Tyler Technologies, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars unless noted.
Business context
Tyler provides software and related services primarily to local governments, schools and other public-sector entities. Its two reportable segments are Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS). Revenue comes from software licenses and royalties, subscriptions (including SaaS and e-filing), software services, maintenance, appraisal services, and hardware and other.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $493.1 million | $416.6 million | +18.4% |
| Gross profit / gross margin | $233.4 million / 47.3% | $193.2 million / 46.4% | Margin +0.9 percentage point |
| Operating income / operating margin | $94.8 million / 19.2% | $67.1 million / 16.1% | Income +41.3% |
| Net income | $58.9 million | $39.1 million | +50.7% |
| Diluted EPS | $1.66 | $1.13 | +46.9% |
| Cash from operating activities | $123.4 million | $66.1 million | +$57.3 million |
- 2014 revenue mix: maintenance $212.7 million (43.1% of revenue), software services $113.8 million, subscriptions $87.8 million, licenses and royalties $49.1 million, appraisal services $21.8 million, and hardware and other $7.9 million. Subscriptions and maintenance together represented approximately 61% of revenue.
- Subscription revenue grew 42%, including $17.0 million of 2014 revenue from Texas’s eFileTexas.gov contract. Software services rose 22%, maintenance 11%, and licenses and royalties 20%; appraisal services rose 5%.
- At year-end, cash and cash equivalents were $206.2 million, versus $78.9 million a year earlier. Current assets were $346.7 million and current liabilities $232.8 million, including $189.2 million of deferred revenue. Shareholders’ equity was $337.0 million.
- Tyler had no outstanding borrowings at year-end. Its $150 million revolving credit facility matured in August 2014 and was not replaced. It had a $2.0 million letter of credit, which management did not expect to be drawn.
- Capital expenditures were $9.3 million; investing activities used $11.6 million and financing activities provided $15.4 million. The company repurchased 294,000 shares for $22.8 million. Year-end backlog was $702.0 million, of which $381.4 million was expected to be recognized in 2015.
- Fourth-quarter revenue was $127.4 million, gross profit $60.5 million, net income $15.3 million and diluted EPS $0.43. Compared with fourth-quarter 2013, revenue grew about 15% and net income about 46%.
Changes versus 2013
- Growth was broad-based, with subscriptions, software services and maintenance all increasing; revenue rose 18.4% and operating margin expanded from 16.1% to 19.2%.
- Operating cash flow increased to $123.4 million, supported in part by higher net income, deferred revenue and timing of tax and vendor payments. Days sales outstanding declined from 87 to 80.
- Cash increased by $127.3 million. Deferred revenue rose to $189.2 million from $156.7 million, principally reflecting maintenance billings and subscription growth.
- The effective tax rate declined to 37.6% from 40.6%, partly due to a larger qualified manufacturing activities deduction. Share-based compensation expense increased to $14.8 million from $11.7 million.
- Tyler acquired SoftCode in August for consideration including $3.5 million cash and $1.5 million in Tyler shares. The acquisition added approximately $3.1 million of goodwill.
Outlook, commentary and risks
- Management said local-government market activity had returned to normal, pre-recession levels and expected another year of “very solid revenue and earnings growth” in 2015. It cautioned that margin expansion could be pressured by onboarding costs, strategic product investment, and continued SaaS and e-filing growth.
- Management expected 2015 appraisal-services revenue to increase moderately and research and development expense to grow more slowly than revenue. Excluding acquisitions, planned 2015 capital spending was $13.5 million to $14.5 million.
- Management expected the Texas e-filing contract to generate approximately $19.0 million in 2015, compared with $17.0 million in 2014. The contract is tied to a state mandate requiring counties to use the service.
- On February 4, 2015, Tyler announced that its contractual R&D commitment for Microsoft Dynamics AX public-sector functionality would end with the release of Dynamics AX 7. It expected royalties to continue and did not expect the change to materially affect 2015 results.
- On January 30, 2015, Tyler invested $15.0 million in convertible preferred stock for a 20% interest in Record Holdings Pty Limited, an Australian court and legal transcription company.
- Key disclosed risks include public-sector budget constraints and lengthy procurement cycles; competitive bidding and pricing pressure; fixed-price project cost overruns; hiring and implementation capacity; cybersecurity, client-data protection and data-center continuity; technological change; acquisition integration; and revenue-recognition timing. SaaS and service growth may also affect margins and the timing of reported revenue.
- The IRS was examining Tyler’s 2012 federal tax return; as of February 18, 2015, no significant adjustments had been proposed. The filing reports no material pending legal proceedings other than routine litigation. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether backlog converts to revenue on schedule and whether implementation hiring can keep pace without reducing margins.
- The durability and economics of subscription growth, including Texas e-filing revenue, contract terms, and customer concentration.
- How operating cash flow is affected by deferred-revenue billing cycles, receivables, and the timing of tax payments; how much 2014 cash generation reflects timing items.
- Liquidity and borrowing access following the expiration of the revolving credit facility, particularly if acquisitions or repurchases increase cash needs.
- The effects of the Microsoft Dynamics AX development transition and the Record Holdings investment, including future costs, royalties and returns.
- Potential effects of the new customer-revenue accounting standard, whose financial impact and adoption method Tyler had not yet determined.