Summary
Revenue grew at Tyler Technologies in the quarter ended March 31, 2023, while profit fell. Total revenue was $471.9 million, up 3.5% from the prior-year quarter, and organic revenue, which also strips out COVID-related revenue, grew 7.2%. Gross profit was $199.8 million, up 3.9%, and the gross margin of 42.4% edged up 0.2 percentage points. The rest of the income statement moved the other way. Operating income fell 19.5% to $45.0 million, net income dropped 22.8% to $30.9 million, and diluted EPS was $0.73, down from $0.94 a year earlier.
The business mix keeps tilting toward the cloud, which lifts recurring revenue and suppresses license sales. Subscription revenue rose 14.3%, and SaaS revenue grew organically 24.4%. SaaS arrangements accounted for about 87% of total new software contract value, up from about 80% in the prior-year quarter. Tyler added 145 new SaaS clients, and 73 existing clients elected to convert to its SaaS model. Maintenance revenue slipped 2% as customers left on-premises arrangements, and professional services revenue fell 13%, dragged down by an $11.9 million decline in COVID-related rent relief work. Software license and royalty revenue also contracted. Annualized recurring revenue from subscriptions and maintenance was $1.58 billion, up 9.1%, and SaaS bookings and conversions added $17.1 million of SaaS ARR in the quarter. Remaining performance obligations, which the company calls backlog, were $1.85 billion, up 5.1%.
Margins show the cost of that transition. Operating margin was 9.5%, down 2.7 percentage points from 12.2%. General and administrative expense rose 15%, research and development expense rose 13%, and interest expense climbed 60% to $7.7 million on higher rates and accelerated debt repayment. Non-GAAP numbers tell a milder story but still point down: non-GAAP operating income was $102.2 million, down 7.7%; non-GAAP net income was $74.7 million, or $1.76 per diluted share, down 7.6%; and adjusted EBITDA was $112.5 million, down 5.6%. Management pointed to duplicate hosting costs during the move from proprietary data centers to the public cloud, higher personnel costs, and professional services hires who are not yet billable.
Cash was the strong spot. Operating cash flow was $74.7 million, up 39.5%, and free cash flow, which deducts capitalized software and property purchases, was $63.6 million, up 55.1%. Capital expenditures were $2.0 million, down 55.9%. Deferred revenue reached $499.0 million, up 9.7%. The company repaid $120 million of term debt during the quarter and ended with net leverage of 1.5 times proforma EBITDA and $130.8 million of cash and cash equivalents. Days sales outstanding improved to 95 days, from 115 days at December 31, 2022 and 99 days at March 31, 2022. Headcount was 7,229 at March 31, 2023, up from 6,959, including 50 employees who joined through acquisitions.
Guidance for the full year 2023 includes non-GAAP diluted earnings per share of $7.50 to $7.65 and a non-GAAP annual effective tax rate of 22.0%. Management expects the decline in software license revenue to accelerate as more business moves to SaaS, since subscription deals bring in less license revenue up front but more revenue over the contract term. The outlook also points to higher cash tax payments under Section 174 rules that require research costs to be capitalized and amortized. Risks listed in the filing include changes to state and local government budgets, client project delays, pricing and retention pressure from competition, cyber attacks and data center disruptions, acquisition integration, inflation and interest rates, and the ability to attract and keep qualified staff. Tyler plans to lay out its long-term strategy at an investor day on June 15, 2023.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2023 | Q4 FY2022 | QoQ | Q1 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $471.9M | $452.2M | +4.3% | $456.1M | +3.5% |
| Gross profit | $199.8M | $193.3M | +3.4% | $192.4M | +3.9% |
| Gross margin | 42.4% | 42.8% | -0.4 pp | 42.2% | +0.2 pp |
| Sales & marketing | $37.1M | -$165.5M | +122.4% | $97.9M | -62.1% |
| General & administrative | $72.4M | $267.3M | -72.9% | — | — |
| Operating income (loss) | $45.0M | $40.7M | +10.5% | $55.9M | -19.5% |
| Operating margin | 9.5% | 9.0% | +0.5 pp | 12.3% | -2.7 pp |
| Net income (loss) | $30.9M | $31.1M | -0.6% | $40.0M | -22.8% |
| Net margin | 6.5% | 6.9% | -0.3 pp | 8.8% | -2.2 pp |
| Diluted EPS | $0.73 | $0.73 | ±$0.00 | $0.94 | -$0.21 |
Risks
The shift from perpetual software licenses to SaaS arrangements is reducing software license revenue. Software licenses and royalties revenue decreased 39% for the three months ended March 31, 2023 compared to the prior period, and the company expects the decline in software license revenues will accelerate as it continues to shift its model away from perpetual licenses to SaaS.
IRC Section 174 now requires capitalization and amortization of research and development expenses over five years for U.S. activities and 15 years for foreign activities, temporarily increasing U.S. federal and state cash tax payments and reducing cash flows in fiscal 2023 and future years. Subsequent to March 31, 2023, the company paid approximately $66.9 million of income taxes related to Section 174.
Interest expense increased 60% for the three months ended March 31, 2023 compared to the prior period, driven by higher interest rates and accelerated amortization of debt issuance costs from the repayment of term loans.
Changes in the budgets or regulatory environments of clients, primarily local and state governments, could negatively impact information technology spending. Professional services revenue decreased 13% for the three months ended March 31, 2023 compared to the prior period, primarily due to lower revenues from COVID pandemic-related rent relief services, which declined $11.9 million.
Duplicate hosting costs as the company transitions from proprietary data centers to the public cloud are partially offsetting gross margin increases. Overall gross margin increased 0.2% for the three months ended March 31, 2023 compared to the prior period, but excluding recent acquisitions it was 42.6%.
The company's ability to achieve growth or operational synergies through the integration of acquired businesses, such as Rapid Financial Solutions and US eDirect, while avoiding unanticipated costs and disruptions to existing operations is a risk. Recent acquisitions contributed $6.2 million of subscriptions revenue for the three months ended March 31, 2023.
The ability to attract and retain qualified personnel and manage the loss or retirement of key management or other key personnel is a risk. Total employee count increased to 7,229 at March 31, 2023 from 6,959 at March 31, 2022, with professional services staff growing by 180 employees since March 31, 2022.
SaaS KPIs
All quarters →Non-GAAP Operating Margin
Free Cash Flow
Adjusted EBITDA
Annualized Recurring Revenue (ARR)
New SaaS Clients Added
Recurring Revenues
Non-GAAP Operating Income
Backlog
SaaS Revenues
Subscription Revenues
Recurring revenues as % of total revenues
Transaction-based Revenues
Summary, forecast, risks and KPIs are extracted from TYLER TECHNOLOGIES INC's SEC filings for Q1 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 6, 2026.