泰勒科技 (TYL) 2005 Q3 法說會逐字稿

Hello and welcome to today's Tyler Technologies third quarter fiscal 2005 conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. Mr. Marr, please begin your call.

Thank you, Tia. Welcome to our third quarter 2005 earnings call. Joining me from our management team are Brian Miller, our CFO, and Lynn Moore, our General Counsel.

First I'd like Brian to give the Safe Harbor statements. Then I'll have some preliminary comments. Brian will then review the details of our operating results and then I will have some final observations and we will take questions. Brian.

Thank you, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the Company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections.

We refer you to our Form 10-K and other SEC filings for more information on those risks. John.

Thank you, Brian. Our third quarter was strong and very much in line with our expectations. This was Tyler's 18th consecutive profitable quarter. The quarter had solid license revenue driven by strong performance in the new business market and even better recurring maintenance revenue, extending our record of excellent customer retention.

We also see indications that our business model is performing well. Operating margins expanded modestly both sequentially and year-over-year, even as several products have been released and their associated development costs have shifted from being capitalized to expensed.

Certainly the bright spot in the quarter was our free cash flow. As we indicated on the last call, there was a spike in maintenance billing late in the second quarter. Collections from that billing, low software capital expenditures, in addition to our earnings from operations drove strong cash flow in the quarter of $9 million.

While the third quarter is traditionally our strongest from the cash flow perspective, we do expect excellent cash flow in relation to earnings going forward as a result of the significant favorable difference between CapEx and depreciation and amortization.

As has been reported, we ended the quarter with $34 million in cash and no debt, up $5 million sequentially and this is after investing $4.7 million in our share repurchase program.

Now I'll ask Brian to provide some detail around the numbers and then I will break down the quarter by products and divisions, update guidance and take questions. Thank you. Brian.

Thanks John. Yesterday, Tyler Technologies reported its results for the third quarter of 2005. For the quarter ended September 30, 2005, Tyler had revenues of $42.3 million, up 1% from the third quarter of 2004. Operating income was 4.1 million, an increase of 19% compared with operating income of 3.4 million in the third quarter of 2004. Net income for the quarter was 2.6 million or $0.06 per diluted share compared to net income of 2 million or $0.05 per diluted share in the third quarter of 2004.

EBITDA for the third quarter of 2005 increased 6% to 6.6 million from EBITDA's 6.2 million in the third quarter of 2004.

Our software-related revenues which include software licenses, software services and maintenance increased an aggregate 9% over the third quarter of 2004. Software license revenues increased 3% over last year's third quarter while software services revenues grew 7% and maintenance revenues grew 14%.

Appraisal services revenues for the third quarter declined 35% from last year's third quarter to $4.1 million, which was in line with our expectations and reflects the completion of some large revaluation projects that contributed to revenues in 2004.

The revenue mix for the third quarter of 2005 was as follows. Software licenses, 17%; software services, 31%; maintenance, 39%; appraisal services, 10%; and hardware and others, 3%.

Overall, 87% of our revenues were software-related in the third quarter compared to 81% of our revenues in last year's third quarter. In the third quarter of 2005 our overall gross margin was 37.9% compared to 36.6% in last year's third quarter.

Margin improvement reflects higher margins for software licenses, services, and maintenance as well as the positive shift in the mix of revenues to include less appraisal services revenues. Software license margins for the quarter were up from last year at 69.8% versus 66.7%. The blended margin for software services and maintenance increased to 32.2% from 31.3% for the same quarter last year.

The appraisal services gross margin in the third quarter of 2005 was 27% compared to 30.8% last year, but up sequentially from 20.0% in the second quarter of 2005 and 16.3% in the first quarter. This sequential improvement reflects the restructuring actions taken with respect to our present services business in the second quarter of this year.

SG&A expense for the third quarter was 11.4 million or 27.1% of revenues, virtually unchanged from the third quarter of 2004 at 11.3 million or 27.1% of revenues.

