Tyler Technologies, Inc. — Q3 2019 Form 10-Q
Business context and period: Tyler provides software, services and appraisal solutions primarily to public-sector entities, especially local governments. This unaudited quarterly report covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $275.4 | $236.1 | $797.6 | $693.3 |
| Gross profit / margin | $130.7 / 47.5% | $111.6 / 47.3% | $374.6 / 47.0% | $323.7 / 46.7% |
| Operating income / margin | $40.1 / 14.5% | $37.6 / 15.9% | $111.2 / 13.9% | $113.6 / 16.3% |
| Net income | $40.4 | $38.9 | $99.7 | $115.9 |
| Diluted EPS | $1.00 | $0.96 | $2.49 | $2.87 |
| Operating cash flow | Not separately provided for quarter | $178.5 | $179.4 |
Q3 revenue increased 16.7% and nine-month revenue increased 15.0%. Subscriptions grew 28.2% in Q3 and 34.4% year to date, reflecting cloud/SaaS adoption and e-filing growth; excluding acquisitions, subscription growth was 23.2% and 24.8%, respectively. Recurring revenue was $185.1 million in Q3. Backlog was $1.4 billion, up 13.9% year over year, with approximately 49% expected to be recognized over the next 12 months.
Q3 net income rose about 3.8%, while nine-month net income fell about 13.9%. Operating income increased 6.6% in Q3 but declined about 2.1% year to date. Gross margin improved slightly, but operating margins were lower as SG&A, R&D and acquired-intangible amortization grew. The effective tax rate was unusually low at 0.4% for Q3 and 11.0% year to date, principally due to excess tax benefits from stock-based awards.
Financial position and liquidity
- At September 30, cash and cash equivalents were $161.4 million, versus $134.3 million at December 31, 2018. The company also held $68.2 million of investment-grade corporate and municipal bonds.
- Current assets were $569.8 million and current liabilities were $476.8 million. Deferred revenue was $391.6 million current and $0.2 million long-term.
- No revolver borrowings were outstanding at quarter-end; the $400 million revolving facility had $400 million available and matures September 30, 2024. The company reported compliance with its covenants.
- Nine-month investing cash outflow was $203.2 million, including $199.9 million for acquisitions and $28.8 million of property and equipment additions. Financing cash inflow was $51.8 million. Cash increased $27.2 million during the period.
- Operating lease liabilities totaled $24.5 million following adoption of the new lease standard. The filing reports no other outstanding borrowings at quarter-end.
Material changes and management commentary
- MicroPact, acquired in February 2019, contributed $36.4 million of nine-month revenue and a $5.6 million net loss. Acquisition-related software amortization increased, weighing on license and acquired-software margins. MyCivic’s results were not material.
- New contract value mix shifted toward subscriptions: 51% subscription-based versus 49% perpetual licenses for the first nine months of 2019, compared with 37% and 63%, respectively, in 2018. Management expects longer-term growth in traditional license revenue to slow as customers choose subscriptions; subscriptions generally generate higher revenue over the contract term but less license revenue initially.
- Management said operating cash flow, cash on hand and available credit should fund working capital, capital expenditures, taxes and share repurchases for at least the next 12 months. Expected 2019 capital spending was $45–$47 million, including about $20 million for real estate and $6 million for capitalized software development.
- The company repurchased approximately 72,000 shares for $14.3 million during the first nine months and retained authorization to repurchase up to 2.6 million additional shares.
- On October 30, 2019, after quarter-end, Tyler acquired certain Courthouse Technologies assets for approximately $19 million in cash, subject to post-closing adjustments.
Risks, contingencies and unusual items
- Management identifies risks including changes in government client budgets or regulation; cybersecurity and data-center continuity; acquisition integration; dependence on internet infrastructure; project delays and renewal rates; competition, product development and staffing; and regulatory compliance.
- The appraisal-services business is cyclical and affected by statutory revaluation schedules. DSO was 114 days, compared with 111 days at December 31, 2018 and 107 days a year earlier; management attributed the increase in part to unbilled receivables and contract timing.
- There were no material legal proceedings beyond routine litigation, and no material changes to the risk factors disclosed in the 2018 Form 10-K. Disclosure controls were reported effective.
- Tyler adopted Topic 842 leases on January 1, 2019, recognizing operating lease assets and liabilities and recording a $1.1 million reduction to opening retained earnings. The filing says adoption had no income-statement impact.
- The filing says no borrowing was outstanding at September 30, while MD&A attributes lower other income partly to increased interest expense from credit-agreement borrowings. Investors may wish to clarify the timing and source of that interest expense.
Investor verification points
- Verify the durability and organic contribution of subscription growth, backlog conversion and the recurring-revenue trend.
- Assess whether acquisition integration and MicroPact’s reported loss, purchase-price allocations and acquired-intangible amortization affect future profitability.
- Track operating-margin pressure, rising SG&A and R&D, and the unusually low tax rate driven by stock-award tax benefits.
- Monitor collections, unbilled receivables and DSO, alongside the timing of deferred-revenue billings.
- Confirm capital-spending expectations, acquisition funding and use of the new $400 million revolver; clarify the reported interest-expense explanation against the zero quarter-end borrowing balance.