Tyler Technologies, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Dollar amounts below are in millions unless stated otherwise.
Business context
Tyler provides software, hosted services, implementation and support, and property appraisal outsourcing, primarily to local and state governments, schools, and other public-sector entities. Its reportable segments are Enterprise Software Solutions (ESS) and Appraisal and Tax Software Solutions and Services (ATSS). Maintenance and subscription services together generated 57% of FY2011 revenue; reported customer turnover was approximately 2%.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $309.4 | $288.6 | +7.2% |
| Gross profit / margin | $141.9 / 45.9% | $128.3 / 44.5% | Margin +1.4 pts |
| Operating income / margin | $46.5 / 15.0% | $41.6 / 14.4% | +11.7% |
| Net income | $27.6 | $25.1 | +10.0% |
| Diluted EPS | $0.83 | $0.71 | +16.9% |
| Cash from operations | $56.4 | $35.4 | +$21.1 |
Revenue mix shifted toward recurring services: maintenance grew 8% to $146.5 million and subscriptions grew 34% to $31.2 million; software license revenue declined 7% to $32.6 million. Software services revenue increased 2% to $69.6 million, while appraisal services increased 13% to $23.2 million. Fourth-quarter revenue was $82.1 million versus $72.4 million a year earlier; quarterly net income was $8.7 million versus $7.2 million, and diluted EPS was $0.27 versus $0.21.
At year-end, cash and cash equivalents were $1.3 million, current assets $107.1 million, and current liabilities $151.6 million, including $123.7 million of deferred revenue. Revolver borrowings were $60.7 million, with $81.0 million of unused availability after letters of credit; total debt-to-capital was 43.7%. Shareholders’ equity was $78.1 million. Operating cash flow funded operations and investment, while financing included $71.8 million of share repurchases. The company reported no cash dividends.
Changes, outlook, and risks
- Revenue increased after a slight decline in 2010. Recurring revenue growth and higher gross margins more than offset lower license sales; SG&A rose 9% and R&D rose 17%.
- In October 2011, Tyler acquired Windsor Management Group for $16.4 million net of cash acquired, adding K-12 financial and human capital management software. Goodwill recorded was approximately $13.3 million. In January 2012, it acquired substantially all assets of Akanda Innovation for $2.9 million, including assumed liabilities.
- Management expected 2012 to remain challenging and unpredictable, planned continued aggressive product-development investment, and expected most growth to come from recurring revenue. It expected ESS license revenue to be higher than 2011, subject to subscription mix, and appraisal revenue to decline slightly. Expected 2012 capital spending, excluding acquisitions and office construction, was $6–7 million; approximately $9 million of planned Plano office construction costs were expected in 2012.
- Year-end signed revenue backlog was $339.8 million, up from $281.4 million; approximately $228.4 million, or 67%, was expected to be recognized in 2012.
- Principal risks include constrained government budgets and lengthy procurement cycles, contract bidding and implementation risks, competition and pricing pressure, project cost overruns, revenue-recognition timing, recruitment and retention, acquisition integration, and technology/product execution.
- Tyler held auction-rate municipal securities with $2.5 million par value and $1.953 million carrying value; auctions had not occurred since 2008. Management considered the impairment temporary but warned further declines could require an other-than-temporary charge. The IRS was examining the 2010 federal return; no significant adjustments had been proposed as of February 22, 2012. The filing reported no material pending litigation beyond routine matters.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Investor verification priorities
- Check whether recurring-revenue growth and customer renewals continued, and whether subscription conversions are still suppressing upfront license revenue.
- Compare actual 2012 ESS license and appraisal revenue with management’s directional expectations and assess backlog conversion and project timing.
- Review cash generation, revolver balance, covenant compliance, and the funding impact of repurchases and planned capital spending.
- Verify the valuation and liquidity of auction-rate securities and monitor any developments in the IRS examination.
- Assess Windsor and Akanda integration, acquisition returns, and the effect of continued R&D investment on operating margins.