泰勒科技 (TYL) 2003 Q3 法說會逐字稿

Good morning. Welcome to the Tyler Technologies third-quarter fiscal year 2003 earnings results conference call. Today's call is being recorded. At this time, for opening comments and introductions, I would like to turn the call over to President and CEO, Mr. John Yeaman.

Thank you, Patricia. And welcome to our third-quarter 2003 earnings conference call. Joining me from our management team are John Marr, our Chief Operating Officer; Brian Miller, Vice President of Finance; Ted Bathurst, our CFO; and Lynn Moore, our General Counsel. 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, and then John Marr will give his comments, and then we will take questions. Brian?

Thank you, John. During the course of this conference call, management may make statements that provide information other than historical information, and may include projections concerning the Company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. John?

I'm pleased to announce that Tyler had another great quarter. We had anticipated that results would be strong this quarter, particularly because of the timing of revenue recognition on our Odyssey contracts, and the results were right in line with our expectations. This was our best quarter since entering the technology sector, in terms of total revenues, software license revenues and operating income. In addition, and probably the most important, this was our 10th consecutive profitable quarter. In an overall market that is definitely not robust, the staff and management of Tyler have worked very hard to continue to grow revenues, marketshare and profits, while at the same time improving our products and client service and strengthening our competitive position. Now, I'd like for Brian to review the numbers for the quarter. Brian?

Yesterday, Tyler Technologies reported its results for the third quarter of 2003. As in the first two quarters of this year, our results showed substantial year-over-year improvement. For the quarter ended September 30, 2003, Tyler had revenues of 37.9 million, which was up 8 percent from the third quarter of 2002. Operating income was 5.1 million, an increase of 55 percent, compared with operating income of 3.3 million in the third quarter of 2002. Net income for the quarter was 3.2 million, or 7 cents per diluted share, up 86 percent, compared to net income of 1.7 million, or 4 cents per diluted share, in 2002. EBITDA for the third quarter increased 55 percent, to 7.9 million or 18 cents per share, from EBITDA of 5.1 million or 10 cents per share in last year's third quarter. A reconciliation of net income to EBITDA is provided in our earnings release.

Our software-related revenues, which in the aggregate increased 23 percent over the third quarter of 2002, once again drove our overall growth. Software license and software service revenues both increased 30 percent over last year, and maintenance revenues grew 15 percent over last year's third quarter. Appraisal services revenues for the third quarter declined 20 percent over last year, in line with our expectations, following the completion or wind-down of certain large appraisal contracts, including the initial Nassau County and Lake County, Indiana contracts. This was our eighth consecutive quarter of year-over-year increases in software license revenues, which we view as a significant leading indicator of our business. The quarter's revenues included $3.4 million of software license revenue, related to the Odyssey courts contract with the state of Minnesota and Lee County, Florida, which was recognized as anticipated in accordance with the achievement of certain milestones.

The revenue mix for the third quarter was as follows. Software licenses, 22 percent; software services, 24 percent; maintenance, 31 percent; appraisal services, 20 percent; and hardware and other, 3 percent. The shift in revenue mix was positive, as 77.3 percent of our revenues were software-related in the third quarter, compared to 67.9 percent of our revenues in last year's third quarter. For the third quarter of 2003, our overall gross margins improved to 40.8 percent from 35.2 percent in the third quarter of 2002. The higher overall margin compared to last year is the result of both a shift in the revenue mix to a greater proportion of software licenses, which carry higher margins, combined with improvements in margins for software services and maintenance, resulting from more efficient utilization of our people and an increased operating leverage that comes with growth in our software-related revenues. The blended third-quarter gross margin for our software services and maintenance was 32.6 percent, compared to 23.8 percent in last year's third quarter, and 31.4 percent in this year's second quarter.

Effective September 1st, we began to amortize the software development costs of the Odyssey courts product over a five-year period. For 2003, we're using the revenue-based method of amortization to appropriately match amortization expense with revenues. Since we expect that all of our 2003 Odyssey courts license revenue was in the third quarter, we also reported in the third quarter amortization expense of $559,000 for the period from September 1st, 2003 through December 31st, 2003. We do not anticipate reporting either license revenue or software amortization related to the Odyssey courts product in the fourth quarter. Beginning in the first quarter of 2004, we expect to being amortizing the remaining Odyssey development cost.

