Tyler Technologies, Inc. — Q1 2012 Form 10-Q
Business context and period. Tyler provides software and services to local governments, schools and other public-sector customers. This unaudited report covers the three months ended March 31, 2012, compared with Q1 2011. Amounts below are in millions unless noted.
Financial performance and position
- Revenue: $82.7, up 12.7% from $73.4. Subscriptions rose 43% to $10.0, maintenance rose 12% to $39.9, software services rose 11% to $18.5, and software licenses rose 9% to $7.4. Appraisal services fell 8% to $5.7.
- Profitability: Gross profit was $37.4, up 14.7%; gross margin improved to 45.2% from 44.4%. Operating income was $10.0 versus $10.0, while operating margin declined to 12.1% from 13.6%. Net income was $5.7 versus $5.7; diluted EPS was $0.17 in both periods. Basic EPS was $0.19 versus $0.18.
- Cash flow: Operating cash flow was $18.1 versus $17.5. Investing used $6.9, including acquisition spending; financing used $2.6, principally net revolver repayments. Cash increased $8.6 to $9.9.
- Liquidity and debt: At March 31, cash was $9.9 and revolving-credit borrowings were $56.0, down from $60.7 at year-end. Available borrowing capacity was $88.1; the $150.0 facility matures August 2014. The company reported covenant compliance. Current assets were $83.7 and current liabilities $129.0, including $109.4 of deferred revenue.
- Other balance-sheet items: Shareholders’ equity was $87.7, up from $78.1 at year-end. Deferred revenue declined to $109.4 from $123.7, which management says is affected by the timing of maintenance renewals.
- Segments: Enterprise Software Solutions revenue was $70.5, up from $60.6; segment operating income was $13.4 versus $12.3. Appraisal and Tax Software Solutions and Services revenue was $12.6 versus $13.2; segment operating income was $2.1 versus $2.6.
Material changes and notable items
- Subscription growth reflected hosted and subscription services, additional customers and conversions to the ASP model; e-filing contributed about $0.5 of the increase. License growth was partly constrained as customers chose subscription arrangements instead of perpetual licenses.
- SG&A rose 23% to $21.3, and increased from 23.6% to 25.8% of revenue. The company cited sales-related headcount and costs, facility expenses, higher share-based compensation and payroll taxes on incentive compensation.
- Appraisal revenue declined mainly after completion of a large Pennsylvania contract. Appraisal gross margin fell to 33.2% from 38.3%, while overall gross margin improved. Management expects to add implementation and support staff, potentially weighing on service margins in the short term.
- Q1 acquisitions included Akanda and Unifund; their combined 2012 net cash purchase cost was approximately $5.8. In April 2012, Tyler acquired CSA for $9.8 cash. These transactions increased goodwill and intangible assets.
- Two auction-rate municipal securities had a $2.5 par value and $1.953 carrying value, reflecting a $0.547 temporary impairment. Auctions have not occurred since 2008; management says it can hold the securities but notes a further other-than-temporary decline could be recognized.
- Performance guarantees had a notional amount of $43.9, supported by $5.9 of letters of credit. The company did not expect the letters of credit to be drawn. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Outlook, commentary and risks
Management expects 2012 to remain challenging and unpredictable and anticipates that most growth will come from recurring revenue. It plans to continue investing aggressively in product development and expects ESS software-license revenue to be moderately higher than in 2011 and appraisal revenue to decline slightly. Excluding acquisitions and office-building investments, 2012 capital spending is expected to be $6.0–$7.0; the company also expects to spend about $16.7 over two years on a Plano office building, including approximately $9.0 in 2012. Management said operating cash flow, cash and available credit should fund requirements for at least the next 12 months.
Key stated risks include changes to public-sector budgets and regulation, customer project delays or reduced transaction activity, renewal-rate declines, economic and capital-market conditions, product-development and technology risks, acquisition integration, competition, staffing and regulatory compliance. Borrowings carry variable rates; management estimated a hypothetical 10% interest-rate increase would add about $0.209 of annual interest expense on $56.0 of debt.
Important facts for investors to verify
- Whether recurring subscription and maintenance growth continues to offset slower license growth and appraisal-service declines.
- Whether SG&A growth, planned hiring and product-development investment affect margins as management expects.
- Integration and financial contribution of Akanda, Unifund and the subsequent CSA acquisition.
- Revolver availability, covenant headroom and financing needs for acquisitions, repurchases and the Plano building project.
- Valuation and recovery prospects of the auction-rate securities, and exposure associated with performance guarantees and letters of credit.
- Seasonality in deferred revenue, receivables and cash flow; management cautions that interim results and trends may not reflect full-year results.