Tyler Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in millions unless stated otherwise. Tyler provides software, related services, and property appraisal services, primarily to local governments. Its reportable segments are Enterprise Software and Appraisal and Tax.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $194.5 | $150.8 | $562.8 | $432.1 |
| Gross profit | $93.5 | $71.8 | $262.5 | $204.0 |
| Operating income | $36.9 | $31.5 | $95.9 | $88.3 |
| Net income | $22.3 | $20.1 | $58.2 | $56.3 |
| Diluted EPS | $0.58 | $0.55 | $1.51 | $1.56 |
| Gross margin | 48.1% | 47.6% | 46.7% | 47.2% |
| Operating margin | 19.0% | 20.9% | 17.0% | 20.5% |
- Revenue increased 29% in Q3 and 30% year to date. Management attributed 11% and 12% growth, respectively, to organic growth, with acquisitions contributing 18% in both periods.
- Q3 revenue growth was led by maintenance ($83.0 million, up 36%), software services ($44.7 million, up 23%), and subscriptions ($36.9 million, up 27%). Organic subscription growth was 23% for Q3 and 25% year to date.
- Operating cash flow was $121.2 million for the nine months, versus $69.9 million in 2015. Investing activities used $42.8 million; financing activities used $88.2 million. Cash declined $9.8 million to $23.3 million.
- At September 30, cash and cash equivalents were $23.3 million; short-term investments were $23.8 million. The company reported $34.0 million invested in corporate and municipal bonds across current and non-current investments.
- Revolver borrowings were $34.0 million, down from $66.0 million at December 31, 2015. The $300 million facility had $263.8 million of unused capacity after outstanding letters of credit. The company reported compliance with covenants and an interest rate of 1.8%.
- Current assets were $277.3 million and current liabilities $348.5 million, including $288.3 million of deferred revenue. Shareholders’ equity was $882.3 million.
Changes versus comparable periods
- Net income rose 11% in Q3 but only 3% year to date; diluted EPS rose 5% in Q3 and fell 3% year to date.
- Revenue growth substantially exceeded operating-income growth. Operating margin declined in both comparisons, while gross margin increased slightly in Q3 and declined modestly year to date.
- Acquired-software amortization rose to $5.6 million in Q3 and $16.7 million year to date, primarily following the November 2015 New World Systems (NWS) acquisition. Customer and trade-name amortization also increased.
- Maintenance and subscription growth reflected a larger installed base and greater adoption of cloud and SaaS offerings. More new clients selected subscriptions: 32% in the first nine months of 2016 versus 24% in 2015.
- Tyler repurchased 758,000 shares for $94.5 million during the first nine months, at an average $124.75 per share. Up to 2.1 million additional shares remained authorized for repurchase at quarter-end.
Outlook, commentary, risks, and unusual items
- Management described local-government software demand as strong and reported backlog of $935.6 million, up 23% year over year, including NWS.
- Management said operating cash, cash on hand, and available credit were sufficient for working capital, capital expenditures, taxes, and planned repurchases for at least the next 12 months. This is not a specific earnings forecast.
- Capital spending guidance, excluding acquisitions, was $40–$42 million for 2016. Planned spending included a $9.7 million office-building purchase in Falmouth, Maine, and office expansion spending; approximately $15.5 million was expected for the Yarmouth, Maine, expansion in 2017.
- The Falmouth building was purchased from an entity owned by an executive’s father and brother. The filing identifies the relationship and purchase price.
- The NWS purchase-price allocation remained preliminary at September 30, 2016. The company had also made a $15 million cost-method investment for a 20% interest in Australian company Record Holdings Pty Limited.
- Key disclosed risks include local-government budget or regulatory changes, cybersecurity and data-center continuity, acquisition integration, project delays, renewal rates, competition, technology development, and retaining qualified staff. No material change to the prior annual report’s risk factors was reported; no material pending legal proceedings were disclosed.
- Tyler expected to adopt the new revenue-recognition standard in fiscal 2018 and the new lease standard in fiscal 2019; their financial impacts were not yet reasonably estimable. It planned to adopt the stock-compensation accounting update in Q4 2016 and expected that change to materially affect income tax expense, operating cash flows, and the effective tax rate.
Important facts for investors to verify
- How much of reported revenue and backlog growth is organic versus acquisition-related, and whether SaaS adoption continues at the reported pace.
- Whether margins recover as acquisition-related amortization, integration costs, and investments in implementation and support capacity evolve.
- Whether operating cash flow remains strong after considering timing effects from taxes, receivables, and deferred-revenue billings.
- Future repurchase pace, capital spending, acquisition financing, and use of the revolving credit facility.
- Final NWS purchase accounting and the eventual effects of the revenue-recognition, lease, and stock-compensation accounting changes.