SG&A expense for the third quarter was 9.7 million, or 26 percent of revenue, compared to 8.2 million, or 23 percent of revenues in the third quarter of 2002. The increase in SG&A includes increased incentive compensation expense related to higher profits, greater sales commissions associated with increased revenues, higher insurance expenses, increased marketing personnel and slightly higher R&D expense.

Our backlog at September 30th was 124 million, compared to 95 million at September 30th of 2002, and 131 million at the end of the second quarter of this year. We finished the quarter with $39.3 million in cash and short-term investments. Cash flow from operations during the third quarter was $13.9 million, and our free cash flow after capital expenditures was $11.7 million, which was more than double the free cash flow of 5 million in last year's third quarter. Free cash flow this quarter actually exceeded our free cash flow for the entire year of 2002.

We typically had very good cash flow in the third quarter, because many of our annual maintenance agreements renew mid-year, and we collect most of those receivables during the third quarter. This quarter's receivables collections were exceptionally strong. For the year to date 2003, our free cash flow was 13.2 million, compared to 6.8 million in the first nine months of last year.

During the quarter, we repurchased 37,600 shares of our common stock on the open market, at an average cost of approximately $6.28. Our remaining authorizations for stock repurchases covers approximately 1,980,000 shares. Our capital expenditures during the third quarter were $2.2 million, which includes 1.8 million of software development. Our DSOs at September 30th improved sequentially to 71.3 days from 88.7 days at June 30th, and they were at the lowest level ever. DSOs at September 30th of last year were 83.7 days. Our stockholders' equity at September 30th, 2003 was 110.4 million, and we have no outstanding debt.

Now, I would like turn the call back over to John  Yeaman.

Thanks, Brian. As most of you know, John Marr was appointed to the position of Chief Operating Officer of Tyler earlier this year. We're very pleased that John has taken on this expanded role, working with all of our operating units to advance strategic initiatives and continue to grow the Company.

At this time, I would like to ask John to comment on the results for the quarter and our outlook for the rest of the year. John?

Thanks, John, and good morning, everybody. As you can tell by the numbers that Brian has reported, we have had another strong quarter, as we expected, financially. This is the result, really, of improved products in broader markets and strong execution by all of the staff of Tyler. And certainly, we're very appreciative of their efforts. All of our products have improved competitively in the marketplace. We hear of one product or another in these calls from time to time more than others, but all of the different divisions -- financial, human resources, CIS -- have improved competitively, and have a broader geographic market. This is true of our tax and appraisal systems, as well, certainly of courts reporting and even municipal courts and public safety are starting to provide more meaningful numbers to the whole equation. So going forward, we believe that we have a broad-enough offering, in terms of products, and a large enough presence now in different geographic markets across the country that we'll see consistency, as we're seeing in these numbers, on a regular basis. We'll continue to invest in these products, and our objective is that quarter over quarter, each of those products enjoys a more competitive position in relation to those in this marketplace than it had the quarter before. And we study our position on a regular basis. We get good intelligence from the marketplace, and I think we use our development resources wisely to ensure that that happens. So we're pleased that this particular quarter, that's backed up in the numbers that you have all seen over the last day or so.

In terms of the marketplace itself, as we have been saying now, and as has been clear reading any newspaper in the country, there has been a lot of pressure on state and local government. And while that is somewhat of an indirect pressure to the products and services we offer, it certainly has its effect when it's as deep and as long as it's been. Having said that, our current view of the marketplace, to share it with you, would be that we're seeing some modest recovery. I don't know that their situation has changed all that much, other than, now that there has been this pressure for some time, we are starting to see decisions take place that may have been on hold over the last year or two. There are a few decisions in particular that we are aware of that literally have been in process for some time, where finally they are making decisions and moving forward. This is important to us; this is an external factor that we don't control. And in order to reach the objectives that we share with you folks, we need at least a stable market, and certainly an improving market would be a benefit that over time would allow us to exceed the expectations that we share with you folks. So our current information information, based on activities of RFPs, numbers of RFPs, as well as the dollars they represent, demonstrations in the marketplace, decisions happening on time, and a general feel for the market is at we're seeing some modest recovery at this point in time. And we are encouraged by that because, again, a stable or modestly improving market will enable us to meet the objectives that we have shared with you folks.

