PART I. FINANCIAL INFORMATION
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (2) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (3) our ability to successfully achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (4) material portions of our business require the Internet infrastructure to be adequately maintained; (5) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (6) general economic, political and market conditions; (7) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (8) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (9) the ability to attract and retain qualified personnel and dealing with the loss or retirement of key members of management or other key personnel; and (10) costs of compliance and any failure to comply with government and stock exchange regulations. A detailed discussion of these factors and other risks that affect our business are described in Item 1A, “Risk Factors.” We expressly disclaim any obligation to publicly update or revise our forward-looking statements.
GENERAL
We provide integrated information management solutions and services for the public sector, with a focus on local governments. We develop and market a broad line of software products and services to address the IT needs of cities, counties, schools and other local government entities. In addition, we provide professional IT services to our clients, including software and hardware installation, data conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. We also provide subscription-based services that utilize the Tyler private cloud such as e-filing, which simplifies the filing and management of court related documents. We also provide property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate six major functional areas: (1) financial management and education, (2) courts and justice, (3) public safety, (4) property appraisal and tax, (5) planning, regulatory and maintenance, and (6) land and vital records management. We report our results in two segments. The Enterprise Software (“ES”) segment provides municipal and county governments and schools with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as financial management; courts and justice processes; public safety; planning, regulatory and maintenance; and land and vital records management. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
Our total employee count increased to 3,775 at September 30, 2016, from 3,075 at September 30, 2015. This increase includes 514 employees added as the result of two acquisitions.
11
For the three a
nd nine months ended September 30, 2016, total revenues increased 29% and 30%, respectively, compared to the prior year periods. Organic revenue increased 11% and 12% for the three and nine months ended September 30, 2016, respectively, compared to the pri
or year periods and revenues from acquisitions completed in 2015 a
nd 2016 contributed 18% for
both
the
three and nine months ended September 30, 2016.
Subscriptions revenue grew 27% and 29% for the three and nine months ended September 30, 2016, respectively, due to a gradual shift toward cloud-based, software as a service (“SaaS”) business, as well as continued strong growth in our e-filing revenues from courts. Organic subscriptions revenue increased 23% and 25% for the three and nine months ended September 30, 2016, respectively. Activity in the local government software market continues to be strong, and with the inclusion of New World Systems Corporation (“NWS”), which was acquired in November 2015, our backlog at September 30, 2016, reached $935.6 million, a 23% increase from last year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for the interim period and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill and share-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the year ended December 31, 2015. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2015.
ANALYSIS OF RESULTS OF OPERATIONS
|
|
Percent of Total Revenues
|
|
|
Third Quarter
|
|
Nine Months
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses and royalties
|
|
|
10.2
|
|
%
|
|
|
10.4
|
|
%
|
|
|
9.7
|
|
%
|
|
|
10.3
|
|
%
|
Subscriptions
|
|
|
19.0
|
|
|
|
|
19.2
|
|
|
|
|