We now expect that our effective tax rate for the full year of 2005 will be 40.5% compared to 41.5% in 2004. Our estimated tax rate in the first half of the year was 41.3% so the third quarter tax rate was 39.8% to true up the year-to-date tax provision to the current expected annual rate.

The decline in the tax rate is the result of a corporate reorganization that favorably impacted our state tax rates, lower nondeductible meals and entertainment expenses, and more nontaxable interest income.

Our backlog at September 30, 2005 was 146.6 million compared to 149.4 million at September 30th of 2004, and 148.5 million at June 30th of '05. Backlog related to our software business which excludes backlog from appraisal services contract was 118 million at September 30th, a decrease of 1.5% from the second quarter of this year.

Appraisal services backlog was 28.6 million at September 30th, a decline of less than 1% from June 30th.

At September 30th, 2005, we had total cash and investments of $34.2 million. We had cash flow from operations of $9.5 million during the third quarter and free cash flow of $9 million. For nine months ended September 30, 2005, Tyler generated 14.6 million in free cash flow compared to 13.5 million in the nine months ended September 30th, 2004. The increase in free cash flow is attributable primarily to lower capital expenditures, primarily for software development as the majority of our capital projects for new products are complete.

This increase was offset, somewhat, by lower earnings including the cash restructuring charge of 1.3 million recorded in the second quarter. During the third quarter we repurchased approximately 601,000 shares of our common stock on the open market at an average cost of approximately $7.76 per share.

For the nine months ended September 30, 2005, we repurchased a total of 2.2 million shares of our stocks at an average cost of $7.07 per share.

Our capital expenditures during the third quarter were $485,000, which includes $174,000 of software development costs. This is down significantly from CapEx of 1.4 million in the third quarter of last year as our capitalized software development declined by 81%. We expect that capitalized software development will remain at very low levels for the foreseeable future with the vast majority of our development cost expenses as cost of maintenance revenues.

Amortization of software development costs was $1.4 million in the third quarter. Day sales outstanding and accounts receivable at September 30, 2005, were 86 days compared to 92 days at December 31st and 84 days at September 30th of 2004.

Our stockholders equity at September 30, 2005, was 109.4 million. We continue to have no debt outstanding and $30 million of available credit under our revolving credit facility.

You'll also see in our Form 10-Q for the third quarter some disclosure regarding some recently initiated litigation between Affiliated Computer Systems and Tyler. While we feel strongly that the allegations in their lawsuit against us are without merit, the costs related to our defense could potentially be significant. You can refer to the disclosure in our Form 10-Q for a more complete discussion of this litigation.

Now, I'd like to turn the call over to John Marr for his comments on the quarter.

Thank you, Brian. Tyler's strategy is to build a company based on products and services uniquely designed to meet the needs of state and local government. In our view, this space has been poorly served by larger multi-industry companies whose products are powerful but are a difficult fit for the specific needs of local government.

Tyler's products are very targeted; and as a result we execute projects on time and on budget with considerably lower risk for project (indiscernible). We also deliver an excellent value to government both initially as well as over the long life of our relationship. Our divisions are in various stages of building these offerings and coming fully up to speed on this model.

The best example of how our model works when fully developed is demonstrated by the performance of our financial divisions. In the third quarter our financial divisions grew year-over-year at 16%. It has strong and expanding margins and low capital needs. In the third quarter, this division represented 60% of Tyler's revenues. We signed 48 new names in 24 different states, clearly supporting our position as a leader in this marketplace.

Odyssey, our courts and justice system, in my view has now enter a stage in its development where we believe that it will perform in line with financials. Yesterday we announced a new contract with the country's eighth largest county, Miami-Dade. As we have mentioned before, we have another similar award not yet announced as well as other decision processes nearing completion where we like our chances.

