Tyler Technologies, Inc. — FY 2021 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2021, not standalone fourth-quarter results. Tyler provides software, cloud subscriptions, payment and digital-government services, and property appraisal services primarily to public-sector customers. Results include NIC from its April 21, 2021 acquisition; NIC is reported as a separate segment.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $1.592 billion | $1.117 billion |
| Operating income | $180.7 million | $172.9 million |
| Net income | $161.5 million | $194.8 million |
| Diluted EPS | $3.82 | $4.69 |
| Gross margin | 44.6% | 48.6% |
| Operating cash flow | $371.8 million | $355.1 million |
- Revenue increased 42.6%; acquisitions contributed 33.7 percentage points of growth. Excluding acquisitions, revenue rose 8.9%.
- Subscriptions revenue grew 123.7% to $784.4 million, including NIC; excluding recent acquisitions, it increased 23.4%. Subscriptions and maintenance represented 79.1% of revenue.
- Net income declined despite higher operating income, reflecting substantially higher interest expense and a smaller benefit from excess tax benefits on stock compensation. The 2021 tax provision was a $2.5 million benefit versus a $19.8 million benefit in 2020.
- At year-end, cash and cash equivalents were $309.2 million and investments were $98.7 million. The company had $500 million of available revolving-credit capacity.
- Debt principal totaled $1.355 billion: $755 million under the 2021 Credit Agreement and $600 million of 0.25% convertible notes due 2026. Credit-agreement borrowings are variable-rate; management estimated that a 0.25 percentage-point rate change would change annual interest expense by $1.9 million.
- Investing activities used $2.091 billion, principally reflecting acquisitions. Cash declined by $294.5 million during the year. Year-end accounts receivable days sales outstanding improved to 108 from 121.
Material changes versus the prior year
- The approximately $2.0 billion NIC acquisition drove much of the step-up in revenue, goodwill, intangible assets, and debt. Tyler also acquired VendEngine, Arx, ReadySub, and DataSpec during 2021.
- Subscriptions rose to 49.3% of revenue from 31.4%; maintenance fell to 29.8% from 41.9%, reflecting NIC’s transaction-based and digital-services revenue and the continued shift to cloud subscriptions.
- Overall gross margin fell 4.0 percentage points, primarily due to NIC’s historically lower-margin business. Excluding 2021 acquisitions, management reported gross margin of 48.5%.
- SG&A increased 50% to $390.6 million, including $23.5 million in acquisition-related transaction expenses, $1.6 million for a separation agreement with NIC’s former CEO, and $3.2 million accrued for litigation. Customer and trade-name intangible amortization also increased following acquisitions.
Outlook, risks, and unusual items
- Management expects continued solid revenue and earnings growth, but provided no specific revenue or EPS guidance in the supplied filing text. It expects cloud-transition expenses to pressure operating margins in 2022 and 2023.
- Backlog was $1.80 billion at year-end, up 12.6%; approximately $840 million, or 47%, was expected to be recognized as 2022 revenue. Planned 2022 capital spending is $65–$70 million.
- FY 2021 included $75 million of NIC COVID-related subscription and services revenue from TourHealth, pandemic unemployment services, and Virginia rent relief. Management expected TourHealth and pandemic unemployment revenue to wind down in the first half of 2022; Virginia rent-relief revenue was expected to continue through 2022. These offerings were described as low margin.
- COVID-19 continued to delay some government procurement and implementations and reduced software-services revenue excluding acquisitions. Key risks also include government budget and procurement changes, cybersecurity and data privacy, third-party/cloud-provider dependence, personnel costs and retention, acquisition integration, competition, and variable-rate debt.
- The company reported no goodwill impairment in 2021, but goodwill was $2.36 billion; the auditor identified goodwill impairment testing and valuation of NIC acquired intangible assets as critical audit matters. The 2020 ransomware incident disrupted internal IT and telephone systems; the filing reported no evidence that client-hosted environments were affected, while noting possible continuing uncertainty.
- Tyler reported no material pending legal proceedings, but recorded a $3.2 million litigation accrual. It paid no cash dividends and said it did not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- How NIC’s growth, margins, and anticipated integration benefits compare with management’s assumptions, and how final purchase-price allocations may change.
- Whether the $1.80 billion backlog converts on schedule, particularly the estimated 47% expected in 2022.
- Progress and costs of the cloud transition, including the expected margin pressure in 2022–2023 and migration to AWS.
- The durability of recurring subscription and maintenance revenue as COVID-related services wind down, and the effect of customer mix on margins.
- Debt repayment, covenant compliance, variable-rate exposure, and potential cash or dilution effects if the convertible notes become convertible.
- Cybersecurity and hosting resilience, including any developments related to the 2020 incident and reliance on third-party providers.