18.6
|
|
|
|
|
18.8
|
|
|
Software services
|
|
|
23.0
|
|
|
|
|
24.2
|
|
|
|
|
23.7
|
|
|
|
|
23.6
|
|
|
Maintenance
|
|
|
42.7
|
|
|
|
|
40.5
|
|
|
|
|
42.3
|
|
|
|
|
41.2
|
|
|
Appraisal services
|
|
|
3.4
|
|
|
|
|
4.3
|
|
|
|
|
3.5
|
|
|
|
|
4.5
|
|
|
Hardware and other
|
|
|
1.7
|
|
|
|
|
1.4
|
|
|
|
|
2.2
|
|
|
|
|
1.6
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
|
100.0
|
|
|
|
|
100.0
|
|
|
|
|
100.0
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses, royalties and acquired software
|
|
|
3.2
|
|
|
|
|
0.6
|
|
|
|
|
3.3
|
|
|
|
|
0.6
|
|
|
Software services, maintenance and subscriptions
|
|
|
45.6
|
|
|
|
|
48.2
|
|
|
|
|
46.3
|
|
|
|
|
48.1
|
|
|
Appraisal services
|
|
|
2.1
|
|
|
|
|
2.6
|
|
|
|
|
2.2
|
|
|
|
|
2.9
|
|
|
Hardware and other
|
|
|
1.0
|
|
|
|
|
1.0
|
|
|
|
|
1.6
|
|
|
|
|
1.2
|
|
|
Selling, general and administrative expenses
|
|
|
21.6
|
|
|
|
|
21.1
|
|
|
|
|
22.2
|
|
|
|
|
21.0
|
|
|
Research and development expense
|
|
|
5.7
|
|
|
|
|
4.8
|
|
|
|
|
5.6
|
|
|
|
|
4.9
|
|
|
Amortization of customer and trade name intangibles
|
|
|
1.8
|
|
|
|
|
0.8
|
|
|
|
|
1.8
|
|
|
|
|
0.8
|
|
|
Operating income
|
|
|
19.0
|
|
|
|
|
20.9
|
|
|
|
|
17.0
|
|
|
|
|
20.5
|
|
|
Other (expense) income, net
|
|
|
(0.3
|
)
|
|
|
|
—
|
|
|
|
|
(0.3
|
)
|
|
|
|
—
|
|
|
Income before income taxes
|
|
|
18.7
|
|
|
|
|
20.9
|
|
|
|
|
16.7
|
|
|
|
|
20.5
|
|
|
Income tax provision
|
|
|
7.3
|
|
|
|
|
7.6
|
|
|
|
|
6.4
|
|
|
|
|
7.5
|
|
|
Net income
|
|
|
11.4
|
|
%
|
|
|
13.3
|
|
%
|
|
|
10.3
|
|
%
|
|
|
13.0
|
|
%
|
12
Revenues
On November 16, 2015, we acquired NWS, which provides public safety and financial solutions for local governments. The following table details revenues for NWS for the periods presented as of September 30, 2016, which are included in our consolidated statement of income:
|
|
Third Quarter
|
|
|
Nine Months
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
3,781
|
|
|
$
|
10,329
|
|
Subscriptions
|
|
|
1,058
|
|
|
|
3,086
|
|
Software services
|
|
|
5,096
|
|
|
|
16,595
|
|
Maintenance
|
|
|
16,885
|
|
|
|
45,071
|
|
Hardware and other
|
|
|
590
|
|
|
|
1,945
|
|
Total revenues
|
|
$
|
27,410
|
|
|
$
|
77,026
|
|
In June 2016 we acquired a company which provides scheduling, time and attendance software. The impact of this acquisition on our operating results is not considered material and is not included in the table above.
The results of these acquisitions are included with the operating results of the ES segment from their dates of acquisition.
Software licenses and royalties
The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
ES
|
|
$
|
18,492
|
|
|
$
|
14,680
|
|
|
$
|
3,812
|
|
|
|
26
|
|
%
|
|
$
|
50,585
|
|
|
$
|
40,563
|
|
|
$
|
10,022
|
|
|
|
25
|
|
%
|
A&T
|
|
|
1,438
|
|
|
|
1,010
|
|
|
|
428
|
|
|
|
42
|
|
|
|
|
3,746
|
|
|
|
4,013
|
|
|
|
(267
|
)
|
|
|
(7
|
)
|
|
Total software licenses and royalties
revenue
|
|
$
|
19,930
|
|
|
$
|
15,690
|
|
|
$
|
4,240
|
|
|
|
27
|
|
%
|
|
$
|
54,331
|
|
|
$
|
44,576
|
|
|
$
|
9,755
|
|
|
|
22
|
|
%
|
Excluding the results of acquisitions, software license revenue and royalties increased 3% for the three months ended September 30, 2016, compared to the prior year period mainly due to higher royalties on sales of Microsoft Dynamics AX by other Microsoft partners. Royalty revenue is dependent upon sales volume from Microsoft partners and can vary substantially from period to period. Excluding the results of acquisitions, software license revenue declined 2% for the nine months ended September 30, 2016, compared to the prior year period. This decline was mainly due to lower add-on sales from our existing customer base of approximately $1.3 million for courts and justice related solutions that assist and support the transition to a paperless environment. By the end of 2015, the majority of our courts and justice clients had implemented these add-on solutions. Software license revenue was also negatively impacted for the three and nine months ended September 30, 2016, by an increase in the number of clients choosing our subscription-based option, rather than purchasing the software under a traditional perpetual software arrangement.
Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our longer-term software license growth rate to continue to be negatively impacted by a growing number of customers choosing our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-based arrangements result in lower software license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract. Our new client mix for the nine months ended September 30, 2016, was approximately 68% selecting perpetual software license arrangements and approximately 32% selecting subscription-based arrangements compared to a client mix for the nine months ended September 30, 2015, of approximately 76% selecting perpetual software license arrangements and approximately 24% selecting subscription-based arrangements. 50 and 189 new clients entered into subscription-based software arrangements for the three and nine months ended September 30, 2016, compared to 35 and 101 new clients for the three and nine months ended September 30, 2015, respectively.
13
Subscriptions
The following table sets forth a comparison of our subscriptions revenue for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
ES
|
|
$
|
35,169
|
|
|
$
|
27,772
|
|
|
$
|
7,397
|
|
|
|
27
|
|
%
|
|
$
|
99,470
|
|
|
$
|
77,814
|
|
|
$
|
21,656
|
|
|
|
28
|
|
%
|
A&T
|
|
|
1,700
|
|
|
|
1,264
|
|
|
|
436
|
|
|
|
34
|
|
|
|
|
5,456
|
|
|
|
3,459
|
|
|
|
1,997
|
|
|
|
58
|
|
|
Total subscriptions revenue
|
|
$
|
36,869
|
|
|
$
|
29,036
|
|
|
$
|
7,833
|
|
|
|
27
|
|
%
|
|
$
|
104,926
|
|
|
$
|
81,273
|
|
|
$
|
23,653
|
|
|
|
29
|
|
%
|
Subscription-based services revenue primarily consists of revenue derived from our SaaS arrangements, which utilize the Tyler private cloud. As part of our subscription-based services, we also provide e-filing arrangements that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements.
Excluding acquisitions, subscriptions revenue grew 23% and 25% for the three and nine months ending September 30, 2016, respectively, compared to the prior year periods. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and nine months ending September 30, 2016, respectively, we added 50 and 189 new SaaS clients and 18 and 47 existing on-premises clients converted to our SaaS model. Since September 30, 2015, we added 222 new SaaS clients and 56 existing on-premises clients converted to our SaaS model. Also, e-filing services contributed approximately $1.0 million and $3.8 million to the subscriptions revenue increase for the three and nine months ended September 30, 2016, respectively, due to the addition of new e-filing clients, as well as increased volumes as the result of several existing clients mandating e-filing.
