Tyler Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unless otherwise noted, financial figures below are in millions of dollars. Prior-year figures are presented as adjusted for the company’s retrospective adoption of the revenue recognition standard.
Business context
Tyler provides software and related services to public-sector clients, primarily local governments and schools. Its offerings include enterprise software, cloud subscriptions and e-filing, maintenance, implementation services, and property appraisal and tax services. Recurring revenue—primarily subscriptions and maintenance—was $154.9 million, or about 66% of third-quarter revenue.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $236.1 | $214.7 | $693.3 | $623.2 |
| Gross profit / margin | $111.6 / 47.3% | $104.0 / 48.4% | $323.7 / 46.7% | $294.0 / 47.2% |
| Operating income / margin | $37.6 / 15.9% | $44.3 / 20.6% | $113.6 / 16.3% | $118.4 / 18.9% |
| Net income | $38.9 | $38.8 | $115.9 | $103.4 |
| Diluted EPS | $0.96 | $0.99 | $2.87 | $2.63 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $179.4 | $142.4 |
Third-quarter revenue increased 10%, while organic growth was 7%; nine-month revenue increased 11%, with 9% organic growth. Subscriptions grew 32% in Q3 and 29% year to date, reflecting SaaS conversions, new SaaS clients, e-filing activity, and Socrata. Maintenance grew 5% and 7%, respectively. Appraisal services declined 12% in Q3 and 15% year to date, principally after completion of large revaluation projects in 2017.
Operating income declined despite revenue growth. Management attributed margin pressure to expanded implementation staffing, lower-margin revenue mix, and higher amortization of acquired software. SG&A rose 18% in Q3 and R&D rose 44%, reflecting higher staffing, share-based compensation, commissions, and product development investment. Net income was supported by unusually low effective tax rates: negative 0.8% for Q3 and 0.1% year to date, primarily due to excess tax benefits from stock option exercises and tax-law effects.
Financial position, cash flow, and capital
- Cash and cash equivalents were $219.5 million at September 30, 2018, versus $185.9 million at December 31, 2017. The company also held $95.8 million of investment-grade corporate and municipal bonds.
- Current assets were $601.7 million and current liabilities $397.0 million. Deferred revenue, current and long-term, totaled $326.9 million.
- Operating cash flow of $179.4 million was offset by $222.3 million of investing outflows, including $167.3 million for acquisitions, $23.5 million for property and equipment, and net purchases of investments. Financing provided $76.5 million, chiefly from stock option exercises and employee stock plan activity. Cash increased $33.5 million.
- No borrowings were outstanding under the $300 million revolving credit facility; the company reported the full amount available and compliance with covenants.
- Accounts receivable increased, and days sales outstanding rose to 107 days from 102 at year-end 2017 and 94 a year earlier. Management cited higher unbilled receivables and billing and collection timing.
Material changes, outlook, and risks
- Acquisitions: Tyler acquired Socrata for approximately $147.6 million net of cash acquired, Sage Data Security for $11.6 million, and CaseloadPRO for $9.2 million. Socrata contributed $5.4 million of Q3 revenue and recorded a $3.9 million net loss for the quarter. Purchase-price allocations remained preliminary. Tyler subsequently acquired MobileEyes for approximately $4.8 million in cash on October 1, 2018.
- Backlog and business mix: Backlog was $1.2 billion, up 7% year over year; approximately 51% was expected to be recognized over the next 12 months. New-client mix shifted toward subscription arrangements: 57% for the first nine months of 2018 versus 49% in 2017. Management expects longer-term traditional license growth to slow as clients favor subscriptions, which initially generate less revenue than perpetual licenses but more over the contract term.
- Spending outlook: Excluding acquisitions, management anticipated 2018 capital spending of $23 million to $26 million. The filing provides no specific revenue or earnings guidance.
- Tax and accounting: Tyler adopted the new revenue standard retrospectively. It materially affected retained earnings and deferred commissions, although the impact on 2017 total revenue was not material; reported comparatives were adjusted. The company planned to adopt the new lease standard in fiscal 2019 and had not yet estimated its financial impact.
- Capital allocation: No shares were repurchased during the first nine months, but approximately 155,000 shares were repurchased after quarter-end through October 31 for $32.3 million. The board had authorized repurchases of up to 2.0 million additional shares.
- Risks and contingencies: Key disclosed risks include government client budget or regulatory changes, cybersecurity and data-center continuity, acquisition integration, dependence on internet infrastructure, project delays and renewal rates, competition, product development, and retaining qualified personnel. No material legal proceedings were reported, and no material quarterly changes to the prior annual report’s risk factors were identified.
Important facts for investors to verify
- Whether subscription growth and backlog convert into revenue and cash flow at expected rates, and how the shift away from perpetual licenses affects near-term revenue.
- Whether hiring and acquisition-related costs moderate enough to stabilize gross and operating margins.
- Whether higher receivables and DSO are temporary timing effects and collections remain sound.
- The final Socrata and other acquisition purchase-price allocations, integration progress, and Socrata’s path to profitability.
- The sustainability of reported earnings and EPS given the exceptionally low effective tax rate and stock-option-related tax benefits.
- The impact of the planned lease-accounting adoption and subsequent share repurchases on liquidity and capital allocation.