泰勒科技 (TYL) 2008 Q2 法說會逐字稿

Hello, and welcome to today's Tyler Technologies second quarter fiscal 2008 earnings conference call. Today's call is being recorded.

Your host for today's call is John Marr, President and CEO, of Tyler Technologies. Mr. Marr, please begin your call.

Thank you, Laurie and welcome to our second quarter 2008 earnings call. Joining me from our Management team is Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor Statement, then I'll have some preliminary comments and Brian will review the details of our operating results. Then I'll have some final comments and we'll take your questions. Brian?

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

Certainly we're pleased with our second quarter results. This quarter marks or 29th consecutive profitable quarter even with a $9 million noncash charge or settlement of the legal dispute regarding warrants. These results have exceeded our expectations by a meaningful margin indicating that market activity remains healthy and we are gaining share. Our results also reflect tremendous execution by the more than 1800 Tyler employees whose industry-leading skills, subject matter expertise and professionalism are a constant.

In June we settled a dispute with Banc of America regarding whether the warrants held by them were exercised properly or had expired. We are pleased with the result of this settlement is that Tyler issued only half of the original 1.6 million shares which clearly created significant value for our shareholders relative to our position prior to the attempted exercise. However, while this settlement is not related to our core operating result, accounting rules dictate that this item be recorded as a noncash operating expense. For the remainder of our remarks, I will exclude the impact of the settlement so as to provide meaningful comparisons to prior periods. Please refer to your press release financial statements for reconciliation of amounts discussed during this call that exclude the settlement and the GAAP reported amounts.

Tyler posted results for the second quarter that exceeded our expectations achieving new highs in quarterly revenue, gross margin, operating income, net income and earnings per share. Our operating income grew by 87% compared to the same period last year. Net income increased by 78%. And gross margins improved by 550 basis points. We experienced 25% revenue growth with exceptional growth in licenses up 43%, and strong increases in software services up 29% and maintenance up 27%. We continue a high level of activity in R&D on our new Microsoft Dynamics Development effort as well as other new product development.

Tyler maintains a strong balance sheet including approximately $44 million in cash and investments at June 30 providing Tyler a high degree of financial flexibility. We will continue to invest aggressively and grow through product development and acquisitions in Tyler through our stock repurchase program and in some strategic real estate acquisitions that I'll discuss in more detail later in the call.

As you've seen from our press release, our outlook for the second half of the year remains positive. And we have revised upward our guidance for the full year, which I'll review a little later. Now I'll ask Brian to review the numbers in more detail.

Yesterday Tyler Technologies reported its results for the quarter ended June 30th, 2008. As John mentioned our quarter results for operating income, net income, EPS, EBITDA and our income tax rate were impacted by the $9 million charge for the noncash legal settlement related to warrants previously held by Banc of America. Including the impact of the settlement in which we received $2 million in cash in July and issued approximately 800,000 shares of Tyler stock or half the shares covered by the original warrant, GAAP operating income for the quarter was $1.8 million, GAAP net income was $246,000 or $0.01 per diluted share and EBITDA was $4.8 million. Our effective tax rate for the quarter was 87.9% because for tax purposes the noncash settlement is not deductible. Provide meaningful analysis and comparison, I'm going to discuss Tyler's results excluding the impact of the noncash legal settlement related to the warrants. Please refer to the press release for the reconciliation of nonGAAP financial measures to GAAP financial measures.

Excluding the effects of the settlement, the second quarter was pretty clearly our best ever by most financial measures. For the second quarter of 2008 Tyler had revenues of $67.6 million up 24.9% from the second quarter of 2007. Operating income was $10.8 million versus $5.8 million for the second quarter of last year, an increase of 86.8%. Net income for the quarter was $6.7 million or $0.17 per diluted share compared to $3.8 million or $0.09 per diluted share for the second quarter of last year. Cash flow from operations was $171,000 for the second quarter compared to $1.9 million for the same period a year ago. Free cash flow was negative $3.8 million compared to $972,000 for the second quarter of last year.

For the six months ended June 30th cash flow from operations was $17.9 million compared to $8.8 million for the same period in 2007. Free cash flow was $13 million for the first two quarters of 2008 versus $7.1 million for the first six months of 2007. The decrease in cash flow for the quarter compared to the prior year is primarily driven by increased capital expenditures for real estate as well as hardware and software purchases for internal use. In addition, the timing of changes in working capital and a significantly larger estimated federal tax payment contributed to lower cash flow from operations compared to last year's second quarter. For the full year our outlook for operating cash flow has not changed significantly from our last call.

