Tyler Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Tyler provides software, services and property appraisal solutions primarily to public-sector customers.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $247.1 million | $221.2 million |
| Gross profit / margin | $116.0 million / 47.0% | $102.8 million / 46.5% |
| Operating income / margin | $34.5 million / 13.9% | $38.8 million / 17.5% |
| Net income | $27.3 million | $37.8 million |
| Diluted EPS | $0.69 | $0.95 |
| Operating cash flow | $24.0 million | $44.6 million |
- Revenue increased 12%. Subscriptions rose 37% to $67.3 million, reflecting SaaS conversions and new clients, e-filing growth, and the MicroPact acquisition. Excluding acquisitions, subscriptions grew 22%.
- Maintenance revenue increased 7% to $100.2 million. Software licenses and royalties declined 4% to $21.8 million; management cited customers’ shift toward subscription contracts.
- Gross margin improved 0.5 percentage point. Operating income fell 11% as SG&A rose 21%, R&D rose 45%, and amortization of other intangibles rose 46%. Higher staffing, share-based compensation, product investment and acquired-asset amortization contributed to expense growth.
- The effective tax rate was 22.0%, versus 4.1% in Q1 2018, principally because excess tax benefits from stock-option exercises declined to $1.7 million from $9.1 million. Excluding those benefits, the rates were 26.8% and 27.2%, respectively.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $39.4 million at March 31, down from $134.3 million at year-end. Tyler also held $81.0 million of investment-grade corporate and municipal bonds, which it intended to hold to maturity.
- Operating cash flow was $24.0 million. Investing activities used $194.9 million, largely reflecting the MicroPact acquisition; financing activities provided $76.1 million, including $85.0 million of revolving-credit borrowings.
- Tyler had $85.0 million outstanding on its $300 million revolving facility, with $215.0 million available. The borrowing rate was approximately 3.80% under a 30-day LIBOR contract; the company reported compliance with facility covenants.
- Current assets were $402.3 million and current liabilities were $403.4 million. Deferred revenue was $319.9 million current and $0.4 million long-term. Total assets were $1.91 billion; shareholders’ equity was $1.36 billion.
- Days sales outstanding were 104 days, compared with 111 at December 31, 2018 and 88 at March 31, 2018. Management attributed the year-over-year increase mainly to higher unbilled receivables.
Material developments, outlook and risks
- Tyler acquired MicroPact on February 28 for approximately $204.2 million net of cash acquired, including contingent consideration and holdbacks. MicroPact contributed $5.5 million in revenue and a $0.4 million net loss after acquisition. The preliminary allocation included $82.0 million of goodwill and $118.8 million of identifiable intangible assets; purchase accounting remained subject to finalization. Tyler also acquired MyCivic for $3.7 million.
- Backlog was $1.3 billion, up 5% year over year; management expected approximately 50% to be recognized as revenue over the next 12 months. Subscription arrangements are gaining share: Q1 new contract value was approximately 54% subscription and 46% perpetual licenses, versus 40% and 60%, respectively, a year earlier. Management expects longer-term license growth to slow as clients choose subscriptions.
- Management forecast 2019 capital spending of $48 million to $50 million, including approximately $22 million for real estate and $6 million for capitalized software development. It stated that operating cash flow, cash on hand and available credit should cover needs for at least the next 12 months.
- Key stated risks include government budget or regulatory changes, cybersecurity and data-center continuity, acquisition integration, project delays and renewal trends, competition, technology development, and recruiting and retaining personnel. No material change to previously disclosed risk factors was reported. Other than routine litigation, no material legal proceedings were disclosed.
- Tyler adopted the new lease standard on January 1, 2019, recognizing operating-lease assets and liabilities and a $1.1 million reduction to opening retained earnings; adoption did not affect income for the quarter.
Investor facts to verify
- How MicroPact’s integration, final purchase-price allocation and contingent consideration affect future expenses, cash flow and results.
- Whether subscription growth and backlog conversion can offset lower perpetual-license revenue and the reported increase in operating expenses.
- The sources of reduced operating cash flow, including deferred-revenue movements, and the effect of acquisition spending and revolving-credit borrowings on liquidity.
- Whether planned capital spending and continued share repurchases remain consistent with cash generation and available credit.