Tyler Technologies, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Tyler provides public-sector software and services, primarily to local governments, through Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $189.0m | $146.3m | $368.3m | $281.3m |
| Gross profit / margin | $86.9m / 46.0% | $68.3m / 46.7% | $169.1m / 45.9% | $132.1m / 47.0% |
| Operating income / margin | $30.9m / 16.3% | $29.6m / 20.2% | $59.0m / 16.0% | $56.8m / 20.2% |
| Net income | $18.9m | $18.8m | $36.0m | $36.1m |
| Diluted EPS | $0.49 | $0.52 | $0.94 | $1.00 |
- Revenue grew 29% in Q2 and 31% in the first half. Management attributed 11% and 12% growth, respectively, to organic revenue, with acquisitions contributing 18% and 19%.
- Subscriptions revenue rose 26% in Q2 and 30% in the first half; organic growth was 22% and 26%. Maintenance increased 32% and 33%; software services increased 33% and 35%.
- Despite higher revenue, Q2 net income was nearly unchanged and first-half net income declined slightly. Operating margin contracted, partly reflecting higher acquired-software amortization, SG&A, R&D, and customer/trade-name intangible amortization. Acquired-software amortization rose to $5.7m in Q2 from $0.5m.
- Cash from operations was $54.1m for the first half, versus $14.8m a year earlier. Investing used $35.7m and financing used $10.2m. Capital expenditures were $22.0m; operating cash flow less capital expenditures was approximately $32.2m.
- At June 30, cash and equivalents were $41.3m and short-term investments were $22.6m; the company also disclosed $34.4m of investment-grade bonds across short- and long-term investment classifications. Revolving-credit borrowings were $135.0m, up from $66.0m at year-end 2015. Unused facility capacity was $162.8m, after accounting for letters of credit. The company reported compliance with covenants; the borrowing rate was 1.7%.
Changes, outlook, and notable items
- NWS, acquired in November 2015, contributed $26.0m of Q2 and $49.6m of first-half revenue. The company also acquired scheduling, time-and-attendance software provider ExecuTime in June 2016; its impact was described as immaterial. NWS purchase-price allocation remained preliminary.
- Backlog reached $867.6m, up 20% year over year, with NWS included. Management cited strong local-government software market activity and continued migration toward cloud/SaaS and e-filing services.
- Perpetual-license revenue excluding acquisitions declined 1% in Q2 and 5% in the first half. Management expects customer preference for subscriptions to weigh on longer-term license growth, while subscription contracts generally generate more revenue over their term. First-half new-client mix shifted to 34% subscription arrangements from 26% a year earlier.
- No formal earnings or revenue guidance was provided in the filing. Management expected 2016 capital spending of $42m–$44m, excluding acquisitions, and stated that cash, operating cash flow, and available credit should fund needs for at least the next twelve months.
- First-half share repurchases totaled $94.5m for 758,000 shares, averaging $124.75 per share. The company had authorization to repurchase up to 2.1m additional shares at June 30.
- Capital spending included a $9.7m purchase of a Falmouth, Maine office building previously leased from an entity owned by an executive’s father and brother, and construction spending for a Yarmouth, Maine expansion. Planned expansion spending was approximately $11.5m in 2016 and $15.5m in 2017.
- Effective tax rates were 37.5% for Q2 and 37.8% for the first half, compared with 36.8% in the respective 2015 periods. Management noted that stock-option tax benefits could affect the manufacturing deduction and future tax rate.
- Key risks include public-sector budget or regulatory changes, cybersecurity and data-center continuity, acquisition integration, project delays, renewal rates, competition, technology development, and recruiting and retaining personnel. The company reported no material legal proceedings beyond routine litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, and whether the reported backlog converts to revenue on schedule.
- Whether SaaS and e-filing growth can offset slower perpetual-license growth while sustaining service margins.
- The ongoing impact of acquisition-related amortization and operating expenses on margins and earnings.
- Debt repayment plans, share-repurchase pace, capital spending, and liquidity under the $300m revolving facility.
- Final NWS purchase-price allocation, integration outcomes, and any subsequent acquisition-related costs or financing needs.
- The effect of tax-accounting changes and stock-based compensation on effective tax rate and reported earnings.