EBITDA for the second quarter of 2008 was $13.8 million compared to EBITDA of $8.4 million in the second quarter of 2007. Our total revenue gross of 24.9% for Q2 compared to Q2 of last year -- of our total revenue growth of 24.9%, organic revenue growth was 17.1% and acquisitions completed in the last 12 months accounted for 7.8% growth.

Our software-related revenues which include software licenses, subscriptions, software services and maintenance, increased in aggregate 31.5% over the second quarter of 2007. Software license revenues increased 42.5% over last year's second quarter. Software license revenue related it our Financial Management and Education Solutions increased 39% compared to last year. And software license revenue related to our Courts and Justice Software Solutions increased 43% from the same period a year ago. Software Services grew by 29% compared to the second quarter of 2007 and was largely driven by services related to our Financial Management and Education Solutions as well as our Courts and Justice Solutions.

Subscription revenues increased 50% compared to last year's second quarter. During the quarter we signed two new ASP customers for our Financial Management systems and converted nine existing customers from their in-house installations to our hosted model. In addition, one large existing ASP customer elected to bring their system in-house by purchasing a perpetual license and ending their ASP arrangement, which had contributed about $450,000 in subscription revenue in each of the first two quarters of this year. We currently have 101 ASP customers and our total annual subscription revenue run rate is approximately $14 million.

Maintenance revenues grew 27% in the quarter. Of that approximately 11% was attributable to acquisitions in the last year and 16% was organic, reflecting growth from new licenses as well as rate increases and a very high renewal rate. Appraisal services revenues declined approximately 27% from the same quarter last year and almost 5% from the first quarter of 2008. The decline was consistent with our expectations and is due to revaluation cycles in various states, primarily Ohio, which reached what we believe is the bottom of the revaluation cycle in this quarter.

The revenue mix for the second quarter of 2008 was as follows: Subscription -- or Software licenses 18%, subscriptions 5%, software services 30%, maintenance 38%, appraisal services 6%, and hardware and other 3%. For the second quarter of 2007 the mix was: Licenses 15%, subscriptions 5%, software services 28%, maintenance 38%, appraisal services 11%, and hardware and other 3%. Overall 91% of our revenue mix was software-related in the second quarter of 2008 versus 86% for the same quarter last year.

For the second quarter of 2008 our overall growth margin was 43.1%, up 550 basis points compared to 37.6% in last year's second quarter. Sequentially growth margins increased from 36.7% in the first quarter of 2008. The increase in the blended growth margin from last year's second quarter and for the first quarter of 2008 was due to higher software license revenues and lower appraisal service revenues in the revenue mix for the second quarter, and increased leverage primarily in the utilization of our implementation and support staff.

Software license margins for the quarter were up from last year at 74.6% versus 71.3%. The increase is due to higher license revenues in the second quarter of 2008 offsetting fixed software amortization expense. The blended margin for software services, maintenance and subscriptions increased to 37.1% from 31.5% for the same quarter last year and increased sequentially from 31.8% in the first quarter of this year. The growth margin for appraisal services declined modestly to 31.4% in the second quarter compared to 31.8% in last year's second quarter as we managed costs in light of the planned decline in revenues.

SG&A expenses were $15.4 million for the second quarter of 2008 compared to 12.8%-- $12.8 million in the second period of 2007. Second quarter of 2008 SG&A expenses were 22.8% of revenues compared to 23.6% in the same quarter last year.

Research and development expense increased 60.5% to $2.3 million in the second quarter. The increase is primarily due to our software development agreement with Microsoft which began in the first quarter of last year and was not fully staffed until mid-2007. R&D expense this quarter was not offset by any reimbursements from Microsoft.

Our backlog at June 30th, 2008 was $238 million compared to $203.9 million at June 30th, 2007 and $242.4 million at March 31st of 2008. Backlog related to our software business, which excludes backlog from appraisal services contract, was $215.1 million at June 30th, an increase of $29 million or 15.6% from June 30th of last year and a decrease of $2.7 million or 1.3% from the first quarter this year. Appraisal services backlog was $22.9 million at June 30th, 2008 compared to $17.9 million at June 30th, 2007 and $24.5 million at March 31st, 2008.

During the second quarter we repurchased approximately 282,500 shares of our common stock on the open market at an average cost of approximately $13.80 per share. Year-to-date at June 30th we've repurchased approximately 1.1 million shares of our stock at an average cost of $13.15 per share. Our remaining authorization of shares that may be purchased totals about 2.7 million shares.

