Tyler Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the same periods in 2020. Tyler provides software and services primarily to public-sector clients. Results include NIC from its April 21, 2021 acquisition date.
Key financial metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $404.1 | $271.1 | $698.9 | $547.6 |
| Gross profit / margin | $182.1 / 45.1% | $131.2 / 48.4% | $326.3 / 46.7% | $260.3 / 47.5% |
| Operating income / margin | $38.3 / 9.5% | $41.3 / 15.2% | $76.5 / 10.9% | $75.2 / 13.7% |
| Net income | $25.5 | $53.9 | $62.5 | $101.4 |
| Diluted EPS | $0.61 | $1.30 | $1.48 | $2.44 |
| Operating cash flow | Not separately provided for the quarter | $51.4 | $96.5 |
- Revenue mix and growth: Q2 revenue rose 49.1%; excluding recent acquisitions, it increased 12.4%. Six-month revenue rose 27.6%, or 9.5% excluding acquisitions. Subscriptions grew 133% in Q2 and 80% for the half, largely reflecting NIC; excluding acquisitions, growth was 23.6% and 24.5%, respectively.
- Cash and liquidity: Cash and equivalents were $216.8 at June 30, versus $603.6 at December 31, 2020. Cash and investments totaled $347.1, including $130.3 in investment-grade bonds. The company reported $435 available under its revolving facility.
- Debt: At June 30, principal borrowings comprised $965.0 under the credit agreement and $600.0 of 0.25% convertible notes due 2026. The credit agreement carrying value was $957.6, net of discounts and issuance costs; notes’ carrying value was $591.9. Credit-agreement borrowings had a 1.79% effective rate, were variable-rate, and were subject to financial covenants; Tyler reported covenant compliance.
Material changes versus prior year
- NIC contributed $99.1 of revenue and a reported net loss of approximately $9.7 from acquisition through June 30. The acquisition drove much of reported revenue growth and substantially increased goodwill and intangibles; goodwill rose to $2.31 billion from $838.4 million at year-end.
- Despite higher revenue, Q2 operating income fell 7.4% and net income fell 52.6%; six-month operating income increased 1.7%, while net income declined 38.4%. Net results were affected by higher acquisition-related amortization, SG&A and financing costs, and by unusually large excess tax benefits from stock awards in 2020.
- Q2 gross margin decreased 3.3 percentage points year over year; six-month gross margin decreased 0.8 points. Management attributed the pressure primarily to NIC’s historically lower margins and increased acquired-software amortization. Excluding recent acquisitions, management reported higher overall gross margins for both periods.
- Six-month operating cash flow declined to $51.4 from $96.5. Investing used $2.0 billion, principally for NIC; financing provided $1.56 billion, primarily from new debt and convertible-note proceeds. Cash declined by $386.9 during the half.
Outlook, commentary and risks
- Management reported backlog of $1.63 billion at June 30, up 5.6% from a year earlier; it expected approximately 47% to be recognized as revenue over the next 12 months. The filing does not provide full-year revenue or earnings guidance.
- Tyler anticipated 2021 capital spending of $48–$50 million, including approximately $22 million of capitalized software development, funded from cash and operating cash flow. It expected software-services and appraisal-services activity to improve as travel restrictions eased.
- COVID-19 continued to delay government procurement, contract signings and implementations, affecting license and services revenue and potentially payment timing. Management cited remote service delivery and improved staff utilization as offsets.
- Principal risks include acquisition integration and realization of expected benefits, variable-rate debt and debt-service obligations, refinancing and conversion or repurchase cash needs for the notes, covenant restrictions, cybersecurity, and public-sector budget or procurement changes. Tyler reported no goodwill impairment at June 30, but noted estimates could change with market conditions and pandemic-related uncertainty.
- The September 2020 ransomware incident was described as contained, with investigation and remediation completed. For the first half, Tyler recorded $0.336 million of incident expenses and approximately $0.637 million of accrued insurance recoveries. The filing also reports a $3.2 million litigation accrual in first-half SG&A, while stating there were no material legal proceedings pending.
- Tyler had signed an agreement to acquire VendEngine for approximately $84 million in cash, subject to customary adjustments, with closing expected in late Q3 2021.
Important facts for investors to verify
- How much future growth and margin performance depends on NIC, and how the preliminary purchase-price allocation and integration progress develop.
- Whether recurring subscription growth and backlog convert to revenue and cash flow as expected, given implementation and government procurement delays.
- Debt-service capacity, variable-rate exposure, covenant headroom, and potential cash or dilution effects from convertible-note conversion or repurchase provisions.
- Whether the reported working-capital pressure and higher days sales outstanding (128 days, versus 121 at year-end 2020) reverse as receivables are collected.
- Updates on VendEngine’s closing and the costs, benefits, and financing implications of further acquisitions.