泰勒科技 (TYL) 2011 Q1 法說會逐字稿

Hello and welcome to today's Tyler Technologies first quarter 2011 earnings conference call. Today's call is being recorded. Your host for today's call is John Marr, President and Chief Executive Officer of Tyler Technologies. Mr. Marr, Please begin your call.

Thank you Jenny and welcome to our first quarter 2011 earnings call. With me on the call today is Brian Miller out Chief Financial Officer. First I'd like for Brian to give the Safe Harbor statement, then I'll have some preliminary comments. Brian will review the details of our operating results, then I'll have some final comments and we'll take your questions. Brian?

Thank you John. During the course of this conference call management may make statements that provide information other then 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 10K and other SEC filings for more information those risks. John?

Thanks Brian. This quarter for our 40th consecutive profitable quarter. Given the challenging market environment and overall economic conditions, our operating results were reasonably solid. Total revenues for the quarter were up 5.1%, due to continued strong growth and recurring revenues from subscriptions and maintenance, that now comprised about 58% of our revenues. In addition out appraisal service business posted solid growth of 45% this quarter. We improved our gross margin by 140 basis points compared to the same period last year, which demonstrates the margin leverage in our recurring revenues. Improvement in gross margin and holding the line on our operating costs, resulted in approximately an 18% improvement in net income over last years first quarter. These results were obtained while we continue to invest significantly in R&D the increased by 29% from the first quarter of 2010.

New contract signings during the first quarter were relatively weak as we continued to experience long sales cycles with less predictability around the timing of contract signings, resulting in a wide variation in bookings over the last few quarters. The more significant new contract signed in the first quarter included Fast contracts for our ERP solutions with McClellan County, Texas; the cities of Covina and Encinatas, California; and Columbia County, New York. We also signed a traditional perpetual license arrangements for our Munis CRP solution with Middale schools in Oklahoma. We signed new contracts for the in-code ERP solution with Orange County, Texas in the cities of Greenville and Georgetown, Texas as well as the cities of Washington and Jefferson City, Missouri. In addition, we signed a new Odyssey Court software contract and the cities of Reno and Sparks Nevada, and a contract for the IS world appraisal and tax software with Newport News, Virginia.

Our sales pipeline remains healthy, and RFP activity for the major products in the first quarter were modestly ahead of last year's pace. We will continue to make what we believed are well timed investments in R&D, that we expect will provide long-term growth in a strong competitive position in the years to come. Now I would like for Brian to provide more detail on the results of the quarter.

Thanks, John. Yesterday Tyler Technologies reported its results for the first quarter ended March 31, 2011. You've most likely read the press release and our form 10-Q has been filed. I am going to comment on some of the key factors in the quarter then move onto John's comments on the current quarter and our outlook for the remainder of 2011.

Revenues for the first quarter were $73.4 million, compared to $69.8 million for the first quarter of 2010. Our 5.1% revenue growth was completely organic as Tyler's last acquisition occurred in January of 2010. Software license revenues decreased 19.3 % from last year's first quarter. The decrease in license revenues is mainly attributable to delays in signing new business due to longer sales cycles in the current economic environment, as well as extended implementation timetables on some signed business, which is consistent with the conditions we have seen for the past several quarters.

In addition, we continue to see an increase in the number of our customers choosing our subscription based offerings rather than purchasing software under a traditional perpetual software license arrangement. Subscription revenue continues to be our fastest growing revenue line and was up 32.6% over last year's first quarter. In the first quarter we signed 13 new subscription-based arrangements and one existing customer conversion compared to a total of 5 new arrangements and 8 conversions in the first quarter 2010. Software services revenues decreased by 1.7% primarily due to the slowness in software license bookings in recent quarters as well as an increase in the mix of customers choosing our subscription based offerings.