As we reported, Odyssey contributed significantly to this quarter in terms of license revenue. We had not recognized any license revenue to this point, and our ability to recognize that license revenue was based on exceptional performance in the deployment of Odyssey at the two sites, both the state of Minnesota, and Lee County. We all appreciate that the awards in that particular channel have been slow, but we continue to believe our competitive position with that product is strong, that the business is out there, and obviously reaching acceptance levels to recognize revenue at these sites will help us and improve our competitive position in the market. So we're pleased to have seen the revenue, but we are also very pleased with the fact that that represents a good deployment, on time and on schedule, for those clients. And that should help us in the marketplace.

In addition to this, again, we see modest signs of improvement in the marketplace. We've seen some significant transactions in the last few months. We have an appraisal and tax system award from Fulton County, Georgia, which is significant, as well as from England, which you've read about in the press release. That's in association with EDS, with the English Valuation Office. And in their review, they interviewed all the leading providers internationally of appraisal services and products, and were favorably impressed with our domain knowledge and our ability and technical skills to execute on a project like that. So we think that's a meaningful award, as well. You've also seen, more recently, that we have awarded a contract with the state of Kansas to deliver our Orion property tax administration system and appraisal system. Through the state, two different taxing jurisdiction at the local and county level. So it's traditional business from that perspective, but it is a statewide engagement with the state of Kansas.

So again, we're very pleased with that particular award, but also with what it represents. Orion, for those of you who are not familiar with it, is a new tax and appraisal solution that is built on the Odyssey platform. So as we have said now for a couple of years, our investment in Odyssey was intended to be used more broadly, and where Tyler products needed to be redeveloped, to use that platform to do so. And we have done that, so it's a good example of leveraging one investment into a different line of business for us. It's also a good example of our different divisions working more closely together and building more of a single company. In our courts division, which is really built from very strong technologists, people that have come out of the technology side of the business, have participated and built most of that product, in cooperation with people out of our appraisal division, who, as we saw in England, are regarded as some of the most expert in that area in that industry. So together, those two divisions have worked very closely to build a product that, in our view, is better than what either of those divisions could have built on their own, and it's been validated even before the product hits general release, with the award from the state of Kansas. It's also been validated with at least 10 contracts from installed customers who see it as the migration product from their existing relationship with us. So it's a good example of our different divisions working together, combining their different areas of expertise and coming out with a best-of-breed product that has been very quickly embraced in the marketplace. And we're very pleased to have seen that occur.

We also see nice growth in our Financial and City Solutions divisions in all the different geographies that we play in. We're seeing more business in markets that have developed since we have put Tyler together in the last three or four years than the traditional markets that these companies were in prior to the Tyler initiative. So it's encouraging to see those particular investments pay off, as well. We've opened an office, as you know, in Concord, California; and we are strengthening our presence on the West Coast and expect meaningful contribution from that market going forward, as well.

We have said that our software growth has been up around 25 percent year to date. We expect it to finish the year up at least 20 percent, which obviously represents most of the growth Tyler has seen throughout the Company this year. And that's balanced by actually being off marginally with our appraisal business. While our business is off a little bit, from an actual standpoint, and while we expected that with the winding down of Nassau and Lake County, a couple of very large contracts, we would point out that their awards have been particularly strong. In fact, through September 30th of this year, our appraisal division has signed more new business in terms of contracts than they ever had in an entire year previously. So we do expect that division to get at least some level of growth going forward, beginning next year, and we are encouraged by that as well.

Our earnings outlook, and our outlook in general, for 2003 has not been changed throughout the year. We remain with the same guidance we had going into the year, and we're happy to have been able to perform on that. Obviously, with this particular announcement in the third quarter, it puts us in a position to certainly perform on the higher end of the range that we have given, in terms of guidance, to this point. So we're very comfortable with the guidance we have on the street, and we would continue to expect to execute on that. And it is what you can expect from us for the balance of the year. And that guidance generally was 8 to 10 percent topline growth, led, obviously, by 20 percent growth in the software divisions and being off a little bit in the appraisal division. Our previous guidance for EBITDA of $44 to $46 million for the year includes $23 million from the HTE gain, and we're staying with that, and for EPS of 53 to 55 cents, which also includes 36 percent related to the HTE gain is also unchanged, although our results to date obviously put us in a good position to perform on that, and again, we would expect to perform on that in the high end of the range.