We are also seeing a steadier stream of smaller awards from our traditional midmarket as well as our installed customer base. It has taken some time and considerable investment but this division now has a strong foundation to build on.

We still do have a few products -- Orion, our tax and appraisal system, as well as a recording and content management system that are largely out of the build or CapEx stage but still require time and investment to transition to where they will be consistent contributors to Tyler's success.

These systems have deployed in early releases. They have been well-received by the marketplace but I would expect that it would be late 2006 or early 2007 before these are fully up to speed and contributing to our financial performance.

It is important to reinforce that we are completely committed to making all these products industry leaders. And while we talk a lot about transitioning from the build stage characterized by high software CapEx investment, I want to reinforce that this should not suggest that our investment and our products has declined. It has only shifted to the expense line.

Tyler has around 300 full-time developers committed to continuing the improvement of our products in their competitive positions.

As Brian indicated, our appraisal service business experienced better margins in the third quarter as a result of the restructuring that took place earlier this year. We would expect revenues in this division to sustain in the same range for the next several quarters representing only around 8 to 10% of Tyler's total revenues.

In terms of guidance, we have narrowed our range somewhat for the balance of the year. Our guidance for the second half of the year was for EPS of 10 to 14%. With our diluted EPS of $0.06 for the third quarter, we now expect the second half EPS will total $0.11 to $0.13. For the full year our EPS is expected to be in the range of $0.17 to $0.19 which includes the restructuring charge of $0.02 per share in the second quarter.

For the year, revenues will be in the range of 168 to 170 million; appraisal service revenues will decline 33 to 36%; software related revenues will grow 4 to 6%, lower than previous guidance, primarily because of the timing of certain contracts and deployments related to the newer products. Our estimated annual effective income tax rate will be 40.5% and we expect CapEx for the year to be in the range of $2.6 to $3 million and total depreciation and amortization to be in the range of $10 to $10.5 million. Now we will take questions.

(OPERATOR INSTRUCTIONS) David Yuschak, Sanders Morris Harris.

Good quarter? Question I've got for you, backlog bound in the third quarter from the second quarter, revenues probably from our point of view may be a little light and I think you maybe indicated from your release that you are ratcheting down a little bit your revenues for the full year compared with what you did in your second quarter numbers.

Could you give a sense as to what the current environment looks like from an actual bookings point of view or are we seeing good pipeline and it's just not translating into a strong bookings period here? Give us a sense as to -- or is it maybe just the climate because of budgets or other things that are in the way of city county governments, that the spending is just not there at this point in time? We are going through some kind of a soft patch so to speak.

A few things there, David. To be honest I don't think that backlog by itself is that strong an indication of how robust our business is. It can be cyclical with things like maintenance revenues. It will be down because of appraisal services being a smaller mix of our business now. Those contracts are for extended periods of time, so they go into backlog and remain there and get worked out.

The shift toward software licenses which are often sold, deployed, and partially recognized in the same quarter, what we will show backlog in relation to our regular run rate for revenues being lower than maybe it has been traditionally. So I wouldn't read an awful lot into a marginal change in backlog.

That aside, we think the market is healthy. It's at least as strong as it's been over the last 12 or 18 months. We don't have any real market concerns from that perspective. So I think it is pretty much the status quo there. I think the fact that licenses are strong, they're at a healthy level but not necessarily up year-over-year very much is, again, a reflection of the mix of products we have.

The mature products that have been out for sometime, that can be sold routinely deployed and revenue recognized on them are up quarter-over-quarter, year-over-year, and performing as we like to see the model perform. The sales channel is expanding and has more capacity and we see plenty of activity in that pipeline.

That's unfortunately somewhat offset by newer products where we have a pretty good reception in the marketplace. There is reasonable activity. And we are satisfied with that. But the ability to contract, deploy, and recognize revenue is not as up to speed as it is with, say, the financial application and as I indicated that's part of the build and release process. And it will be a little bit longer for things like Orion and content management and recording systems to get to that stage.

