Tyler Technologies, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. Tyler supplies software and related services primarily to local governments, including recurring maintenance, SaaS and e-filing, plus property appraisal services.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $591.0 million | $493.1 million | +19.9% |
| Gross profit / margin | $277.2 million / 46.9% | $233.4 million / 47.3% | Margin down 0.4 percentage points |
| Operating income / margin | $108.0 million / 18.3% | $94.8 million / 19.2% | Income +13.9%; margin down 0.9 points |
| Net income / margin | $64.9 million / 11.0% | $58.9 million / 11.9% | Income +10.1%; margin down 0.9 points |
| Diluted EPS | $1.77 | $1.66 | +6.6% |
| Operating cash flow | $89.0 million | $123.4 million | Down $34.4 million |
Revenue growth was broad-based: subscriptions rose 27% to $111.9 million, software services 23% to $139.9 million, maintenance 15% to $245.5 million, and licenses and royalties 20% to $59.0 million. Recurring subscriptions and maintenance together represented approximately 60% of revenue. Organic revenue increased 17%, according to management.
Fourth quarter: Revenue was $158.9 million versus $127.4 million, up 24.7%. Net income was $8.6 million versus $15.3 million, and diluted EPS was $0.23 versus $0.43. Q4 included $5.5 million of NWS acquisition-related costs and $3.5 million of NWS intangible amortization; the filing does not separately quantify their after-tax impact on quarterly earnings.
Liquidity, debt and cash flows
- Year-end cash and cash equivalents were $33.1 million, down from $206.2 million. Tyler also held $30.9 million of investment-grade corporate and municipal bonds.
- Borrowings under a new $300 million revolving credit facility were $66.0 million, leaving $234.0 million available. The facility matures in November 2020, is secured by substantially all company assets, and had a 1.6% year-end interest rate. Tyler reported covenant compliance.
- Operating cash flow fell to $89.0 million, principally reflecting higher tax payments and increased receivables, partly offset by deferred revenue growth. Investing used $398.5 million, largely reflecting acquisitions. Financing provided $136.4 million, including $66.0 million of net borrowings.
- Accounts receivable days sales outstanding increased to 100 days from 80, largely due to NWS receivables; excluding NWS, management reported 79 days.
Material changes and unusual items
- Tyler acquired New World Systems (NWS) on November 16, 2015, expanding its public safety and financial software offerings. Consideration was approximately $337.5 million cash, net of cash acquired, plus 2.1 million Tyler shares valued at $362.8 million. NWS contributed $10.1 million of revenue after acquisition in 2015.
- NWS’s preliminary allocation included $527.6 million of goodwill and $264.8 million of identifiable intangible assets; the purchase price allocation remained incomplete at year-end. NWS represented 57% of total assets but 2% of 2015 revenue.
- Annual operating results included $5.9 million of NWS transaction expenses. Acquired-software amortization and increased implementation and development hiring contributed to lower gross margin.
- Year-end revenue backlog reached $844.5 million, up 20% from $702.0 million; $476.3 million, or 56%, was expected to be recognized in 2016.
- The effective tax rate rose to 40.2% from 37.6%, affected in part by a lower manufacturing deduction and nondeductible NWS transaction costs. A $21.1 million income tax receivable was recorded.
Outlook, risks and contingencies
- Management described local-government software activity as good and expects to increase product investment, forecasting approximately $47 million of R&D expense. Excluding acquisitions, 2016 capital spending was expected to be $31–33 million, with a further approximately $10 million contemplated for a leased Maine office building.
- Management expects sufficient cash, operating cash flow and available credit to meet needs for at least the next 12 months. The filing gives no specific revenue or EPS guidance.
- Key risks include public-sector budget constraints and lengthy procurement cycles; competition and pricing pressure; cyberattacks, client-data breaches and data-center disruptions; implementation delays and fixed-price project overruns; and difficulties integrating acquisitions or retaining qualified staff.
- Management’s internal-control assessment excluded NWS. The independent auditor likewise did not audit NWS controls, although NWS was included in the consolidated financial statements and represented 57% of year-end assets. Tyler’s assessed controls were reported effective; the auditor gave an unqualified opinion on the financial statements and on Tyler’s controls within the stated scope.
- The company reported no material pending legal proceedings beyond routine litigation. The IRS was examining the 2012 federal return and a state audit was open for 2011; no significant IRS adjustments had been proposed as of February 22, 2016.
Important facts for investors to verify
- Whether NWS integration delivers the anticipated revenue, earnings and cash-flow benefits, and how its final purchase accounting affects goodwill and amortization.
- Whether the backlog converts to revenue on schedule, particularly the $476.3 million expected in 2016, and whether elevated receivables and DSO normalize.
- Whether margin pressure from hiring, implementation costs and acquired-software amortization eases as the company works through backlog.
- Whether operating cash generation rebuilds liquidity following the acquisition, while accounting for debt, share repurchases and planned capital spending.
- The implications of NWS’s exclusion from the 2015 internal-control assessment and the outcome of the open tax examinations.