泰勒科技 (TYL) 2005 Q4 法說會逐字稿

Hello, and welcome to today's Tyler Technologies fourth quarter fiscal 2005 and yearend 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, Luanne. Welcome to our fourth quarter 2005 earnings call. Joining me from my management team is Brian Miller, our Chief Financial Officer. First, I'd like to have Brian give the Safe Harbor statement, then I'll have some preliminary comments. Brian will review the details of our operating results. I'll have some final comments, and then we'll take your questions.

Brian?

Thank you, John, and good morning, everyone.

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

John?

Thank you, Brian. This was Tyler's 19th consecutively profitable quarter. Our overall revenues as well as license revenues were virtually flat over 2004. Our software related backlog is 20% over last year's level going into 2006, indicating strong performance in the marketplace. This serves as positive reinforcement that our improved and expanded sales channel is productive, and that the competitive positions of our products have improved.

We're also pleased to see our financial model working well. In 2005, we generated $18.5 million in free cash flow, a 21% increase over 2004. During the year, or at least early, we had some challenges. This is a positive indicator. As you know from our guidance, we expect that low CapEx and high free cash flow, in relation to earnings, will continue to grow, and that this free cash flow growth rate is sustainable. Generally, the second half of 2005 performed in line with our expectation and serves as a very good basis for our 2006 outlook.

Brian?

Thank you, John. Yesterday, Tyler Technologies reported its results for the fourth quarter and the year ended December 31st, 2005.

For the fourth quarter of 2005, Tyler had revenues of $44.3 million, down 1% from the fourth quarter of 2004. Operating income was $5.1 million, a decrease of 9% compared with operating income of 5.6 million in the fourth quarter of 2004. For the year ended December 31st, 2005, Tyler had revenues of 170.5 million, down 1% from December 31st, 2004. Operating income for the year was $14.0 million, a decrease of 24% compared with operating income of 18.4 million for the year 2004.

Net income for the fourth quarter was 3.1 million or $0.07 per diluted share, compared to net income of 3.0 million, or $0.07 per diluted share in the fourth quarter of '04. Net income for the year was 8.2 million or $0.19 per diluted share compared to net income of 10.1 million or $0.23 per diluted share for the year 2004.

Results for the full year of 2005 include the pre-tax restructuring charge of 1.3 million reported in the second quarter. Excluding the restructuring charge, operating income for the year would have been 14.0 million and net income would have been 9.0 million or $0.21 per share.

We continued our trend of very strong cash flow performance in the fourth quarter. Cash flow from operations was $4.5 million for the fourth quarter, up 25% from 3.6 million a year ago. Free cash flow was 3.9 million; more than double the 1.8 million of free cash flow in last year's fourth quarter. For the full year of 2005, Tyler generated $18.5 million of free cash flow, more than twice our net income, and up 21% compared to 15.3 million last year. The increase is primarily the result of lower capital expenditures and higher deferred revenue associated with new contracts.

It should also be noted that 2005 cash flow was reduced by the cash expenditure of 1.3 million for the restructuring costs. We ended the year 2005 with total cash and investments of $37.5 million. EBITDA for the fourth quarter of 2005 decreased 7% to $7.5 million from EBITDA of 8 million in the fourth quarter of 2004. EBITDA for the year 2005 decreased 18% to 23.4 million from EBITDA of 28.4 million for 2004.

Our software related revenues, which include software licenses, software services and maintenance, increased an aggregate 3% over the fourth quarter of '04. Software license revenues decreased 9% over last year's fourth quarter. Software services revenue did not change from the fourth quarter of last year, and maintenance revenues grew 13% from last year's fourth quarter. Appraisal services revenue for the fourth quarter declined 26% from the fourth quarter of '04, reflecting the completion of some large revaluation projects that contributed to revenues in '04.

License -- the revenue mix for the fourth quarter of '05 was as follows: licenses, 18%, software services, 29%, maintenance, 38%. The revenue mix for the full year of 2005 was as follows; software licenses, 17%, software services, 30%, maintenance, 38%, appraisal services, 11%, and hardware and others, 4%. Overall, 85% of our revenue mix was software related for the fourth quarter of '05 compared to 82% for the fourth quarter last year.

