Tyler Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are to the corresponding 2010 periods. Tyler provides software, hosted services, professional services, and property appraisal services primarily to local governments and schools. Results are reported in Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $76.7m | $72.6m | $150.1m | $142.4m |
| Gross profit | $34.1m | $32.5m | $66.8m | $62.5m |
| Operating income | $9.8m | $10.5m | $19.8m | $18.6m |
| Net income | $5.6m | $6.2m | $11.4m | $11.1m |
| Diluted EPS | $0.17 | $0.17 | $0.34 | $0.31 |
| Operating cash flow | Not separately presented | Not separately presented | $19.3m | $(0.4)m |
- Q2 revenue rose 5.7%, while operating income fell 6.2% and net income fell 10.0%. Q2 gross margin was 44.5% versus 44.7%; operating margin was 12.8% versus 14.4%; net margin was 7.3% versus 8.6%.
- For the first half, revenue increased 5.4%, operating income 6.4%, and net income 2.1%. Gross margin was 44.5% versus 43.9%; operating margin was 13.2% versus 13.1%; net margin was 7.6% versus 7.8%.
- Revenue mix shifted toward recurring services: first-half subscriptions increased 29% to $14.2m and maintenance increased 6% to $70.6m. Software license revenue declined 12% to $15.1m; software services declined 2% to $34.8m; appraisal services increased 32% to $12.2m.
- R&D expense rose 32% to $9.6m for the half, primarily reflecting lower recognized Microsoft offsets. SG&A increased 2% to $35.8m. Other expense increased to $1.0m from $0.1m, mainly due to higher interest expense and fees associated with greater borrowings.
Cash, liquidity, debt, and capital allocation
- At June 30, cash and cash equivalents were $1.4m, current assets $107.3m, and current liabilities $133.3m. Revolving-credit borrowings were $31.5m; unused borrowing capacity was $110.2m, after letters of credit totaling $8.3m. The $150m facility matures in August 2014; Tyler reported compliance with its covenants.
- First-half operating cash flow was $19.3m, investing cash outflow $8.2m, and financing cash outflow $11.9m. Cash declined $0.7m to $1.4m. Investing included $6.6m for land and a building in Plano, Texas; additions to property and equipment were $8.4m.
- Tyler repurchased 913,000 shares for $20.9m during the first half, at an average price of $22.87 per share; 1.8m shares remained authorized for repurchase at June 30. The company said operating cash flow, cash on hand, and available credit should fund needs for at least the next 12 months.
- Two auction-rate municipal securities had a $2.1m carrying value against $2.5m par value, with a $0.4m cumulative unrealized impairment. Auctions had not occurred since February 2008. Management considered the impairment temporary but warned that further deterioration could require an other-than-temporary write-down.
Management outlook, risks, and unusual items
- Management expected 2011 to remain challenging and unpredictable, with growth primarily from recurring revenue, and said it expected to continue investing aggressively in product development. It expected full-year ESS software license revenue to be moderately below 2010 and appraisal revenue moderately above 2010.
- Excluding acquisitions, 2011 capital spending was projected at $12.5m–$13.0m, including the $6.6m Plano property purchase. No full-year revenue or earnings guidance was provided in the supplied filing text.
- Management attributed weaker license sales to longer sales cycles, public-sector budget constraints, postponed purchasing decisions, extended implementation timetables, and customers choosing subscription arrangements. Subscription arrangements generate lower initial license revenue but higher subscription revenue over the contract term.
- A customer terminated an arrangement and disputed certain previously invoiced amounts. The related receivable was $4.2m; Tyler believed its claim was enforceable and intended to pursue collection.
- The April 2011 amended Microsoft development agreement changed how R&D offsets are recognized: offsets are recorded when Tyler invoices Microsoft for work performed. Tyler had recorded $2.1m of offsets and expected to recognize the remaining $4.1m through mid-2012, with about 75% in the second half of 2011, mostly in Q4; actual timing and amounts may vary.
- Principal stated risks include local-government budget and regulatory changes, delayed or reduced customer projects, economic and capital-market conditions, product-development and technology risks, acquisition integration, competition, and attracting and retaining personnel. Management said disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the mix shift to subscriptions can sustain recurring-revenue growth while license and related service revenue remain pressured.
- Collections and any potential impairment relating to the disputed $4.2m customer receivable.
- Actual Microsoft R&D offset recognition and associated development spending in the second half of 2011.
- Cash generation, credit-line usage, and the pace of share repurchases relative to operating and capital needs.
- Valuation and recoverability of the auction-rate securities, including any change in auction liquidity, credit support, or impairment assessment.
- Progress against the stated 2011 license, appraisal-revenue, and capital-spending outlook.