Software services
The following table sets forth a comparison of our software services revenue for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
ES
|
|
$
|
40,608
|
|
|
$
|
33,210
|
|
|
$
|
7,398
|
|
|
|
22
|
|
%
|
|
$
|
121,372
|
|
|
$
|
94,203
|
|
|
$
|
27,169
|
|
|
|
29
|
|
%
|
A&T
|
|
|
4,130
|
|
|
|
3,188
|
|
|
|
942
|
|
|
|
30
|
|
|
|
|
11,836
|
|
|
|
7,562
|
|
|
|
4,274
|
|
|
|
57
|
|
|
Total software services revenue
|
|
$
|
44,738
|
|
|
$
|
36,398
|
|
|
$
|
8,340
|
|
|
|
23
|
|
%
|
|
$
|
133,208
|
|
|
$
|
101,765
|
|
|
$
|
31,443
|
|
|
|
31
|
|
%
|
Software services revenue primarily consists of professional services billed in connection with implementing our software, converting client data, training client personnel, custom development activities and consulting. New clients who purchase our proprietary software licenses generally also contract with us to provide for the related software services. Existing clients also periodically purchase additional training, consulting and minor programming services. Excluding the results of acquisitions, for the three and nine months ended September 30, 2016, respectively, software services revenue grew 9% and 14% compared to the prior year periods. This growth is partly due to additions to our implementation and support staff, which increased our capacity to deliver backlog, and a contract mix that included more custom development and other services.
Maintenance
The following table sets forth a comparison of our maintenance revenue for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
ES
|
|
$
|
78,292
|
|
|
$
|
56,451
|
|
|
$
|
21,841
|
|
|
|
39
|
|
%
|
|
$
|
223,802
|
|
|
$
|
164,457
|
|
|
$
|
59,345
|
|
|
|
36
|
|
%
|
A&T
|
|
|
4,708
|
|
|
|
4,567
|
|
|
|
141
|
|
|
|
3
|
|
|
|
|
13,973
|
|
|
|
13,372
|
|
|
|
601
|
|
|
|
4
|
|
|
Total maintenance revenue
|
|
$
|
83,000
|
|
|
$
|
61,018
|
|
|
$
|
21,982
|
|
|
|
36
|
|
%
|
|
$
|
237,775
|
|
|
$
|
177,829
|
|
|
$
|
59,946
|
|
|
|
34
|
|
%
|
14
We provide maintenance and support services for our software products and certain third-party software. Excluding the results of acquisitions, maintenance revenu
e grew approximately 8% for both the three and nine months ended September 30, 2016, compared to the prior year. Maintenance revenue increased mainly due to growth in our installed customer base from new software license sales, as well as annual maintenanc
e rate increases.
Appraisal services
The following table sets forth a comparison of our appraisal services revenue for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
ES
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
%
|
A&T
|
|
|
6,541
|
|
|
|
6,557
|
|
|
|
(16
|
)
|
|
|
(0
|
)
|
|
|
|
20,083
|
|
|
|
19,337
|
|
|
|
746
|
|
|
|
4
|
|
|
Total appraisal services revenue
|
|
$
|
6,541
|
|
|
$
|
6,557
|
|
|
$
|
(16
|
)
|
|
|
(0
|
)
|
%
|
|
$
|
20,083
|
|
|
$
|
19,337
|
|
|
$
|
746
|
|
|
|
4
|
|
%
|
The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states. Appraisal services revenue for the nine months ended September 30, 2016, increased primarily due to the Franklin County, Ohio, revaluation project, which began late in the fourth quarter of 2015.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
Software licenses and royalties
|
|
$
|
623
|
|
|
$
|
147
|
|
|
$
|
476
|
|
|
N/M
|
|
%
|
|
$
|
1,927
|
|
|
$
|
1,183
|
|
|
$
|
744
|
|
|
|
63
|
|
%
|
Acquired software
|
|
|
5,598
|
|
|
|
552
|
|
|
|
5,046
|
|
|
N/M
|
|
|
|
|
16,737
|
|
|
|
1,464
|
|
|
|
15,273
|
|
|
N/M
|
|
|
Software services, maintenance and subscriptions
|
|
|
88,623
|
|
|
|
72,764
|
|
|
|
15,859
|
|
|
|
22
|
|
|
|
|
260,610
|
|
|
|
207,819
|
|
|
|
52,791
|
|
|
|
25
|
|
|
Appraisal services
