泰勒科技 (TYL) 2004 Q2 法說會逐字稿

Good morning. Welcome to the Tyler Technologies second-quarter 2004 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 the President and CEO, Mr. John Yeaman.

Thank you, Christy, and welcome to our second-quarter 2004 earnings call. Joining me from our management team are John Marr, our Chief Operating Officer and soon-to-be CEO; Brian Miller, our VP of Finance; Ted Bathurst, our CFO; and Lynn Moore, our General Counsel. First, I would like for Brian to give the safe harbor statement.

Thank you, John. During the course of this conference call, management may make statements that provide information other than historical information that 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 refer you to our Form 10-K and other SEC filings for more information on those risks.

Thank you, Brian. As you have seen from our earnings release, this was another very successful quarter for Tyler. Brian Miller and John Marr will have more comments on the results in just a minute. We also announced on Tuesday that our Board of Directors has named John Marr President and Chief Executive Officer effective August 1. and elected me Chairman of the Board to succeed Stuart Reeves. These changes are in accordance with the leadership succession plan we announced over a year ago.

I would like to thank Stewart for his service as Chairman. He assumed the role at a time when we needed his industry knowledge, his experience, and his leadership. And we are particularly gratified that he will continue to serve on the Board as an independent director.

For the last few years, we have seen record results across all of our divisions, and it has been a pleasure for me to lead the Company as President and CEO through these exciting years. I am equally pleased to hand the leadership of the Company to John Marr, and am convinced that with John's guidance, Tyler's best years are yet to come.

Now I would like for Brian to review the numbers for the quarter, and then John Marr will make some comments.

Thanks, John. Yesterday afternoon, Tyler Technologies reported its results for the second quarter of 2004. You should note that our results in 2004 include the results of our December, 2003 acquisitions from their respective acquisition dates.

For the quarter ended June 30, 2004, Tyler had revenues of $44.3 million, up 22 percent from the second quarter of 2003. Internal revenue growth was approximately 11 percent, and Eden Systems accounted for an additional 11 percent of revenue growth in the quarter. Operating income was $5.0 million, an increase of 63 percent, compared with operating income of $3.1 million in the second quarter of 2003.

Net income for the quarter was $3.0 million, or 7 cents per diluted share, compared to net income of $2.0 million, or 4 cents per diluted share, in the second quarter of 2003. EBITDA for the second quarter of 2004 increased 51 percent to $7.8 million, from $5.2 million in last year's second quarter. A reconciliation of net income to EBITDA is provided in our earnings press release.

Our software-related revenues, which include software licenses, software services, and maintenance, increased in the aggregate 29 percent over the second quarter of 2003. Software License revenues were $7.4 million, an increase of 20 percent over last year's second quarter and the second highest quarterly license revenues in our history. Excluding Eden Systems, Software License revenues grew 6 percent in the quarter.

Appraisal Services' revenues for the second quarter declined 4 percent from last year. For the first half of the year, Appraisal Services revenues are up 6 percent, in line with our expectations for single-digit growth for the year.

The revenue mix for the second quarter of 2004 was as follows. Software Licenses, 17 percent; Software Services, 30 percent; Maintenance, 33 percent; Appraisal Services, 16 percent; Hardware and other, 4 percent.

We continued our trend of seeing an overall positive shift in revenue mix, with 80 percent of our revenue software-related in the second quarter, compared to 76 percent of our revenues in last year's second-quarter.

For the second quarter of 2004, our overall gross margin was 38.6 percent, up slightly from last year's second-quarter gross margin of 38.4 percent. Software License margins for the quarter declined from 75.3 percent last year to 69.9 percent this year. We expect to continue to see some margin pressure throughout the year on software licenses, as we absorb the amortization of our new Odyssey courts and Orion Texas (ph) appraisal and tax products, while revenues are still ramping up, combined with the percentage of completion revenue recognition being used on many of those new contracts. The blended margin for Software Services and Maintenance increased to 33.2 percent from 31.4 percent last year, reflecting the increased operating leverage that comes with economies of scale on our software-related business.

