Tyler Technologies, Inc. — Q1 2016 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2016, compared with Q1 2015. Tyler provides software and related services mainly to local governments and schools through Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS). Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $179.3 | $135.0 | +33% |
| Gross profit / gross margin | $82.1 / 45.8% | $63.9 / 47.3% | Margin down 1.5 percentage points |
| Operating income / margin | $28.0 / 15.6% | $27.2 / 20.1% | Income +3%; margin down |
| Net income / net margin | $17.1 / 9.5% | $17.3 / 12.8% | Net income down 1% |
| Diluted EPS | $0.44 | $0.48 | Down 8% |
| Operating cash flow | $40.3 | $(2.1) | Improved |
| Capital expenditures | $16.7 | $1.9 | Increased |
- Revenue growth was reported as 14% organic and 19% from acquisitions completed in 2015. NWS, acquired in November 2015, contributed $23.6 million of Q1 revenue.
- Subscriptions grew 35% (31% excluding acquisitions), software services 38% (20% excluding acquisitions), and maintenance 33% (8% excluding acquisitions). Perpetual software licenses declined 9% excluding acquisitions as more customers selected subscription arrangements.
- SG&A increased 43% to $40.8 million; R&D increased 42% to $10.0 million. Higher acquired-software amortization was a major factor in the lower overall gross margin.
Financial position and liquidity
- At March 31, cash and cash equivalents were $35.3 million; investment-grade bonds totaled $33.9 million and were intended to be held to maturity.
- Revolver borrowings were $140.0 million, compared with $66.0 million at December 31, 2015. The $300 million facility matures in November 2020; unused capacity was $156.8 million after $3.2 million of letters of credit. The reported interest rate was 1.7%, and Tyler said it was in compliance with facility covenants.
- Current assets were $225.5 million and current liabilities $289.7 million. Deferred revenue was $250.1 million current and $4.6 million long-term.
- Operating cash flow benefited from net income, noncash depreciation and amortization, share-based compensation, and collections of receivables. Cash used in financing was $15.9 million, including $93.9 million for treasury-share purchases, partly offset by $74.0 million of net revolving borrowings.
Outlook, commentary, and risks
- Management reported a $808.7 million backlog at March 31, up 17% year over year, and described local-government software market activity as good. No specific revenue or earnings guidance was provided.
- Management expected 2016 capital spending of $37–$39 million, excluding acquisitions. Planned spending included an office building purchase and office expansion; approximately $8.5 million was expected for the expansion in 2016 and $18.5 million in 2017.
- Management said cash, operating cash flow, and available credit were expected to fund working capital, capital spending, taxes, and share repurchases for at least the next 12 months. Future acquisitions could require additional debt or potentially dilutive securities.
- The NWS purchase-price allocation remained preliminary; estimates for acquired intangibles, liabilities, deferred revenue, and related taxes could change. The company also reported an investment valued using significant unobservable inputs: its 20% interest in Record Holdings.
- Key stated risks include local-government budget or regulatory changes, cybersecurity and data-center continuity, acquisition integration, project delays and renewal trends, competition, product-development risks, and recruiting and retaining qualified personnel. Tyler reported no material change to its previously disclosed risk factors and no material pending legal proceedings beyond routine litigation.
- Tyler expected to adopt the new revenue standard in fiscal 2018 and the new lease standard in fiscal 2019; financial impacts were still being assessed. It planned to adopt the stock-compensation standard in fiscal 2016 and expected an effect on income tax expense and the effective tax rate.
Important facts for investors to verify
- Whether organic growth, subscription conversions, and backlog translate into sustained revenue and profit growth.
- How acquisition-related amortization, integration, and final NWS purchase accounting affect margins and results.
- Whether revolver borrowings, share repurchases, and planned capital spending remain consistent with liquidity and covenant capacity.
- How much of the lower diluted EPS and margins reflects ongoing costs versus acquisition-related or other period-specific factors.
- The eventual financial and operational effects of the announced accounting-standard adoptions and the Microsoft Dynamics AX development-contract amendment.