Tyler Technologies, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Tyler provides software, services, and property appraisal solutions primarily to public-sector customers, especially local governments. Financial figures below are in millions of dollars except per-share amounts.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $112.6 | $95.8 |
| Gross profit / margin | $52.5 / 46.6% | $43.8 / 45.8% |
| Operating income / margin | $19.9 / 17.6% | $14.5 / 15.2% |
| Net income | $11.9 | $8.5 |
| Diluted EPS | $0.33 | $0.25 |
| Operating cash flow | $16.6 | $17.1 |
- Revenue increased 18%; subscriptions grew 52% to $20.5 million, software licenses and royalties grew 27% to $11.2 million, software services grew 19% to $24.3 million, and maintenance grew 9% to $50.2 million.
- Appraisal services revenue declined 13% to $4.9 million. Enterprise Software Solutions (ESS) revenue was $100.8 million, compared with $83.6 million; Appraisal and Tax Software Solutions and Services (ATSS) revenue was $12.3 million, compared with $12.8 million.
- Operating income rose 37% and net income rose 40%. Gross margin improved 0.8 percentage points; operating margin improved 2.4 points. The effective tax rate was 39.4%, versus 39.9%.
- Cash and cash equivalents were $97.1 million at March 31, up from $78.9 million at December 31, 2013; available-for-sale investments were $1.3 million. Current assets were $207.6 million and current liabilities $161.4 million. No borrowings were outstanding; $148.0 million of revolving credit capacity remained available.
- Cash from investing activities was an outflow of $3.3 million, primarily for equipment and facilities; financing activities provided $5.0 million. Deferred revenue was $139.3 million, down from $156.7 million at year-end. DSO was 66 days, versus 87 at December 31, 2013 and 72 a year earlier.
Changes and management commentary
- Growth was driven by a more active local-government market, larger software contracts, subscription adoption, and the Texas court e-filing contract. Management said product investment had strengthened its competitive position.
- The Texas Office of Court Administration e-filing contract was expected to generate recurring revenue of approximately $17 million in 2014 and $19 million in 2015. In Q1, Tyler added 32 SaaS customers and 15 existing customers converted to SaaS.
- Severe weather hindered field data gathering and reduced Q1 appraisal-services revenue. Management expected appraisal-services revenue for the rest of 2014 to grow year over year, partly from increased work tied to Indiana’s appraisal cycle.
- Management cited hiring and product development as ongoing investments to deliver backlog and support anticipated business. Implementation and support staffing increased by 196 employees year over year; total employees were 2,608, versus 2,406.
- Capital spending guidance for 2014, excluding acquisitions, was $12 million to $13 million. Management expected R&D expense to grow more slowly than revenue. The filing gives no overall revenue or EPS forecast.
Liquidity, risks, and other items
- The $150 million revolving credit facility matures August 11, 2014; it was secured by substantially all assets other than real property. Tyler reported compliance with covenants. The company said cash, operating cash flow, and credit access should fund needs for at least the next 12 months.
- A $2.0 million letter of credit reduced available facility capacity; outstanding performance guarantees had an estimated notional amount of $29.0 million. Management did not expect the letter of credit to be drawn.
- Risks highlighted include public-sector budget or regulatory changes, security breaches and data-center interruptions, customer project delays, renewal-rate declines, product-development and acquisition risks, competition, hiring and retention, and regulatory compliance. No material changes to the 2013 Form 10-K risk factors were reported.
- There were no material legal proceedings other than routine litigation. The company reported no Q1 share repurchases, but bought approximately 12,000 shares for $0.9 million after quarter-end. The credit facility’s near-term maturity and the stated repurchase authorization are relevant to monitor.
- Disclosure controls were judged effective as of March 31, 2014; no material change in internal control over financial reporting was reported.
Investor verification points
- Track whether subscription and e-filing growth, including the Texas contract’s anticipated revenue, converts to sustainable revenue and margins.
- Verify progress on the appraisal-services recovery outlook and the effect of weather and appraisal-cycle timing.
- Review renewal billings, deferred revenue, collections, and operating cash flow, which was slightly lower year over year despite higher earnings.
- Confirm refinancing or replacement of the revolving facility before its August 2014 maturity and monitor covenant capacity, guarantees, and subsequent share repurchases.
- Assess whether accelerated hiring and product investment support backlog delivery without weakening margins, and monitor the impact of stock-based compensation and option activity on expenses and taxes.