Tyler Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Tyler provides software, services, and property appraisal solutions primarily to local governments, schools, and other public-sector clients. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $209.1 | $189.0 | $408.7 | $368.3 |
| Gross profit / margin | $95.9 / 45.8% | $86.9 / 46.0% | $190.2 / 46.5% | $169.1 / 45.9% |
| Operating income / margin | $37.1 / 17.6% | $30.9 / 16.3% | $73.2 / 17.9% | $59.0 / 16.0% |
| Net income | $31.6 | $25.0 | $63.9 | $43.2 |
| Diluted EPS | $0.81 | $0.65 | $1.63 | $1.11 |
- Revenue increased 10.7% in Q2 and 11.0% for the first half; net income rose approximately 26% and 48%, respectively.
- Subscriptions grew 21% in Q2 and 19% in the first half, while maintenance revenue increased 14% in both periods. Q2 license and royalty revenue declined 3%; appraisal services declined 9%.
- First-half operating cash flow was $49.6 million, down from $60.8 million. Investing used $40.4 million and financing provided $9.8 million; cash increased $18.9 million to $55.1 million.
- At June 30, cash and cash equivalents were $55.1 million and short-term investments were $24.7 million. Total assets were $1.44 billion. Current liabilities were $359.6 million, including $304.1 million of deferred revenue.
- No revolving-credit borrowings were outstanding; available capacity was $297.8 million, with $2.2 million in letters of credit. The company reported compliance with credit-facility covenants.
Changes, management commentary, and outlook
- Subscription growth reflected new SaaS clients, conversions of existing on-premises clients, and e-filing activity. Management said subscription arrangements generally produce less license revenue initially but more revenue over the contract term. New-client mix shifted toward subscriptions: 48% in the first half versus 34% a year earlier.
- Higher recurring-revenue mix and improved license margins contributed to first-half gross-margin expansion. Q2 overall gross margin edged down 0.2 percentage points, including pressure from lower-margin hardware and appraisal services. Appraisal-services margins were affected by staffing for a large revaluation project.
- Management expected 2017 capital spending of $53–$55 million, including office expansion and acquisition/renovation costs. It said cash, operating cash flow, and available credit should cover needs for at least the next twelve months. No earnings or revenue guidance is stated in the provided filing text.
- First-half tax rate was 12.4%, versus 25.2% a year earlier, primarily reflecting $18.6 million of excess tax benefits from stock-option exercises. Excluding those benefits, the filing reports a 37.9% effective rate.
- Tyler acquired Modria.com on May 30 for $5.9 million, net of debt assumed; the filing says the operating-results impact was not material.
- The company anticipated adopting the revenue-recognition standard in fiscal 2018 using the full retrospective method and expected a material financial-statement impact, especially for perpetual and time-based software licenses and contract-acquisition costs. The impact was not yet reasonably estimable. Lease-accounting adoption was expected in fiscal 2019; the impact was also not yet estimable.
- Key disclosed risks include public-sector budget or regulatory changes, cybersecurity and service continuity, acquisition integration, internet infrastructure, project delays and renewal rates, competition, product-development risks, and retaining qualified personnel. No material legal proceedings beyond routine litigation were reported; no material quarterly risk-factor changes were disclosed.
Important facts for investors to verify
- Whether SaaS adoption and recurring-revenue growth continue to offset slower perpetual-license revenue growth, and how contract mix affects revenue timing and margins.
- Cash conversion and receivables: first-half operating cash flow declined year over year, and DSO was 101 days versus 93 at year-end 2016.
- The sustainability of reported earnings growth given the significant effect of stock-option tax benefits on the tax rate and EPS.
- Actual capital spending versus the $53–$55 million estimate, and the financial and operational results of acquisitions.
- The eventual quantified effects and transition outcome of the new revenue-recognition standard, which management expected to materially affect the financial statements.