泰勒科技 (TYL) 2004 Q3 法說會逐字稿

Good morning. Welcome to the Tyler Technologies third 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 Marr.

Thank you, Debra. Welcome to the third quarter 2004 earnings call. Joining me from Management today are Brian Miller, our V.P. of Finance, and Ted Bathurst, our CFO. First, I would like to ask Brian to present 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 and may include projections concerning the Company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. John?

Thank you, Brian. Tyler has, in the third quarter of 2004, had its 14th consecutive profitable quarter. But as you know, our results did not meet our expectations. We have had a number of positive developments in the quarter. We've made consistent progress on our long-term objectives of growing our market reach and presence, spilling up into the market place. And improving the competitive positions of our products and the strength of our sales and deployment channels. However, as I indicated, the results for this quarter have not met our expectations, that has happened basically for 2 different reasons. We have experienced some pressure on license sales with a couple of our products. Predominantly our newer products where some of the market presence and sales channels and pipeline for those products is still developing and that's created some lumpiness in our license sales and combined with that, we have a number of other dynamics that I'll offer some more details on later in the call. With amortization being higher from new products coming on-line and that amortization coming on-line. People who previously worked on those capital projects being expensed at a greater rate. That happening more quickly in this year than we had anticipated. Much higher cost related to Sarbanes-Oxley and 404 compliance and with the newer products coming on-line, a greater number of those contracts being accounted for on a percentage of completion basis. I'm going to ask Brian to go through some of the details of the numbers for the quarter and then again, as I indicated, I'll offer some observations around the points I just outlined.

Thank you, John. Yesterday after the market closed, Tyler Technologies reported its results for the third quarter of 2004. Note that our results for 2004 include the results of the acquisitions we made in December 2003 from their respective acquisition dates. For the quarter ended September 30th, 2004, Tyler had revenues of $41.9 million, up 10% from the third quarter of 2003. The Eden Systems acquisition accounted for virtually all of the revenue growth in the quarter as revenues excluding Eden declined 1% compared to last year. Operating income was $3.4 million, a decrease of 33% compared with operating income of $5.1 million in the third quarter of 2003. Net income for the quarter was $2 million or 5 cents per diluted share compared to net income of $3.2 million or 7 cents per diluted share in the third quarter of '03. EBITDA for the third quarter of 2004 decreased 21% to 6.2 million from 7.9 million in last year's third quarter and a reconciliation of net income to EBITDA is provided in our earnings release.

Our software related revenues which include software licenses, software services and maintenance increased in the aggregate 15% over the third quarter of '03. Software license revenues were $7 million, a decrease of 17% from last year's third quarter. As we have previously noted, the comparison to last year's third quarter was a difficult one for us with respect to software licenses because last year's third quarter included $3.4 million of license revenues related to the 2 large Odyssey contracts in Minnesota and Florida. Excluding Eden Systems, software license revenues declined 30% in the quarter because of those 2 large contracts in last year. In addition, a number of software contracts we signed this year are being accounted for on the percentage of completion basis which spread the license fee revenues across 2 or more quarters as the related services are performed for the implementations.

Software services revenues increased 33% over last year's third quarter reflecting increased revenues from implementations across all of our product lines. Our recurring revenues from maintenance increased 25% over last year's third quarter. Approximately 9% of the increase is from the Eden acquisition and 16% is organic. The strong increase in our recurring revenues is due to growth in our installed customer-base together with rate increases. Appraisal services revenues for the third quarter declined 14% from last year. For the first 9 months of the year, appraisal services revenues are virtually flat with last year. As we've discussed in the past, appraisal services revenues are somewhat lumpy depending on the timing of significant projects. Last year's third quarter included revenues related to a large reappraisal contract in Lake County, Indiana, which was completed during that quarter. The revenue mix for the third quarter of 2004 was as follows -- 17% from software licenses, 30% software services, 35% maintenance, 15% appraisal services, and 3% hardware and other. Overall, 81% of our revenues were software related in the third quarter compared to 77% of our revenues in last year's third quarter.

For the third quarter of 2004, our overall gross margin was 36.6% compared to last year's third quarter gross margin of 40.8%. Software license margins for the quarter declined from 75.7% last year to 66.7% this year. The decline in margins is the result of lower software license revenues and increased amortization expense related to new products. We've experienced margin pressure throughout this year as we absorb the amortization of our new Odyssey Courts and Orion Tax and Appraisal products while revenues are still ramping up, combined with the percentage of completion method, revenue recognition being used on many of these new contracts. The blended margin for software services and maintenance declined to 31.3% from 32.6% last year. As we added staff to increase our capabilities to implement our growing backlog.

