Tyler Technologies, Inc. — Q3 2012 Form 10-Q
Business context and period: Tyler provides software, hosted services and property appraisal services primarily to local governments, schools and other public-sector customers. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the same 2011 periods. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $93.8 | $77.2 | $267.9 | $227.3 |
| Gross profit / margin | $44.9 / 47.9% | $36.1 / 46.8% | $123.1 / 45.9% | $102.9 / 45.3% |
| Operating income / margin | $18.7 / 19.9% | $12.4 / 16.0% | $41.2 / 15.3% | $32.2 / 14.2% |
| Net income | $10.8 | $7.5 | $23.6 | $18.9 |
| Diluted EPS | $0.33 | $0.23 | $0.72 | $0.57 |
| Operating cash flow | Not stated for the quarter | $42.3 | $45.1 |
- Revenue increased 21.6% in Q3 and 17.9% year to date; net income rose 44.3% and 25.2%, respectively. Q3 operating margin expanded 3.9 percentage points.
- Recurring revenue categories grew strongly: subscriptions rose 42% in Q3 and 43% year to date; maintenance rose 20% and 17%. Software services rose 25% and 19%.
- Software license revenue rose 14% in Q3 and 7% year to date. Excluding acquisitions, it increased 3% in Q3 and was flat year to date; management cited customer migration to subscription offerings and fewer add-on sales.
- Appraisal services revenue declined 3% in Q3 and 5% year to date, primarily following completion of a large Pennsylvania contract. Overall gross margin improved by 1.1 points in Q3 and 0.6 points year to date.
- Acquisitions contributed to growth: Tyler acquired Akanda, UniFund and Computer Software Associates in 2012. The combined net cash purchase price was approximately $15.2 million. Acquired goodwill and intangible assets increased, including approximately $14 million of customer and trade-name intangibles from acquisitions since October 2011.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $0.1 million, investments available-for-sale were $2.0 million, and revolving-credit borrowings were $28.0 million. Current assets of $94.1 million were below current liabilities of $144.7 million, which included $120.1 million of deferred revenue.
- The $150 million revolving facility had $116.1 million of available borrowing capacity, in addition to $5.9 million of letters of credit. The facility matures August 11, 2014; the reported average rate on borrowings was 3.6% at quarter-end. Tyler reported covenant compliance.
- Nine-month operating cash flow was $42.3 million, down from $45.1 million. Investing used $21.5 million, including $15.2 million for acquisitions and capital spending. Financing used $22.0 million, including $32.7 million of net credit-line repayments. Cash declined $1.2 million to $0.1 million.
- Management said operating cash flow, cash and available credit were sufficient for expected needs for at least the next 12 months. DSO was 75 days at September 30, versus 99 days at December 31, 2011.
Outlook, risks and unusual items
- Management expected 2012 ESS software license revenue to be slightly above 2011 and appraisal revenue to decline slightly. It anticipated lower software-services revenue and margins in Q4 due to holiday-season utilization, and expected to add implementation and support staff that could weigh on near-term margins.
- Tyler planned continued aggressive product-development investment. Excluding acquisitions and office-building investments, expected 2012 capital spending was $6–$7 million; it also planned approximately $16.8 million for a Plano office building, with about $4.7 million expected to be paid in 2012.
- Two auction-rate municipal securities had a $2.0 million carrying value against $2.45 million par value. Auctions have not occurred since 2008; fair value relies on a Level 3 model. Management considered the impairment temporary but noted a future other-than-temporary loss remained possible.
- A customer disputed acceptance of software services under a contract valued at approximately $785,000; Tyler had collected about $575,000. A termination for cause could expose Tyler to excess replacement costs. Management said it believed the services and amounts collected were valid under the contract.
- Other cited risks include public-sector budget or regulatory changes, project delays, renewal rates, competition, product-development execution, acquisition integration, staffing and access to capital. Management reported no material change in the risk factors disclosed in its 2011 Form 10-K.
Important facts for investors to verify
- Whether subscription growth and migration from perpetual licenses continue to support recurring revenue and margins.
- How acquisition-related revenue, integration costs, amortization and goodwill develop.
- Whether Q4 staffing additions and seasonal utilization affect services margins as management anticipated.
- Liquidity and valuation developments for the auction-rate securities, plus the disputed customer contract’s outcome.
- Debt usage, covenant headroom, planned capital spending and any renewed share repurchases; no repurchases occurred in the first nine months of 2012.