Tyler Technologies, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the same periods in 2010. Amounts below are in millions of dollars except per-share data and percentages.
Business context
Tyler provides software, hosted services and related services primarily to local governments, counties and schools. Its reportable segments are Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS). Recurring maintenance and subscription revenue together represented 58.3% of Q3 revenue, up from 55.3% a year earlier.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $77.2 | $73.8 | $227.3 | $216.2 |
| Gross profit / margin | $36.1 / 46.8% | $33.2 / 45.0% | $102.9 / 45.3% | $95.7 / 44.3% |
| Operating income / margin | $12.4 / 16.0% | $11.8 / 16.0% | $32.2 / 14.2% | $30.5 / 14.1% |
| Net income | $7.5 | $6.7 | $18.9 | $17.8 |
| Diluted EPS | $0.23 | $0.19 | $0.57 | $0.50 |
| Operating cash flow | Not presented separately | Not presented separately | $45.1 | $27.3 |
- Q3 revenue grew 4.6% and net income grew 11.6%; nine-month revenue and net income increased 5.1% and 5.7%, respectively.
- Q3 software license revenue fell 18% to $7.6 million, while subscriptions rose 33% to $8.0 million. For the first nine months, licenses declined 14% and subscriptions grew 30%.
- Maintenance revenue increased 7% in Q3 and 6% year to date. Appraisal services rose 21% for the first nine months, largely from large revaluation contracts.
- Research and development expense increased 30% in Q3 and 31% year to date, partly reflecting lower Microsoft reimbursements. SG&A rose 8% in Q3, including facility-related moving costs.
Liquidity, debt and capital allocation
- At September 30, cash and equivalents were $5.3 million; available-for-sale investments were $2.1 million, classified as non-current. Cash increased $3.2 million from year-end 2010.
- Revolver borrowings were $58.0 million, versus $26.5 million at December 31, 2010. The $150 million facility had $83.7 million of unused capacity after outstanding letters of credit; it matures August 2014. The company reported covenant compliance and an interest rate of 3.23% at quarter-end.
- Nine-month investing cash outflow was $9.7 million, including $6.6 million paid for land and a building in Plano, Texas. Financing cash outflow was $32.3 million, primarily reflecting $70.5 million spent repurchasing approximately 3.0 million shares, partly offset by $31.5 million of net revolving-credit borrowings.
- The board authorized an additional 2.0 million-share repurchase in September; 1.8 million shares remained authorized at quarter-end. The company expected 2011 capital spending, excluding acquisitions, of $11.7–$12.2 million.
- Days sales outstanding were 88 days, compared with 102 at December 31, 2010 and 94 at September 30, 2010. Management said cash, expected operating cash flows and available credit were sufficient for at least the next 12 months.
Outlook, risks and unusual items
- Management described 2011 customer demand as challenging and unpredictable, citing local-government budget constraints, longer sales cycles and delayed purchasing and implementations. It expected growth primarily from recurring revenue and continued aggressive product-development investment.
- Management expected full-year 2011 ESS software license revenue to be moderately below 2010 and appraisal services revenue to be moderately above 2010. No consolidated earnings or revenue guidance was provided in the filing.
- On October 14, 2011, after quarter-end, Tyler acquired Windsor Management Group, a K-12 financial and human-capital software provider, for $16.3 million cash, net of $7.2 million cash acquired. Purchase-price allocation was not final.
- A $4.2 million receivable relates to a customer that terminated its arrangement and disputes some invoiced amounts. Tyler considers the claim valid and intends to pursue collection.
- Two auction-rate municipal securities had a $2.5 million par value and $2.1 million carrying value, reflecting a $0.4 million temporary impairment. Auctions had not occurred since 2008; management warned a future other-than-temporary impairment could be required.
- Key stated risks include public-sector budget or regulatory changes, delayed or reduced customer projects, economic conditions, product-development and technology risks, acquisition integration, competition and retention of qualified personnel. Management reported effective disclosure controls and no material changes to internal controls during the quarter.
Important facts for investors to verify
- Whether subscription growth can offset continued weakness in perpetual software licenses, and how hosted conversions affect maintenance revenue and margins.
- Collection prospects and any reserve implications for the disputed $4.2 million customer receivable.
- Liquidity, borrowing levels, covenant headroom and the effects of continued share repurchases and the Windsor acquisition.
- The valuation and recoverability of the auction-rate securities, including any change in impairment assessment.
- Windsor’s final purchase-price allocation, integration costs and contribution to results; and the timing and amount of remaining Microsoft R&D reimbursements.