I do believe we are either in that stage or very close to that stage with Odyssey.

So you are thinking on these newer products is it's just that stretch out while you bring in or potentially landing new businesses that pipeline from your own operations point of view is maybe half full heading towards full.

That's right.

So that you can mitigate little blips along the path.

You have got fully released products that have been out there for sometime and things happen quite routinely and that is performing very well. In fact, they're mid- to high teen growth rates and licenses for a number of years. You've got other products that have been in the CapEx mode with no revenues while they are being built.

We are now in the stage where they are largely out of that. But they are transitioning. You can't be doing 10, 12, 15 installations at a time and routinely recognizing revenue. So you have no CapEx to speak of. Very little amortization on line in resources previously capitalized that are expensed.

And with all of those various pressures as I indicated earlier, to see any expansion and we did have marginal expansion in our operating margin percents year-over-year, sequentially, I think it's really a pretty good thing.

I think Odyssey's largely made that transition. I think they have a volume of business now. They have a product that is mature enough that, while most of their contracts are a percentage of completion, they will be a very consistent performer going forward. Their growth rates and operating margins will start to trend toward the financials divisions.

The other products, which are certainly a smaller part of our business, it will be a few more quarters before they reach that stage.

As far as the marketing support for getting increased pressures for, say, court and justice. What things are you looking at there to maybe boost the initiatives to grow that business and get the penetration you'd like to see?

It's really building out the infrastructure around the product and I think the last couple of years we have focused on certain opportunities. And we focused on the deployment of the yearly contracts and those have gone well and are successful and are good references to leverage new business from. But certainly had a narrower market focus primarily on as we've said a few dozen counties and a few states.

And from there, now, we are broadening out. We've added some resources. A couple of positions to that sales and marketing end, which gives them more capacity. And we have also as I indicated started to market back into that midmarket where really, traditionally, we had grown from as well as into our installed base. So that is their strategy going forward.

So right now you've hired a few additional people for court and justice and probably look to hire some more early next year? More resources for that effort?

We will continue to grow that channel for now.

You are in pretty good shape (MULTIPLE SPEAKERS) resources.

This will not be a channel with dozens of salespeople. Really six or eight salespeople is enough for that.

Could be pretty productive for you is what you're saying. Okay, thanks a lot then.

Charles Strauzer with CJS Securities.

Question to you really -- I like the progression in the appraisal margins. It shows some pretty good strength in picking the cost up there. Is this a good base to kind of use going forward given that (indiscernible) flat. Are you comfortable with where the cost structure is right now?

Yes.

Brian you mentioned, too, about the ACS issue and I don't see the Q out yet. Is that going to be coming out later today?

Yes. I believe it should be filed later today.

So you'll have more detail about that on that document, right?

Right, yes, there is a more complete discussion of it.

Tom Meagher with FBR.

Congratulations on the quarter. John, could you give a little more color on financial systems? You said it had a 60% (ph) growth rate. What's the status of the organization there now? I know when you acquired Eden you're running them parallel. Are those two organizations still running parallel? Are they still effectively selling it to each other? How do you have that structured these days?

That's a good question. Something we've spent a lot of time on and have made a lot of progress on in the nearly two years Eden has been on board. The entire history as Tyler had eight or nine financial systems had gone back to two encode systems and (indiscernible) systems without a lot of overlap between those. And certainly as Eden came in with a significant market presence and some real strength in the marketplace that we are a little different than the others. There is a real need to keep all the systems alive, support them and continue to develop them and we have done that over the last two years.

At this point, we have very good intelligence as to which system does what well. Which systems apply or track different customers and we have moved in a direction where there is very little overlap in terms of where the systems get bid and what clients we attract with them. We are much more conscious and have much more continuity in the sales channel, so that Tyler generally now puts its best foot forward with these opportunities and that will continue to progress.