For the fourth quarter of 2005 our overall gross margin was 37.7% compared to 39.9% in last year's fourth quarter. Sequentially, gross margins improved from 37.4% in the third quarter of '05. The decline from last year's fourth quarter in margins was due to a lower percentage of software licenses in the revenue mix this year. Note that we have reclassified amortization of acquired software in our income statement to now include in it in cost of revenues, which slightly reduce gross margins for prior periods.

Software license margins for the quarter were down from last year at 68% versus 72.6% last year, but improved slightly from the third quarter of '05. The blended margin for software services and maintenance decreased to 31.3% from 33.6% for the same quarter last year, and 32.2% in the third quarter of this year.

SG&A expense for the fourth quarter was 11.6 million, or 26.2% of revenues, down from 12.2 million in the fourth quarter of '04 or 27.3% of revenues. SG&A expense was flat compared to the 11.4 million in the third quarter of '05. SG&A expense declined from the fourth quarter of '04 primarily due to reduced costs associated with first year compliance with Sarbanes-Oxley Act last year.

Our backlog at December 31st, 2005 reached a new high of 165.4 million, compared to 142.2 million at December 31st of '04, and 146.6 million at September 30th of '05. Backlog related to our software business, which excludes backlog from appraisal services contracts, was 136.9 million at December 31st, an increase of 18.9 million or 16% from the third quarter of this year, and an increase of 28.6 million or 26% from December 31st of last year. Appraisal services backlog at -- was $28.5 million at December 31st, 2005, essentially flat with September 30th.

During the fourth quarter, we repurchased approximately 276,000 shares of our common stock on the open market at an average cost of approximately $8.15 per share. For the year 2005, we repurchased a total of 2.5 million shares of our stock at an average cost of $7.20 per share. Through last week in the first quarter, we have repurchased 250,000 shares at an average cost of 8.75 per share, and our remaining authorization now totals 1.8 million shares. We also issued 325,000 shares related to two acquisitions completed in January 2006.

Our capital expenditures during the fourth quarter were $589,000, which includes $50,000 of capitalized software development. This is down significantly from CapEx of 1.8 million in the fourth quarter of last year, as our capitalized software development declined by 95%. Although we continue to spend significant amounts of money on product developments, we expect that capitalized software development will remain at relatively low levels for the foreseeable future, and that virtually all of our development costs in 2006 will be expensed. Amortization of post-acquisition software development costs was 1.5 million in the fourth quarter.

Days sales outstanding and accounts receivable at December 31, 2005, were 101 days compared to 82 days at September 30th and 89 days at December 31, 2004. The increase in DSOs at the fourth quarter reflects a high level of annual maintenance billing at December 31st, which increased receivables, while the revenues are initially deferred and amortized over 12 months.

Our stockholders' equity at December 31, 2005, was $112.2 million. And we continue to have no debt outstanding and $30 million of available credit under our revolving credit facility.

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

Thank you, Brian. Free cash flow continues to be an area of focus for us. The low capital expenditures and high depreciation and amortization, non-cash stock options expense, increased deferred revenue from growing maintenance contracts and other positive cash flow characteristics are little likely to continue. We expect free cash flow will continue to outpace booked earnings.

Given the lower capital expenditure rates, it's important to reinforce that this is not an indication of lower investment in our product. Tyler has 350 developers in the States and with the Mazik acquisition, another 20 offshore, which we intend to expand. Virtually all of this is expense now.

However, our investment in our products and future has never been higher. During the quarter, our financial systems division continued to perform well, accounting for 62% of Tyler revenues, a 9% year-over-year growth rate. During the quarter, this division alone signed 49 new name customers in 22 different states.

We continue to be encouraged that Odyssey, our courts and justice product, has transitioned out of a developmental stage to a product and business unit, that will be a consistent performer and have predictable growth and margin expansion going forward.

Recently, we announced a significant award for our Orion tax and appraisal product from the State of Montana. This product is being well received by the marketplace, and we are completely committed to creating an industry-leading solution that will serve our clients and Tyler well for a long time. However, from a financial standpoint, Orion will be another several quarters before it performs well financially.