|
|
|
4,053
|
|
|
|
3,984
|
|
|
|
69
|
|
|
|
2
|
|
|
|
|
12,473
|
|
|
|
12,397
|
|
|
|
76
|
|
|
|
—
|
|
|
Hardware and other
|
|
|
2,120
|
|
|
|
1,565
|
|
|
|
555
|
|
|
|
35
|
|
|
|
|
8,481
|
|
|
|
5,278
|
|
|
|
3,203
|
|
|
|
61
|
|
|
Total cost of revenues
|
|
$
|
101,017
|
|
|
$
|
79,012
|
|
|
$
|
22,005
|
|
|
|
28
|
|
%
|
|
$
|
300,228
|
|
|
$
|
228,141
|
|
|
$
|
72,087
|
|
|
|
32
|
|
%
|
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of September 30:
|
|
Third Quarter
|
|
Nine Months
|
|
|
2016
|
|
2015
|
|
Change
|
|
2016
|
|
2015
|
|
Change
|
Software licenses, royalties and acquired software
|
|
|
68.8
|
|
%
|
|
|
95.5
|
|
%
|
|
|
(26.7
|
)
|
%
|
|
|
65.6
|
|
%
|
|
|
94.1
|
|
%
|
|
|
(28.5
|
)
|
%
|
Software services, maintenance and subscriptions
|
|
|
46.2
|
|
|
|
|
42.5
|
|
|
|
|
3.7
|
|
|
|
|
45.2
|
|
|
|
|
42.4
|
|
|
|
|
2.8
|
|
|
Appraisal services
|
|
|
38.0
|
|
|
|
|
39.2
|
|
|
|
|
(1.2
|
)
|
|
|
|
37.9
|
|
|
|
|
35.9
|
|
|
|
|
2.0
|
|
|
Hardware and other
|
|
|
38.0
|
|
|
|
|
27.1
|
|
|
|
|
10.9
|
|
|
|
|
31.8
|
|
|
|
|
28.0
|
|
|
|
|
3.8
|
|
|
Overall gross margin
|
|
|
48.1
|
|
%
|
|
|
47.6
|
|
%
|
|
|
0.5
|
|
%
|
|
|
46.7
|
|
%
|
|
|
47.2
|
|
%
|
|
|
(0.5
|
)
|
%
|
Software licenses, royalties and acquired software.
Amortization expense for acquired software comprises the majority of costs of software licenses, royalties and acquired software. We do not have any direct costs associated with royalties. In the three and nine months ended September 30, 2016, respectively, our software licenses, royalties and acquired software gross margin percentage declined compared to the prior year periods due to much higher amortization expense for acquired software resulting from our acquisition of NWS. Excluding the impact of NWS revenues and amortization expense, our software license, royalties and acquired software gross margin was 94.4% and 94.1% for the three and nine months ended September 30, 2016, respectively.
Software services, maintenance and subscriptions.
Cost of software services, maintenance and subscriptions primarily consists of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities and various other services such as custom client development and on-going operation of SaaS and e-filing arrangements. The software services, maintenance and subscription gross margin in the three and nine months ended September 30, 2016, respectively, was 3.7% and 2.8% higher than the comparable prior year periods. Excluding 284 employees added with acquisitions, our implementation and support staff has grown by 139 employees since September 30, 2015. To support sales growth, we began making significant investments in our implementation and support staff in early 2015. Since December 31, 2014, we have added 303 employees,
15
excluding employees added with acquisitions.
These additions contributed to revenue growth in 2016. In addition, the NWS revenue mix includes a lower proportion of software services compar
ed to Tyler’s historical revenue mix, which also benefited the gross margin. Costs related to maintenance and various other services such as SaaS and e-filing typically grow at a slower rate than related revenue due to leverage in the utilization of suppor
t and maintenance staff and economies of scale. Maintenance and subscription price increases also resulted in slightly higher gross margins.
Appraisal services.
Appraisal services revenue comprised approximately 4% of total revenue. A high proportion of the costs of appraisal services revenue are variable, as we often hire temporary employees to assist in appraisal projects, whose terms of employment generally end with the projects’ completions.
