Business context and reporting period
Tyler Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012; it also reports unaudited quarterly results, including Q4 2012. Tyler provides software, hosted services, support, and property-appraisal services primarily to local governments, schools, and other public-sector entities. Its reportable segments are Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS).
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $363.3 | $309.4 | +17.4% |
| Gross profit / margin | $167.7 / 46.2% | $141.9 / 45.9% | Margin +0.3 pp |
| Operating income / margin | $56.6 / 15.6% | $46.5 / 15.0% | Income +21.6% |
| Net income | $33.0 | $27.6 | +19.7% |
| Diluted EPS | $1.00 | $0.83 | +20.5% |
| Operating cash flow | $58.7 | $56.4 | +$2.2 |
- Recurring maintenance and subscription revenue was $216.5 million, about 60% of total revenue. Subscriptions grew 43% to $44.6 million; maintenance grew 17% to $171.9 million.
- FY2012 cash and cash equivalents were $6.4 million, with $2.0 million of auction-rate securities classified as non-current. Borrowings under the revolving credit facility were $18.0 million; reported unused borrowing capacity was $126.1 million. Shareholders’ equity was $145.3 million and debt-to-capital was 11.0%.
- Investing activities used $34.7 million, including $25.7 million net cash for four acquisitions and $9.1 million in property and equipment additions. Financing activities used $18.9 million; no shares were repurchased in 2012.
- Q4 2012 revenue was $95.4 million versus $82.1 million in Q4 2011; net income was $9.4 million versus $8.7 million, and diluted EPS was $0.28 versus $0.27.
Material changes versus the prior comparable period
- Growth was driven mainly by recurring and services revenue: software services rose 20%, maintenance 17%, and subscriptions 43%. Software license revenue rose 2% reported, but declined 6% excluding acquisitions; management cited fewer add-on sales and customer migration to subscriptions.
- Overall gross margin edged up to 46.2%. Operating expenses increased, including R&D expense up 23% to $20.1 million, partly because Microsoft reimbursements fell to $1.0 million from $3.5 million.
- Tyler acquired Akanda, UniFund, Computer Software Associates, and EnerGov during 2012; acquisition-related goodwill and intangible assets increased. Headcount rose to 2,388 from 2,091, including employees added through acquisitions.
- Revenue backlog increased to $380.6 million from $339.8 million; approximately $267.4 million, or 70%, was expected to be recognized in 2013.
Outlook, risks, and unusual items
- Management expected gradual marketplace improvement in 2013, higher software license revenue than in 2012, and a slight increase in appraisal revenue. It planned increased hiring and investment; no specific consolidated revenue or earnings guidance was provided.
- For Texas statewide e-filing, Tyler expected about $3.0 million of 2013 implementation investment and very limited 2013 filing revenue. Management estimated a potential recurring revenue stream of $15 million to $20 million when mandatory e-filing is fully implemented; realization depends on phased rollout and filing volumes.
- Key risks include public-sector budget constraints and lengthy procurement cycles, project delays and fixed-price cost overruns, competition and pricing pressure, cybersecurity and hosted-service interruptions, recruitment and retention, and acquisition integration.
- Two auction-rate municipal securities had a $2.45 million par value and $2.04 million carrying value; auctions had not occurred since 2008. Their Level 3 valuation relies on a model, and the filing warns a further impairment could be required. The company said it could hold the securities and did not expect their illiquidity to impair operations.
- Outstanding performance guarantees had a stated notional amount of $35.1 million, supported in part by $5.9 million of letters of credit; management did not expect the letters to be drawn. The IRS was examining the 2010 federal tax return; the filing did not estimate any potential settlement.
- Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts to revenue on the expected timetable, and whether project delivery and hiring costs affect margins.
- Whether subscription growth and e-filing adoption offset slower perpetual license growth and customer transitions away from maintenance contracts.
- The Texas e-filing rollout schedule, required investment, and assumptions underlying the estimated $15 million to $20 million mature revenue stream.
- Liquidity and valuation developments for the auction-rate securities, covenant capacity and the August 2014 credit-facility maturity.
- Final purchase-price allocations for acquisitions, integration performance, and any outcome from the IRS examination or customer disputes.