Our capital expenditures during the second quarter were $4 million. And we did not capitalize any software development costs this quarter. CapEx for the second quarter of last year was $937,000 included $80,000 of capitalized software development costs. Included in capital expenditures for the quarter is approximately $2.2 million for land in Lubbock, Texas in connection with our planned office development there, $500,000 in telephone system hardware and $300,000 for software purchase for internal use. We expect to spend approximately $27.5 million this year on strategic real estate acquisitions above our normal relatively low level of maintenance-type CapEx for fixed assets, which continues to be in line with our original plan. Although we continue to spend significant amounts on product development, we currently expect that capitalized software development will remain at very low levels for the the foreseeable future and that virtually all of our development costs in 2008 will be expensed.

Amortization of post-acquisition software development costs was $1.1 million in the second quarter down from $1.2 million in last year's second quarter. Day sales outstanding and accounts receivable at June 30th, 2008 were 103 days compared to 102 days at June 30th, 2007 and 90 days at March 31st of 2008. Our maintenance billing cycle typically peaks at its highest level in June. And the majority of the cash is collected in the third quarter of each year. As a result, our DSO seasonally increase in the second quarter compared to the first quarter.

Stockholders equity at June 30th was $142.3 million. We continue to have no debt outstanding and ended the second quarter of 2008 with $43.8 million in cash and investments. Now I'd like to turn the call back over to John for more comments on the quarter and our outlook for the rest of the year.

Oaky, thanks, Brian. As mentioned earlier, we have decided to take advantage of some opportunities to acquire real estate for our use. These strategic investments will support our long-term growth in markets where we have a significant skilled work force and expect to continue to significantly expand operations over time. We expect for 2008 approximately $27.5 million in capital expenditures pertaining to real estate. And by the time we complete the construction of the Lubbock facility, we will be in the $32 million to $35 million range.

I appreciate this is something you haven't seen from us in the past so I'll spend a minute sharing our view. First, market conditions and our own needs have driven different reasons that these three projects happened to come together all at once. In our view, all three opportunities make sense from a financial and a strategic perspective. I don't believe that beyond these projects we will see other projects on this scale for office space. It is important to point out that we are convinced that we can make these investments without any opportunity cost to our flexibility and supporting investments in our offerings, acquisition strategy or repurchasing our shares. And while it isn't currently necessary, we would not be opposed to leveraging these assets if circumstances required.

Financially, the investments are marginally accretive to earnings initially improving over time, for certain-- but certainly more accretive to free cash flow and EBITDA. Additionally, these are Class A properties that we believe will appreciate over time. All this being said, we are not in the real estate business. And while these are sound investments financially, they are also important strategically. The building we are building is in Lubbock. And the two we are buying are in Falmouth and Yarmouth, Maine three miles apart.

These two locations are places where our divisions have deep roots with each of the divisions having been there for more than 25 years. In both places we are currently spread out over three locations with no room to grow. These investments will allow us to make long-term plans for expansion in markets where we have a strong presence in our employer of choice. And our costs are very competitive. I'm certain that our already sprong position in terms of recruiting and keeping the best employees will be significantly enhanced and that we will realize increased efficiencies.

Our results are evidence that the local government market for nondiscretionary products like ours remains healthy. While we see some areas under a bit of pressure, our overall view is that things remain pretty normal. We will continue to watch more closely than in better times for any meaningful signs of more significant weakness. But again, at this point it is pretty marginal. To the extent that there are marginal weaknesses, we believe Tyler is positioned to actually take advantage. We see some evidence that players in this space that are not number one or number two, or it is not their primary or secondary highest priority, are pulling back. We're committed to continue our competitive initiatives and support our sales and marketing initiatives and believe we will exit this cycle in an even stronger position.

During the quarter we had a number of important awards including in Financial and Education Management contracts with the City of Orange in the town of Applebee, California, the city of village-- village of Bensenville, Illinois and the Minnesota historical society. We signed a five-year ASP contract with Westport, Connecticut.

We installed MUNIS at the Fort Worth independent school district in Texas. As you may know, Fort Worth was already a MUNIS Financial Management Systems ASP client. Fort Worth elected to convert from our hosted solution to an in-house installation and purchase a perpetual license. They also purchased the Tyler Educational Management Solution and our VersaTrans Transportation Solution. As well as the Student Assessment Analysis System from our partner School City. The loss recurring revenue from this transition were effectively replaced during the quarter by the Fort Worth ongoing maintenance agreement and by other traditional to ASP conversions.

In Courts and Justice, we added the city of Arlington, Texas with our Municipal Courts Solution and the city of Birmingham, Alabama and St. Louis County as well.