So the redundancy that sounds expensive in the sales process but over the last two years, clearly, has won business we otherwise would not have won has been minimized a lot more recently and will be nearly nonexistent going into next year.

The development of the products, they will all certainly be supported, enhanced, and marketed products for some time going forward. But certainly a mix and best of both breeds product and integration emerges as we work those different organizations together.

So we are happy with the progress we have made there. There's far less redundancy, more specific investments both in the channel and the product and, yet, we haven't compromised our market share.

And then a follow-on on appraisal services. Obviously it is a much smaller business than it has been in the past few years. You've seen some margin improvement there. Putting aside the fact that the license revenue from the software side of the business, obviously, something you want to hold onto, is that something you still consider to be core or would you prefer -- is it an option to consider divesting that out to somebody else, given that there will be somewhat of a drag on you going forward?

We don't rule anything out and if it made more sense for to be outside Tyler, we would look at that objectively and do that. But as we have said before, our job is to get that under control, get reasonable margins, make sure it is profitable and have its priorities moving in a direction where they can't hurt us as we were hurt earlier in the year. And as you see now they are about 10% of our revenues in the quarter with some continued growth in the other areas and their revenue is continuing to stabilize. Probably look next year where there will be maybe more like eight. And in our view on that lower revenue base, the volatility will be much less significant and any reasonable level of volatility one would expect, really, is pretty insignificant to Tyler overall.

And their margins are reasonable and they're making money and we are satisfied to keep them inside the Company organized that way.

(OPERATOR INSTRUCTIONS) Brian Kinstlinger with Sidoti & Co.

Just two questions. The first one, John, the first time in, I think in a while we started to hear the pipeline and the outlook for obviously picking up and it is good to hear. So I'm wondering maybe if you could -- two questions, it's a two-part question.

First of all, the one that really hasn't been announced that as I recall is based on a funding issue. Now that we're starting a new fiscal year, where is the funding for that whatever it is -- county, state, city?

The second question is, can you quantify how many deals maybe you are looking at without getting into even the size that maybe you expect in the next two quarters or so to maybe hear an answer from and what is happening with the sales cycle in the times?

I appreciate the interest, Brian, and we all know there is some history where this was a big investment. And we had higher expectations for it and shared a lot of our experience with the initial launch with the investment world. And the result of that is, obviously, you create some expectations around that.

We've tried to move away from being that specific. Obviously we are not that specific with our other divisions as most companies aren't. We feel some obligation to back up, obviously, things we have said before. The Miami-Dade deal has been announced. That is one of the two we alluded to earlier.

Really, the other opportunity is quite solid. It isn't anything that has any reasonable likelihood of not happening. But we have a policy that the customer has to be perfectly comfortable with the announce and if they are not perfectly comfortable, or don't want to draw attention to them we won't obviously announce it. It is more important to be responsive to the marketplace we sell into and eventually that all makes its way to the marketplace you folks are in.

So that deal is a real deal. It doesn't have exposure of going away. It's just not one where all the ducks are in a row, so to speak, to actually do a public announcement on it.

There are a couple of other deals similar to those that are well into their process that we are clearly a finalist or a preferred vendor and so we would expect that we would see another one or two of those deals follow these in a reasonable period of time.

As we know from the last two or three years, those deals are out there. We compete well for them. We will win our share of them; but it is hard to predict the timing of them and it's hard to run a business consistently with only that as your marketplace.

With the additional sales resources and the capacity and the product becoming more mature we are actively selling it back into the installed base, as well as into the midmarket. And that is where we'd like to see the consistency develop in this business.

Those aren't names that will get released. They will be more modest in size and just occur but we do have a number of those processes underway and awards and projects turning into revenue. So it is all those things combined. And I do not want to create an explosive expectations such as once existed around this product. But in terms of seeing mid-teens, 20% growth out of this division in line with what financials has done. They are profitable.