Maintenance revenue growth was 6.3%; a combination of new revenues associated with licensed sales in the past year, and annual rate increases for existing customers. This growth is net of maintenance revenues lost from existing customers who have converted to our hosted subscription based arrangements in the past year. Together recurring revenues from subscriptions and maintenance comprised 57.9% of our total revenues for the first quarter and grew 9.8% year-over-year. Finally, appraisal services revenue increased 45% in the first quarter primarily due to the ramp up of work on several new revaluation contracts we began in late 2009 and mid-2010. Including a number of Indiana Counties and a major revaluation project in Allegheny County, Pennsylvania, which is now approximately half complete.

For the first quarter of 2011 our blended gross margin increased 140 basis points to 44.4% compared to 43% in last year's first quarter. With gross margins for our software services, maintenance, and subscriptions primarily driving the increase. Our ability to increase gross margin despite a significant decline in high margin licensed revenues, illustrates the power of the leverage in incremental maintenance and subscription revenues. In light of delays in contract signings and implementations, we have managed staffing levels to keep costs in line with revenues as much as possible and have deferred some planned hiring until new business is in hand.

SG&A expense decreased 1.6% and as a percentage of revenue was 23.6% compared to 25.1% in last year's first quarter. Non-cash stock compensation expense was $1.4 million in the first quarter of 2011 compared to $1.5 million in the first quarter of 2010. $196,000 was included in cost of revenues and $1.2 million was included in SG&A expense. Net research and development expense increased 29.4% to $4.5 million for the first quarter of 2011 compared to $3.5 million for the same period last year.

R&D expense was offset by cost reimbursement recognized under our agreement with Microsoft of $415,000 in the first quarter of 2011 and $1.2 million in the first quarter of 2010. We currently expect additional offsets to research and development costs totaling approximately $4.7 million for the remainder of 2011 and 2012 associated with the expansion of the Microsoft agreement. The recognition of those reimbursements will vary from quarter to quarter, but we currently expect for 2011 the majority of the offsets will be recognized in the fourth quarter. Gross R&D expense before the effect of the Microsoft reimbursements increased approximately $293,000 from the first quarter of 2010 and was primarily driven by development costs for Tyler software products other than the Microsoft project.

Operating income was $10 million versus $8.1 million at last year and net income for the quarter was $5.7 million or $0.17 per diluted share, compared to net income of $4.9 million or $0.13 per diluted share in the first quarter of 2010. Our effective tax rate for the first quarter was 39.6%. The fully diluted share count declined by approximately 2.9 million shares from last year primarily as a result of our stock repurchases.

Free cash flow, excluding real estate capital expenditures for the first quarters of 2011 and 2010, was very strong in the first quarter and increased 177% to $16.3 million compared to $5.9 million for the same period in 2010. The increase is primarily due to the timing of certain accrued liability payments, including payroll, as well as lower bonus payments compared to last year. Also included in last year's first quarter free cash flow was a payment of $1.8 million related to the adoption of the new vacations policy that eliminated carryover of unused vacation from year to year. Day sales outstanding and accounts receivable was flat with last year at 81 days at both March 31, 2011, and 2010. This is down from 102 days at December 31, 2010, due to peaks in the maintenance billing cycle which normally occur in June and December of each year followed by collections in the subsequent quarter.

During the first quarter we repurchased 335,000 shares of our common stock for approximately $6.8 million at an average cost of $20.43 per share. At the end of the first quarter of 2011, we had 32.1 million common shares outstanding and authorizations to repurchase up to a total of 2.4 million additional shares. We also used $6.6 million of cash to purchase 27 acres of land in a building in Plano, Texas as a potential site for possible relocation of our courts and justice division. Our existing office lease for that division expires in 2013 and we are evaluating the potential construction of a new facility on this land.

Our backlog at March 31, 2011, was $262.1 million, up 19.8% compared to $218.8 million at March 31, 2010. Backlog related to our software business which excludes backlog from appraisal services contracts was $233.2 million compared to $195.9 million at March 31, 2010. Appraisal services backlog was $29 million at March 31, 2011, compared to $22.8 million at March 31, 2010. Backlog at March 31, 2011, included approximately $81.5 million of maintenance compared to about $71.8 million a year ago. Bookings continued to be very lumpy from quarter to quarter and were down slightly from the first quarter of last year.