Based on our year-to-date performance and our outlook for the remainder of the year, we have revised upwards our guidance for the full year 2008. We currently expect 2008 revenues to be in the range of $261 million to $266 million. We expect 2008 diluted earnings per share to be approximately $0.51 to $0.55. Before the noncash legal settlement pertaining to the warrants in $0.29 to $0.33 on a GAAP basis. Because of the effect of our tax rate, the settlement is expected to impact our earnings by approximately $0.07 per share in the second half of the year. We expect fully diluted shares to be approximately $40 million. For the year, estimated pretax expense related to stock options and the employee stock purchase plan is expected to be $3.5 million or approximately $0.07 per share after taxes. We estimate an effective tax rate for 2008 of approximately 39.2% before the impact of the legal settlement and 52.5% including the settlement.

We expect free cash flow for the year to be within the range of $9.5 million and $15.5 million, with total CapEx of approximately $32 million to $33 million for the year including $27.5 million for real estate. In total, depreciation and amortization of approximately $12 million before real estate CapEx. Before real estate CapEx, free cash flow is expected to be $37 million to $43 million. Now Laurie, we'll take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Charles Strauzer with CJS Securities.

Hey, good afternoon.

Hey, Charlie.

Hey, John, Brian. Quick-- two quick questions for you. One is picking up, John, on the real estate and obviously you made a pretty good decision to kind of take advantage of some of the declining, I'm sure, commercial real estate property prices. But the-- walk us through a little bit more of the financial implications of buy versus lease. What led you to the buy decision?

Yes, we're currently leasing one of those three properties. The other one is more of a market opportunity, a building that's available that we thought the valuation was compelling and that gives us a growth in Maine. And then really in the Lubbock area, there aren't any lease opportunities for the kind of space that we need. So, again, part of it was brought on by necessity and our own opportunities in those areas. Having the ability to purchase these seems to make sense financially. We've been paying rent on this building for a full life of what it would have taken. And again, we've done the work and the analysis, it's marginally accretive to earnings initially. Obviously you fix a lot of those costs for the long-term. So over time it'll become more accretive to earnings. And it's certainly more meaningfully a contributor to free cash flow and EBITDA especially if we pay for these in cash.

Got it. And so we shouldn't read into it that you're not dialing back acquisitions or other uses of the free cash flow?

No absolutely not, I tried to be clear about that. We would not do this. We certainly would find a developer or investor and lease them if we thought it had any opportunity cost in terms of our investments in our own products, acquisitions that are going to come in front of us or even continuing to be opportunistic with our own shares. So we wouldn't have done that if a lot of activity is going on in those three categories and we need to put some debt on these buildings in order to pursue those, we're not adverse to doing that either. So we really don't believe it's an either/or situation.

Based on [inaudible] and flexibility, that's great. And then John, you had mentioned too about the kind of the macroenvironment and the competitive environment. Am I correct in hearing you say that you're seeing less competition because people might be a little bit shy in this kind of environment to compete for some of these projects?

It's probably only anecdotal at this point. But in every market we have our most direct competitors. And certainly we'd expect that they will continue to focus on this market going forward. But some percentage of the market is made up of players that aren't as significant here. And it's going to be difficult for players that have a 10% market share to pursue all of these deals with those results. And so I think the players that win 40% and 50% of the bids they write and incur all those costs of sales obviously are going to remain focused on this market. But some of the more marginal ones that may make sense, but they're less active on the business front. And we're seeing some probably only anecdotal signs of that. As well as other companies that are more diversified that have their primary markets, and in times like these even if it's other markets that creating challenges for them, might stick to their stronger knitting so to speak and not have as much activity in what might be a tertiary market from them.

So we have seen, just by bid conferences and who's bidding on different deals and so forth, at least some anecdotal evidence of that. And we believe that our share is strong enough and we're making share gains, and the market is healthy enough that we can reach our objectives as we did this quarter certainly, and that we can come out of this cycle on the other end stronger in terms of a leader in the space.

Great. And thanks, John. And then great job on the quarter, guys.

Thanks.

We'll go next to Craig Bell with SMH Capital.

Yes, good morning. Just wondering if you could comment on the-- your life with Microsoft and how the spending is going on that? Is that still going sort of according to a plan or are you getting a little bit ahead of what you had originally thought?

Well, it's probably a little ahead of the very original plan which we expected. It's, it's-- we did not have full scope definition and so forth on the initial plan. So the project's grown a little bit from that. The whole concept of reimbursement though also evolved during that period so that the net cost is probably less than what we originally thought the burn rate would be on this project pre-general release. Yes, the head count is probably a little higher and the net cost a little lower because of the idea of reimbursement.

