Tyler Technologies, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Tyler provides software and related services primarily to local governments, schools, and other public-sector customers, across Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS).
Financial performance
Amounts in millions except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $107.0 | $93.8 | $305.9 | $267.9 |
| Gross profit / margin | $49.5 / 46.3% | $44.9 / 47.9% | $140.4 / 45.9% | $123.1 / 45.9% |
| Operating income / margin | $17.9 / 16.7% | $18.7 / 19.9% | $47.7 / 15.6% | $41.2 / 15.3% |
| Net income | $11.0 | $10.8 | $28.6 | $23.6 |
| Diluted EPS | $0.32 | $0.33 | $0.83 | $0.72 |
| Operating cash flow | Not separately provided | Not separately provided | $58.7 | $42.3 |
| Investing cash flow | Not separately provided | Not separately provided | $(20.1) | $(21.5) |
| Financing cash flow | Not separately provided | Not separately provided | $7.1 | $(22.0) |
- Q3 revenue grew 14.0%; nine-month revenue grew 14.2%. Management reported organic growth of 11.5% and 10.8%, respectively.
- Subscriptions grew 34% in both periods; maintenance grew 11% in Q3 and 12% year to date. Appraisal services declined 7% in both periods.
- Q3 net income rose modestly, but diluted EPS fell to $0.32 from $0.33 as weighted-average diluted shares increased. Nine-month net income and diluted EPS increased.
- Q3 gross margin declined 1.6 percentage points, while nine-month gross margin was flat. Q3 operating margin fell 3.2 points; nine-month operating margin improved 0.3 points.
Balance sheet, cash flow, and liquidity
- At September 30, 2013, cash and equivalents were $52.1 million, compared with $6.4 million at year-end 2012. Current assets were $164.8 million and current liabilities $181.6 million; deferred revenue was $151.5 million.
- No revolving-credit borrowings were outstanding; available capacity was $145.0 million after $5.0 million of letters of credit. The $150 million facility matures August 11, 2014. Tyler reported covenant compliance.
- Nine-month cash increased $45.7 million. Operating cash flow was $58.7 million; investing used $20.1 million, including approximately $15.2 million for the Plano office building; financing provided $7.1 million.
- Operating cash flow included $13.2 million of excess tax benefits from share-based exercises, classified as financing cash flow. Cash generation also reflected collections and a $11.0 million increase in deferred revenue.
- Two auction-rate municipal securities were carried at $2.1 million against $2.4 million par. Auctions have not occurred since 2008; management considers the impairment temporary but notes that further declines could require an other-than-temporary impairment charge.
Changes, outlook, and risks
- Growth was led by recurring subscriptions and maintenance. Subscription growth reflected SaaS customers and e-filing; new subscription arrangements can reduce initial-period license revenue while providing recurring revenue over contract terms.
- The Texas statewide e-filing implementation (TexFile) pressured service and subscription margins. Tyler expected 2013 implementation costs of approximately $3.0–$3.5 million with limited 2013 revenue. Management estimated a $16–$19 million annual recurring revenue stream when e-filing is fully mandatory; implementation was to phase in beginning in 2014.
- Management expected gradual marketplace improvement and planned investment in hiring and delivery capacity. It expected 2013 appraisal-services revenue to be moderately below 2012, citing delays in customer purchasing decisions. Excluding acquisitions and office-building investments, anticipated 2013 capital spending was $7.7–$8.7 million; a final Plano-building payment of approximately $5.5 million was expected in Q4.
- Operating costs rose: Q3 research and development expense increased 40%, partly because there were no Microsoft agreement expense offsets in 2013 versus $1.0 million in the 2012 comparison period. Share-based compensation also increased.
- Key stated risks include public-sector budget or regulatory changes, data security and data-center continuity, project delays and renewals, product-development and technology risks, competition, hiring and retention, and acquisition integration. Routine litigation was reported; no material legal proceedings were identified.
Important facts for investors to verify
- Whether subscription, maintenance, and e-filing growth converts to durable revenue and margins, including achievement of the Texas contract’s projected recurring revenue.
- How quickly implementation and support capacity is utilized, and whether TexFile costs and the planned hiring continue to weigh on margins.
- The sustainability of operating cash flow, including the effect of deferred-revenue timing and share-based tax benefits.
- Refinancing or renewal plans for the credit facility maturing in August 2014, and the availability of liquidity if needed.
- Valuation assumptions and recoverability of the illiquid auction-rate securities, as well as exposure under $39.6 million of performance guarantees.