Our capital expenditures for the year will more than likely come in around $9 million. That's $2 to $3 million below what we have allocated and communicated to you folks before. I would add to that that this does not represent a difference in terms of the investment we've made. We allocated the funds we felt might be necessary in order to execute all of the development projects that would be capitalized that we had in front of us, and to make all the investments that we had in order to facilitate those projects. And all of those projects are being executed; they are all generally on time and on budget. And basically, the lower investment in capital expenditures is just simply executing ahead of the plan, rather than doing anything less than we had on our plate to begin with.

So, with that, we're prepared to take question from the group.

(OPERATOR INSTRUCTIONS). David Yushak, Sanders Morris Harris.

(indiscernible) difficult environment with the kind of numbers you are putting in there. Question for you -- on the Minnesota and Lee County contracts, how much more wind-down do you have on both of those, as far as revenues you might expect in the fourth quarter into 2004?

Well, in terms of the license revenue, we recognize that that's 70 percent of the total license revenue, on those two contracts this quarter. But we really wouldn't expect to recognize any further license revenue until the latter part, actually, of '04. But we are, on an ongoing basis, recognizing services revenue associated with both of those agreements. And that will continue on for the better part of the next two years.

So you are --

At least with respect to Minnesota (indiscernible).

Does that Minnesota contract then suggest that it could be a little longer and more services, just because of the extent of the work that needs to be done (indiscernible)?

The software itself is completed, but what the contract calls for is the remaining 30 percent of the aggregate software license fee to not be billable until certain other services have been performed regarding another county that we're working on. So therefore, we're not going to record any of the remaining software licenses until all the services have been performed. But the services to be performed do not have anything to do with adding functionality to the product. The product is there, and the product is being amortized.

And at this point we have recognized about 7 million of the total $11 million on the Minnesota contract.

You indicated on your press release, too, that you're seeing a lot more productivity on the services and maintenance side of it. And certainly it's speaking to the kind of margins you're seeing there. What in particular are you doing there to increase the productivity of your resources there? Because it does sound like what you have done within your own capital spending efforts -- you're getting a lot more productivity off the capital spending. I'm just kind of curious what you're doing in the way of productivity off of your human resources, to get that kind of operating margin.

It's really more a function, David, of the mix of revenues. Certainly, I think we have good systems in place to manage our goals and manage our resources and make sure that we're performing. But it's really more a function of the mix of revenues and the scale. As we sell more of the same product, it becomes more profitable. And as we put more and more customers on the same help desk and receiving the same updates, they become more profitable and margins expand. So it's really more of function of the business model and the scale in the model than necessarily doing anything productivity-wise with individual teams that's different. We do watch that very closely; every team in the Company has specific goals and objectives. And we measure them against that, and I think the performance is good, but in order to continue to see margin expansion, that's going to come from scale, selling more of the same products and mix of revenues.

That tells me that, from a market penetration point of view, you could see a lot better margins going ahead as your scale more commonality (multiple speakers).

That's right. We don't share -- there's a limit to how far we can break everything down publicly. But we certain know the different margins, internally, of the products we sell $20 million of, or the divisions that a single product supports for that kind (ph) versus 5 or 10. And as you grow, those that sell more of the same products and have more customers, the margin expansion is considerable. So, while we hit 40 percent this quarter, obviously had nice license revenues to help us with that, from Odyssey. But as we have moved from 35 to 40, we know that that's not at all a feeling, that to continue to see 100 and 200 basis points expansions year after year, as we grow, is a reasonable expectation, and something we certainly have in our models.

Tom Meagher, BB&T Capital Markets.

Good morning. Congratulations on a solid quarter. Brian, I didn't get all the details on the status of the stock buyback program. Could you run that over for me again?

Sure. We bought 37,600 shares during the quarter, and the remaining authorization is for about 1,980,000 shares.

Given that the stock has obviously appreciated pretty significantly, do you foresee doing any more in terms of the stock buyback, at this point in time?