The headcount will remain relatively stable until general release. It'll expand a little bit as we add for a few things we're not addressing currently. But what you've seen in the first half is low reimbursement. So it's been lumpy to date. So the net costs that we show in R&D has been jumping around a little bit. We do expect that to become -- to get better visibility on that sometime in the near future so that it'll be a little more consistent and predictable.

Okay. And then in terms of timing, are you still on schedule for the release?

Yes. I mean, if we think of the release in a range. I mean there's no way to know the date. But certainly we're looking at mid- to late 2010 for a release. However, that certainly won't mean a spike in revenues immediately. And a buildup from that release going forward.

Okay. Great. And then just lastly, you spoke in your prepared comments about March conditions still seem to be normal. As you look out the next 12 months or so, what kind of areas are you looking at for -- that would sort of raise your concern if you saw something out there? I mean, what's going to be the key for you to see that maybe it's not normal anymore?

Well, certainly if you had processes, procurement processes that had gotten underway that don't result in the purchase for that reason, that would be the clearest indication. Now, those always happen because there are always parts of the country and areas and certain cities and counties where different things affect them. So the first time you see one of those you can't say there's a different market condition. You have to see if there's any greater volume and if it's from the broader economic conditions rather than something specific to that city or county. And we just haven't seen anything out of the usual-- ordinary there. We certainly see a couple of those, but you always do.

What specifically are they telling us? There's always pressure. If you talk to a local government official on what they can do and what they do with their resources. And so when is it different? And I think we need to see something more meaningful than what we've seen. They're certainly not working with fewer dollars. It may not be all the dollars that they'd like to be working with. So we look at these different things. And then just the weight of the leading indicators. The volume of our fees we're receiving, bid conferences we're going to, interest at trade shows, these sorts of things that we measure. And again, those things continue to look generally normal when you look at the whole breadth of it and the whole situation.

Certainly anecdotally, individual cities, counties, you can see some things that slip or that they don't do now that they ordinarily might. But I don't think the weight of those is meaningful in terms of the effect on the whole marketplace. But as I said, we'll watch it real closely. We'll want to see it. If it happens early, there are some adjustments we can make if that's the case in terms of minimizing its affect on us.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) We'll go to [Del Warmington] with Del Mar Capital.

Yes. Gentlemen, on your balance sheet you have deferred the revenue by $92 million. Going forward in the third quarter, what portion that-- do you anticipate recognizing?

Well we don't have an exact breakdown of how that'll flow by quarter. But certainly deferred revenue reaches a very high level at the end of the second quarter because for a large portion of our business we bill our annual maintenance in June which goes into deferred revenue and then comes out over the next 12 months. We have had a fairly high level of deferred revenue related to certain contracts where we have contract terms that require us to have revenue recognition that delays that until we achieve certain milestones or receive acceptances or other conditions. And some of those started to come out in the second quarter, and there are others that we expect to recognize in the second half of the year, some of the sort of pent-up revenue that because of accounting rules has been sitting in deferred. So second quarter would typically be a high period during the year.

Okay. Also, you have backlog of $230 million. And the forecast for revenue for '08 is at $261 million to $266 million. Should we expect that this ratio in terms of book-to-bill in terms of backlog-to-revenue to remain in like a one-to-one ratio approximately?

I guess in a general sense that would be in the ballpark. We've had-- over the period of the last few quarters we've seen backlog rise as a percentage relative to the revenue fairly significantly particularly because of our Courts and Justices division. And to some extent in our Financial-- Financial Management System business where we sign business at a faster rate than we've had the capacity to deliver it. We've made significant additions to our headcount to build our capacity to deliver that. We've talked in the past quarters about how that has affected our margins as those people come on board and then take a few months before they really become productive and able to deliver revenues at the same rate that more experienced people are.

So we're starting to work out of that and be able to deliver some of our backlogs faster. But we've also then continued to be very successful in signing new business at approximately the same rate. So in that range would certainly be something we'd expect it to be at. But it certainly can bounce around from quarter-to-quarter particularly depending on large contracts.

And last question, in terms of sales cycle, have you seen any change in terms of the sales cycle in your products?

No. As I've indicated, certainly at a high level the answer to that's no. And what we see a little bit of here and there we think is also pretty ordinary. So people seem to be starting procurement processes and moving through them at a normal rate.

Thanks a million.

Thanks, [Del].

Okay.

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

All right, Laurie, thank you. And I appreciate all of you joining us on the call today. And if there are any further questions, feel free to contact Brian or myself. Have a good day.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.