Our appraisal services division returned to profitability in the second half of 2005 and has incredible plans for 2006, with revenues virtually flat and normal operating margins from a historical perspective. In 2006, we would expect appraisal services to be a little less than 10% of total Tyler revenues.

Since the announcement of our recent acquisitions, we have been actively engaged in integrating these companies. Both are being integrated into our recently consolidated financial division, with all G&A functions absorbed by our existing structure. Additionally, we have made adjustments in the financial sales channel to sell these products both directly as well as leveraging them through other resources.

I'm very pleased by the early traction these products have had within our sales channel as well as in the marketplace. I would, however, caution that as we have seen before with other products, it takes time to win business, contract, implement, and ultimately recognize revenue through this process. Consequently, I expect that both acquisitions will be neutral to marginally dilutive to earnings for the first few quarters as part of Tyler. However, I'm very confident that eventually these acquisitions will make a strong contribution to extending and expanding both our growth and margin rates.

Our guidance for 2006 remains consistent with what we communicated in January. We anticipate revenues of $191 million to $196 million; appraisal service revenues are expected to decline only slightly, less than 5%, software related revenues will grow from 13 to 17%. We anticipate earnings per share of 29 to 32%, with 65% of more of those earnings coming in the second half of the year.

Estimated pre-tax expense of 1.9 million for stock-options will be incurred as a result of implementing FAS 123R because we do not get a tax benefit for all of these expenses, the EPS of that expense will be approximately $0.04. We anticipate an effective tax rate of 40.8% for 2006. We anticipate cash flow from operations in 2006 of 24 to $28 million, and free cash flow of 21 to $24 million.

Capital expenditures will be between 3.5 and $4 million, and total depreciation and amortization will be between 9.3 and 9.8 million, excluding amortization from the acquisition of the -- from the recent acquisitions. We will add significant amortization as a result of quantifying that amortization.

At this point, we will take questions.

[Operator Instructions]

Your first question comes from David Yuschak with Sanders Morris Harris.

Good morning, gentlemen.

David.

Just a couple quick questions. As far as you know with financials doing well, could you give us sense as to how the EDEN acquisitions -- because we've seen lot of press releases of MUNIS will be cooking with us on all cylinders. Could you give us an idea where we're doing with EDEN?

Well, that's interesting. I think there was a period of time where we had more press releases with EDEN and MUNIS and I do encourage people to look at that information as more anecdotal. It really doesn't suggest the overall trend, it's just -- you know certain deals that we think reinforce our strategies that we think are important to make public or certainly deal with significant size.

EDEN continues to really perform in line with our expectations. They actually have a pretty significant backlog and intend to be winning business, pretty much at the rate that they are on -- that they run that backlog off. So they have had a number of nice wins in the last couple of quarters, I guess, none of them has reached the threshold of being announced.

Okay. So the whole financial suite area just looks very robust at this point in time?

I think all products -- all three products that we market: an INCODE products, EDEN products and MUNIS products, I would agree, have good markets. They all have their strength in different niches. They're being sold through a sales channel that I indicated is further consolidated. So we have virtually eliminated conflict in the channel and overlap, but all set -- all three of those products were available to all sales reps in the Tyler channel and they're all contributing.

Okay. And then, on backlog, it was really encouraging to see that kind of jump in backlog. Is it -- the conditions today will be improved primarily -- you have been, kind of, on a plateau there for awhile, and this kind of was encouraging so just maybe this is, kind of, a breakout quarter for backlog and as well as the macro environment being out there.

Could you give us a view as to what that, how you see that in 2006 and into 2007 as far as the needs that could drive that backlog as well as you had said earlier, John, in your competition really taking the competitive position, the things you've done to improve that --your product line, as well as the sales channel productivity is also contributing. I'm just trying to get a sense as to how those two factors are playing into effect with backlog relative to maybe the macro environment if you would, please?

Yes. Well, you know I did mention it in my comments, all of these things have to be looked at in aggregate. And I think in a year, where we're overall flat in revenues basically, and license revenues, we were up by at least marginally in software related revenues obviously, you need to look at that in combination with the backlog. And I think the fact that we contracted for, and some cases have delivered on, significant software awards, but not yet recognize the revenue. You know one might want to look at that and put it in relation that we are having some success in the marketplace.

