Tyler Technologies, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparative periods ended June 30, 2012. Amounts below are in millions of dollars unless stated otherwise. Tyler provides public-sector software and services, primarily to local governments, through Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS).
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $103.1 | $91.4 | $198.9 | $174.1 |
| Gross profit | $47.0 | $40.7 | $90.9 | $78.1 |
| Gross margin | 45.6% | 44.5% | 45.7% | 44.9% |
| Operating income | $15.3 | $12.5 | $29.8 | $22.5 |
| Net income | $9.0 | $7.1 | $17.5 | $12.8 |
| Diluted EPS | $0.26 | $0.22 | $0.51 | $0.39 |
| Operating cash flow | Not provided separately | Not provided separately | $16.6 | $8.4 |
- Q2 revenue grew 12.8%; first-half revenue grew 14.2%. Management reported organic growth of 9.5% and 10.4%, respectively.
- For Q2, subscriptions increased 31%, software services 11%, maintenance 11%, and software licenses and royalties 20%. Appraisal services declined 12%. For the first half, those growth rates were 33%, 11%, 13%, 18%, and a 7% decline, respectively.
- Operating margins were 14.9% in Q2 versus 13.6% a year earlier and 15.0% for the first half versus 12.9%. Net margins were 8.8% versus 7.8% for both Q2 and the first half.
- First-half operating cash flow increased to $16.6 million, aided by net income and a $15.4 million increase in deferred revenue; cash flow also reflected a $21.7 million use from accounts receivable. Investing used $13.7 million, including approximately $10.1 million for the Plano office building. Financing used $6.2 million, including $18.0 million of net revolving-credit repayments.
Financial position and material changes
- At June 30, cash and cash equivalents were $3.1 million, versus $6.4 million at year-end 2012. Current assets were $146.6 million and current liabilities $183.3 million; deferred revenue was $155.9 million.
- No revolving-credit borrowings were outstanding at June 30; available capacity was $144.6 million under the $150 million facility, after letters of credit. The facility matures August 11, 2014. Tyler reported compliance with its covenants.
- Accounts receivable were $121.3 million, up from $99.2 million at year-end. Days sales outstanding rose to 106 from 95 at year-end and 99 in June 2012; management attributed the increase primarily to the seasonal maintenance billing cycle and newer billings not yet due.
- ESS first-half revenue was $173.1 million versus $148.5 million; ATSS revenue was $25.3 million versus $25.0 million. Segment operating income was $38.2 million for ESS and $4.6 million for ATSS, compared with $29.3 million and $4.4 million, respectively, a year earlier.
- Tyler’s 2012 acquisitions contributed to reported growth. A purchase-price allocation adjustment for the EnerGov acquisition increased goodwill by $1.1 million, with a corresponding reduction in tangible assets; the December 2012 balance sheet was revised retrospectively.
Outlook, risks, and notable items
- Management expected gradual marketplace improvement to continue in 2013 and planned investment in hiring, e-filing contracts, and delivery capacity. The filing provides no quantitative full-year revenue or earnings guidance.
- For the Texas TexFile statewide e-filing system, the company expected $3.0–$3.5 million of implementation expense in 2013 and very limited 2013 revenue. Tyler estimated potential annual recurring revenue of $15–$20 million once mandatory e-filing is fully implemented over a phased two-and-a-half-year period beginning in January 2014.
- Management expected appraisal-services revenue to be moderately lower in 2013 than in 2012, citing customer purchasing delays. Excluding acquisitions and office-building investments, anticipated 2013 capital spending was $7.7–$8.7 million; the company expected a further $8.4 million of 2013 spending to complete the Plano building.
- Other key risks include public-sector budget or regulatory changes, customer project delays, security and data-center continuity, product development and competition, hiring and retention, and acquisition integration. The company said no material risk-factor changes occurred during the quarter.
- Two auction-rate municipal securities were carried at $2.1 million against $2.4 million par value, using a Level 3 valuation model; auctions had not occurred since 2008. Management considered the impairment temporary but noted a future other-than-temporary impairment could be required. Outstanding performance guarantees had a stated notional amount of $37.2 million; management did not expect related letters of credit to be drawn.
- Effective tax rate was 39.9%, versus 39.2% a year earlier. No material legal proceedings were reported beyond routine litigation.
Important facts for investors to verify
- Whether subscription, SaaS, maintenance, and e-filing growth continues to offset the shift away from upfront software licenses and weaker appraisal-services revenue.
- Actual TexFile implementation costs, mandatory adoption timing, and progress toward the estimated fully implemented revenue opportunity.
- Collections after the seasonal billing peak, receivables and DSO trends, and the sustainability of operating cash flow.
- Completion cost and timing for the Plano building, planned capital spending, and renewal or replacement of the credit facility before its August 2014 maturity.
- Changes in the fair value and liquidity of the auction-rate securities and any resulting impairment charges.