SG&A expense for the third quarter was 11.3 million or 27.1% of revenues. Compared to 9.7 million or 25.6% of revenues in the third quarter of '03. Expenses associated with corporate governance and related Sarbanes-Oxley and NYSE regulatory compliance during the quarter and throughout this year have been significant and the scope of those and cost of those efforts have exceeded our original estimates significantly. Our backlog of September 30th, 2004 was $149 million. A new high for Tyler. Compared to 124 million at of September 30th of 2003 and 147 million at the end of the second quarter of this year. Backlog related to our software business which excludes backlog from appraisal services contracts, increased by $7.4 million in the third quarter. Which is partially indicative of the increased deferral software license revenues under a percentage of completion accounting. At September 30th, 2004, we had total cash and investments of $36.6 million. Cash flow from operations continued to be strong during the third quarter at 5.6 million and free cash flow after capital expenditures was 4.2 million in the third quarter. For the first 9 months of 2004, Tyler has generated $13.5 million of free cash flow compared to $13.2 million last year.

During the third quarter, we repurchased approximately 333,000 shares of our common stock on the open market at an average cost of approximately $8.55 per share. For the first 9 months of 2004, we have repurchased a total of more than 851,000 shares of our stock at an average cost of $8.88 per share. With the 2 million share increase authorized yesterday by our Board of Directors, we now have a remaining board authorization for repurchases of up to 3,129,000 additional shares. Our capital expenditures during the third quarter totaled $1.4 million which includes $900,000 of software development. This is down from a CapEx of 2.1 million in the third quarter of last year as our capitalized software development declined by 48%. DSOs as of September 30th, 2004 were 84 days compared to 86 days at June 30th of 2004. Our stockholders equity of September 30th, 2004 was $120 million. Again, we have no debt outstanding. Now, I would like to turn the call back over to John for some additional comments on the quarter.

Thank you, Brian. As I indicated earlier, this is our 14th consecutive profitable quarter. Our cash flow was strong. And we've made good progress on all of our different longer term business initiatives in terms of improving the competitive position of the product and the strength and reach of our marketing channel and presence in the market place. At the same time for this particular quarter, our financial results are not in line with what our expectations were. And as I indicated, that really has occurred for 2 different reasons. The first is, that we did not recognize the volume of license revenues that we would have expected to in order to achieve our objectives. And I would like to just discuss that for a moment.

Tyler has had a long-term strategy since we brought the different divisions together and as we brought the divisions together, we reviewed the different products that we had acquired and we identified those products, the products -- all of the products that we're currently marketing, certainly, were identified as products that would be Tyler products that, over time, we would invest in consistently and improve their competitive position and consistently build the sales channel that would give them exposure to the market place throughout the country. And we've discussed this with you on an ongoing basis. As we identified these products and reviewed them, certain products were in a technological environment and were architected in a way that we could invest in those products as they existed in continually improve their competitive position really indefinitely. And for those products, that was the direction that we went. In other cases, and these would be primarily our larger CapEx projects that you're familiar with over the last couple of years, in reviewing those products, we were real honest with our evaluation and determined that the technology they were based on, and the current architecture was reaching the end of its technological life cycle, and that we would be better to start from scratch and build a product that could be invested in over a very long period of time, consistently improved in terms of its competitive position and serve its customer's needs for a very long period of time. And those areas were more in line with the products like Odyssey and Orion that we've discussed with you.

That side of the business is still developing to some degree. Both those products, the 2 primary products have been launched. They've been received in the market place. We have a number of contracts around both of them. Both of them have been deployed and installed and have customers live on them. And we're encouraged by what we will be able to achieve with those products in the future. But the development of those products and their presence in the market place and sales channels around them is something that takes a long time to build to a level to have the same consistency as the other divisions that had products that could be extended. The other products, coincidentally, products that our 3 divisions that have focused on the financial market, were products and technologies that could be extended. The sales channels could be extended and built from where they were and they're more mature, if you will, in terms of business units in their results are much more consistent.

