Tyler Technologies, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Tyler provides public-sector software and services, primarily to local governments and schools. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $128.7 | $107.0 | $365.7 | $305.9 |
| Gross profit | $61.8 | $49.5 | $172.9 | $140.4 |
| Operating income | $26.7 | $17.9 | $70.2 | $47.7 |
| Net income | $17.0 | $11.0 | $43.6 | $28.6 |
| Diluted EPS | $0.48 | $0.32 | $1.23 | $0.83 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $95.1 | $58.7 |
- Q3 revenue grew 20% year over year; nine-month revenue grew 20%. Management reported organic revenue growth of 20% for both periods.
- Q3 gross margin was 48.0%, versus 46.3%; operating margin was 20.8%, versus 16.7%; net margin was 13.2%, versus 10.3%. Nine-month gross margin was 47.3%, versus 45.9%; operating margin was 19.2%, versus 15.6%; net margin was 11.9%, versus 9.4%.
- Subscription revenue increased 49% in Q3 and 51% for the nine months, led in part by e-filing. Maintenance revenue rose 11% for both periods. Software license and royalty revenue rose 26% in Q3 and 24% for the nine months.
- At September 30, cash and cash equivalents were $157.4, compared with $78.9 at December 31, 2013. Current assets were $293.0 and current liabilities $221.4. Deferred revenue was $185.8, up from $156.7 at year-end.
- Nine-month investing cash outflow was $10.3, including $3.2 for the SoftCode acquisition; financing cash outflow was $6.3, including $22.8 of share repurchases. Cash increased $78.6 during the period.
- There were no outstanding borrowings or debt at September 30. The $150 million revolving credit line matured August 11, 2014 and was not renewed. A $2.0 letter of credit remained outstanding and expires in 2015; management did not expect it to be drawn.
Changes, outlook and other notable items
- Profitability improved faster than revenue, with gross and operating margin gains. Management attributed gross-margin improvement principally to revenue mix and lower initial costs on the Texas e-filing contract; increased hiring partly offset the gains.
- Tyler acquired SoftCode on August 29 for $3.2 million cash, net of acquired cash, plus 16,540 Tyler shares valued at $1.5 million. The preliminary purchase allocation included approximately $3.0 million goodwill and $2.1 million intangible assets.
- Employee count increased to 2,796 from 2,482 a year earlier. Management said hiring and product development are continuing investments to deliver backlog and support anticipated business.
- The Texas Office of Court Administration e-filing contract was expected to generate approximately $17 million in 2014 and $19 million in 2015. These are contract revenue expectations, not company-wide guidance.
- Management expected 2014 capital spending, excluding acquisitions, of $10.5–$11.0 million and said cash, operating cash flow and credit-market access should cover needs for at least the next 12 months. No full-year revenue or earnings guidance is stated in the provided filing text.
- Key risks cited include public-sector budget or regulatory changes, security breaches and data-center interruptions, project delays and renewal trends, competition, product-development execution, acquisition integration, and retaining qualified personnel. Management reported no material change in risk factors from the 2013 Form 10-K and no material legal proceedings beyond routine litigation.
- The company was assessing the impact and adoption method for the new revenue-recognition standard; it could not yet reasonably estimate the financial impact. The standard was effective for annual periods beginning after December 15, 2016, with early adoption prohibited.
Important facts for investors to verify
- Whether subscription and e-filing growth, including the Texas contract, converts to sustained revenue and margin growth.
- Whether hiring and backlog delivery support growth without materially eroding margins or service quality.
- The final SoftCode purchase-price allocation, integration progress and realized commercial benefits.
- Cash generation, deferred-revenue trends, and capital allocation following expiration of the revolving credit facility and continued share repurchases.
- The eventual financial and reporting effects of adopting the new revenue-recognition standard.