Tyler Technologies(TYL) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides detailed financial statements, notes, management's analysis of operations and liquidity, and disclosures on market risks and internal controls Item 1. Financial Statements The financial statements present Tyler Technologies' performance for the three and nine months ended September 30, 2022, showing increased revenues and net income driven by subscription growth Condensed Consolidated Statements of Income For Q3 2022, total revenues grew 2.9% to $473.2 million and net income increased 20.5% to $53.2 million, primarily driven by subscription revenue growth over the nine-month period Financial Metric (In thousands) | Financial Metric (In thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | YoY Change | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $473,191 | $459,873 | 2.9% | $1,397,983 | $1,158,750 | 20.6% | | Subscriptions Revenue | $254,346 | $252,942 | 0.6% | $755,604 | $554,979 | 36.2% | | Operating Income | $60,913 | $56,184 | 8.4% | $173,538 | $132,683 | 30.8% | | Net Income | $53,233 | $44,170 | 20.5% | $133,163 | $106,676 | 24.8% | | Diluted EPS | $1.26 | $1.04 | 21.2% | $3.14 | $2.53 | 24.1% | Condensed Consolidated Balance Sheets As of September 30, 2022, total assets slightly decreased to $4.68 billion, while total liabilities significantly decreased to $2.13 billion, leading to an increase in shareholders' equity to $2.55 billion Balance Sheet Item (In thousands) | Balance Sheet Item (In thousands) | Sep 30, 2022 (unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $185,927 | $309,171 | | Total Current Assets | $860,150 | $964,331 | | Goodwill | $2,449,405 | $2,359,674 | | Total Assets | $4,675,373 | $4,732,161 | | Total Current Liabilities | $812,248 | $829,501 | | Term loans | $452,138 | $718,511 | | Total Liabilities | $2,128,075 | $2,408,129 | | Total Shareholders' Equity | $2,547,298 | $2,324,032 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, operating cash flow was $259.6 million, with significant cash usage for acquisitions and term loan repayments, resulting in a $123.2 million net decrease in cash Cash Flow Activity (In thousands) | Cash Flow Activity (In thousands) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $259,598 | $256,743 | | Net cash used by investing activities | ($125,754) | ($2,084,788) | | Net cash (used) provided by financing activities | ($257,088) | $1,458,550 | | Net decrease in cash and cash equivalents | ($123,244) | ($369,495) | - The primary use of cash in investing activities was $117.7 million for acquisitions, net of cash acquired[16] - Financing activities were dominated by a $270.0 million repayment on term loans[16] Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, including the US eDirect acquisition, debt structure, segment realignment into Enterprise Software and Platform Technologies, and a $1.88 billion backlog Note 3: Acquisitions The company acquired US eDirect Inc. for approximately $116.6 million, resulting in $91.5 million in goodwill and $34.1 million in other intangible assets, integrated into the Platform Technologies segment - Acquired US eDirect Inc. on February 8, 2022, for a total purchase price of approximately $116.6 million, net of cash acquired[36] - The acquisition resulted in approximately $91.5 million of goodwill and $34.1 million of other identifiable intangible assets[38] Note 4: Debt Total borrowings decreased to $1.085 billion from $1.355 billion due to $270.0 million in term loan repayments, with $500 million available under the revolving credit facility Debt Instrument (In thousands) | Debt Instrument (In thousands) | Sep 30, 2022 (Principal) | Dec 31, 2021 (Principal) | | :--- | :--- | :--- | | Term Loan A-1 | $380,000 | $585,000 | | Term Loan A-2 | $105,000 | $170,000 | | Convertible Senior Notes | $600,000 | $600,000 | | Total borrowings | $1,085,000 | $1,355,000 | - The company repaid $270.0 million of the Term Loans under the 2021 Credit Agreement during the nine months ended September 30, 2022[58] - As of September 30, 2022, the company had an available borrowing capacity of $500 million under its Revolving Credit Facility[58] Note 14: Segment and Related Information Effective January 1, 2022, the company realigned into Enterprise Software and Platform Technologies segments, with Q3 2022 revenues of $327.9 million and $148.7 million respectively - As of January 1, 2022, the company realigned its structure into two reportable segments: Enterprise Software (ES) and Platform Technologies (PT)[94] Segment Performance (In thousands) | Segment Performance (In