So you'll see that number hopefully, generally go up, and I would expect that but, at times, you'll see us earn more of the revenue and see a better growth rate. And when you don't see that, as was the case in the second half of the year, I think, it's important to look at that and see that those awards were there and that business is there to be earned.

Now, do you think that given the -- where you -- that backlog may become more important to you as an indicator, because not all of your business flows through backlog?

You know I don't look at it a lot of myself. I think this was compelling enough to look at and note some of its maintenance. Our EDEN division builds most of its maintenance in December, and so to the extent that was up from last year, that's a little bit of it. But lot of it is licenses and related services. Sometimes we sign contracts that are very standard and it's a product right off the shelf and the contract can get delivered on and significant portions of it recognized right away.

Obviously, we had a mix of contracts that were from divisions that may have percentage of completion accounting or there may have been something about the contract that takes a slower revenue recognition route, and so you see it going into backlog and stay there a little bit longer before it's earned.

Okay. So you don't...

We do not watch it as a real primary indicator. No.

Okay. Fine. Thanks a lot, then.

Your next question comes from Matthew [Conrad] with FBR.

Hi. Good afternoon, gentlemen. I guess it's good morning out there. I just had a quick question regarding the DSOs. I wasn't able to jot that down. DSOs are about 101 days, you say? And has that come down? I guess there was some billing at the end of the year?

Yes. DSOs jumped up to 101 days, that includes unbilled. But there were some significant billing both for maintenance and some fairly large new signings in a couple of our divisions that we were able to bill at the end of the year, kind of ahead of when the revenues are recognized, so that's caused that to jump up a little bit. It's really kind of timing of those billings. And we don't see it really as a indicator of any problems in the receivables. We'd expect...

So that has come back down now?

That is backed down in the fourth -- in the first quarter.

It has already?

Yes, we have collected a significant amount of those. The first quarter has been a very strong quarter for cash flow.

Great. And would December 31st be typical of a big billing day or would you try and get things out before the end of the year?

December is typically one of the high points of our billings. One of our large divisions bill, most of its maintenance, at December 31st. June 30th is also another billing day, another large division bills most of it is maintenance as of then. So there are a couple of points where they have lumpiness. But at the end of the year, there was unusually high amount of billing towards the end.

Okay. Understood. And then, real quickly, just housekeeping, when you ran through the guidance, the effective tax rate for '06 going forward, I didn't get that?

40.8%.

40.8?

Correct.

Great. Thanks so much.

Thank you.

Your next question comes from Tom Meagher with FBR.

Yes, once again, good morning. I have really two questions, John, on the acquisitions that you announced back in late January. Both of them I think were a little on the small side. I think I remember they were saying less than 3 million. Obviously, the pension administration market is a fairly large one, but is the idea there that you are really going after kind of the local county municipal type of outfit as opposed to trying to bang heads with some of these guys that are doing a larger state type programs?

Well, it's both. Their traditional business has been the typical city/county teachers' pension fund, firemen's pension fund type of thing. And I think we can provide access to our client base and our sales channels to help them enhance their experience, which has been regionally very strong but not much of a national presence. So we'll certainly look to leverage that where they have primarily been.

They, however, have participated in some of those larger deals you indicated, which can be very significant in relation to their size. And they've felt that there have been two reasons they have struggled with that. One of them would have been technologically, which they have solved that problem. They have a newer platform that is very competitive there.

And the other simply was that they were a very small private company, and it was hard for them to overcome that in that process. So we anticipate that we will help them sell up into environments that they have been technically capable to deliver on, but haven't had a platform to win that business from.

Okay, so would that imply then that it was different from what you said, perhaps they are acting more as a subcontractor in the original case at this point in time, and you would see their role perhaps evolving into more of a prime contractor role?

Yes, that's exactly right. I think the Tyler sales channel, some of the Tyler sales representatives have more experience in those size accounts. However, they have some strong resources there as well. And together, I think they will be more viable there. And again, at the end of the day, they've been involved in processes where they were very competitive, but it was hard to overcome the size of their company, their capitalization, whatever. However, you want to look at it, bonding, et cetera. And obviously, Tyler eliminates all those hurdles.

