TYLER TECHNOLOGIES INC annual report, FY2020

Tyler Technologies, Inc. — FY 2020 Form 10-K

Reporting period: Year ended December 31, 2020; filed February 19, 2021. This is an annual report, not a standalone fourth-quarter filing. Tyler provides software and related services to public-sector clients, particularly local governments, through its Enterprise Software and Appraisal and Tax segments.

Financial performance and liquidity

• Revenue grew 2.8%; excluding acquisitions, growth was 1.4%. Subscriptions rose 18% to $350.6 million, while software licenses and royalties fell 27% to $73.2 million. Maintenance increased 9% to $467.5 million.
• Recurring subscription and maintenance revenue was $818.2 million, or 73.3% of total revenue. Year-end backlog was $1.59 billion, up 9.4%; approximately $780 million was expected to be recognized in 2021.
• Net income included a $19.8 million income tax benefit, compared with a $13.3 million provision in 2019. Management attributed the change primarily to $60.2 million of excess tax benefits from share-based compensation and a $3.4 million CARES Act NOL carryback benefit. Excluding excess tax benefits, the company reported a 23.1% effective tax rate for 2020.
• At year-end, cash and cash equivalents were $603.6 million and investments were $154.8 million. The company had no borrowings and had $400 million available on its revolving credit facility, maturing in 2024. Shareholders’ equity was $2.0 billion; total debt was zero.
• Current assets were $1.11 billion and current liabilities were $564.3 million. Deferred revenue, including long-term amounts, was $461.4 million. Days sales outstanding increased to 121 days from 117.
• Fourth-quarter 2020 revenue was $283.3 million and net income was $54.1 million; diluted EPS was $1.29. These are unaudited quarterly figures included in the 10-K.

Changes versus the prior year

• Subscription growth reflected continued adoption of SaaS and transaction-based services: Tyler added 488 new SaaS clients, and 157 existing clients converted to SaaS.
• COVID-19-related procurement and implementation delays, along with the September cybersecurity incident, contributed to lower license and software-services revenue. Appraisal-services revenue also declined amid project delays.
• Overall gross margin improved by 1.0 percentage point, helped by a higher subscription mix and improved virtual-services utilization. Software-license gross margin declined as license revenue fell.
• Operating cash flow increased to $355.1 million. Cash and investments increased substantially, supported in part by operating cash generation and $135.3 million of employee stock-option and stock-purchase-plan proceeds.

Outlook, risks and unusual items

• Management described the local-government software market as active and expected continued solid revenue and earnings growth, while planning significant product-development investment. It did not provide specific 2021 revenue or earnings guidance in the supplied filing text.
• Management expected 2021 capital spending of $39–$40 million, including approximately $17 million of capitalized software development.
• COVID-19 remained a risk to procurement, public-sector budgets, implementations, appraisal work, and collections. Management expected continued near-term pressure on some revenues, with the full effect potentially delayed because of recurring revenue.
• A ransomware incident in September 2020 disrupted some internal IT and telephone systems. The company reported no evidence that hosted client application environments or client networks were affected. It estimated approximately $1.5 million of lost 2020 revenue and recorded $4.2 million of incident costs; it had received $2.4 million in insurance recoveries and accrued another $1.1 million. Further response and remediation costs were expected.
• On February 9, 2021, after year-end, Tyler agreed to acquire NIC, Inc. for $34 per share in cash, subject to closing conditions. The transaction was expected to be financed with cash and new debt; Tyler obtained a commitment for a $1.6 billion, 364-day unsecured bridge facility. Completion was not assured.
• Other key risks include cybersecurity and data protection, reliance on government customers and competitive bidding, project cost overruns, competition, acquisition integration, and retaining qualified staff. No material litigation was reported. The annual goodwill impairment test resulted in no impairment charge.

Important facts for investors to verify

• Track whether the NIC acquisition closed, its final financing and leverage, and any integration costs or revised capital priorities.
• Assess whether backlog converts to revenue as expected and whether SaaS growth offsets continued pressure on perpetual licenses and implementation services.
• Monitor the continuing financial and operational effects of COVID-19 and the cybersecurity incident, including additional costs, insurance recoveries, or disclosures of client-data impact.
• Separate underlying earnings trends from the unusually favorable 2020 tax benefit, and review the timing and sustainability of cash flow and stock-based compensation tax benefits.
• Review accounts-receivable collection trends, including the increase in DSO and unbilled receivables, and the assumptions used for revenue recognized over time.