thousands) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Enterprise Software (ES) | | | | Total Revenues | $327,879 | $295,535 | | Segment Operating Income | $110,693 | $102,602 | | Platform Technologies (PT) | | | | Total Revenues | $148,704 | $169,392 | | Segment Operating Income | $33,466 | $40,182 | Note 15: Disaggregation of Revenue In Q3 2022, 94% of revenue ($444.7 million) was recognized over time, with recurring revenues, primarily maintenance and subscriptions, totaling $371.7 million or 78.6% of total revenues - Recurring revenues, comprised of maintenance and subscriptions, totaled $371.7 million for the three months ended September 30, 2022, representing 78.6% of total revenues[99][100] - Transaction-based fees, included in recurring revenues, were $148.9 million for Q3 2022, down from $171.2 million in Q3 2021[99] Note 16: Deferred Revenue and Performance Obligations The company's backlog was $1.88 billion as of September 30, 2022, with approximately 46% expected to be recognized as revenue within the next 12 months - The company's backlog (remaining performance obligations) was $1.88 billion as of September 30, 2022[102] - Approximately 46% of the backlog is expected to be recognized as revenue within the next 12 months[102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported a 2.9% revenue increase for Q3 2022, driven by professional and appraisal services, improved gross margin, and strong liquidity despite a decline in COVID-related transaction revenues Analysis of Results of Operations Q3 2022 revenue growth was 2.9%, impacted by a $37.2 million decline in COVID-related transaction revenues, while gross margin improved to 43.3% and operating income rose 8.4% - Total revenues for Q3 2022 increased 2.9%, but excluding acquisitions, revenues grew 1.2%[113] - The mix of new clients for the first nine months of 2022 was approximately 78% subscription-based, up from 66% in the prior year period, contributing to an 11% decline in Q3 software license revenue[122] - Q3 subscriptions revenue growth was flat (1%) due to a $37.2 million decline in COVID-related transaction-based revenues, which offset growth from new SaaS clients[126] - Overall gross margin for Q3 2022 increased to 43.3% from 42.7% in Q3 2021, attributed to a decline in lower-margin COVID-related revenues[137] Financial Condition and Liquidity The company maintains a strong financial position with $185.9 million in cash, $500 million available credit, and $259.6 million in operating cash flow for the first nine months of 2022 Liquidity Metric (In thousands) | Liquidity Metric (In thousands) | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $185,927 | $309,171 | | Available borrowing capacity | $500,000 | N/A | | Total Debt (Principal) | $1,085,000 | $1,355,000 | - Net cash provided by operating activities was $259.6 million for the nine months ended September 30, 2022[147] - Days Sales Outstanding (DSO) was 107 days at September 30, 2022, compared to 108 days at December 31, 2021[149] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on its $485.0 million variable-rate debt, where a 0.25% change would alter annual interest expense by approximately $1.2 million - The primary market risk is interest rate risk on the $485.0 million of variable-rate debt outstanding as of September 30, 2022[160] - A 0.25% change in interest rates would change annual interest expense by approximately $1.2 million[162] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[163] - No material changes to internal control over financial reporting occurred during the third quarter of 2022[164] Part II. OTHER INFORMATION This section details legal proceedings and updates on risk factors affecting the company's operations and financial outlook Item 1. Legal Proceedings The company filed a lawsuit on August 23, 2022, to recover approximately $15 million in contractually owed fees from a state client following a contract termination for convenience - The company is involved in a legal dispute with a state client following a contract termination for convenience[166] - The company filed a lawsuit on August 23, 2022, to recover approximately $15 million in contractually owed fees[166][167] - The outcome of the dispute is currently unresolved and the amount of potential loss, if any, cannot be estimated[167] Item 1A. Risk Factors No material changes were reported in the company's risk factors during the three months ended September 30, 2022, as previously disclosed in the annual report - No material changes were reported in the company's risk factors during the three months ended September 30, 2022[168]