Okay. And then just one follow on, I know you're talking to some people about the pension administration area that, it's been somewhat of slow growing market for a number of companies. I was just wondering what, what attracted you to do that particular sector at this point in time?

Well, this particular deal, there are two very different deals in these acquisitions. Again, this was a pretty typical deal -- small company, valuations based pretty much on current revenue and earnings rates, and again, any incremental growth. And we certainly believe that through access to our customer base as well as Tyler's credibility in having them pursue those other accounts there will be incremental business, supports this.

So we don't have to anticipate macro growth rates or other significant things to get a good return on this particular investment. The other deal, obviously, was a very small company, an exciting product that we do need to grow significantly for Tyler to recognize the return on that investment.

Okay. Thanks very much. I appreciate it.

Sure.

Your next question comes from Brian Kinstlinger with Sidoti.

Hi. Good afternoon. Well, John if you can talk -- I've two questions. The first is about the records division that we heard a little bit about. Number one, and maybe I missed the comments about it, but I'm wondering if that's a profitable division, and how you build up the scale or if that's one of your focuses.

And then my second question is, on the Odyssey, how the pipeline has been looking compared to the last two quarters, where it has been pretty stable? If you see more opportunities or have there been a decline, is it relatively flat? Can you just give us sense on both of those, I'd appreciate it.

Well, record is as we've said before. It's a small part of our business, it's -- I don't know maybe 6% or 7% of our business of. So I'm not sure it always want, specific comment unless there is something interesting going on there. So that's all that is. They are -- we don't breakout, obviously, the earnings by division. They're not a significant contributor, even in relation to their size. They've built some new products.

I think I've said, really at this point we've built a number of new products and gone through a lot of developments, both in terms of product and company development throughout the company. And at this point, there are really two products for segments of our business that I would consider to still be in the development stage. And that would be Orion and the records side of the business. So there, you know, still a little bit of an investment from that perspective.

In terms of, as you said, kind of, building them out, they will not be a significant or a large independent division within Tyler. We clearly see ourselves selling those products through other sales channels within Tyler and absorbing management and G&A through the other divisions as well. They' are not a division that will have the skill to hit the margins that we target with all of those components built into the divisions. So they will be -- operate more within other divisions.

In terms of your question on Odyssey, they are not flat. They definitely have business lined up and pretty much contracted for the year that will support a growth rate that's considerably higher than the overall Tyler growth rate that we've talked about in our guidance. And we see them growing at a growth rate, again, reasonably higher than Tyler's blended growth rate as far out as we can see. And that is pretty much based on tangible business that we can identify.

Yes. That makes sense given, you know, we've seen some releases relate to Odyssey. I guess I'm even more curious in the long-term. So I'm interested in the pipeline. Are you seeing new --people that, you haven't even put bids and are close to or just the starting the process. But are you seeing new people enter into your pipeline as opportunities, maybe not for today, because the sales cycle business takes -- obviously in a month or two. But maybe in 6 months or 12 months from now, they become, you know, really an opportunity that when awards could happen, based on the sales cycles?

Yes, we are pleased with the volume of business that we see out there and we're pleased with our competitive position in it. We are obviously not going to go back to where we were naming specific sites when we were making the investments and felt compelled to do that. But again, the tangible business we can identify that our next 12 or 18 months clearly supports that business well. And the more -- you know the further out opportunities that we are just beginning to become engaged in, we would think winning our share of that would sustain that.

Okay. Thank you.

[Operator Instructions]

Your next question comes from Charles Strauzer with CJS Securities.

Hi, good afternoon. Quick question for you, John, just a quick update if you can on the ECF suit, has anything changed all there?

No, it's moving very slowly. There's really nothing new to report there. There is some discovery going on. And I don't think you'll see that move very quickly.

Got it. Thank you very much.

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

Okay. Well, thank you for joining us on this call. And if there are any further questions, feel free to contact myself or Brian Miller. Thank you.

This concludes the conference call. You may now disconnect.