SG&A expense for the second quarter was 11.4 million, or 25.8 percent of revenues, an improvement of 200 basis points compared to 10.1 million, or 27.8 percent, of revenues in the second quarter of 2003. Expenses associated with corporate governance and Sarbanes-Oxley compliance have been significant and will continue to impact our SG&A costs in the second half of the year. Our backlog at June 30, 2004 was $147 million compared to $131 million at June 30, 2003 and 140 million at the end of the first quarter this year.

At June 30, 2004, we had total cash and investments of $35.2 million. Cash flow from operations continued to be strong during the second quarter at $7.3 million, compared to $5.6 million in the second quarter of 2003. Our free cash flow after capital expenditures was $5.5 million in the second quarter, compared to 3.5 million in the same quarter last year.

During the second quarter we repurchased approximately 327,000 shares of our common stock on the open market at an average cost of approximately $8.95 per share. For the first six months of 2004, we have repurchased a total of 518,000 shares of our stock at an average cost of $9.09. Our remaining Board authorization for repurchases covers approximately 1,462,000 shares.

Our capital expenditures during the second quarter totaled 1.8 million, which includes 1.1 million of software development. This is down from CapEx of 2.1 million in the second quarter of last year, as our capitalized software development declined by 35 percent.

DSOs at June 30, 2004 were 86 days, compared to 89 days at June 30th of last year and 80 days at March 31, 2004. The increase in DSOs from the first quarter to the second quarter is the normal seasonal pattern, as we bill a significant portion of Maintenance for our Financial Systems Division during the quarter. Our stockholders' equity at June 30, 2004 was $120 million and we have no debt outstanding.

I would like to turn the call over to John Marr for his comments on the quarter.

Thank you, Brian. Thanks, everybody else for joining the call. As you have learned from the release and Brian's comments, we have had our best second quarter ever as a technology company. It is our 13th consecutive profitable quarter. The results were very much in line with our own internal expectations and just marginally better than the guidance that analysts have published. Cash flow was particularly strong, and we feel that we are very much on track with our plans for the year and beyond. To us this is a validation that our strategy is sound and that the model is working as we anticipated.

It is also pleasing, in order to execute this, to know that all of our employees are executing and outexecuting, we believe, our competition on a regular basis, and certainly our customers have supported our initiatives well and the market has been receptive to our new products as well as our existing products.

The general market condition as we find it has been continually improving. About half our business are our financial systems now, and those fared particularly well in the first half of the year, and the outlook for those applications is strong as well. On the appraisal side of the business, our experience in that marketplace is a little less robust than the financial side, but still positive. We are in a process of rolling out some new applications there that have been received very well by the marketplace. We have a number of contracts in place for our new appraisal solution.

But we are also very patient and disciplined in the way we roll that product out, so the numbers may not fully reflect the reception of that product in the marketplace. That will continue into the second half of the year as we ramp up the infrastructure around those products.

And on the Courts and Justice side, again, we have not had the explosive growth with those products that maybe at one point in time had been anticipated, but we continue to have good interest in the product. We continue to be confident that the product is competitive and have good success in the execution of the projects that are underway.

So a little mix from that perspective. Again, our view is that the market, especially in the financial area, has recovered pretty nicely, that the market is reasonably strong in the other areas as well. We have been in a better position to take full advantage of the recovered market with our financial products that are a little more mature and have the sales channels and the implementation resources and all the business infrastructure around them to grow that business as the markets recovered. And in the other areas where we've developed new products that we view as very competitive in the marketplace, it is going to take a little longer to take full advantage of an improving marketplace.

The competitive position of all of these products in our view continue to improve, as we discuss each quarter. We have an ongoing strategy where we invest in and improve the competitive position of all our leading products, as well as continue to grow our sales channel and our presence in different marketplaces around the country, and we believe in this quarter we have made good progress in all of those areas as well.

