Tyler Technologies, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Tyler provides public-sector software and related services, primarily to local governments. Financial amounts below are in U.S. dollars; income-statement and cash-flow figures are for the periods indicated.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $146.3m | $124.4m | $281.3m | $237.0m |
| Gross profit / margin | $68.3m / 46.7% | $58.6m / 47.1% | $132.1m / 47.0% | $111.1m / 46.9% |
| Operating income / margin | $29.6m / 20.2% | $23.6m / 19.0% | $56.8m / 20.2% | $43.5m / 18.3% |
| Net income | $18.8m | $14.7m | $36.1m | $26.6m |
| Diluted EPS | $0.52 | $0.42 | $1.00 | $0.75 |
| Operating cash flow | Not separately provided | Not separately provided | $14.8m | $28.8m |
- Q2 revenue rose 17.6% and net income rose 27.8% year over year; six-month revenue increased 18.7% and net income increased 35.6%.
- Subscription revenue grew 29% in Q2 and 26% for the half year; maintenance revenue rose 14% in both periods. Software services grew 15% in Q2 and 20% for the half year.
- At June 30, cash and cash equivalents were $204.1m, compared with $206.2m at year-end 2014. The company also held $6.4m of short-term investment-grade bonds. It reported no debt and a $1.5m letter of credit.
- Current assets were $395.5m and current liabilities $240.7m. Deferred revenue was $201.5m. Shareholders’ equity totaled $400.6m.
- Six-month investing cash outflow was $34.0m, including a $15.0m Record Holdings investment, $6.4m of bond purchases, $6.4m for acquisitions, and capital expenditures. Cash decreased $2.1m over the period.
Material changes and management commentary
- Growth reflected stronger local-government market activity and competitive positioning, as well as growth in subscriptions, maintenance, and appraisal services. Four statewide e-filing contracts contributed substantially to subscription growth.
- Gross margin was 46.7% in Q2, down 0.4 percentage points year over year. Management cited hiring and onboarding costs to expand implementation and development capacity; six-month gross margin increased 0.1 percentage points.
- Operating cash flow declined year over year. Management attributed the difference mainly to higher receivables associated with the maintenance billing cycle, bonus payments, and higher tax payments. Days sales outstanding was 94 days, versus 80 at December 31, 2014 and 104 a year earlier.
- In January, Tyler invested $15.0m for a 20% interest in Australian company Record Holdings, accounted for under the cost method. In May, it acquired Brazos Technology for cash and shares; the purchase-price allocation remained in process, and the acquisition’s operating impact was described as not material.
- Management said local-government activity had returned to normal, pre-recession levels and expected 2015 to bring “very solid revenue and earnings growth.” It anticipated some margin-expansion pressure from staffing costs, product investment, and continued SaaS and e-filing growth. No quantified revenue or earnings guidance was provided.
- Tyler expected 2015 capital spending, excluding acquisitions, of $13.5m–$14.5m. It expected R&D expense to grow more slowly than revenue. Its contractual development commitment for public-sector functionality in Microsoft Dynamics AX ends with the release of Dynamics AX 7; discussions with Microsoft on further commitments were ongoing.
Risks, contingencies, and unusual items
- Key risks include changes in public-sector budgets or regulation; cybersecurity, data-center continuity, and internet infrastructure; project delays, renewals, and product development; acquisition integration; competition; and attracting and retaining personnel.
- The filing reported no material legal proceedings beyond routine litigation and no material changes to the risk factors in the 2014 Form 10-K.
- The company was assessing the impact and adoption method for the new revenue-recognition standard, with adoption expected in fiscal 2018 under the then-proposed deferral; it could not yet estimate the financial impact.
- The effective tax rate was 36.8% for Q2 and the first half. Management noted it could rise during the year if stock-option exercises generate significant excess tax benefits.
Important facts for investors to verify
- Whether strong revenue and earnings growth translates into improved operating cash flow as receivables are collected and billing cycles progress.
- Whether hiring and onboarding costs ease and gross margins improve as implementation capacity expands.
- How subscription, SaaS, and e-filing growth affects revenue mix and profitability compared with perpetual-license sales.
- The final Brazos purchase-price allocation and performance of the acquisition, and developments concerning the Record Holdings investment.
- Progress on the Microsoft Dynamics AX 7 development commitment and any future agreement with Microsoft.