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Tyler Technologies Reports Earnings for Fourth Quarter 2017

February 21, 2018 4:17 PM

Total revenues grow nearly 13 percent; subscription revenues rise 26 percent

PLANO, Texas--(BUSINESS WIRE)-- Tyler Technologies, Inc. (NYSE: TYL) today announced financial results for the fourth quarter and year ended December 31, 2017.

Fourth Quarter 2017 Financial Highlights:

Full Year 2017 Financial Highlights:

“We are pleased with Tyler's very strong finish to 2017,” said John S. Marr Jr., Tyler’s chairman and chief executive officer. “We achieved double-digit total revenue growth in the fourth quarter, with subscription revenue growth of 26 percent. In addition, license and royalties revenue reached a new quarterly high, surpassing $20 million for the first time. We also achieved an increase in our non-GAAP operating margin of 120 basis points.

"Our GAAP effective tax rate was favorably impacted in the fourth quarter by the enactment of the Tax Cuts and Jobs Act (the "Tax Act") primarily due to the remeasurement of deferred tax assets and liabilities. Going forward, we expect that our effective tax rate will benefit significantly from the reduction in corporate tax rates as a result of the Tax Act.

“Market activity and our competitive position in the local government software market remain strong and our total bookings for the quarter rose 37 percent. Bookings under both our license and subscription models were robust, and subscription arrangements comprised approximately 33 percent of the total dollar volume of new software contracts. We added approximately $7 million in annual recurring revenues from software subscriptions in the fourth quarter, an increase of 156 percent over last year. Annual bookings for 2017 exceeded $1 billion for the first time, and year-end backlog was $1.1 billion, up 18 percent over last year.

"With our positive outlook for 2018 and our strong financial position and cash flow, supplemented by the benefit of lower tax rates, we plan to make incremental research and development investments to continue to expand our market-leading position in public sector software and drive future growth. We expect to increase our R&D spend by more than 20 percent in 2018, while continuing to pursue strategic acquisitions at reasonable valuations,” said Marr.

Guidance for 2018

As of February 21, 2018, Tyler Technologies is providing the guidance below for the full year 2018. This guidance reflects the preliminary estimated impact of ASC 606, which Tyler expects to adopt using the full retrospective method effective January 1, 2018.

The actual impact of ASC 606 is subject to a number of variables and uncertainties, including the mix and timing of new contracts and specific terms contained in individual contracts. For comparison purposes, Tyler's guidance for 2018 under the prior ASC 605 basis would be as follows:

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 is derived by adding back the estimated full year impact of non-cash share-based compensation expense and employer portion of payroll tax related to employee stock transactions of approximately $49 million, and amortization of acquired software and intangible assets of approximately $35 million. Additionally, the non-GAAP tax rate of 24 percent is estimated periodically as described below under "Non-GAAP Financial Measures" and excludes approximately $26 million of discrete tax benefits related to share-based compensation that are included in the GAAP estimated annual effective tax rate.

Conference Call

Tyler Technologies will hold a conference call on Thursday, February 22, at 10:00 a.m. EST 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/10115773. Registered participants will receive an email with a calendar reminder and a dial-in number and PIN that will allow them immediate access to the call on February 22.

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 February 28, 2018. 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 10115773.

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

About Tyler Technologies, Inc.

Tyler Technologies (NYSE: TYL) is a leading provider of end-to-end information management solutions and services for local governments. Tyler partners with clients to empower the public sector - cities, counties, schools and other government entities - to become more efficient, more accessible and more responsive to the needs of their constituents. Tyler's client base includes more than 15,000 local government offices in all 50 states, Canada, the Caribbean, Australia, and other international locations. In 2017, Forbes ranked Tyler on its "Most Innovative Growth Companies" list, and Fortune included Tyler on its "100 Fastest-Growing Companies" list. More information about Tyler Technologies, headquartered in Plano, Texas, can be found at www.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 leases, share-based compensation expense, employer portion of payroll taxes on employee stock transactions, acquisition-related costs, and expenses associated with amortization of intangibles arising from business combinations.

Historically, for the purpose of determining non-GAAP net income, Tyler has used a non-GAAP tax rate of 35 percent in its calculation of the tax impact related to certain non-GAAP adjustments. Beginning in 2017, Tyler is adjusting its non-GAAP pretax income using a tax rate equal to Tyler's annual estimated tax rate on non-GAAP income. 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 wells 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) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (2) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (3) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (4) material portions of our business require the Internet infrastructure to be adequately maintained; (5) 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; (6) general economic, political and market conditions; (7) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (8) 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; (9) 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 (10) costs of compliance and any failure to comply with government and stock exchange regulations. A detailed discussion of 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. We expressly disclaim any obligation to publicly update or revise our forward-looking statements.