As Brian indicated, gross margins, at least, have been under a little bit of pressure in the first half of the year, and that will continue in the second half of the year. As we have discussed our business model with you before, we see margin expansion as something that will happen on an ongoing basis for a relatively long period of time. We believe there is still considerable room to grow our margins and very nice leverage in the way our business works. However, as we have also indicated before, this can be somewhat lumpy. And as Brian indicated, this is a year where certainly Orion and Odyssey products were invested in considerably, but the amortization of those projects has come online and certainly that put some pressure on gross margins for software products.

It is also, I think we are pointing out that these investments are basically development teams that we have built, that when those products are pre-general release in the development stage, were captured and capitalized and are now being expensed. Those teams still exist and still work on improving the competitive position of those products on an ongoing basis, but now they are expensed. So we kind of get hit a couple of ways there in terms of absorbing the amortization of the products we've developed, as well as incurring the expenses of these resources that previously were capitalized. We are pleased, obviously, that we can both absorb the amortization and manage the expense and still see overall growth in our margins, even though it has put some short-term pressure on our gross margins.

Over time, obviously, the infrastructure around those products, the sales channels, the implementation teams, the products get more on a general release format, where we can deploy more projects at the same time, obviously, we will get relief from that pressure on the margins. So when we talk about this being a little lumpy at times, that is what we're experiencing there at this point in time.

Our guidance for the remainder of the year remains unchanged. We are a little ahead of what analysts had published, but we are very consistent with our own internal plans and our guidance remains unchanged, which is revenue growth in the area of 20 to 24 percent, about half of that coming from the Eden acquisition but the other half being organic. Net income being in the area of 12 to $13 million. We will have an effective tax rate of around 41 percent, and that will result in fully diluted EPS of around 27 to 29 cents, obviously around 35 to 45 percent on the 20 to 24 percent top-line growth.

CapEx will be, I think originally we published around 7.5 to $8 million. We're probably going to come in on the low end of that range or even marginally below it. Again, this is just a matter of products moving from the development stage to an expense stage, and basically not a reflection of our investment in our products going forward. We're investing in all these products at a very high rate and very much focused on their competitive position. So as a result, obviously, with lower CapEx, both as a percentage and a dollar amount, we are generating even better cash flow than the financial statement would suggest.

Lastly, certainly, I want to thank John Yeaman for his support in this transition process. I think when we first discussed it with you folks a year ago, our idea was that we had a number of very good things going on with Tyler. We had very strong team that was working very well together. John has supported that process and helped put that team together over the years, and we didn't want to do anything that risked any of the strengths of Tyler in order to take advantage of new opportunities.

But at the same time, we have identified a number of different opportunities and a number of different initiatives that we believe can be complementary and incremental to our core business. And I have been able to focus on those as John continued to support the initiatives that have been successful, and certainly I look forward to continuing to do that over the next year with John. As John indicated, I also want to thank Stuart Reeves as being the Chairman for us. He certainly has contributed significantly, has a wealth of experience, is very valuable to Tyler, and we look forward to having him on the Board going forward as well. With that, we would like to take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Charles Strauzer, CJS Securities.

Good morning. Great quarter. I want to just ask you a couple of quick questions. First, if you look at the overall guidance and the trends that -- you put up two quarters now where you have basically come in about a penny ahead of expectations, and revenues trending a little ahead of expectations. And you said at the start of the year this would be more back-end loaded or second-half loaded, but yet you're not taking the guidance up. You took some business away from Q3 potentially and put got it in Q2. Is that why? Or is it just you're being a little bit more on the conservative side?

I don't think we are being a little bit more on the conservative side, and we expect that people might draw the conclusion or at least have the suggestion that you have made, Charlie. There are a number of things going on. It is a good thing that while I think we will remain somewhat seasonal and continue to have stronger second halves than first halves, maybe not to the same degree. We're spread out in more states now. These states have different fiscal years. Some are July 1 states. Some are September 30 and some are regular calendar year. We have different seasonal and weather-related things in the appraisal business as we move around the country. So the reasons for our seasonalness in the past are being normalized a little bit.

