Tyler Technologies Reports Earnings for Third Quarter 2020

Rhea-AI Summary

Tyler Technologies (NYSE: TYL) reported Q3 2020 revenues of $285.7 million, a 3.8% increase year-over-year, with organic growth at 3.3%. Non-GAAP revenues rose to $285.9 million, up 3.2%. Recurring revenues from subscriptions grew 12% to $207.3 million. Operating income increased 24% to $49.7 million. However, net income fell 2.7% to $39.3 million, or $0.94 per diluted share. The company revised its 2020 guidance upwards, expecting revenues between $1.117 and $1.129 billion, and EPS between $4.53 and $4.63, amid challenges from COVID-19 and an IT security incident that impacted revenue.

Positive

• Total revenues increased by 3.8% year-over-year.
• Recurring revenues grew by 12% to $207.3 million.
• Operating income increased 24% to $49.7 million.
• Cash flows from operations rose by 30.5% to $169.8 million.
• Total backlog reached a record high of $1.55 billion.

Negative

• Net income decreased by 2.7% to $39.3 million.
• IT security incident reduced service revenues by approximately $1.5 million.
• Software license and services revenues declined due to longer sales cycles.

PLANO, Texas--(BUSINESS WIRE)--Tyler Technologies, Inc. (NYSE: TYL) today announced financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Financial Highlights:

• Total revenues were $285.7 million, up 3.8% from $275.4 million for the third quarter of 2019. Organic revenue growth was 3.3%. Non-GAAP total revenues were $285.9 million, up 3.2% from $277.2 million for the third quarter of 2019. Non-GAAP organic revenue growth was 2.7%.
• Recurring revenues from maintenance and subscriptions were $207.3 million, up 12.0% from $185.1 million for the third quarter of 2019, and comprised 72.5% of third quarter 2020 revenue.
• Operating income was $49.7 million, up 24.0% from $40.1 million for the third quarter of 2019. Non-GAAP operating income was $81.8 million, up 15.2% from $71.0 million for the third quarter of 2019.
• Net income was $39.3 million, or $0.94 per diluted share, down 2.7% compared to $40.4 million, or $1.00 per diluted share, for the third quarter of 2019. Non-GAAP net income was $62.4 million, or $1.50 per diluted share, up 14.8% compared to $54.3 million, or $1.35 per diluted share, for the third quarter of 2019.
• Cash flows from operations were $169.8 million, up 30.5% compared to $130.1 million for the third quarter of 2019.
• Adjusted EBITDA was $88.9 million, up 15.4% compared to $77.1 million for the third quarter of 2019.
• Software subscription arrangements comprised approximately 47% of the total new software contract value in the third quarter, compared to approximately 51% in the third quarter of 2019.
• Total bookings were $292 million, up 12.9% compared to the third quarter of 2019. Subscription bookings in the third quarter added $9.9 million in annual recurring revenue.
• Total backlog was $1.55 billion, up 9.2% from $1.41 billion at September 30, 2019. Software-related backlog (excluding appraisal services) was $1.51 billion, up 9.5% from $1.38 billion at September 30, 2019.

“We are pleased with our third quarter results, particularly in light of the continuing impact of the COVID-19 pandemic, as we achieved double-digit growth in operating income and record highs for free cash flow and adjusted EBITDA,” said Lynn Moore, Tyler’s president and chief executive officer. “Revenues continued to be impacted by the COVID-19 pandemic. We returned to positive revenue growth in the third quarter, driven by strong recurring revenues with subscription revenues up 18.6%. Software license, professional services, and appraisal services revenues declined due to longer sales cycles, delays in projects, and the near elimination of billable travel revenue. We experienced an IT security incident in late September which also reduced services revenues in the quarter by an estimated $1.5 million.

"We continued to experience significant savings in operating expenses in the third quarter, in part driven by the successful deployment of more efficient service delivery and operating models. As a result, our operating margins expanded significantly, with our non-GAAP operating margin up 300 basis points to 28.6%, and our adjusted EBITDA rose to a new quarterly high. Cash flows from operations and free cash flow also reached record levels, growing 30.5% and 34.8%, respectively. Our balance sheet is stronger than ever, and we ended the quarter with $650 million in cash and investments and no outstanding debt.

