Tyler Technologies, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing also reports fourth-quarter results. Amounts are U.S. dollars; financial statement figures are in millions unless noted.
Business context
Tyler provides software, cloud subscriptions, implementation and support services, and property appraisal outsourcing, primarily to local governments and schools. Its reportable segments are Enterprise Software and Appraisal and Tax. Maintenance and subscription services together generated about 62% of 2016 revenue. The filing reports approximately 2% annual customer turnover.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $756.0 million | $591.0 million |
| Gross profit / gross margin | $355.4 million / 47.0% | $277.2 million / 46.9% |
| Operating income / margin | $131.3 million / 17.4% | $108.0 million / 18.3% |
| Net income | $109.9 million | $64.9 million |
| Diluted EPS | $2.82 | $1.77 |
| Operating cash flow | $191.9 million | $134.3 million |
| Capital expenditures | $37.7 million | $12.5 million |
Revenue increased 28% year over year; management reported organic revenue growth of 12%. Maintenance revenue rose 32%, subscriptions 27%, software services 25%, and licenses and royalties 26%. The 2015 comparison includes only a partial year of New World Systems (NWS), acquired in November 2015. Reported operating margin declined, while overall gross margin was essentially flat.
FY 2016 net income includes a $29.6 million income-tax benefit from early adoption of ASU 2016-09, which changed the accounting for excess tax benefits on stock-option exercises. Without that benefit, management stated the 2016 tax provision would have been $49.0 million and the effective tax rate 37.9%. Diluted EPS comparisons are also affected by the new standard’s share-count calculation.
Fourth-quarter revenue was $193.3 million and diluted EPS was $0.80. Fourth-quarter net income was $31.2 million and included a $9.2 million income-tax benefit from the accounting change.
At year-end, cash and cash equivalents were $36.2 million and investments totaled $33.5 million. Borrowings under the revolving facility were $10.0 million, with $287.8 million of unused capacity; the company reported compliance with its covenants. Shareholders’ equity was $915.5 million. Operating cash flow increased, while financing used $138.1 million, including $112.7 million of share repurchases. The company reported no material off-balance-sheet arrangements.
Changes, outlook, and risks
- Backlog rose 13% to $953.3 million, of which $580.2 million was expected to be recognized in 2017. Management described market activity as robust and expected continued solid revenue and earnings growth, without providing a specific numerical forecast in this filing.
- Subscription revenue growth reflected SaaS adoption and e-filing activity. In 2016, 250 new clients selected SaaS and 53 existing clients converted. A growing preference for subscriptions may reduce initial-year license revenue while building recurring revenue over contract terms.
- Higher acquired-software amortization, principally from NWS, weighed on license-related gross margin; increased investment in implementation and support capacity contributed to service revenue growth. R&D expense increased 44%, to $43.2 million.
- The company acquired a small business for approximately $7.4 million in 2016. It planned $52–$54 million of 2017 capital spending, including approximately $24 million for real estate, and expected to continue investing in product development.
- Management expects adoption of the new revenue-recognition standard in FY 2018 to materially affect reported financial statements, particularly the timing and allocation of software license, installation, and contract-acquisition costs. The financial impact had not yet been reasonably estimated. Lease-accounting changes were expected to be adopted in FY 2019; impact was also undetermined.
- Principal risks include government budget constraints and lengthy procurement cycles; competition and pricing pressure; project delays and fixed-price contract overruns; cybersecurity, client-data, and data-center availability risks; recruiting and retention; acquisition integration; and dependence on the Internet and evolving technology.
Important facts for investors to verify
- Separate recurring operating performance from the $29.6 million tax benefit and evaluate the resulting tax rate and EPS comparability.
- Assess the contribution of NWS and other acquisitions to reported growth, margins, amortization, and backlog conversion.
- Track backlog realization, SaaS conversions, e-filing growth, client retention, and implementation capacity against management’s outlook.
- Review the expected effects and implementation readiness for FY 2018 revenue recognition, including potential changes to reported revenue timing and commission expense.
- Monitor cash generation, planned capital spending and repurchases, and the use and covenants of the secured revolving credit facility.