So we expect going forward that while we will remain having some of that, that it won't be as severe as it has been in the past. Our own internal planning suggested that the first half would be a little better than what analysts originally published, but that overall, everybody was pretty much on the mark for the year. So there's part of that, Charlie.

Secondly, while we are having nice growth, we are doing well in the marketplace, we're pleased with the market in general, we do have some pressure for this year, say, on margins and earnings, therefore. And part of that is kind of the onetime absorption of the new amortization and the conversion of some of those resources to expenses. And that is something that we are happy to be able to handle within our own estimates, but won't reoccur going forward. And as we see new growth on top of that, we should see better margin expansion.

And then as Brian indicated, the cost on governance and Sarbanes-Oxley compliance is real and somewhat material to the earnings we will have on the revenues that we generate. So the balance of those things tells us that we should stay with the guidance that we've given, and quite frankly, we still have a little work to make that guidance. We have some revenues to identify that haven't been fully accounted for, which is typical for this time of year. But in general, I think we are giving guidance that is to the best of our knowledge and I don't think we are being overly conservative.

One quick follow-up, if you can. Just a little granularity, and maybe, Brian, you can answer this. On the SG&A line, I know you had mentioned that software development cost was lower in this quarter. What are your hiring plans for the second half of the year?

You mean across-the-board hiring plans or (multiple speakers) developers?

Well, if you could talk a little bit about the development side and what the plans are there to ramp or to stay still and overall FTEs.

I think in general, our headcount is up a little bit from where it was at the end of the year, so we're growing it slightly. But I don't expect to change significantly over the second half. Different areas of the Company have some marginal growth in headcount to support growth in the overall revenues. But I think as John pointed out, more of it is a shift in terms of how some of that headcount is being accounted for on our books, where they were working on projects -- new product development that was capitalized. More of the development teams now are working on product enhancements of existing products and things that are expensed. And as John said, we managed that and those evolutions are accounted for in our guidance, but it is more a shift in how we are accounting for those people than adding a lot of people. The headcount overall should be relatively stable. I think it's at about 1350 is our total headcount right now.

Thanks. Great job on the quarter.

Gary Abbott of Merriman.

I would like to add my congratulations on the quarter and also say congratulations, John, actually both of you. I think this is a good thing. My question is this. John, if I were to think about what you said qualitatively, that the finance business is doing well, and it sounded like there's a lot of momentum there, and listening to you, it sounds like the courts and appraisal software, it is probably doing okay, but certainly not as well. In the context of 6 percent organic year-to-year license growth, presumably finance grows faster, courts grows slower or maybe not even at all right now. Do you think that is a function of the uneven performance between the two groups, and the courts in particular -- do you think their performance is more a function of sales cycles, of the market, of competition? And what are you doing to make that an elements of upside over the next year?

I don't know that the sales cycles are all that different. I think it is somewhat a function of product cycles. And in the software business, it's not just a matter of having a competitive product that demonstrates well and can win business. It is a matter of obviously having a sales channel, presence in the marketplace with installed customers, implementation resources that can commit to and deploy the software as those opportunities present themselves. And I think we've done an awful lot to put ourselves in a position to grow both our courts business and our appraisal business.

So if you looked at the numbers you're looking at now and see some softness in those areas, and if we were telling you that that was news to us, that would be an issue, because you don't respond to those things real quickly in the software business, whether it's building sales channels or redeveloping products.

We have known for three years that those were product areas where we would benefit from developing and making investments in new products. And those have been made. Both of those products are installed. Those customers are doing well, and those products are maturing, and the infrastructure around them is being built in terms of sales channels and deployment teams and the like.