"Bookings in the third quarter grew 12.9% and were particularly strong for our justice and public safety solutions. We signed significant contracts for our Odyssey^® court case management solution with the Washington State Administrative Office of the Courts and Dallas County, Texas, that culminated extended sales processes, and public safety bookings more than doubled last year's third quarter. We finished the quarter with a new record high backlog of $1.55 billion," added Moore.

"As we continue to work through the challenges brought about by the COVID-19 pandemic and obtain a clearer understanding of the near-term impacts on our results, we have revised our guidance for the full year of 2020 to reflect higher earnings expectations. I'm extremely proud of how the entire Tyler team has risen to face the challenges of this year head-on, supporting our clients as well as each other. We remain confident in the fundamental strengths of the public sector market and in our ability to grow and invest in strategic initiatives in a difficult environment," said Moore.

Guidance for 2020

As of September 30, 2020, Tyler Technologies is providing the following guidance for the full year 2020:

• GAAP total revenues are expected to be in the range of $1.117 billion to $1.129 billion. Non-GAAP total revenues are expected to be in the range of $1.118 billion to $1.130 billion.
• GAAP diluted earnings per share are expected to be in the range of $4.53 to $4.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate.
• Non-GAAP diluted earnings per share are expected to be in the range of $5.48 to $5.58.
• Pre-tax non-cash, share-based compensation expense is expected to be approximately $77 million.
• Research and development expense is expected to be in the range of $88 million to $90 million.
• Fully diluted shares for the year are expected to be in the range of 41.5 million to 42.0 million shares.
• GAAP earnings per share assumes an estimated annual effective tax rate of approximately negative 12% after discrete tax items and includes approximately $65 million of discrete tax benefits related to share-based compensation.
• The non-GAAP annual effective tax rate is expected to be 24%.
• Capital expenditures are expected to be in the range of $30 million to $31 million, including approximately $10 million related to real estate and approximately $6 million of capitalized software development costs. Total depreciation and amortization expense is expected to be approximately $81 million, including approximately $54 million from amortization of acquisition intangibles.

GAAP to non-GAAP guidance reconciliation

Non-GAAP total revenues is derived from adding back the estimated full year impact of write-downs of acquisition-related deferred revenue and amortization of acquired leases of approximately $1 million. Non-GAAP diluted earnings per share excludes the full year impact of non-cash share-based compensation expense and employer portion of payroll tax related to employee stock transactions of approximately $77 million, and amortization of acquired software and intangible assets of approximately $54 million. Additionally, the non-GAAP tax rate of 24% is estimated periodically as described below under "Non-GAAP Financial Measures" and excludes approximately $65 million of estimated discrete tax benefits that are included in the GAAP estimated annual effective tax rate.

Conference Call

Tyler Technologies will hold a conference call on Thursday, November 5, at 10:00 a.m. Eastern Time to discuss the company’s results. The company is offering participants the opportunity to register in advance for the conference through the following link: http://dpregister.com/sreg/10147974/d912e3b1c6. Registered participants will receive an email with a calendar reminder and a dial-in number and PIN that will allow them to listen to the call live.

Participants who do not wish to pre-register for the call may dial in using 844-861-5506 (U.S. callers) or 412-317-6587 (international callers) or 866-450-4696 (Canada callers) and ask for the “Tyler Technologies” call. A replay will be available two hours after completion of the call through November 12, 2020. To access the replay, please dial 877-344-7529 (U.S. callers), 412-317-0088 (international callers) and 855-669-9658 (Canada callers) and reference passcode 10147974.

The live webcast and archived replay can also be accessed at https://tylertech.irpass.com/Presentations.

About Tyler Technologies, Inc.

