Tyler Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. Tyler provides software, SaaS, professional services, maintenance, e-filing and property appraisal services, primarily to local governments, schools and other public-sector clients.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $935.3 million | $840.9 million | +11% |
| Gross profit / margin | $439.6 million / 47.0% | $399.4 million / 47.5% | Margin down 0.5 percentage points |
| Operating income / margin | $152.5 million / 16.3% | $162.8 million / 19.4% | Income down 6% |
| Net income | $147.5 million | $169.6 million | Down 13% |
| Diluted EPS | $3.68 | $4.32 | Down 15% |
| Cash from operations | $250.2 million | $195.8 million | Up $54.4 million |
- Revenue growth was 9% organically and 2% from acquisitions. Subscriptions increased 28% to $220.5 million, or 23.6% of revenue; maintenance increased 7% to $384.5 million. Together, subscriptions and maintenance generated $605.1 million, approximately 65% of revenue.
- Software services revenue rose 6% to $191.3 million; licenses and royalties rose 8% to $93.4 million. Appraisal services fell 13% to $21.8 million, mainly following completion of large revaluation projects.
- Operating expenses grew faster than revenue: SG&A rose 18% to $207.6 million and R&D rose 34% to $63.3 million. Management cited higher staffing, stock-based compensation and product-development investment. The overall gross-margin decline also reflected implementation staffing and lower appraisal-service volume.
- FY 2018 net income and EPS were below 2017, which included a $26.0 million one-time tax benefit from U.S. tax-law changes. Management stated that, excluding the Tax Act benefit and excess stock-option tax benefits, the effective tax rate would have been 27.4% in 2018 versus 37.0% in 2017.
- Fourth-quarter revenue was $242.0 million versus $217.7 million; net income was $31.6 million versus $66.2 million and diluted EPS was $0.79 versus $1.68. The 2017 quarter included the substantial tax benefit from the Tax Act.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $134.3 million; investments in corporate, municipal and asset-backed securities totaled $97.7 million. Total assets were $1.79 billion and shareholders’ equity was $1.32 billion.
- There were no borrowings under the $300 million revolving credit facility, leaving $300 million of unused capacity. Tyler reported compliance with its covenants. The facility matures in November 2020 and is secured by substantially all company assets.
- Investing activities used $238.3 million, including $178.1 million for acquisitions and $27.4 million for property and equipment. Financing activities used $63.6 million, including $150.1 million of share repurchases, partly offset by employee stock-plan proceeds.
- Accounts-receivable days sales outstanding increased to 111 from 102. Unbilled receivables were $104.2 million, up from $64.6 million; management attributed the increase largely to revenue recognized before billing on software licenses and implementation work.
Business changes, outlook and notable items
- Tyler acquired Socrata for $147.6 million net of cash acquired, plus Sage, CaseloadPRO, MobileEyes and SceneDoc. Socrata contributed $13.9 million of revenue and a reported $11.5 million net loss after acquisition in 2018. The other 2018 acquisitions were described as not material individually or collectively to results.
- Backlog was approximately $1.25 billion, up 2% year over year; about $625.6 million, or 50%, was expected to be recognized in 2019. Management said it expected continued solid revenue and earnings growth and planned significant product-development investment, but provided no quantified earnings or revenue guidance in the supplied filing text.
- Planned 2019 capital spending was $54–$56 million. A January 2019 agreement to acquire MicroPact contemplated $185 million in cash plus contingent consideration of up to $10 million; closing remained subject to customary conditions. Tyler also acquired MyCivic for $3.7 million in February 2019.
- Adoption of the new revenue standard was applied retrospectively. Management said its effect on 2017 and 2016 total revenue was not material, but it materially affected retained earnings and deferred commissions. The standard changed the timing and allocation of some software-license revenue and extended commission amortization periods.
- Tyler expected the new lease standard to add an estimated $15.5–$17.8 million of lease assets and liabilities to the balance sheet in 2019. No material pending legal proceedings, material purchase commitments or off-balance-sheet arrangements were reported beyond operating leases.
- Key risks include cyberattacks and exposure of client data, data-center or Internet interruptions, public-sector budget constraints and lengthy procurement, competition and pricing pressure, project delays and fixed-price cost overruns, acquisition integration, and attracting and retaining qualified employees. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether recurring subscription and maintenance growth continues, and how the shift to SaaS affects near-term license revenue and margins.
- Whether the $1.25 billion backlog converts to revenue on schedule, particularly the stated 2019 portion, and whether higher unbilled receivables and DSO normalize.
- Underlying earnings and tax-rate comparability after separating the 2017 one-time Tax Act benefit and annual stock-option tax benefits.
- Socrata’s post-acquisition performance and integration, including its reported 2018 loss, and the results and funding of the planned MicroPact acquisition.
- The effect of elevated hiring, R&D spending, stock compensation, repurchases and 2019 capital spending on operating margins, cash and per-share results.