Tyler Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Tyler provides software, services, and property appraisal solutions primarily to local governments, schools, and other public-sector clients.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $199.5 million | $179.3 million | +11% |
| Gross profit / gross margin | $94.3 million / 47.3% | $82.1 million / 45.8% | Margin +1.5 percentage points |
| Operating income / operating margin | $36.1 million / 18.1% | $28.0 million / 15.6% | Margin +2.5 percentage points |
| Net income | $32.3 million | $18.2 million | +77% |
| Diluted EPS | $0.83 | $0.47 | +77% |
| Operating cash flow | $48.2 million | $41.3 million | +$6.9 million |
Revenue growth was led by subscriptions (+18%), maintenance (+14%), software services (+6%), and software licenses and royalties (+8%). Subscriptions benefited from SaaS client additions and conversions, as well as e-filing growth. Maintenance revenue also reflected rate increases, installed-base growth, and the completion of recognition of certain acquisition-related deferred revenue.
Enterprise Software revenue was $182.6 million, versus $161.8 million; segment operating income was $52.1 million, versus $40.7 million. Appraisal and Tax revenue was $19.1 million, versus $18.3 million; segment operating income was $4.2 million, versus $4.8 million. Appraisal services gross margin declined, partly due to added resources for a large revaluation project.
Cash, debt, and liquidity
Cash and cash equivalents were $63.7 million at March 31, 2017, up from $36.2 million at December 31, 2016. Tyler also held $33.5 million in investment-grade corporate and municipal bonds. It had no revolving-credit borrowings, compared with $10.0 million at year-end, and had $297.8 million of unused capacity under its $300 million revolving facility; two letters of credit totaled $2.2 million. The company reported compliance with credit-facility covenants.
Investing activities used $20.1 million, including $19.8 million of property and equipment additions. Financing activities used $0.5 million; the company repurchased 42,000 shares for $6.2 million. Management said operating cash flow, cash on hand, and available credit were expected to cover working capital, capital expenditures, taxes, and repurchases for at least the next 12 months. DSO was 74 days, versus 93 days at December 31, 2016 and 69 days a year earlier.
Material changes, outlook, and risks
- Net income growth was substantially aided by a lower reported effective tax rate: 10.2%, versus 33.9%. Excess tax benefits from stock-option exercises were $10.1 million, versus $1.2 million. Excluding those benefits, the effective tax rate was 38.2% in both periods.
- Tyler expects 2017 capital spending of $53 million to $55 million, including office expansion and purchase/renovation projects. No full-year revenue or earnings guidance is provided in the filing.
- Management described a gradual shift toward SaaS and subscription arrangements. These can reduce initial-year license revenue versus perpetual licenses but produce higher overall revenue over the contract term. New-client mix was approximately 55% perpetual and 45% subscription in Q1 2017, compared with 66% and 34%, respectively, a year earlier.
- Tyler expects to adopt the revenue-from-contracts standard in fiscal 2018 using the full retrospective method, subject to system readiness and completion of its analysis. Management anticipates a material financial-statement impact, particularly from software license, installation, and contract-acquisition-cost accounting, but could not yet reasonably estimate the impact. SaaS and professional-services revenue are expected to remain substantially unchanged. The company expects to adopt the new lease standard in fiscal 2019 and had not estimated its impact.
- Key stated risks include public-sector budget or regulatory changes; security breaches and data-center interruptions; acquisition integration; reliance on internet infrastructure; client project delays and renewal trends; competition, technology development, and staffing. The filing reported no material changes to the risk factors in the 2016 Form 10-K and no material legal proceedings beyond routine litigation.
- Disclosure controls were reported effective as of March 31, 2017, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings and EPS increase reflects the unusually large stock-option tax benefit, and how should normalized tax expense be assessed?
- Whether SaaS growth and client conversions sustain recurring-revenue growth while managing the lower initial license revenue and delivery costs.
- Progress and spending against the $53 million to $55 million 2017 capital-spending plan, and the resulting effect on cash generation.
- The eventual quantified effects and transition details of the revenue-recognition standard, including any retrospective restatement.
- Whether the improvement in margins and cash flow persists as staffing, R&D, cloud infrastructure, and implementation capacity expand.