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Tyler Technologies: Heavy SaaS Buys Dragged On Sales

‘If all of the subscription deals had been license deals it would have been an additional, approximately $12 million of licenses, which would have gone directly to the bottom line,’ says Brian Miller, CFO of the Plano, Texas-based solution provider.

Tyler Technologies posted higher quarterly revenue, but said an increase in customers opting to buy software via subscription rather than license ultimately hurt this quarter’s sales as more of the company’s customers placed workloads in the cloud.

“In the short term, it’s a negative to profitability because you’re not getting that upfront license. We have a conversion factor and we said that if all of the subscription deals had been license deals it would have been an additional, approximately $12 million of licenses, which would have gone directly to the bottom line,” said Brian Miller, CFO at the Plano, Texas-based software company. “In the short term it puts pressure on both revenue growth and earnings growth … Over the long term the break even point – say for a three-year subscription agreement – is somewhere around the end of that third year, into that fourth year in terms of revenues breaking even.”

Tyler Technologies -- No. 43 on the 2018 CRN Solution Provider 500 -- posted strong first quarter revenues of $247.1 million, up 11.7% from $221.2 million for the first quarter of 2018. Net income was $27.3 million, or $0.69 per share, down 27.7% compared to $37.8 million, or $0.95 per diluted share, for the first quarter of 2018.

Software subscriptions for the quarter added $11.4 million in new, annual recurring revenue, which was up 148 percent over last years $4.6 million. Miller said the company signed 35 new subscription software contracts in the quarter with a value greater than $100,000.

“We’re continuing to see evolution in the market,” said CEO Lynn Moore Jr. “I think if you look at the subscription rate five years ago, versus today its significantly different. I’d anticipate five years from now it will continue to be different. There is still a good chunk of the market that is looking for on premises, but at the same time we are making plans internally as the markets continue to shift to the cloud.”

The company said in terms of full-year guidance around the mix of subscription to licensed software sales, this quarter was on the high end of subscription sales, but usually ranges between 45 percent and 55 percent, subscription. He said if the subscription mix were to remain on the higher end, the company would be challenged meeting revenue guidance.

“You’ve seen those percentages bounce around a lot from quarter to quarter, and frankly, just a lot of it is randomness among the customers who happened to make decisions in this quarter as to which one of those buckets they fall in,” Miller said. “Today, I think customers are still in one of the camps or the other. Often we have somewhat limited ability to drive them more towards subscription, but … in many cases we have a pretty limited ability to change which way they want to go.”

Moore said Tyler is focused on winning the customers business and catering to their needs. One analysts asked Moore why, given they higher subscription rates, the company didn’t push sales harder in that direction.

“The market is moving. It does feel quarter to quarter. We had a strong SaaS quarter this quarter, but at the end of the day, the value to Tyler is capturing the customer, whether its on-prem or in subscription,” Moore said. “So we want to make sure we get that customer. There’s still a fair amount of business out there, that if we went 100-percent one way, we would start missing out.”

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