I think we look at the cash we have, dynamically and pretty broadly, and as you all know, we did a considerable buyback earlier in the year, and bought a lot of stock back over the last 15 months or so. So we don't feel a tremendous amount of pressure to do that at the moment. We bought some stock back this quarter at these price levels and, given that as the stock goes up and we see some options turnover and the fully-diluted count go up a little bit with the price going up, yes, we will continue to do probably modest buybacks in this particular marketplace. But probably, there will be better uses and more leverage and other investments we can use that cash for at these current levels. So, looking at very specific, disciplined acquisitions certainly is something we could do where the dollar could be more powerful for us than just buying our own stock back. So when the stock is fairly valued as it is, we will do probably a little more conservatively. And if that weren't the case, we would be aggressive, as we have been before.

And just kind of a clarification on the demand question. What you said kind of jibes with what we have been hearing from our other coverage companies in the state and local government area. As far as Odyssey goes, though, given that it is, if you will, a bigger-ticket kind of item out there, are you seeing less demand for that than you are seeing for some of your older products out there right now?

Well, we don't have any older products.

(multiple speakers) legacy products. Given that Odyssey is (multiple speakers).

We don't have any legacy products. I'm not being wise, but seriously, the product development strategy has different components to it. Seriously, all the products we market are very competitive in the marketplace, have all been invested in and enhanced, and all have good futures ahead of them, in terms of being competitive. The difference is that Odyssey was in an older technology, or our court solution was an older technology, and had to be redeveloped from scratch, so it required a bigger capital project. And that's what we've done. So, anyway, we just internally are careful about that, because these are not legacy or traditional products; they are products that are very competitive in the marketplace today. Odyssey -- the initial launch, as you know, was at large counties and states. We will sell that into more mid-sized types of accounts as time goes by, but on the high end, we wouldn't say the demand isn't what we thought it would be, but the sales cycle is considerably longer than we might have expected, and maybe some of that is the result of the pressures on their budgets. So it's really more just the timing; we're working the same prospects we have been working for two or three years. Most of the prospects we have ever worked are still on that list, and it's just been much longer than we expected, more than less demand.

Thanks very much. Good quarter.

Brian Kinstlinger, Sidoti & Company.

A couple of questions. First of all, if I take away Odyssey, it seems that software licenses were down 20 percent, because you didn't do any last year. So I'm just wondering. It would be the first time that, other that odyssey, software license was down and it was pretty significant. Am I looking at something incorrectly here, or is there a little bit of concern toward the back end of 2003? And how should I read into this, if at all?

I can appreciate how you're looking at that, Brian. But if you took the top two software deals out of any quarter, our software sales would be down and the quarter wouldn't be as good. Every quarter we have a couple of meaningful deals. We signed a Kansas deal, an England deal, some large financial deals. There's always a couple large deals. And this quarter, those two deals came from Odyssey, and if they weren't there, obviously, the quarter would not have been what it was. But that's kind of what I was trying to provide earlier, is we have five or six different product lines. All of them have improved their competitive position, and all of them have broader geographic markets than they had a couple years ago. And obviously, yes, it's our job to go out and make sure that one or two of those divisions every quarter contribute kind of a lead deal, for the quarter to work. So yes; it's definitely true that if we don't sell a couple of large accounts every quarter, or have a couple lined where revenue can be recognized, it's tough to put together enough small ones to make it. But as broad as our market is now geographically, and as many products as we have, we are pretty confident that we'll have that business more consistently.

One more, a little tweak on how I'll ask it, then. If I look at appraisal, obviously it's down a little bit. We've talked about -- and obviously, now court and justice is up in software. Does this (indiscernible) the financial software right now? Did it have a tough quarter, year over year, at least in the software license line?

I'd have to look at it. I'd say it might have been somewhat flat. Again, these divisions are somewhat lumpy, and quarters go by quickly. Financial software in general is doing very well. Geographically, we are getting a lot of new business from new geographies we have opened over the last year or two. Our position, as I said, in relation to specific competitors that we compare ourselves to every day has improved, and that's definitely a growing area of our business. And we expect it to grow and contribute considerably going forward. But in any one quarter -- I think this quarter actually, just from memory, was reasonably flat from a year ago. But year to date, it's up real nicely.

Actually, in terms of the larger deals, last year's third quarter had some major contributions from some property tax deals in Allegheny County, Pennsylvania, large tax deals. So, like John said, some quarters, the big deals come out of one divisions and some quarters, they come out of another.