So our view is that maybe that market isn't quite as hot as the financial market. The financial market clearly has recovered more and more. Those markets are adequately strong. They seem to be improving somewhat. But our real opportunity is as we mature those products and as we build those resources around them and as we leverage them through our existing sales channels and implementation teams, we think we will see the same results that we're seeing on financials. But they were not quite as mature in terms of businesses and products to as quickly take advantage of the recovery in the marketplace that our financial divisions were.

Two follow-ups. Do you anticipate over the next year that that becomes a driver of accelerating growth? And then the other follow-up that I'm not allowed, Ted, is there anything you can do about the tax rate to get it down?

I think they will perform, as we build the resources, we believe the products are very competitive. The early adopters of those products are encouraging, and we think the gap between their performance and our financials will certainly narrow. I don't think our expectation would be that they would go beyond what we're currently experiencing in financials, which is pretty strong performance.

This is Ted regarding the tax rates. If I had to summarize our tax rate, hopefully everyone realizes that all our net operating loss carryforwards and our capital loss carryforwards as of a year ago have been fully utilized, so we're a full cash-paying taxpayer. Having said that, we have a 35 percent federal statutory rate and we have state taxes -- in fact, some of the places that we make some of our higher income are our higher state -- tax rates. And then once you figure in the net of the federal benefit, the only other real permanent difference we have is things like meals and entertainments. So you add the 35 plus the 5 plus the 1, you get to 41 percent. I don't see that changing materially into the future. I don't see it going up or going down.

In terms of coming up with some kind of tax advantage method to lower the effective tax rate, in our business I don't see it right now, but we are always looking for avenues to lower our effective rate.

Thank you. Congratulations.

Brian Kinstlinger of Sidoti, Inc.

I just wanted to -- one follow-up to the question is for clarification purposes. Do you expect in the second half of the year organic revenue growth just on the software license would exceed 6 percent after the answer you just provided? I wasn't sure.

I would have to look back at last year's second half. I'd expect it to remain pretty strong. The financial divisions that performed very well in the first half have outlooks and leading indications that make us comfortable that that will be able to be extended. And I think as, certainly, the appraisal product continues to be deployed and move more into a product that is mature and can have multiple projects going on at the same time, that those revenues will come online. So we see it certainly growing and building, but I do -- if I recall from memory, I think we probably had a pretty significant license recognition on Odyssey in the second half of last year.

(multiple speakers) third quarter makes a tough comp.

Right. So we would have to look at that. But definitely our view is that our internal and existing products are definitely doing better. But we may have a tough comp out there.

One little maintenance question on the amortization, why the margins are coming down. So amortization which is reported below SG&A is also reported in each one of the gross profit lines as well. Is that accurate?

We have two types of amortization. When we acquire a company, we allocate a piece of the premium to something called software. That is acquisition date software. We also allocate a piece to customer base. We did it with our acquisitions over five years ago. We did with our acquisition of Eden. The amortization is in the line item called amortization of acquisition intangibles.

Post-acquisition software that we have capitalized and now that software is ready for general release, we start amortizing to expense. That amortization is (indiscernible) by the cost of software license (indiscernible).

Thanks for the clarification there. If you look at your new clients, have all different budgets. We're headed basically into the '05 budget session now, where talks are ongoing, some of them are releasing. What is your expectation of the state budgets and, obviously, the only reason I ask is some of your bigger ticket items now do have some target market there. What is your general sense right now for how we are going to shape out in '05?

I think on a macro level, and I'm sure you see some of this, that the budget situation has improved pretty significantly at the state level, and we are encouraged by that. States are still a very small percentage of our business, but provide some indirect pressure or benefits to local governments depending on how they're faring. But at the highest level, those numbers are pretty encouraging.

And then at the local level, obviously they rely on their direct revenues from most of our projects. And some of the political pressure subsides when they are not getting problems with their revenue sharing from the state or when they are not in an environment where all those things are being questioned. And in our view, that has loosened up those strings certainly measurably over the last six months or so.

So we are encouraged by it. We've seen some good activity and benefited from it. We look at our leading indicators. We look at processes staying on track, decisions made getting funded, and all of that tells us that we are back in a pretty normal market, which we really hadn't had in, say, '00 and '01 and into '02.