Tyler Technologies (NYSE: TYL) provides integrated software and technology services to the public sector. Tyler's end-to-end solutions empower local, state, and federal government entities to operate more efficiently and connect more transparently with their constituents and with each other. By connecting data and processes across disparate systems, Tyler's solutions are transforming how clients gain actionable insights that solve problems in their communities. Tyler has more than 26,000 successful installations across more than 10,000 sites, with clients in all 50 states, Canada, the Caribbean, Australia, and other international locations. Tyler was named to Forbes' "Best Midsize Employers" list in 2019 and has been recognized three times on Forbes' "Most Innovative Growth Companies" list. More information about Tyler Technologies, an S&P 500 company headquartered in Plano, Texas, can be found at tylertech.com.

Non-GAAP Financial Measures

Tyler Technologies has provided in this press release financial measures that have not been prepared in accordance with generally accepted accounting principles (GAAP) and are therefore considered non-GAAP financial measures. This information includes non-GAAP revenues, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP earnings per diluted share, EBITDA, and adjusted EBITDA. We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating Tyler’s ongoing operational performance because they provide additional insight in comparing results from period to period. Tyler believes the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with other companies in our industry, many of which present similar non-GAAP financial measures. Non-GAAP financial measures discussed above exclude write-downs of acquisition-related deferred revenue and acquired subleases, share-based compensation expense, employer portion of payroll taxes on employee stock transactions, expenses associated with amortization of intangibles arising from business combinations, acquisition-related expenses, and incremental costs associated with COVID-19.

Tyler currently uses a non-GAAP tax rate of 24%. This rate is based on Tyler's estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating Tyler's non-GAAP income, as well as significant non-recurring tax adjustments. The non-GAAP tax rate used in future periods will be reviewed periodically to determine whether it remains appropriate in consideration of factors including Tyler's periodic effective tax rate calculated in accordance with GAAP, changes resulting from tax legislation, changes in the geographic mix of revenues and expenses, and other factors deemed significant. Due to differences in tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to Tyler's estimated annual tax rate as described above, the estimated tax rate on non-GAAP income may differ from the GAAP tax rate and from Tyler's actual tax liabilities.

Non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial information prepared in accordance with GAAP. The non-GAAP measures used by Tyler Technologies may be different from non-GAAP measures used by other companies. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures, which has been provided in the financial statement tables included below in this press release.

Forward-looking Statements

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; (2) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (3) disruption to our business and harm to our competitive position resulting from cyber-attacks and security vulnerabilities; (4) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (5) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (6) material portions of our business require the Internet infrastructure to be adequately maintained; (7) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (8) general economic, political and market conditions; (9) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (10) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (11) the ability to attract and retain qualified personnel and dealing with the loss or retirement of key members of management or other key personnel; and (12) costs of compliance and any failure to comply with government and stock exchange regulations. These factors and other risks that affect our business are described in our filings with the Securities and Exchange Commission, including the detailed “Risk Factors” contained in our most recent annual report on Form 10-K and quarterly report on Form 10-Q. We expressly disclaim any obligation to publicly update or revise our forward-looking statements.

(Comparative results follow)

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020					2019
Software licenses and royalties		$	19,937			$	25,379			$	55,699				$	67,847
Subscriptions		89,290				75,272				256,651					216,022
Software services		47,946				54,997				143,733					160,841
Maintenance		117,979				109,833				349,104					316,674
Appraisal services		5,394				6,008				15,853					17,455
Hardware and other		5,200				3,911				12,338					18,751
Total revenues		285,746				275,400				833,378					797,590
Software licenses and royalties		1,177				971				3,047					2,680
Acquired software		7,965				7,975				23,998					22,645
Subscriptions, software services and maintenance		125,881				128,545				381,947					371,464
Appraisal services		3,434				4,096				11,795					11,306
Hardware and other		3,780				3,096				8,748					14,870
Total cost of revenues		142,237				144,683				429,535					422,965
Gross profit		143,509				130,717				403,843					374,625
Selling, general and administrative expenses		66,819				63,888				196,825					187,481
Research and development expense		21,642				21,130				65,952					60,172
Amortization of customer and trade name intangibles		5,392				5,646				16,176					15,762
Operating income		49,656				40,053				124,890					111,210
Other income, net		280				499				1,740					838
Income before income taxes		49,936				40,552				126,630					112,048
Income tax provision (benefit)		10,652				162				(14,096		)			12,311
Net income		$	39,284			$	40,390			$	140,726				$	99,737
Earnings per common share:
Basic		$	0.98			$	1.04			$	3.52				$	2.58
Diluted		$	0.94			$	1.00			$	3.39				$	2.49
Weighted average common shares outstanding:
Basic		40,261				38,765				40,013					38,614
Diluted		41,606				40,280				41,493					40,015