On the balance sheet, we ended the first quarter of 2011 with $4.4 million in cash and investments and $22.5 million in outstanding borrowings under our $150 million revolving credit facility. At March 31st, we had $119.2 million of availability under the agreement. The average interest rate on the borrowings in the first quarter was 3 %. We finished the quarter with 2019 employees, down from 2,054 at the end of the December. Now, I would like to turn the call back over to John for his further comments.

Thanks, Brian. Our results for the quarter reflected the stability and steady growth in our recurring revenues which were approximately 58% of total revenues. As well as our ability to continue to improve our gross margins and to make what we believed are well timed investments in our existing and future products and maintain and enhance our competitive position in the marketplace. We believe that our competitive position is stronger than ever and that our continued significant investment will allow us to take advantage of an eventual return to a stronger economic environment. In addition, we continue the year with a healthy backlog of business.

Generally market indicators continue to be mixed, but mostly overall encouraging. There are segments of our business where leading indicators, RFPs, demo schedules, the progression and the sales process, appear to be headed back in the direction of a more normal environment. However, until we see a trend develop, we continue to expect that the new business environment in 2011 will be both challenging and unpredictable. And the growth will come primarily from recurring revenues as was the case last year.

Lastly, it seems to have been conference month for us. Two weeks ago I attended the Microsoft Conversions conference in Atlanta. This conference is for Dynamics products only, including all ERP products as well as Dynamic CRM. As you know, Dynamics AX2012, a product we have partnered on, is scheduled to be released later this year. At the conference we were pleased to see that Microsoft's commitment to AX as a lead product, as well as the focus on the public sector as a priority vertical, was clear to the 9,300 people in attendance. This week I attended the Tyler Connect 2011 Customer Conference in Nashville along with 1,500 customers and a few hundred other Tyler employees and partners. It was a very positive and energizing experience, and I want to thank all of our staff that work to make it a great success.

And finally, our 2011 annual guidance is as follows. We currently expect 2011 revenues to be in the range of $305 million to $310 million. We forecast 2011 diluted earnings per share to be approximately $0.74 to $0.79. Fully diluted shares for the year are expected to be approximately $33.7 to $34.3 million. For the year estimated pre-tax expense related to stock options and employee stock purchase plan is expected to be $6.5 million or approximately $0.15 per diluted share after taxes. We estimate an effective tax rate for 2011 of approximately 39.6 %. We expect our total capital expenditures, including the real estate purchase in the first quarter of $6.6 million, will be approximately $11.5 to $12 million for the year, and total depreciation and amortization will be between $10.5 and $11 million. Now we'll take your questions.

(Operator Instructions) Your first question is from Jonathan Ho with William Blair.

Good morning.

Good morning.

Just a quick question in terms of some additional color on your pipeline. Can you maybe give us a sense of what you are seeing in terms of the sales and implementation cycles and what changes, if any, this quarter you have seen in that environment?

Well, first, I guess I would say, it is still kind of according to segment. There are certain segments that, as I said, appear to be going back toward a little more normal behavior, meaning that the volumes are up a little bit and that processes seemed to progress, not very fast, but a little more normally than they have been the last six quarters or so. Other segments, not the case, still pretty slow. So, again, in certain areas, the RFP volume is up, and RFPs are turning into demos and demos into short list and those sorts of things, a little more the way they did in '08, '09, so to speak, but again it is not all the way across the board. As I said, we would like to see it broader and would like to get that experience to go on a little bit longer before I think we think we're clearly in a recovery.

Okay. Then, just as a quick follow-up, on the geographic side are you seeing any greater traction in some of the newer geographies that you haven't had penetration in before and maybe just a sense of the growth opportunity from that type of expansion?

