Tyler Technologies, Inc. — FY2013 Form 10-K
Business context and reporting period: This annual report covers the year ended December 31, 2013, not a standalone fourth quarter. Tyler provides software, implementation, subscription, maintenance, e-filing, and property appraisal services, primarily to local governments and schools. Its reportable segments are Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS).
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $416.6 million | $363.3 million | +14.7% |
| Gross profit / gross margin | $193.2 million / 46.4% | $167.7 million / 46.2% | Margin +0.2 percentage points |
| Operating income / margin | $67.1 million / 16.1% | $56.6 million / 15.6% | +18.6% income |
| Net income | $39.1 million | $33.0 million | +18.5% |
| Diluted EPS | $1.13 | $1.00 | +13.0% |
| Operating cash flow | $66.1 million | $58.7 million | +$7.4 million |
- Revenue growth was led by subscriptions (+39%), software services (+12%), maintenance (+12%), and software licenses and royalties (+20%). Subscriptions and maintenance together were about 61% of revenue. Appraisal services declined 8%, largely following completion of a large Pennsylvania contract.
- ESS revenue was $367.7 million and ATSS revenue was $50.0 million. Backlog reached approximately $551.7 million, up from $380.6 million; management expected $311.0 million, or 56%, to be recognized in 2014.
- Cash and cash equivalents were $78.9 million at year-end, compared with $6.4 million a year earlier; available-for-sale investments were $1.3 million. Current assets were $217.2 million and current liabilities were $192.1 million. Days sales outstanding improved to 87 from 95.
- There were no revolver borrowings at year-end; shareholders’ equity was $246.3 million. The $150 million credit facility had $148 million of available capacity, subject to a $2 million letter of credit, and matured August 11, 2014. Tyler reported compliance with covenants. Operating, investing, and financing cash flows were $66.1 million, negative $25.7 million, and positive $32.0 million, respectively.
Material changes versus FY2012
- Revenue, operating income, net income, and diluted EPS increased. Overall gross margin edged up 0.2 percentage points; operating margin rose from 15.6% to 16.1%.
- Subscription revenue increased by $17.2 million, reflecting new SaaS customers, customer conversions, and e-filing growth. Excluding acquisitions, subscription growth was 37%.
- Appraisal services revenue fell by $1.7 million. Research and development expense increased 16% to $23.3 million; SG&A increased 13% to $98.3 million.
- Cash increased substantially, aided by operating cash generation and financing inflows, including $28.2 million of excess tax benefits from share-based award exercises. Capital expenditures were $26.9 million, including $20.3 million for a Plano office building. No shares were repurchased in 2013.
Outlook, commentary, risks, and unusual items
- Management expected gradual improvement in the marketplace in 2014. It forecast a slight increase in appraisal services revenue and $12–$13 million of capital spending, excluding acquisitions.
- Texas mandated civil e-filing beginning in January 2014, with a phased rollout over two and a half years. Tyler expected the contract to generate recurring annual revenue of $17–$19 million when e-filing became mandatory; implementation expenses were approximately $3.3 million in 2013, with limited related revenue that year.
- Management identified public-sector budget constraints, lengthy procurement and contract processes, competition, project execution and fixed-price contract risks, revenue-recognition timing, hiring and retention, and cybersecurity/data-center continuity as important risks. Hosted services also depend on reliable internet and data-center operations.
- The effective tax rate increased to 40.6% from 38.8%, in part because option-related tax benefits limited the qualified manufacturing activities deduction. The company anticipated an approximately $9.7 million tax refund in 2014. The IRS was examining the 2010 federal tax return; the filing gives no clear estimate of any potential settlement.
- Management reported no material legal proceedings other than routine litigation, no off-balance-sheet arrangements, and no goodwill impairment in 2013. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the Texas e-filing rollout achieved the expected adoption, revenue ramp, and implementation economics.
- How much of the reported backlog converted to revenue, and whether hiring and delivery capacity supported that conversion without margin pressure.
- Whether SaaS and maintenance growth continued to offset the lower initial-year license revenue associated with subscription arrangements.
- How the credit facility’s August 2014 maturity was addressed, and whether borrowing capacity and covenant compliance remained adequate.
- The outcome of the 2010 IRS examination and realization of the expected tax refund.
- Movements in unbilled and retention receivables, deferred revenue, and revenue estimates for long-term or customized contracts.