TYLER TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share data)
(Unaudited)
			Three Months Ended September 30,										Nine Months Ended September 30,
			2020					2019					2020					2019
Reconciliation of non-GAAP total revenues
GAAP total revenues			$	285,746				$	275,400				$	833,378				$	797,590
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue			113					1,698					433					6,052
Add: Amortization of acquired leases			78					89					235					289
Non-GAAP total revenues			$	285,937				$	277,187				$	834,046				$	803,931
Reconciliation of non-GAAP gross profit and margin
GAAP gross profit			$	143,509				$	130,717				$	403,843				$	374,625
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue			113					1,698					433					6,052
Add: Amortization of acquired leases			78					89					235					289
Add: Share-based compensation expense included in cost of revenues			4,555					3,612					13,176					11,166
Add: Amortization of acquired software			7,965					7,975					23,998					22,645
Non-GAAP gross profit			$	156,220				$	144,091				$	441,685				$	414,777
GAAP gross margin			50.2		%				47.5	%				48.5	%				47.0	%
Non-GAAP gross margin				54.6	%				52.0	%				53.0	%				51.6	%
Reconciliation of non-GAAP operating income and margin
GAAP operating income			$	49,656				$	40,053				$	124,890				$	111,210
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue			113					1,698					433					6,052
Add: Amortization of acquired leases			78					89					235					289
Add: Share-based compensation expense			18,424					14,887					54,112					44,369
Add: Employer portion of payroll tax related to employee stock transactions			134					621					2,591					1,052
Add: Acquisition related costs			—					5					—					945
Add: COVID-19 incremental costs			—					—					727					—
Add: Amortization of acquired software			7,965					7,975					23,998					22,645
Add: Amortization of customer and trade name intangibles			5,392					5,646					16,176					15,762
Non-GAAP adjustments subtotal			32,106					30,921					98,272					91,114
Non-GAAP operating income			$	81,762				$	70,974				$	223,162				$	202,324
GAAP operating margin				17.4		%			14.5		%			15.0		%			13.9		%
Non-GAAP operating margin				28.6		%			25.6		%			26.8		%			25.2		%
TYLER TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share data)
(Unaudited)
			Three Months Ended September 30,										Nine Months Ended September 30,
			2020					2019					2020					2019
Reconciliation of non-GAAP net income and earnings per share
GAAP net income			$	39,284				$	40,390				$	140,726				$	99,737
Non-GAAP adjustments:
Add: Total non-GAAP adjustments to operating income			32,106					30,921					98,272					91,114
Less: Tax impact related to non-GAAP adjustments			(9,038		)			(16,992		)			(68,073		)			(36,448		)
Non-GAAP net income			$	62,352				$	54,319				$	170,925				$	154,403
GAAP earnings per diluted share			$	0.94				$	1.00				$	3.39				$	2.49
Non-GAAP earnings per diluted share			$	1.50				$	1.35				$	4.12				$	3.86
Detail of share-based compensation expense
Cost of subscriptions, software services and maintenance			$	4,555				$	3,612				$	13,176				$	11,166
Selling, general and administrative expenses			13,869					11,275					40,936					33,203
Total share-based compensation expense			$	18,424				$	14,887				$	54,112				$	44,369
Reconciliation of EBITDA and adjusted EBITDA
GAAP net income			$	39,284				$	40,390				$	140,726				$	99,737
Amortization of customer and trade name intangibles			5,392					5,646					16,176					15,762
Depreciation and amortization included in
cost of revenues, SG&A and other expenses			14,921					14,076					44,271					40,639
Interest expense included in other income, net			153					236					456					1,409
Income tax provision (benefit)			10,652					162					(14,096		)			12,311
EBITDA			$	70,402				$	60,510				$	187,533				$	169,858
Write-downs of acquisition-related deferred revenue			113					1,698					433					6,052
Share-based compensation expense			18,424					14,887					54,112					44,369
Acquisition related costs			—					5					—					945
COVID-19 incremental costs			—					—					727					—
Adjusted EBITDA			$	88,939				$	77,100				$	242,805				$	221,224