For the three and nine months ended September 30, 2016, respectively, our blended gross margin increased 0.5% and decreased 0.5%, respectively, compared to the prior year periods. Our overall gross margin was positively impacted by improved utilization of our support and maintenance staff. The contract mix included less software license revenues offsetting the gross margin increases.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for administrative and sales and marketing employees, as well as, professional fees, trade show activities, advertising costs and other marketing related costs.
The following table sets forth a comparison of our SG&A expenses for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
Selling, general and administrative expenses
|
|
$
|
42,007
|
|
|
$
|
31,869
|
|
|
$
|
10,138
|
|
|
|
32
|
|
%
|
|
$
|
124,998
|
|
|
$
|
90,810
|
|
|
$
|
34,188
|
|
|
|
38
|
|
%
|
SG&A as a percentage of revenues
was 21.6% and 22.2% for
the three and nine months ended September 30, 2016, respectively, compared to 21.1% and 21.0% for the three and nine months ended September 30, 2015, respectively. Excluding acquisitions, SG&A expense increased approximately 10% and 14% for the three and nine months ended September 30, 2016, respectively. These increases are mainly due to compensation cost related to increased staff levels, higher stock compensation expense and increased commission expense as a result of higher sales
.
Excluding 142 employees added with acquisitions, we have added 15 employees since September 30, 2015. In addition, for the three and nine months ended September 30, 2016, stock compensation expense rose $1.2 million and $4.6 million, respectively, compared to the same periods in 2015, mainly due to increases in our stock price over the last few years.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
Research and development expense
|
|
$
|
11,070
|
|
|
$
|
7,193
|
|
|
$
|
3,877
|
|
|
|
54
|
|
%
|
|
$
|
31,362
|
|
|
$
|
21,307
|
|
|
$
|
10,055
|
|
|
|
47
|
|
%
|
16
Research and development expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate revenue,
as well as costs related to the ongoing development efforts for Microsoft Dynamics AX. Our contractual research and development commitment to develop public sector functionality for Microsoft Dynamics AX was amended in March 2016, which significantly reduc
ed our development commitment through March 2018. However, we will continue to provide sustained engineering and technical support for the public sector functionality within Dynamics AX. License and maintenance royalties for all applicable domestic and int
ernational sales of Dynamics AX to public sector entities will continue under the terms of the contract.
Excluding the results of acquisitions, research and development expense in the three and nine months ended September 30, 2016, declined 0.1% and 2.1%, respectively,
mainly due to reduced development efforts for Microsoft Dynamics AX, offset somewhat by other research and development efforts related to new Tyler product development initiatives. As a result of the Microsoft Dynamics AX amendment, we plan to redeploy certain development resources to enhance functionality on several existing solutions and these costs will be recorded in cost of sales – software services, maintenance and subscriptions.
Amortization of Customer and Trade Name Intangibles
Acquisition intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization of customer and trade name intangibles increased substantially from the comparable prior year periods due to the acquisition of NWS in November 2015. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as operating expense.