They really have more opportunity for leverage and margins, given the amortization from the significant investments we made. We really feel this division has turned the corner to perform in line with the other full developed divisions.

If you take a look at the sales cycles right now. If you were to put in and I'm not sure if there are a lot of new deals out there but this quarter, last quarter next quarter, you were to take a look at an RFP, do you think it is still going to take two years at this point to run through the cycle again like it has in the past? Or do you think generally and whether you win or not, do you think generally the sale cycles will start to improve?

I think two years -- this happens on every area. In financials we have deals that last two and three years. But we have, we are working on literally a couple of hundred deals at any point in time. And the ones that continue to slip don't materially affect our business. I think courts, that will be unusual. But they may be there and if your list is shorter and material they could have the effect they've had in the past.

But no. I don't think that typical sales cycle will be two years. I think that it might be more in the area of a year but certainly some deals will slip.

Final question I have is the margins on the software license are pretty decent, but in years past you've got some 400 to 700 basis points better. What is the Company -- what has to happen to get back? Is it a volume issue or a mix issue? How do you get back to the 74 to 77% range in 2002 to 2003?

Yes it's a volume issue and volume takes care of it by itself because the vast majority of the cost against that is amortization from previously capitalized projects. And we have very little of that going on now. We have some projects still coming out that add to that marginally. But that will be pretty much a fixed cost given that we have very low CapEx going forward. And further out, it obviously begins to get worked off. But for certainly some period of time it will be relatively fixed and all increases really bring very little in corresponding costs. So the margin will expand.

Charles Strauzer with CJS Securities.

Just one thing I want to ask about was you are winding down CapEx on large product development. Obviously Orion is the last big product cycle. Anything on the next year or two horizon in terms of large project development projects that you plan to launch or investigate that -- ?

That's a good question because if somebody looks at Tyler closely over some period of time now. Odyssey initially was expensive and took a little bit longer than we expected. We get that kind of behind us and contributing now and we got Orion and a couple of others. Recording system and content management systems and, certainly, if that is our business model then, there will always be those.

And the answer to your question is no. We acquired a number of companies in this space. Some of them had products, mostly in the financial area, that could be evolved and continue to be evolved to become more and more competitive and serve our needs and the marketplace needs. That was the approach we took.

Others like the ones where we've had the redevelopment efforts, we didn't believe that was the case. They needed to be completely rearchitected and rebuilt in order to have a platform that we could build a company around for a very long period of time. That is the end of the list. We do not have new projects being designed that will go into a heavy CapEx mode and then have this transitional mode where they are still an investment before they emerge to be profitable.

So as I indicated the majority of our Company has now emerged from that, whether it was transitional or a new product like Odyssey. We have some business, Orion and the other couple I mentioned, that will stay in that mode for another year or so while they are not that material to our business. And when that is complete we see the Company starting to perform as a whole, more in line with what we are seeing in financials over recent years.

So if I can surmise that, it sounds like you have the product portfolio in place that is current in terms of technology, give you the engine for growth, organic (MULTIPLE SPEAKERS)

Now could we decide we want some significant extension to an existing system or some new niche product? We might and I certainly would want to keep the flexibility to do that and if it is off-line and a complete build it would probably be a capital project.

But I really think in relation to our overall business it would be relatively insignificant at this point in time. But obviously we will continue to look at good uses of our capital. If we decide there's a build that is important to us, we will do it. But I think as a percentage of our overall business we have come out of that being a major issue.

So should I also take that to mean that if you found an attractive property that puts you into new area with a nice software package that's something you would also investigate?

Sure.

At this time there appears to be no further questions. Mr. Marr, I'll turn the call back over to you for closing remarks.

Thank you and appreciate everyone listening and participating in the call today. If there are further questions feel free to contact myself or Brian Miller. Thank you.

Thank you for participating in today's Tyler Technologies third quarter fiscal 2005 conference call.