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)

Three Months EndedDecember 31,

Twelve Months EndedDecember 31,

2017 2016 2017 2016
Revenues:
Software licenses and royalties $ 20,522 $ 19,975 $ 75,694 $ 74,306
Subscriptions 47,621 37,778 173,510 142,704
Software services 47,280 41,595 187,149 174,804
Maintenance 93,013 85,194 361,569 322,969
Appraisal services 5,755 6,204 25,023 26,287
Hardware and other 3,660 2,535 17,717 14,973
Total revenues 217,851 193,281 840,662 756,043
Cost of revenues:
Software licenses and royalties 1,117 1,037 3,321 2,964
Acquired software 5,443 5,498 21,686 22,235
Software services, maintenance and subscriptions 99,886 88,329 387,634 348,939
Appraisal services 3,718 3,938 16,286 16,411
Hardware and other 2,187 1,662 12,595 10,143
Total cost of revenues 112,351 100,464 441,522 400,692
Gross profit 105,500 92,817 399,140 355,351
Selling, general and administrative expenses 45,725 42,162 176,974 167,161
Research and development expense 12,017 11,793 47,324 43,154
Amortization of customer and trade name intangibles 3,499 3,458 13,912 13,731
Operating income 44,259 35,404 160,930 131,305
Other income (expense), net 914 (285 ) 698 (1,998 )
Income before income taxes 45,173 35,119 161,628 129,307
Income tax (benefit) provision (16,625 ) 3,923 (2,317 ) 19,450
Net income $ 61,798 $ 31,196 $ 163,945 $ 109,857
Earnings per common share:
Basic $ 1.64 $ 0.85 $ 4.40 $ 3.01
Diluted $ 1.56 $ 0.80 $ 4.18 $ 2.82
Weighted average common shares outstanding:
Basic 37,694 36,653 37,273 36,448
Diluted 39,499 38,975 39,246 38,961
TYLER TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share data)
(Unaudited)

Three Months EndedDecember 31,

Twelve Months EndedDecember 31,

2017 2016 2017 2016

Reconciliation of non-GAAP total revenues

GAAP total revenues $ 217,851 $ 193,281 $ 840,662 $ 756,043
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue 124 1,664 663 15,063
Add: Amortization of acquired leases 111 111 444 444
Non-GAAP total revenues $ 218,086 $ 195,056 $ 841,769 $ 771,550

Reconciliation of non-GAAP gross profit and margin

GAAP gross profit $ 105,500 $ 92,817 $ 399,140 $ 355,351
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue 124 1,664 663 15,063
Add: Amortization of acquired leases 111 111 444 444
Add: Share-based compensation expense included in cost of revenues 2,541 1,881 9,415 6,548
Add: Amortization of acquired software 5,443 5,498 21,686 22,235
Non-GAAP gross profit $ 113,719 $ 101,971 $ 431,348 $ 399,641
GAAP gross margin 48.4 % 48.0 % 47.5 % 47.0 %
Non-GAAP gross margin 52.1 % 52.3 % 51.2 % 51.8 %

Reconciliation of non-GAAP operating income and margin

GAAP operating income $ 44,259 $ 35,404 $ 160,930 $ 131,305
Non-GAAP adjustments:
Add: Write-downs of acquisition-related deferred revenue 124 1,664 663 15,063
Add: Amortization of acquired leases 111 111 444 444
Add: Share-based compensation expense 9,980 8,399 37,348 29,747
Add: Employer portion of payroll tax related to employee stock transactions 418 311 1,102 1,001
Add: Amortization of acquired software 5,443 5,498 21,686 22,235
Add: Amortization of customer and trade name intangibles 3,499 3,458 13,912 13,731
Non-GAAP adjustments subtotal $ 19,575 $ 19,441 $ 75,155 $ 82,221
Non-GAAP operating income $ 63,834 $ 54,845 $ 236,085 $ 213,526
GAAP operating margin 20.3 % 18.3 % 19.1 % 17.4 %
Non-GAAP operating margin 29.3 % 28.1 % 28.0 % 27.7 %
TYLER TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share data)
(Unaudited)