The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
Amortization of customer and trade name
intangibles
|
|
$
|
3,458
|
|
|
$
|
1,282
|
|
|
$
|
2,176
|
|
|
|
170
|
|
%
|
|
$
|
10,273
|
|
|
$
|
3,585
|
|
|
$
|
6,688
|
|
|
|
187
|
|
%
|
Other (Expense) Income, Net
The following table sets forth a comparison of our other (expense) income, net for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
Other (expense) income, net
|
|
$
|
(526
|
)
|
|
$
|
255
|
|
|
$
|
(781
|
)
|
|
N/M
|
|
|
$
|
(1,713
|
)
|
|
$
|
621
|
|
|
$
|
(2,334
|
)
|
|
N/M
|
|
Other (expense) income, net is comprised of interest expense and non-usage and other fees associated with our revolving credit agreement, as well as interest income from invested cash. In 2015, we had significantly higher invested cash balances and no outstanding debt until we completed the NWS acquisition on November 16, 2015.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the periods presented as of September 30:
|
|
Third Quarter
|
|
|
Change
|
|
Nine Months
|
|
|
Change
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
Income tax provision
|
|
$
|
14,155
|
|
|
$
|
11,602
|
|
|
$
|
2,553
|
|
|
|
22
|
|
%
|
|
$
|
35,973
|
|
|
$
|
32,633
|
|
|
$
|
3,340
|
|
|
|
10
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.9
|
|
%
|
|
36.5
|
|
%
|
|
|
|
|
|
|
|
|
|
|
38.2
|
|
%
|
|
36.7
|
|
%
|
|
|
|
|
|
|
|
|
The effective income tax rates for the three and nine months ended September 30, 2016 and 2015, were different from the statutory United States federal income tax rate of 35% primarily due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction and non-deductible meals and entertainment costs. The effective income tax rate for the three and nine months ended September 30, 2016, increased compared to the prior year period mainly due to higher non-deductible share-based compensation.
17
In the past few years a relatively high amount of excess tax benefits related to stock option exercises have resulted in a reduction in our qualified manufacturing activities deduction. The qualified man
ufacturing activities deduction can be limited to a certain level of taxable income on the tax return. Therefore any significant items that reduce taxable income, such as excess tax benefits on stock options, can reduce the amount of the qualified manufact
uring activities deduction. It is possible that significant excess tax benefits related to stock option exercises for the remainder of the year could reduce the qualified manufacturing activities deduction. A reduction in the qualified manufacturing activi
ties deduction could result in a higher effective tax rate. The excess tax benefits for the three and nine months ended September 30, 2016, were $12.1 million and $18.8 million,
respectively, and did not materially impact the tax rate.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2016, we had cash and cash equivalents of $
23.3 million compared
to $33.1 million at December 31, 2015. We also
had $34.0 million invested in
investment grade corporate and municipal bonds as of September 30, 2016. These investments mature between 2016
and mid-2018 and
we intend to hold these investments until maturity
.
As of September 30, 2016, we had $34.0 million in outstanding borrowings and two outstanding letters of credit totaling $2.2 million.
We do not believe the letters of credit will be required to be drawn upon. These letters of credit
expire mid-2017. We
believe our cash from operating activities, revolving line of credit, cash on hand and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.
The following table sets forth a summary of cash flows for the nine months ended September 30:
($ in thousands)
|
|
2016
|
|
|
2015
|
|
Cash flows provided (used) by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
121,238
|
|
|
$
|
69,913
|
|
Investing activities
|
|
|
(42,846
|
)
|
|
|
(59,358
|
)
|
Financing activities
|
|
|
(88,165
|
)
|
|
|
21,892
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(9,773
|
)
|
|
$
|
32,447
|
|
Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other potential capital resources include cash on hand, public and private issuances of debt or equity securities, and bank borrowings. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors. We currently believe that cash provided by operating activities, cash on hand and available credit are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, and share repurchases for at least the next twelve months.
For the nine months ended September 30, 2016, operating activities provided cash of $
121.2 million. Operating activities that provided cash were primarily comprised of net income of $58.2 million, non-cash depreciation and amortization charges of $37.5 million and non-cash share-based compensation expense of $21.3 million.
Other sources of operating cash were higher deferred revenue balances due to growth in our installed software maintenance customer base and growth in subscription-based arrangements and timing of payments for wages. Slightly offsetting these increases were annual maintenance and subscription billings as well as milestone billings for several contracts.
In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings. Our renewal dates occur throughout the year, but our largest renewal billing cycles occur in the second and fourth quarters. However, we recorded a significant amount of new software license arrangements in 2015 and 2016, which is a factor in maintenance growth. The related maintenance billings for these new arrangements were processed at various times throughout year, rather than on our normal maintenance billing cycles, which slightly altered our typical deferred revenue cycle in 2015 and 2016. In addition, subscription renewals are billed throughout the year.