Yes. No question. Last year in our ERP division we did I think 11 of 50 deals or 11 of 48 deals in California where we really had virtually no presence just a few years ago. So, no question, it is a good thing we expanded geographically. Every quarter, if you look at the list, there are contributions from newer markets as well as the existing markets, and if we didn't have the broader geographic footprint that we have, our new business would be off even more.

We will hear next from Brian Kinstlinger with Sidoti and Company.

Hello. Great, thanks. The first question related to your Dynamics and the release of that. Can you maybe quantify the pipeline that you're tracking? I know you can't bid yet on it. And maybe talk about any flow of expenses over the next two years ex reimbursements?

I can't help you much on the quantifying of the pipeline. I did tell you I went to the Convergence Conference two weeks ago, and some of our people there for the whole week. There is no question, at a high level that there is a lot of energy and excitement around this product's upcoming launch and their channel is definitely on it, and incented to push it. Partners were interested, but as you also indicated, it is even too early for us to be broadly bidding this system ourselves or for the partners to be doing it. So, while I think there is a lot of anticipation to it and that's encouraging and again if you been at the show, I think you would be encouraged by that, we would caution you on timing. Because, as you know, from the time you bid a system in this market, it is some time before you sell, deliver and recognize revenue on something. It will be awhile and I would be very cautious for the coming few quarters as to putting any meaningful revenue in, but there is definitely a lot of energy around the launch.

In terms of expenses, we will have a reduction maybe in the area of 20% of some hedge shifting to other things or coming down in general, as we go through the next six months or so. We also will have reimbursement running off, so the net spend is going to be lumpy and it won't come down in a meaningful way until into next year.

Okay. My second question-- I appreciate that. If you can quantify and if not, at least qualify, the total proposals outstanding we're seeing in some of the government services peaking at all time high levels given awards are delayed, so maybe if you can talk about that. Then, specifically, since Dynamics addresses a larger market, do you see any difference in your smaller Municipalities in decision times versus the large ones or the cities and states that you do work with?

Yes, sure.

You're right. Total proposals out for us and, if you're suggesting more broadly, are on a higher level. If we look at the number of deals we're working on and the total value of those deals, as we told you, it is kind of at historical highs. Which sounds encouraging, but as you know, and have said, the reason that's the case is because they're not converting into decisions as quickly as they have in the past, so the pipeline actually gets heavier. We're seeing some of those move along a little more quickly then they were, as I said, 6 months or a year ago. That's kind of our experience.

On the Dynamic side, the product should be as similarly appealing to smaller accounts as it is to larger accounts. So, I think in their channel that you will see the range of-- in terms of size of accounts to be broad, and they should get similar traction in all of those different segments of the marketplace. I think that what you are suggesting is right, that we will probably have more success with it initially on the higher end of our product line, because I think in some cases, in our larger deals or larger market, we're a smaller company. Sometimes we're handicapped by that or not always given as good a look as we think we're entitled to, and it is not a matter of our product's ability to compete in that space or certainly our ability to execute those projects, but it is really just a recognition situation. We believe in our higher end that, it being a Microsoft product and Microsoft supporting us, as they clearly are intending to do in those situations, that we should be able to bid up a little bit in terms of the size of the different accounts and get a better look.

Moving on, we'll hear from Nathan Schneiderman with Roth Capital.

Hi, John and Brian. Thanks in advance for taking my questions. John, when you think about the environment overall, would you say it is better or worse or about the same as it was 3 to 6 months ago?

Overall, I don't want to be overly enthusiastic and be a little cautious here, but overall just based on the facts and the experience we have, I would say that it is better than it was 6 and 12 months ago. Again, it is not all the way across the board in certain segments, but obviously we track all of this and there is no question it is a little better than it was 6 or 12 months ago and obviously we're hoping for that to become --

When you say it is better, what specific data are you looking at that makes you feel it is better? I guess when I look at -- I am sorry.