If I just shift one time to Odyssey and Orion, first of all, in the past you have talked -- if you can you give us, first of all, an update on Odyssey? Then also, in the past couple of quarters, you have given us the number of outstanding bids. And maybe if you could quantify the pipeline of the size of the bids totaled that you are maybe bidding on, that would be helpful.

I don't think we've -- again, the focus on that, probably of our own making, has been pretty close. That's fair; we certainly went out and talked a lot about. We're happy with the product we've developed, and it's competitive position. It's performing well in the two sites it's installed in. And generally, all I'd say is we've got roughly the same number of prospects that we've talked about before, for roughly the same number of dollars. And we would expect that we would see two or three decisions, certainly, in the coming weeks or months. But we've acknowledged it's very hard to read, and we have very little influence over the timeline. And if you look at deals that other companies in that space announced, and how long they worked those deals before they were actually signed, they are experiencing the same thing. So it's hard for us to say we think we are going to have -- you know, we've been doing this. And it's very hard for us to deliver on that. So I think what we can say is we're not concerned about our competitive position. We're at the tradeshow this week for courts, and we're talking to the market, and we are pleased with our competitive position. We think there is enough business out there to get what we need to support the investment we've made. But our ability to sign deals regularly, quarter over quarter, certainly hasn't existed at a very good level. So we'll continue to work that and feel good about the outlook. I think you shouldn't look at '04, for example, and think that Odyssey necessarily has to be the product that carries the year. I think it will -- we'll close business, and it will contribute. But the Financials and City Solutions will do the same, Tax and Appraisal looks very good with our new products. Certainly, they have been received very well. And really, across the board, we see each of those divisions contributing to another strong year.

Last question is, if I look at Orion, it's a new product. And the clients also are getting a little bit bigger, in that respect, as well. What can we expect for sales cycles, for Orion? And did I hear you say something -- that 10 customers have accepted installing this?

Well, not accepted it, but Orion really has a much broader market in the initial launch than Odyssey had. Odyssey was specifically designed for the high end, and it has shown up there and done well, in terms of winning a couple of deals and being in a good competitive position. But when you are only focused on the very high end of the market, there are fewer transactions. And again, they don't happen regularly enough to see the consistency that we might have liked. Orion is clearly -- evidence from Kansas, is ready already to be selected on a high-end transaction against the whole marketplace, in Kansas. And it's very encouraging to see that occur, really coincidental with the first release of the product.

We also have had -- the other clients are mostly installed customers, or traditional types of prospects and customers, and they would be more typical-sized deals -- 2, 3, $400,000 deals. And yes, we have somewhere around 10 existing clients, or clients of that ilk that have signed up to take delivery of that product. So we have a pretty good number of our traditional-sized client and mid-range business that's been receptive to it. And we have a kind of an anchored deal on the high end, as well. And what's interesting is those traditional types of deals have come out of a Texas division, which is our courts division now. And the other one, the Kansas deal, has come out of our appraisal division. So it's also a good example of a joint development project, and then a single Tyler product that's being marketed across both divisions in Tyler.

In relation to sales cycles for some of the medium to higher end, will those take a little bit longer, do you think, given --?

Kansas was a pretty typical sales cycle, six or eight months.

It was six or eight months. That's helpful.

But, you know, the next one could be more like Odyssey and take two years. We don't (multiple speakers) control that.

Let's hope not.

There's no reason why they have to take that long, but they could. Anyway, given the number of installed accounts we have, and our presence in that marketplace, and that we're marketing it in a broad range of accounts, something from -- one of our early clients has 20,000 parcels, and obviously the largest one is a statewide deployment. So, given the size of that market, we definitely expect -- and that's what we're seeing -- to see more consistent performance there.

(OPERATOR INSTRUCTIONS). Jack Hoffman (ph), Kings Point Partners.

Nice quarter, guys. Just one question on appraisal services, because you been winning a lot of appraisal services contracts of late. When do we begin to see more of a steady or growth out of appraisal? Does it begin in the first quarter of next year, or when do these contracts that have been signed start to kick in?

I think you'd expect to see that back in a growth mode starting in the first quarter of next year. A lot of that has to do with the comps, because the first quarter of this year was the quarter that the big contracts started to wind down. And you also have to remember that these are typically longer-term contracts, anywhere from 18 months up to, in the case of Nassau County follow-on contracts, six years. So that's good in the (technical difficulty) lot of referring revenues, but a lot of that is in our backlog, and will be recognized over longer periods. Probably, first quarter is when we would expect to see growth -- year-over-year growth again in the appraisal line.