Our days sales outstanding (“DSO”)
was 87 days at
September 30, 2016, compared to 100 days at December 31, 2015 and 77 days at September 30, 2015. Our maintenance billing cycle typically peaks at its highest level in June and second highest level in December of each year and is followed by collections in the subsequent quarter. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.
Investing activities used
cash of $42.8 million
in the nine months ending September 30, 2016.
Approximately $29.5 million was invested in property and equipment. We purchased an office building in Falmouth, Maine, that was previously leased from an entity owned by
an executive’s father and brother, for approximately $9.7 million and paid $4.6 million for construction to expand a building in Yarmouth, Maine. We plan to spend approximately $11.5 million in 2016 and approximately $15.5 million in 2017 in connection with the completion of this office expansion. The remaining additions were for computer equipment, furniture and fixtures
18
in support of internal growth, particularly with respect to growth in our cloud-based offerings. In the nine months ended September 2016, we
made a small
acqui
siti
on
for approximately $7.4 million and paid $2.0 million related to the working capital holdback in connection with the NWS acquisition.
Investing activities used cash of $59.4 million in the nine months ending September 30, 2015. On January 30, 2015, we made a $15.0 million investment in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited. We also invested $29.4 million in investment grade corporate and municipal bonds maturing between 2015 and mid-2017. On May 29, 2015, we paid $6.1 million in cash, net of cash acquired and including debt assumed, to acquire all of the capital stock of Brazos. The remaining use of cash was for capital expenditures related to computer equipment, furniture and fixtures in support of internal growth.
Financing activities used cash of $88.2 million in the nine months ended September 30, 2016, and were comprised of purchases of treasury shares, net borrowings from our revolving line of credit and proceeds from stock option exercises and employee stock purchase plan activity. During the nine months ended September 30, 2016, we purchased 758,000 shares of our common stock for an aggregate purchase price of $94.5 million at an average price paid per share of $124.75.
In the nine months ended September 30, 2015, financing activities provided cash of $21.9 million in the nine months ended September 30, 2015, and were comprised of $11.7 million from stock option exercises and employee stock purchase plan activity and $10.8 million excess tax benefit from exercises of share-based arrangements. We also purchased approximately 5,400 shares of our common stock for an aggregate purchase price of $645,000 in the nine months ended September 30, 2015.
On May 11, 2016, our board of directors authorized the repurchase of an additional 1.5 million shares of Tyler common stock and as a result we had authorization to repurchase up to 2.1 million shares of Tyler common stock as of September 30, 2016. The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended at various times from 2003 through 2016. There is no expiration date specified for the authorization, and we intend to repurchase stock under the plan from time to time.
We made tax payments of $25.0 million in the nine months ended September 30, 2016, compared to tax payments of $27.2 million in the nine months ended September 30, 2015.
Excluding acquisitions, we anticipate that 2016 capital spending will be between $40.0 million and $42.0 million. Capital spending includes $9.7 million paid in March for an office building in Falmouth, Maine, and approximately $11.0 million of additional funds we plan to spend to expand an office building in Yarmouth, Maine. We expect the remaining capital spending will consist primarily of computer equipment and software for infrastructure replacements and expansion. We currently do not expect to capitalize significant amounts related to software development in 2016, but the actual amount and timing of those costs, and whether they are capitalized or expensed, may result in additional capitalized software development. Capital spending is expected to be funded from existing cash balances, cash flows from operations and borrowings under our revolving line of credit.
From time to time we engage in discussions with potential acquisition candidates. In order to consummate any such opportunities, which could require significant commitments of capital, we may incur debt or issue potentially dilutive securities in the future. No assurance can be given as to our future acquisitions and how such acquisitions may be financed.