Okay. And then if I look at the court and justice business, I would say two years ago you had a clear competitive advantage, it looked like. It's been about two years. I'm wondering if any of your competitors -- if you're hearing that are gaining, with new software development, if they're becoming more competitive in that market with newer software?

The second question related to that, given that it sounds like maybe that state budget and some of the other budgets are improving, without giving an exact number -- because I know you don't classify it separately, would use say that your pipeline in court and justice or your number of bids are increasing, staying the same, or decreasing at this point?

I would say that our outlook is pretty much as it has been. We add some prospects. We converted two prospects into contracts in the second quarter in Lehigh and New Hampshire. And we would expect, obviously, to sign some more of the prospects and make them customers and pretty much add new prospects at the same rate. So I don't think it's necessary expanding or contracting. It is pretty stable from that perspective.

And on the competitive landscape, what are you hearing with the (indiscernible) of the world?

As a product, technically and functionally, we believe we have a strong product and that's one of our competitive advantages. As I indicated, we need to have the sales infrastructure. We need to have the customer base and we've been working on those things for some time and they're coming online, and that will result in business as we go forward. But we would still consider the product itself to be something that we are particularly strong on, and we don't believe that the competitors are showing up with the level of sophistication in terms of technology that we have in the Odyssey and Orion platform.

My final question, taking on the CEO role, I'm just curious -- you have a bunch of stand-alone businesses, I believe. I'm wondering what your thought is about that strategy, if that will remain for a while or you will look to get the synergies of those businesses to cut some costs. And the second question is your acquisition appetite. You're gaining some cash now again. Obviously you made one. What are your thoughts? Is anything near term or is it more longer-term in looking at any acquisitions on a case-by-case?

Okay. First in the synergies and changes, as we have indicated, we have a number of things going well. We have a number of divisions performing very well. And that's why we are in more of a transition than an outright change, and we are definitely going to be careful to protect all of that. Having said that, with the exception of Eden, that's a new company to Tyler, everybody has been together for five or six years, and I think a lot of these people can see where these synergies exist and where we can leverage some opportunities. And we're beginning to take more advantage of that.

Last quarter, we did have our first annual or national sales meeting with certainly the senior people from all the different sales channels there. I think we had about 80 different sales people and sales managers there.

There were eight or nine different products or services that we felt were offered by one division or another that could as easily be offered by other sales channels and divisions. They were presented sales packages on how to sell those, were presented, and sales reps from other divisions left that meeting with an ability to sell those products and those services, get compensated for them, as they do on products out of their own division, get credit on them towards their quotas, etc. So those types of opportunities have been identified and we've done a number of things to start to leverage and take better advantage of those than we had in the early years of the Tyler strategy.

The SG&A, the Sarbanes-Oxley, some of these external things also will provide us opportunities to integrate some of our systems so that we can manage those costs as well, and we're doing some things in those areas. There are other opportunities, such as marketing, where we're coordinated marketing to create a stronger brand, really is not an increase in cost at all but a coordination that gives us an incremental benefit to the money we are already spending on marketing. And Tyler, as you know, has a significant presence in local government and a little bit in state, and is probably the largest company exclusively focused on that market; yet we're not necessarily always known as that.

In fact, probably most companies are known to have more form than substance, and we believe at Tyler we have more substance than form. So we are coordinating those efforts and those resources to build a brand where larger cities and counties and some states would expect to do business with Tyler rather than pleasantly surprised to learn there is a system out there they might want to consider. So those are some of the areas that we have initiatives going on where we think we can either leverage existing investments or get some synergies from doing some integration.

Okay, and the acquisition?

