Tyler Technologies, Inc. — Q1 2013 Form 10-Q
Business and period: Tyler provides software, related services and property appraisal services primarily to public-sector customers, particularly local governments. This unaudited report covers the three months ended March 31, 2013, compared with Q1 2012; balance-sheet changes are compared with December 31, 2012. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $95.8 | $82.7 | +$13.1; +15.8% |
| Gross profit / margin | $43.8 / 45.8% | $37.4 / 45.2% | Margin +0.6 percentage points |
| Operating income | $14.5 | $10.0 | +$4.4 |
| Net income | $8.5 | $5.7 | +$2.8 |
| Diluted EPS | $0.25 | $0.17 | +$0.08 |
| Cash from operations | $17.1 | $18.1 | −$1.0 |
| Capital expenditures | $5.1 | $1.0 | +$4.0 |
Revenue growth was led by subscriptions, up 35% to $13.5 million, maintenance, up 16% to $46.1 million, and software services, up 10% to $20.5 million. Software licenses and royalties rose 17% to $8.8 million; appraisal services declined 2% to $5.6 million. Management reported that subscription growth reflected SaaS additions and customer conversions, as well as e-filing activity. Excluding acquisitions, subscription revenue grew approximately 34% and maintenance revenue 11%.
Operating margin was reported as 15.2%, versus 12.1%; net margin was 8.9%, versus 6.9%. The effective tax rate increased to 39.9% from 39.2%. Other expense declined to $0.3 million from $0.7 million, principally because of lower interest expense.
Financial position and liquidity
- At March 31, cash and cash equivalents were $4.5 million, down from $6.4 million at year-end. Current assets were $97.5 million and current liabilities $149.8 million; current liabilities included $125.4 million of deferred revenue.
- The company had no revolving-credit borrowings, $144.6 million of available borrowing capacity, and $5.4 million of outstanding letters of credit. It reported compliance with credit-facility covenants. The $150 million facility matures August 11, 2014.
- Financing activities used $14.2 million, including $18.0 million of net repayments on the revolving line. Net cash decreased $1.9 million to $4.5 million.
- Operating cash flow was $17.1 million. The company attributed working-capital movements in part to maintenance-billing collections and timing of tax payments. DSO was 72 days, versus 95 at December 31, 2012 and 64 at March 31, 2012.
Material developments, outlook and risks
- Management expected gradual marketplace improvement during 2013 and planned significant investments, including hiring to support backlog and new business.
- For TexFile, a statewide Texas court e-filing system, the company expected to expense approximately $3.0–$3.5 million of implementation costs in 2013, with very limited 2013 revenue. Management estimated a potential annual recurring revenue stream of $15–$20 million when e-filing becomes fully mandatory; the state’s phased mandate begins in January 2014.
- Management expected appraisal-services revenue to increase slightly in 2013. Planned 2013 capital spending was $8.5–$9.5 million excluding acquisitions and office construction, plus approximately $15.5 million for a Plano office building.
- Two auction-rate municipal securities had a $2.4 million par value and a $2.0 million carrying value, including a $0.4 million temporary impairment. Auctions have not occurred since 2008; the securities are valued using a Level 3 model. The company said it could hold them but warned that further market declines could require an other-than-temporary impairment.
- Risks include public-sector budget or regulatory changes, security breaches and data-center interruptions, project delays and renewal trends, product-development and competitive pressures, acquisition integration, and access to capital. The filing reported no material change in the risk factors from the 2012 Form 10-K, no material legal proceedings beyond routine litigation, and effective disclosure controls as of March 31, 2013.
Important facts for investors to verify
- Whether subscription and maintenance growth persists, and how much reflects acquisitions versus organic growth.
- TexFile implementation spending, adoption and timing of the projected recurring revenue; the estimate is forward-looking.
- Cash-flow and deferred-revenue seasonality, capital spending, and funding needs for the Plano office and potential acquisitions.
- Valuation, liquidity and impairment risk associated with the Level 3 auction-rate securities.
- Available credit capacity, covenant compliance and the credit facility’s August 2014 maturity.