Tyler Technologies, Inc. — Q1 2018 Form 10-Q
Business context and reporting period: The filing covers the three months ended March 31, 2018. Tyler provides software, services, and property appraisal outsourcing primarily to local governments, schools, and other public-sector customers. Results are reported in Enterprise Software (ES) and Appraisal and Tax (A&T). Comparative 2017 figures are presented as adjusted for the company’s retrospective adoption of ASC 606.
Financial performance
- Revenue: $221.2 million, up 10.7% from adjusted Q1 2017 revenue of $199.7 million. Subscriptions grew 23% to $49.0 million; maintenance rose 9% to $93.9 million. Appraisal services declined 18% to $5.4 million. Recurring revenue was $142.9 million.
- Profit and margins: Gross profit was $102.8 million, up from $94.5 million; gross margin was 46.5%, down 0.8 percentage points. Operating income was $38.8 million, up from $36.8 million, while operating margin declined to 17.5% from 18.4%. Net income was $37.8 million versus $32.8 million; diluted EPS was $0.95 versus $0.84.
- Taxes: The effective tax rate was 4.1%, compared with 10.6%. Management attributed the low rates principally to excess tax benefits from stock-option exercises; excluding those benefits, the rates were 27.2% and 38.2%, respectively.
- Cash flow: Operating cash flow was $44.6 million, compared with $48.2 million. Investing used $41.0 million, including $8.9 million of property and equipment additions and net purchases of marketable securities. Financing provided $21.1 million, largely from option exercises and employee stock purchases. Cash increased $24.7 million to $210.6 million.
- Liquidity and debt: The company held $210.6 million in cash and cash equivalents and reported $96.5 million invested in investment-grade corporate and municipal bonds. It had no revolving-credit borrowings and $299.5 million of available capacity under its $300 million facility; a $0.5 million letter of credit was outstanding. The company was in compliance with credit covenants.
- Balance sheet: Total assets were $1.626 billion and shareholders’ equity was $1.261 billion at March 31, 2018. Current liabilities included $268.1 million of deferred revenue. Deferred revenue, including long-term, totaled $268.8 million.
Material changes and management commentary
- Subscription growth reflected new SaaS customers, conversions of existing on-premises clients, and e-filing activity. New-client mix shifted toward subscriptions: approximately 63% chose subscription arrangements versus 37% perpetual licenses, compared with 45% and 55%, respectively, a year earlier.
- Management said additional implementation staff increased capacity to deliver backlog, supporting license and services growth. However, higher staffing costs and lower-margin appraisal services weighed on gross margin.
- Appraisal services revenue declined following completion of several large revaluation projects in 2017; management noted the business is cyclical and affected by state revaluation schedules.
- ASC 606 was adopted January 1, 2018 using full retrospective application. Adoption materially affected retained earnings and deferred commissions, though its impact on 2017 total revenue was not material and it did not change reported cash flows. The new standard changed timing and allocation of certain software-license revenue and extended commission amortization periods.
- Backlog was $1.2 billion at March 31; management expected approximately 50% to be recognized as revenue over the next 12 months.
Outlook, risks, and unusual items
- Management expected 2018 capital spending of $22 million to $25 million, including approximately $2 million for real estate. No specific revenue or earnings guidance was provided in the filing.
- On April 30, 2018, after quarter-end, Tyler acquired Socrata for approximately $150 million cash and Sage Data Security for approximately $11.5 million cash, subject to post-closing adjustments. The filing noted that future acquisitions could require debt or potentially dilutive securities.
- Management identified risks including public-sector budget or regulatory changes, cybersecurity and data-center continuity, acquisition integration, Internet infrastructure, project delays and renewal rates, competition, product-development execution, and hiring and retention.
- The company reported no material legal proceedings beyond routine litigation and no material changes to the risk factors disclosed in its 2017 Form 10-K. Management said disclosure controls were effective as of March 31, 2018.
Important facts for investors to verify
- Whether SaaS and e-filing growth can continue to offset slower perpetual-license growth, and how subscription mix affects reported revenue and margins.
- Whether staffing investments convert the $1.2 billion backlog into revenue without further gross-margin pressure.
- The cash, debt, and integration implications of the post-quarter Socrata and Sage Data Security acquisitions.
- The sustainability of the unusually low reported tax rate, given the substantial stock-option tax benefits and Tax Act-related changes.
- The effect of ASC 606 on comparability, deferred commissions, receivables, and future revenue timing.