Business Context and Reporting Period
Company: Tyler Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Tyler Technologies provides integrated information management solutions and services for local governments, including software products, professional IT services, subscription-based services (ASP/hosting), and property appraisal outsourcing. The company operates as a single segment.
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (in thousands) | 2008 (in thousands) |
|---|---|---|
| Total Revenues | $216,069 | $195,557 |
| Gross Profit | $95,524 | $80,842 |
| Operating Income | $33,835 | $18,387 |
| Net Income | $20,354 | $9,731 |
| Diluted EPS | $0.56 | $0.25 |
| Cash from Operations | $31,249 | $45,399 |
| Cash & Equivalents (End of Period) | $1,895 | $23,779 |
| Debt (Revolving Credit) | $2,101 | $8,000 |
Margins (Nine Months): Gross Margin improved to 44.2% from 41.3% in the prior year. Operating Margin improved significantly to 15.7% from 9.4%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 10.5% year-over-year, driven by growth in Software Services (+11%), Maintenance (+16%), and Subscriptions (+21%). Software License revenue declined slightly (-3%) due to longer sales cycles and timing of contract recognition.
- Profitability Surge: Net income more than doubled (+109%). This was primarily due to the absence of a $9.0 million non-cash legal settlement charge related to warrants that impacted the 2008 period.
- Expense Increases: Research and Development (R&D) expenses increased 47% to $8.0 million, largely due to the Microsoft Dynamics AX project. Selling, General, and Administrative (SG&A) expenses rose 12% due to higher stock compensation and marketing costs.
- Cash Flow: Operating cash flow decreased by $14.1 million compared to the prior year, attributed to higher accounts receivable balances (DSO increased to 104 days) and a lack of unusually large advance payments seen in 2008.
- Acquisitions: Completed acquisitions of Assessment Evaluation Services, Inc. (AES) and Parker-Lowe & Associates, along with various software asset purchases, totaling approximately $2.9 million in cash outflows.
Outlook, Risks, and Management Commentary
- Outlook: Management notes that the financial market crisis continues to disrupt credit markets, potentially affecting local government IT spending. However, they expect software license revenues for the fourth quarter of 2009 to be comparable to the prior year period.
- Capital Allocation: The company repurchased 1.2 million shares of common stock for $17.0 million during the nine-month period. They have authorization to repurchase an additional 2.3 million shares. Capital spending for 2009 is expected to be between $14.0 million and $15.0 million, primarily for an office building in Lubbock, Texas.
- Liquidity: The company holds $7.9 million in cash and cash equivalents (including restricted cash) and has $21.6 million of unused borrowing capacity under its revolving credit facility. Management believes these resources are sufficient for foreseeable needs.
- Investment Risk (ARS): The company holds $2.1 million in Auction Rate Securities (ARS) which are currently impaired due to market liquidity issues. Management classifies these as non-current, does not plan to sell them at a loss, and believes they will recover to par value.
- Legal Contingency: A putative collective action regarding employee overtime classification (Fair Labor Standards Act) is pending. The company intends to vigorously defend the action but cannot estimate the outcome.
Investor Verification Checklist
- Accounts Receivable Aging: Verify the collectability of the $85.6 million in accounts receivable, noting the increase in Days Sales Outstanding (DSO) to 104 days.
- ARS Valuation: Monitor the fair value of the $2.1 million in Auction Rate Securities and the potential for an "other-than-temporary" impairment charge if market conditions do not improve.
- Government Spending Trends: Assess the impact of local and state government budget constraints on the renewal rates for maintenance contracts and the timing of new software license sales.
- Legal Settlement Exposure: Track the status of the collective action lawsuit regarding employee overtime classification for potential liability.
- Capital Expenditure Completion: Confirm the completion and cost of the Lubbock, Texas office building construction, which is a significant portion of 2009 capital spending.