Three Months EndedDecember 31,

Twelve Months EndedDecember 31,

2017 2016 2017 2016

Reconciliation of non-GAAP net income and earnings per share

GAAP net income $61,798 $31,196 $163,945 $ 109,857
Non-GAAP adjustments:
Add: Total non-GAAP adjustments to operating income 19,575 19,441 75,155 82,221
Less: Tax impact related to non-GAAP adjustments (39,287 ) (15,408 ) (85,192 ) (56,230 )
Non-GAAP net income $42,086 $35,229 $153,908 $ 135,848
GAAP earnings per diluted share $1.56 $0.80 $4.18 $ 2.82
Non-GAAP earnings per diluted share $1.07 $0.90 $3.92 $ 3.49

Detail of share-based compensation expense

Cost of software services, maintenance and subscriptions $2,541 $1,881 $9,415 $ 6,548
Selling, general and administrative expenses 7,439 6,518 27,933 23,199
Total share-based compensation expense $9,980 $8,399 $37,348 $ 29,747

Reconciliation of EBITDA and adjusted EBITDA

GAAP net income $ 61,798 $ 31,196 $ 163,945 $ 109,857
Amortization of customer and trade name intangibles 3,499 3,458 13,912 13,731
Depreciation and other amortization included in
cost of revenues, SG&A and other expenses 10,330 9,322 40,013 36,570
Interest expense included in other expense, net 191 270 762 1,965
Income tax provision (benefit) (16,625 ) 3,923 (2,317 ) 19,450
EBITDA $ 59,193 $ 48,169 $ 216,315 $ 181,573
Write-downs of acquisition-related deferred revenue 124 1,664 663 15,063
Share-based compensation expense 9,980 8,399 37,348 29,747
Adjusted EBITDA $ 69,297 $ 58,232 $ 254,326 $ 226,383
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)

December 31,2017

December 31,2016

ASSETS
Current assets:
Cash and cash equivalents $ 185,926 $ 36,151
Accounts receivable, net 227,127 200,334
Current investments and other assets 72,408 43,580
Income tax receivable 11,339 2,895
Total current assets 496,800 282,960
Accounts receivable, long-term portion 7,536 2,480
Property and equipment, net 152,315 124,268
Other assets:
Goodwill 657,987 650,237
Other intangibles, net 236,444 267,259
Non-current investments and other assets 38,510 30,741
Total assets $ 1,589,592 $ 1,357,945
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 72,849 $ 63,284
Deferred revenue 309,461 298,217
Total current liabilities 382,310 361,501
Revolving line of credit — 10,000
Deferred revenue, long-term 1,274 2,140
Deferred income taxes 38,914 68,779
Shareholders' equity 1,167,094 915,525
Total liabilities and shareholders' equity $ 1,589,592 $ 1,357,945
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

Three Months EndedDecember 31,

Twelve Months EndedDecember 31,

2017 2016 2017 2016
Cash flows from operating activities:
Net income $ 61,798 $ 31,196 $ 163,945 $ 109,857
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization 13,829 12,780 53,925 50,301
Share-based compensation expense 9,980 8,399 37,348 29,747
Provision for losses - accounts receivable 4,110 4,484 4,110 4,484
Deferred income tax benefit (15,649 ) (17,650 ) (29,865 ) (28,939 )
Changes in operating assets and liabilities,
exclusive of effects of acquired companies (20,694 ) 12,596 (33,708 ) 26,409
Net cash provided by operating activities 53,374 51,805 195,755 191,859
Cash flows from investing activities:
Cost of acquisitions, net of cash acquired (1,583 ) — (11,344 ) (9,394 )
Purchase of marketable security investments (9,874 ) (7,189 ) (59,779 ) (20,316 )
Proceeds from marketable security investments 7,611 7,581 28,786 16,837
Additions to property and equipment (5,323 ) (8,197 ) (43,057 ) (37,726 )
Increase in other (419 ) (69 ) (1 ) (121 )
Net cash used by investing activities (9,588 ) (7,874 ) (85,395 ) (50,720 )
Cash flows from financing activities:
Decrease in net borrowings on revolving line of credit — (24,000 ) (10,000 ) (56,000 )
Purchase of treasury shares (442 ) (17,339 ) (7,474 ) (111,838 )
Contributions from employee stock purchase plan 1,702 1,807 7,044 6,236
Proceeds from exercise of stock options 16,277 8,438 49,845 23,527
Net cash provided (used) by financing activities 17,537 (31,094 ) 39,415 (138,075 )
Increase in net cash and cash equivalents 61,323 12,837 149,775 3,064
Cash and cash equivalents at beginning of period 124,603 23,314 36,151 33,087
Cash and cash equivalents at end of period $ 185,926 $ 36,151 $ 185,926 $ 36,151

Tyler Technologies, Inc.

Brian K. Miller, 972-713-3720

Executive Vice President - CFO

[email protected]

Source: Tyler Technologies, Inc.

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