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
				September 30, 2020					December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents				$	518,685				$	232,682
Accounts receivable, net				362,667					374,089
Current investments and other assets				88,495					66,444
Income tax receivable				20,752					6,482
Total current assets				990,599					679,697
Accounts receivable, long-term portion				24,459					22,432
Operating lease right-of-use assets				15,321					18,992
Property and equipment, net				170,833					171,861
Other assets:
Goodwill				840,028					840,117
Other intangibles, net				341,999					378,914
Non-current investments				75,278					42,235
Other non-current assets				33,646					37,366
Total assets				$	2,492,163				$	2,191,614
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities				$	92,761				$	90,211
Operating lease liabilities				5,780					6,387
Deferred revenue				436,504					412,495
Total current liabilities				535,045					509,093
Revolving line of credit				—					—
Deferred revenue, long-term				118					199
Deferred income taxes				45,985					48,442
Operating lease liabilities, long-term				12,870					16,822
Shareholders' equity				1,898,145					1,617,058
Total liabilities and shareholders' equity				$	2,492,163				$	2,191,614

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
			Three Months Ended September 30,										Nine Months Ended September 30,
			2020					2019					2020					2019
Cash flows from operating activities:
Net income			$	39,284				$	40,390				$	140,726				$	99,737
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization			20,476					19,803					60,746					56,547
Share-based compensation expense			18,424					14,887					54,112					44,369
Operating lease right-of-use assets expense			1,390					1,428					4,233					3,979
Deferred income tax expense (benefit)			1,271					(2,889		)			(2,458		)			(10,329		)
Changes in operating assets and liabilities,
exclusive of effects of acquired companies			88,963					56,454					8,969					(15,776		)
Net cash provided by operating activities			169,808					130,073					266,328					178,527
Cash flows from investing activities:
Additions to property and equipment			(2,796		)			(4,781		)			(19,064		)			(28,833		)
Purchase of marketable security investments			(31,582		)			(17,205		)			(111,329		)			(27,322		)
Proceeds from marketable security investments			21,774					17,166					61,794					56,854
Proceeds from the sale of investment of preferred shares			—					—					15,000					—
Purchase of investment of common shares			—					—					(10,000		)			—
Investment in software			(1,621		)			(1,308		)			(4,316		)			(3,540		)
Cost of acquisitions, net of cash acquired			—					(650		)			(261		)			(199,870		)
Decrease (increase) in other			341					(925		)			13					(493		)
Net cash used by investing activities			(13,884		)			(7,703		)			(68,163		)			(203,204		)
Cash flows from financing activities:
Decrease in net borrowings on revolving line of credit			—					(15,000		)			—					—
Purchase of treasury shares			(2		)			—					(15,484		)			(17,786		)
Proceeds from exercise of stock options			8,395					40,163					100,732					62,295
Payment of contingent consideration			—					—					(5,619		)			—
Contributions from employee stock purchase plan			3,032					2,718					8,209					7,327
Net cash provided by financing activities			11,425					27,881					87,838					51,836
Net increase in cash and cash equivalents			167,349					150,251					286,003					27,159
Cash and cash equivalents at beginning of period			351,336					11,187					232,682					134,279
Cash and cash equivalents at end of period			$	518,685				$	161,438				$	518,685				$	161,438