The number of RFPs we responded to in the fourth quarter and the first quarter are both up more than a little from same year ago periods. The trailing 12 months RFPs on a moving average, demo schedules, these sorts of things that we track are trending in the rights direction.

When you look at the license result down 19% and in the year ago period it was down 21%, do you think we're now at a new lower level and last year it was typically an $8 million to $9 million a quarter license range, now you're slightly below $7 million. Do you think the business is basically step functioned down to this level or do you think that Q1 is really an anomaly on the low side?

Well, it depends on a number of variables. Obviously we hope it is at least a new low, if not an anomaly. There's no question it was weak and so we don't want to explain that away. No question in the whole quarter that's kind of the disappointing data point, although a quarter is a short period of time for a relatively small company like us. But there is no question it was weak, and we acknowledge that. At the same time 13 SaaS deals, that's a lot of SaaS deals, and there is no question there is opportunity cost to that. If those were all traditional customers, they could have made a meaningful difference in the license number and yet we're obviously pleased to have them be SaaS clients. Also, some of the deals are bigger deals, more of them are POC, and accounting on BSOE basis carves any discount in a deal out of licenses. So, I do think that the number a little bit understates our performance in the new business license market for a combination of those reasons, but at the same time no question it was soft.

Our next question comes from Torin Eastburn with CJS Securities.

Good afternoon. Just one quick question on the real estate, Brian. I think you said you were evaluating developing that plot. If that's the case, why buy the land before you're certain what you're going to do with it? Thank you.

Well, we had an opportunity to purchase a property at what we thought was a very attractive price, that was a current opportunity that we wanted to take advantage of. We have a while before we have to make a final decision about what we do with respect to the long-term facilities for that division. It was an opportunity that presented itself now that we took advantage of and we will decide-- continue to evaluate factors including the costs and the ultimate needs there over the next several months. We don't expect to spend any more cash on that facility this year, so it is awhile before we have to make a final decision. And we're comfortable that it gives us a lot of flexibility with respect to whether we ultimately build on it or ultimately move out of that -- resell that property.

Thank you.

(Operator Instructions ) We will hear next from Raghavan Sarathy with Dougherty & Company.

Thanks for taking my questions, two questions from my end. John, you mentioned several times when you talked about the tone of the business, certain segments of the business are improving. Can you give us some color on whether you're looking at that from a product perspective or you're looking at it from a market perspective, meaning sort of state level deals or this is a local type -- local level deals. How are you looking at that? And I have a follow-up.

I guess we look at it from all of those different angles. I would say from a segment standpoint that we see all of the different segments with part of their market becoming more active. Geographically, I don't see certain regions necessarily recovering more quickly than others. The difference when we talk about the segments is really more the sizes of the opportunities. It is interestingly the lower end of the opportunities that are slower to recover in our experience.

And maybe if I can follow up on that, so at the high-end are you winning deals say against Oracle, PeopleSoft, because you have a lower cost of ownership and implementation or can you give us some color on how or why you are winning at the high-end?

I wouldn't say there is a lot of deals directly against them. I wouldn't say there is a greater amount of that experience right now. I think it is probably the tier right below that, where we don't see them or they are not normally as competitive, so maybe you call them tier 2 deals. Obviously, that's only the financial deals, but that segment of the market is part of the segment that appears to be more active.

At the same time, while it is more active and there are more deals, it continues to move slow. We literally have people who know who they want, know what they want to do, but they need to be concerned about the politics of it and exactly when they should do it. Not necessarily time it with head count reductions and other things they are competing with. So, we still have that unpredictability in timing and obviously some of this is tax and appraisal and courts and justice where Oracle and the likes are not in that market at all. Again, the higher market actually is a little stronger than the lower end.

At this time there appears to be no more questions. Mr. Marr, I will turn the call back over for closing remarks.

Okay. Thank you, Jenny, and thank all of you for joining us on the call today. If there are any further questions, please feel free to contact myself or Brian Miller. Have a good day.

Again that, does conclude today's conference. We do thank you for your participation.