Tyler Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Tyler provides software and related services to public-sector entities, with Enterprise Software and Platform Technologies as its two reportable segments. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $473.2 | $459.9 | $1,398.0 | $1,158.8 |
| Operating income | $60.9 | $56.2 | $173.5 | $132.7 |
| Net income | $53.2 | $44.2 | $133.2 | $106.7 |
| Diluted EPS | $1.26 | $1.04 | $3.14 | $2.53 |
| Gross margin | 43.3% | 42.7% | 42.2% | 45.1% |
| Operating cash flow | Not separately stated for quarter | $259.6 | $256.7 |
- Q3 revenue rose 2.9%; nine-month revenue rose 20.6%. Excluding 2021 and 2022 acquisitions, growth was 1.2% and 4.6%, respectively.
- Nine-month subscription revenue increased 36.2%, substantially reflecting acquisitions, including NIC; excluding acquisitions, it rose 5.9%. Q3 subscriptions were up 0.6% overall but down 2.4% excluding acquisitions.
- Q3 operating margin was 12.9%, versus 12.3%; nine-month operating margin was 12.4%, versus 11.4%. Nine-month gross margin declined 2.9 percentage points, with management citing lower license and maintenance revenue, inflation-related labor costs, and transition costs associated with moving data centers to AWS.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $185.9, down from $309.2 at year-end 2021. Available-for-sale investments were $62.0, bringing cash and investments to about $247.9.
- Nine-month operating cash flow was $259.6. Investing activities used $125.8, including about $117.7 for acquisitions and $25.6 of capitalized software development. Financing activities used $257.1, primarily reflecting $270.0 of term-loan repayments. Cash declined $123.2 over the period.
- Debt principal totaled $1,085.0: $485.0 of term loans and $600.0 of 0.25% convertible notes due 2026. There were no revolver borrowings; $500.0 of revolving capacity remained available. The company reported compliance with debt covenants.
- Current liabilities were $812.2, including $529.2 of deferred revenue. The filing reports total assets of $4,675.4 and shareholders’ equity of $2,547.3.
Material changes, outlook and risks
- Management attributed the Q3 subscription softness mainly to a $37.2 decline in COVID-related transaction revenue. For the nine months, acquisition contributions were significant. Tyler reported ARR of $1.49 billion, flat year over year, and backlog of $1.88 billion, up 6.3%; it expected approximately 46% of backlog to be recognized over the next 12 months.
- Management expected 2022 capital spending of $58–$62, including about $34 of capitalized software development. The filing provides no specific revenue or earnings guidance.
- Tyler acquired US eDirect in February for approximately $116.6 net of cash acquired; its results were described as not material to consolidated results. On October 26, after quarter-end, Tyler signed an agreement to acquire a payments provider for approximately $70, expected to close in Q4.
- A state client terminated a professional-services contract. Tyler sought approximately $15 in fees and reported about $12 of related net billed receivables at September 30. It filed suit; the matter remained unresolved, and the company could not estimate the likelihood of outcome or potential loss.
- Q3 income tax included a $1.4 tax benefit and an effective rate of negative 2.8%, compared with a 13.8% rate a year earlier. Research-credit benefits and uncertain-tax-position liabilities materially affected the period’s tax rate.
- Risks identified include public-sector budget changes, cybersecurity and data-center continuity, acquisition integration, inflation and interest rates, project delays, competition, and hiring and retention. Management reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- How much of reported revenue and subscription growth reflects acquired businesses versus organic growth, and whether the decline in COVID-related transaction revenue continues.
- Whether ARR and backlog convert into revenue as expected, including the timing and profitability of that conversion.
- The effect of inflation, cloud-transition costs, staffing and utilization on margins and cash generation.
- Debt repayment plans and sensitivity to interest rates on the $485.0 of floating-rate term loans.
- The outcome and collectability of the state-client dispute, and the closing, financing and integration of the announced $70 acquisition.
- The sustainability of the unusually low Q3 effective tax rate given research-credit benefits and uncertain tax positions.