Once other quick question, regarding your comments earlier about how the margin business seems to be picking up. I wonder if you could elaborate a little bit. What kind of business is starting to pick up? Is it across the board, or are you finding pricing is getting a little bit firmer? Are you beginning to see just --

Again, Jack, that's really a reflection of the mix. Our software license and software-related business is up better than 20 percent year to date, and our appraisal business is off a little. And that's had a material shift in the margins, so it's really a result of mix of revenues and then selling more of the same product, where clearly, the margins expand once you cover your fixed costs.

David Yushak, Sanders Morris Harris.

Now that your cash is piling up nicely, and you bought your Dutch auction back and got rid of some legacy shareholders, what's the prospects of you guys taking a look at acquisitions? And what areas would you think -- given the complement of products you have, it covers a pretty good spectrum of local county offerings, and the strength of moving it all to Odyssey, what kind of things would you even be looking for if you were to look at acquisitions?

Well, we are looking at that, obviously, a lot more than we did over the last several years. We are in a good position to do something like that, in terms of organizationally integrating a new company or division if it fits. And I think the sales channel we have and the leverage we have in the marketplace puts us in a position to do some of that and realize some real value out of it. So we're certainly giving it more consideration than we have in the past. As I indicated earlier, while we certainly may buy some of our stock back from time to time, especially to offset the options, we probably can buy more value with small private companies that exist in this space. The types of companies would probably come from one of two areas. One would be a complement to an existing line of business we have -- it could be appraisal or finance or whatever -- where a certain geography or base of customers or resources, as we said earlier, as we sell more of the same product or type of product, there's scale in our model and our margins expand. So, where there is a good fit that brings, again, market people, customers that will support that, that's certainly something we could do.

The second area would be to broaden our breadth of products. There are other applications in local and county government that we currently don't have a significant presence in, and we could build product for those spaces if we chose to be in the spaces. Or we could acquire someone who has an existence there and integrate it into the Company. So those are really the two areas that we would look for opportunities.

That latter part -- would that be products that do represent some pretty significant opportunities, or more just kind of add-ons to the kind of capability you've already got in your product?

Well, add-ons we probably would build organically. So, for example, if there were a product that is a bolt-on to a financial system, in order for it to really seamlessly be integrated and have value to our customers, we'd probably build that. So it would be the other; it would be kind of entirely -- an area that we have very little presence in now. There's an administrative part of education that we're not currently in. There are other parts of public safety that we're not in, and those would be some areas that we might --

So those would be pretty significant potential revenue --

Those are areas of business that are equal to the areas we're currently in -- justice or appraisal of those types of thing.

And one last question. With the EDS relationship -- that certainly gave you a lot of visibility on the appraisal side of this business. And traditionally, these IT service companies like to bring you in on expertise (ph) but then take the margin on it. But with the kind of capabilities you are demonstrating, and getting invited into this thing from the UK government, do you see yourself being in a much stronger position to align yourself with the types of EDSs that have some more clout in the relationship because of what you are bringing in, in the way of value here?

Yes. That's certainly something we'd like to see developed. We are a part of a lot of very large projects, not necessarily -- we don't necessarily have all the products or services required. And the team with a larger integrator or provider is something we'd be certainly interested in doing -- in very large counties, very large cities or state governments, places that we aren't necessarily on our own yet. So sure; we're interested in seeing that develop.

Is that something that you would think this could be on the more immediate horizon, because of this EDS relationship? Or is it more just kind of out there that, as you gain more traction in your space, it will happen?

I don't think it's necessarily more immediate. There could be some engagements we would be interested in right now. And if we pursue those, they're still not immediate, just because, as you know, the cycles involved here. So no; there isn't anything immediately there.

At this time, there are no further questions. Mr. Yeaman, are there any closing remarks?

Okay. Thanks for the questions. I think that's all we have for now. Thanks for joining us today, and if you have begun any further questions, feel free to call Brian or call myself.

Thank you for participating in today's Tyler Technologies third-quarter fiscal year 2003 earnings results conference call. You may now disconnect.