. The company repaid $120.0 million of term loans during the first half. Its $500 million revolving facility had no borrowings outstanding. The company reported compliance with credit-agreement covenants.
- Other indicators: Backlog was $1.90 billion, up 2.8% year over year; management expects approximately 46% to be recognized over the next 12 months. Annualized recurring revenue was $1.66 billion, up 11.2% year over year. Current and long-term accounts receivable, net, were $647.0 million; DSO was 112 days.
Material changes versus the prior comparable period
- Q2 revenue, operating income, and net income increased year over year; first-half revenue grew, but operating income declined about 5% and net income was essentially unchanged. First-half diluted EPS slipped to $1.87 from $1.88.
- Subscription growth reflects SaaS adoption and transaction-based activity, including online payments and e-filing. New software contract value was approximately 85% subscription-based in the first half, versus 76% in the prior-year period.
- Professional-services and license revenue declined, partly reflecting reduced COVID-related rent-relief activity and customers’ shift from perpetual licenses to subscriptions. Management expects the decline in license revenue to accelerate as the business shifts toward SaaS.
- Gross margin improved, with management citing subscription growth, lower COVID-related revenue and associated costs, and lower acquired-software amortization. Higher personnel costs and duplicate hosting costs during the transition from proprietary data centers to the public cloud partly offset the improvement.
- First-half interest expense increased to $14.1 million from $11.0 million, reflecting higher interest rates and debt-cost amortization. The effective tax rate declined to 15.5% from 21.8%, principally due to research tax credits and excess tax benefits on stock awards.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expects 2023 capital spending of $63–$65 million, including approximately $37 million for software development, and anticipates elevated cash taxes due to required capitalization and amortization of research and development costs under IRC Section 174. Management believes cash, operating cash flow, and available credit are sufficient for at least the next 12 months.
- Risks: Identified risks include government-client budget or regulatory changes; cyberattacks, security vulnerabilities, and service interruptions; project delays and lower transaction activity; acquisition integration; inflation and rising interest rates; competition; product-development risks; and attracting and retaining personnel. The company reported no material changes to its previously disclosed risk factors.
- Contingencies and unusual items: A lawsuit against a state-government client seeks approximately $15 million in fees following a contract termination; the matter remained unresolved, and additional pursuit costs are possible. A $10 million litigation liability related to the Rapid acquisition was recorded in Q1 2023, with a matching indemnification receivable from escrow. Minimum third-party purchase commitments were approximately $244 million through 2031. No material subsequent events were reported.
- Cash income-tax payments were $92.9 million in the first half, versus $24.3 million a year earlier. The filing attributes the expected temporary increase in cash taxes partly to IRC Section 174 requirements.
- Beginning in 2023, appraisal-services revenue and related costs were combined with professional services and related cost categories; prior periods were reclassified for presentation.
Important facts for investors to verify
- Whether SaaS conversion and transaction-based revenue growth can continue to offset declining professional-services and perpetual-license revenue.
- Whether operating cash flow recovers after the unusually high tax payments and working-capital uses, and how receivables and DSO evolve.
- Progress on public-cloud migration and whether duplicate hosting costs and higher staffing costs pressure margins.
- Term-loan repayment plans, variable-rate exposure, and the company’s ability to maintain credit covenants and liquidity.
- Developments in the state-client lawsuit, the Rapid acquisition litigation matter, and the related indemnification receivable.
- Actual capital spending and cash taxes compared with management’s stated expectations.