Summary
Tyler Technologies posted fiscal third-quarter revenue of $473.2 million, up 2.9% from the prior-year quarter. Organic revenue growth, which excludes COVID-related revenues, was 9.0%. Gross profit rose 4.3% to $204.7 million, and gross margin improved to 43.3% from 42.7%. Operating income increased 8.4% to $60.9 million, with operating margin of 12.9%, up from 12.2%. Net income rose 20.5% to $53.2 million, and diluted EPS came in at $1.26, up from $1.04. COVID-related revenues from NIC's initiatives are expected to end in the fourth quarter. The prior-year quarter carried a far larger amount of that work, which explains much of the gap between reported and organic growth.
Recurring revenues from maintenance and subscriptions were $371.7 million, up 0.2%, and made up 78.5% of total revenue. On an organic basis, recurring revenues were $364.5 million, up 9.3%. Annualized non-GAAP recurring revenues (ARR) were $1.49 billion, unchanged from the prior-year quarter because COVID-related subscription revenue fell away. Excluding COVID-related revenue, organic ARR grew 11.2%. Software subscription arrangements were approximately 91% of total new software contract value, against approximately 74% a year earlier, and subscription bookings added $28.1 million in annual recurring revenue. Tyler added 153 new SaaS clients in the quarter and converted 70 existing on-premises clients to SaaS. Since September 30, 2021, it has added 604 new SaaS clients and converted 325 existing on-premises clients. Deferred revenue was $531.7 million, up 7.3%, and remaining performance obligations were $1.88 billion, up 6.2%.
Cash generation stepped back. Operating cash flow was $129.4 million, down 37.0% from the prior-year quarter, while year-to-date operating cash flow was $259.6 million, up 1.1%. Capital expenditures were $4.7 million in the quarter, down 28.5%, and $17.4 million year to date, down 16.0%. Free cash flow was $115.6 million, compared with $192.8 million a year earlier. Tyler cut term debt by $190 million during the quarter, and management said net leverage is now under two times proforma EBITDA. The company also signed a five-year $54 million contract with the U.S. Department of State, the largest win in its Federal Division's history, though only about $8 million of the contract value landed in third-quarter bookings.
Guidance for the full fiscal year 2022 was trimmed at the upper end of the revenue range to reflect lower license revenue and pressure on professional services revenue tied to staffing. Management said the mix shift toward SaaS is pressuring near-term growth because license revenue will fall faster than planned this year and in 2023. Non-GAAP diluted EPS guidance for the full year is $7.51 to $7.65, and management said the midpoint is unchanged after adjusting for a lower effective tax rate. The annual non-GAAP effective tax rate is 22.5%, down from 24.0%, reflecting a larger estimated research tax credit. Research and development expense is expected to be $97 million to $100 million, interest expense about $28 million, and total depreciation and amortization about $147 million.
Public sector demand is the bright spot. Management pointed to healthy budgets and robust market activity, with stable or increasing RFP and demo activity across business units. The risks are less comfortable. Public sector budgets and regulatory changes could curb information technology spending. Cyberattacks and security vulnerabilities could disrupt operations or expose client data. Tyler also carries integration risk from acquisitions, reliance on internet infrastructure, client project delays, inflation and rising interest rates, competition, and the need to attract and retain qualified personnel. Backlog and recurring revenue give some stability, but the SaaS transition and the wind-down of COVID-related work will keep reported growth uneven.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $473.2M | $468.7M | +1.0% | $459.9M | +2.9% |
| Gross profit | $204.7M | $193.4M | +5.8% | $196.2M | +4.3% |
| Gross margin | 43.3% | 41.3% | +2.0 pp | 42.7% | +0.6 pp |
| Sales & marketing | $103.6M | $99.7M | +3.9% | $101.8M | +1.7% |
| Operating income (loss) | $60.9M | $56.8M | +7.3% | $56.2M | +8.4% |
| Operating margin | 12.9% | 12.1% | +0.8 pp | 12.2% | +0.6 pp |
| Net income (loss) | $53.2M | $39.9M | +33.3% | $44.2M | +20.5% |
| Net margin | 11.3% | 8.5% | +2.7 pp | 9.6% | +1.7 pp |
| Diluted EPS | $1.26 | $0.94 | +$0.32 | $1.04 | +$0.22 |
Risks
Tyler's clients are primarily local and state governments, so changes in their budgets or regulatory environments could negatively impact information technology spending. The MD&A also cites general economic, political and market conditions, including inflation and changes in interest rates, as factors that could cause results to differ.
Subscriptions revenue grew 1% for the three months ended September 30, 2022, but excluding acquisitions it decreased 2%, largely due to a $37.2 million decline in COVID-related transaction-based revenues. Total transaction-based fees declined 13% for the quarter compared to the prior period.
Software licenses and royalties revenue decreased 11% and 6% for the three and nine months ended September 30, 2022, respectively, as more clients choose SaaS rather than perpetual licenses. Management expects software licenses revenue to continue to decline as the Company transitions to cloud-based only offerings.
Overall gross margin decreased 2.8 percentage points for the nine months ended September 30, 2022, with subscriptions, professional services and maintenance gross margin down 1.7% over the same period. MD&A attributes the decline to lower software licenses and maintenance revenue, higher personnel costs related to inflation, and bubble costs from the data center transition to AWS.
The accelerated shift to the cloud and transition from proprietary data centers to AWS created higher hosting costs and bubble costs, which contributed to the year-to-date gross margin decrease. The company also grew implementation and support staff by 216 employees since September 30, 2021, excluding acquisitions, adding near-term costs.
Revenue growth for the nine months ended September 30, 2022, was driven by the NIC and US eDirect acquisitions, with total revenues up 20.6% but only up 4.6% excluding 2021 and 2022 acquisitions. Integration of acquired businesses may not achieve expected growth or operational synergies and can cause unanticipated costs and disruptions.
Interest expense change was attributable to increased amortization of debt issuance costs from accelerated term loan paydown and an increase in interest rates. As of September 30, 2022, the company had $600 million of Convertible Senior Notes due 2026 and $485 million of Term Loans outstanding.
ARR was $1.49 billion as of September 30, 2022 and remained flat compared to the prior year period, due to the decline in COVID-related revenues and maintenance, offset by an increase in subscriptions revenue. A flat recurring revenue base could pressure growth if COVID-related transaction fees and maintenance attrition continue.
SaaS KPIs
All quarters →Non-GAAP Operating Margin
Free Cash Flow
Adjusted EBITDA
New SaaS Clients Added
Recurring Revenues
Non-GAAP Gross Margin
Existing On-Premises Clients Converted to SaaS
Total backlog
Recurring revenues as % of total revenues
Annualized Recurring Revenue
Summary, forecast, risks and KPIs are extracted from TYLER TECHNOLOGIES INC's SEC filings for Q3 FY2022 (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.