On the acquisition side, we look at a lot of companies that we know in our space and that get brought to us. And we are pretty comfortable that there are quality companies out there that would contribute to Tyler, and that the value proposition can be compelling and that that will present itself from time to time as a way to use the cash that we're generating and put it to work for our shareholders. So we don't have anything specific at the moment or we would be announcing it, but we actively look at things that we identify ourselves through our people in the field that have relationships with these companies and have known them a long time, like we did with Eden. We also look things that are brought to us. And again, I guess generally, we would say that the opportunity to identify quality companies that present a very good value proposition to Tyler, we believe exist, and from time to time we will be doing something there.

Okay, thank you.

David Yuschak of Sanders Morris Harris.

I promise that I will ask you one question, one follow-up, and then get back in the queue. First one is I do congratulate you for spending the money on the new technology, the Odyssey, the Orion. I think all of those things are really important for a company like you to have out there. I'm happy to have the drag until you ramp up the sales. But I think that is important for you; I congratulate you for focusing on it.

But the thing I want to get some clarification on is, you mentioned some products coming out later this year. Is that something new or is that related to Orion, something you're doing there? Or could you just give me some clarification, and is it maybe a follow-up to some of the things you're doing with the United Kingdom on their appraisal business? I just want to get some clarification there.

I don't think I meant it that way, if that's the way I said it, David. I think our products are out. The product we're relying on in Tyler are out -- Orion and Odyssey and then the existing products, the financial products, the recording products, have been enhanced and their competitive positions enhanced. What I intend to say is that while we have completed some of the major capital investments on the new product side, we continue to invest in all of those products. We identify specific competitive technologies and functions that we believe ought to be added into these products on a quarterly basis, and each of those products gathers market intelligence and has the resources on staff and has a strategy where their objective is to improve those products on a consistent basis going forward.

So no, we do not have new products or entire new releases coming online. We have absorbed that with Orion and Odyssey over the last year or so. And as I indicated, building the infrastructure and getting the acceptance in the marketplace takes some time, so their results aren't yet on par with the Financial Solutions, but we do look for that to ramp up over the next year.

So you're just saying basically all your products out there basically have been updated software wise and everything else -- that's probably why you (multiple speakers).

That's right. I think because of the capital investment, we have had a lot of focus on products that were redevelopment efforts, like Odyssey and Orion. But we have invested similarly in other products that were in an environment where we could make that investment in the existing product rather than starting over. And those investments were generally expensed and not as -- it was not as obvious, I guess, to the outside world. But we have invested in and done the things technically and functionally that we needed to do to every class of products we acquired. And in some cases those were redevelopment efforts and in some cases those were investing in existing products.

So that's where we are today, and we believe all of those products are far more competitive than they were, say, a year or two ago. That is not a task. We are not done with that, and that's what we say, resources that may have been on a capital project are now expensed, and we will continue to invest in all of those products and continue to improve their competitive position.

Margin expansion will occur as you absorb that, because those teams are adequately staffed to support much higher revenues. So as we grow the revenues and the licensing around those, we would see the resources required from a product development standpoint grow at a considerably lower rate.

Then the follow-up question. On the Maintenance and Services area, I have been impressed with the continued improvement on gross margin there. Is it primarily because you're getting more driver out of the Maintenance side, or is it doing things with Professional Services itself as you manage Maintenance as well as the new projects you bring on, whether it's Kansas or whatever? Are you finding better ways to get productivity off of that staff (ph)?

Well, the productivity on the Professional Services we use to some degree as a competitive advantage. So in other words, if we find a way to install a product more efficiently or to use fewer resources in deploying it, that will probably literally result in lower cost to the customer and enhance our competitive position. So it doesn't necessarily improve margins, but it does have great value to us in terms of our competitive position, So on the Maintenance side, you really can split Maintenance down the middle. And half of Maintenance goes toward supporting the services that go along with it, primarily a help desk. And help desk resources will grow as we bring in new customers, but they will grow at a rate below the growth in the revenue there. So there is some leverage there that we benefit from.

The big leverage comes on the other half of Maintenance, which is basically their contribution to the ongoing development of the product. And that is much more like License Revenue. So when we have nice growth in our Maintenance revenue, again about half of that is targeted toward product development, and obviously, you have similar scale there and margin benefits that you have with Software Licenses. So that is probably where most of it comes from.

