Tyler Technologies, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are in millions unless stated otherwise. Tyler provides software, related services and property appraisal services primarily to local governments, schools and other public-sector customers.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $91.4 | $76.7 | $174.1 | $150.1 |
| Gross profit / margin | $40.7 / 44.5% | $34.1 / 44.5% | $78.1 / 44.9% | $66.8 / 44.5% |
| Operating income / margin | $12.5 / 13.6% | $9.8 / 12.8% | $22.5 / 12.9% | $19.8 / 13.2% |
| Net income / margin | $7.1 / 7.8% | $5.6 / 7.3% | $12.8 / 7.3% | $11.4 / 7.6% |
| Diluted EPS | $0.22 | $0.17 | $0.39 | $0.34 |
- Q2 revenue grew 19% year over year and six-month revenue grew 16%. Subscriptions rose 45% in Q2 and 44% year to date; maintenance grew 20% and 16%, respectively. Software services increased 21% and 16%.
- Q2 software license revenue was essentially flat; six-month revenue rose 4%. Management said that, excluding acquisitions, license revenue declined 6% in Q2 and 1% year to date, partly as customers selected subscriptions instead of perpetual licenses.
- Appraisal-services revenue fell 4% in Q2 and 6% year to date, mainly following completion of a large Pennsylvania contract. Its gross margin also declined; overall gross margin was flat in Q2 and improved 0.4 percentage point year to date.
- SG&A increased 18% in Q2 and 20% year to date; R&D increased 7% and 10%. Management cited added headcount, acquisition-related costs, facilities expenses, higher share-based compensation and incentive-related payroll taxes.
Cash flow, balance sheet and liquidity
- For the first six months, operating cash flow was $8.4 million, versus $19.3 million a year earlier. Investing used $19.5 million, including $15.2 million of net acquisition spending; financing provided $10.1 million. Cash declined $1.0 million to $0.3 million.
- At June 30, cash was $0.3 million, current assets $117.3 million, current liabilities $150.0 million and shareholders’ equity $99.6 million. Receivables were $100.5 million current and $0.6 million long-term; deferred revenue was $125.7 million.
- Revolver borrowings were $65.7 million, up $5.0 million from year-end, at an average rate of 3.4%. The $150 million facility matures August 11, 2014; reported available borrowing capacity was $78.4 million, with $5.9 million of letters of credit outstanding. The company was in compliance with covenants.
- Tyler reported $46.3 million of notional performance guarantees and said it did not expect the related letters of credit to be drawn. DSO was 99 days, unchanged from December 2011 and down from 106 days a year earlier.
- Capital expenditure outlook, excluding acquisitions and office buildings, was $7.5–$8.5 million for 2012. The company also planned about $16.8 million over two years for a Plano office building, with approximately $7.5 million expected to be paid in 2012.
Developments, outlook and risks
- Tyler acquired Akanda, UniFund and Computer Software Associates during 2012. These transactions added goodwill and acquired intangible assets; combined net cash paid in the first half was approximately $15.2 million. Results were included from their respective acquisition dates.
- Management expected 2012 to remain challenging and unpredictable, with most growth again coming from recurring revenue, while continuing to invest aggressively in product development. It expected ESS software license revenue to be moderately higher than in 2011 and appraisal-services revenue to decline slightly. No overall revenue or earnings forecast was provided in the filing text.
- Management expected to add implementation and support staff for recent contract signings; staffing growth slightly ahead of revenue could pressure near-term gross margins. It expected to record the remaining approximately $1.0 million of Microsoft-related R&D offsets in the second half of 2012; timing and actual amounts could vary.
- Two auction-rate municipal securities had a carrying value of $1.9 million against $2.45 million par, including a $0.55 million temporary impairment. Auctions had not occurred since February 2008; the securities were valued using a model with significant unobservable inputs. Management viewed the impairment as temporary but noted a future other-than-temporary write-down was possible.
- A customer disputed acceptance of approximately $0.785 million of software services and considered termination for cause. Tyler had collected approximately $0.575 million; a termination could expose it to excess replacement costs. Tyler believed the work and amounts collected were valid. Other than routine litigation, no material legal proceedings were reported.
- Key disclosed risks include public-sector budget or regulatory changes, project delays and contract size, renewals, product development and technology risks, acquisition integration, competition, staffing and access to capital. Management stated disclosure controls were effective at June 30, 2012.
Important facts for investors to verify
- Whether recurring-revenue growth and subscription conversions continue to offset weaker perpetual-license sales, and how they affect margins and cash collections.
- Whether first-half operating cash flow weakness reverses as seasonal receivables are collected and maintenance renewals are billed.
- Debt availability, covenant headroom, interest-rate exposure and funding needs for planned capital spending, acquisitions and potential repurchases.
- Performance of the acquired businesses, purchase-price accounting and expected integration benefits and costs.
- Resolution and potential financial exposure from the disputed customer contract, and changes in the valuation or liquidity of the auction-rate securities.
- Execution of management’s stated 2012 outlook, including the expected Microsoft R&D offsets and staffing-related margin effects.