Thanks and I'll get back into queue.

Jack Salzman of Kings Point Partners.

Congratulations, gentlemen, and congratulations, John, on the promotion. Actually all my questions have been answered. I guess the only broad question I have is now that the local governments seem to be reverting back to norm in terms of looking at your products, is there any prospect over the next 12 or 18 months where you think prices could firm, or do you think prices are basically stable, meaning that all the growth that we could expect will be basically organic?

Prices firm (indiscernible) come under some pressure or (multiple speakers) strong?

Either one. Do you see any pricing pressure going forward or do you think prices are beginning to either hold or perhaps even that there's (multiple speakers).

I think in general prices are holding pretty well. I think Tyler's big benefit there -- the current pricing works fine for us, as we take advantage of scale and to some degree is a competitive advantage of hours. Some pressure is good because often we are less money than some of the larger Tier 1 vendors, and while pricing won't drive any decision, it being a criteria that gets considered is actually a pretty good thing for us.

The pricing pressure, Jack, is sporadic, and it is more driven by a vendor here or there that might be choosing to get very aggressive in an individual situation rather than a broad market condition at this point in time. So from time to time, we will see a vendor -- both the very large vendors as well as the local regional players, someone with a new product that needs to get some traction under it -- that occasionally get pretty aggressive, and we have to choose whether we want to get aggressive or hope that the value we bring gets identify and they make the decision. So occasionally, see some pressure in individual deals, but in general, we don't see any macrotrend.

I appreciate it. Thanks very much and good quarter.

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

A follow-up. The backlog was up 6 or 7 (indiscernible) -- I think, you said, Brian, from the first quarter. You had to have some wind down possibly in that Lake County appraisal business and have good revenue on the top line. Could you give us maybe a little deeper look into the magnitude of that performance, because it was a good bookings quarter for you, obviously.

It was a strong quarter -- obviously, our best quarter ever in terms of overall revenues, yet backlog was still up. So obviously, the revenues didn't just come out of backlog. The backlog in the appraisal business -- again, there were not any -- we sign business all the time there, but there weren't any very large signings there. So the backlog on the appraisal side of the business declined sequentially from first quarter to second quarter and is at a lower level than it was last year. So the increase then has been entirely on the software side of the business.

Some of it is maintenance, David. June 30 is a big month as it is the fiscal year for a number of states, so some of that is just the annual cycle of billing new maintenance agreements.

And then one last question on -- how you look at the pipeline today, opportunities out there, and how does that jibe with what you are seeing in your own geographical expansion to take care of that? Because I think one of your strategies is to really do some nice things geographically. Are you seeing areas of the country where the pipeline is looking better so that you're more encouraged to put more resources behind it? You just had that contract you did out in California for instance. Kansas is (indiscernible). I'm just curious as to where that pipeline may be and where you think your opportunities may be to keep the success going on that geographic expansion.

Actually, the country, I think, is performing pretty consistently. And that can change, and obviously having a broader presence would help us address that. But right now, actually, we're having good success around the country. I saw some numbers out of the news division yesterday where there was marginally better contribution out of the Northeast region, which obviously is their original region, but not tremendously above the other three regions, being the South, Midwest, and the West. And the other three were almost dead heat. And so it's pretty balanced across the country, and obviously that gives us a lot of flexibility going forward.

So we remain real pleased with our ability to get accepted into new geographies, states and regions, and all of them are contributing. And we also are moving step-by-step up the ladder in terms of the size of the deals that we're doing, and we would expect that sometime that we would see more of that, but it is happening.

Okay, thanks.

At this time, sir, there are no further questions. Are there any closing remarks?

We just one to thank everybody for participating in the call and appreciate their support. We are pleased with the results and look forward to doing more of the same in the future. So thanks again.

Thank you. This concludes your conference. You may now disconnect.