So, we kind of look at it this and review it in a couple of ways. Again, we believe we're on the right track with the newer products. We believe that the feedback is encouraging and we believe that what we've learned with our more mature divisions, enables us to accomplish the same thing with those products over time. But hopefully, we have warned and raised in prior calls the fact that some of this growth and achieving these objectives could be lumpy from time-to-time and while we feel very good about the competitive position of all of our products in the market place and the progress in building our sales channels, that it could be lumpy on a quarter-to-quarter basis and this particular quarter has demonstrated that. So, that's a little bit of what's going on in terms of the organization of the Company. The evolution of the products and the pressure that, in this particular quarter, we experienced with those licenses. None of that, in our view, has a lasting effect. It is a timing and a lumpiness that we've discussed before. But as you will see, our outlook for the fourth quarter and really beyond that is at the most, marginally affected by this particular experience.

In combination with some softness in a couple of our business areas, we've experienced this with a number of things going on in the Company more operationally or in terms of our business or financial fundamentals. And as Brian indicated, in the first 9 months of 2003, we capitalized $5.2 million in software development. And in the first 9 months of -- and we amortized $3 million from previously-capitalized projects. In 2004, we capitalized 3.5 million or about 1.7 million less and we amortized about 4.5 million or about 1.5 million more. So, that's about a $3.2 million in shift in expenses in our business. Now, fundamentally, things really didn't change that much. Products came on-line and we need to amortize them and obviously will for some period of time. But people that are on the Orion project or on the Odyssey product are generally still on those projects. And so our expenses don't go down they get shifted to that. So that's a significant shift. We think it is the right thing to do for the long-term and to have those teams at those levels to continue to improve our competitive position with those particular products. But it obviously is an awful lot to absorb in a single year and if you project it out over the year, obviously it looks like it would be greater than a $4 million shift. So, that's a significant development in the year that, in combination with some lumpiness in the license sales has affected our ability to meet our objectives.

As we all know, we're also in a year where we're challenged by the Sarbanes-Oxley and 404 requirements. And our experience there has been well-beyond anything we anticipated. We allowed for a significant increase in our external cost and we allowed for the deployment of a number of our different resources internally to be focused on this project. And we thought consistent with what we read and saw in the market place and were advised by our external partners that that was appropriate. But it has turned out as it has, apparently for many other companies to be much more significant than that. Our cost for the year will be about 1.3 million in terms of external cost, greater than what they were last year. And about $1 million greater than what we allowed for in our plan for the year.

Total audit in costs for the year will be 1.7 to $1.8 million. And these are the external only costs. It doesn't include the significant internal costs that we incur supporting these different resources and these different processes. And if you do the math, obviously that puts about 2 cents pressure on our earnings. So, this, by itself, is not necessarily something driving our results. But in combination with all of the other things that we've discussed, obviously puts some additional pressure on our earnings. Although, we fell short of the street estimates, we do not give quarterly guidance. We give annual guidance. And we're working hard to achieve fourth quarter results that will bring us in line with our original guidance in that range for the year. But we will, at this point, likely be on the low-end of that range if not slightly below the range. Revenue growth will be around 20%. Approximately half of that coming from the Eden acquisition late last year. Our effective tax rate will be around 41% and our fully diluted earnings per share again will be around 27 cents or slightly below. Total CapEx for the year will be in the area of 6.5 to $7 million below last year's level even though revenues are significantly higher. CapEx -- software CapEx really was around 8 or 9% of revenues just 3 years ago and now it has settled down in a range of being only in the 2 or 3% range and we would look for it to stabilize in that range. Now, we'll take questions.

[OPERATOR INSTRUCTIONS]. Gary Abbott, Merriman.

My first question is, John, you guys have typically said, you get a lot of your revenue out of backlog but you have business to close in a given quarter. The business that you closed in the given quarter, was there any change that leaned toward percentage of completion because presumably, you knew what was going to come out of backlog at the start of the quarter so, on the margin, was there some change in the types of contracts that you signed this quarter? That's my first question. Then I'll come back for a follow-up.

No, I don't think there are changes in contracts that existed but --.

I'm sorry, I meant new contracts.

Yes, well the blend of new contracts is something that you don't know for certain which contracts are going to come in and generally, the observation is that the Orion and Odyssey contracts, while we have made some nice sales in the market place, and have a number of contracts out there that we're not able to recognize the revenue as quickly as you would with a more mature product. Now, there aren't changes in the contract so to speak. But the recognition occurs as different milestones are reached and different resources are deployed and sometimes it is hard to know exactly how much of that will happen in one quarter versus the other. So, at this point, I believe our software-related backlog is up about $7 million from last year. And obviously that suggests that we've made sales in that area that we haven't been able to recognize.

I'm sorry. Up $7 million from last year or last quarter.

Last quarter.

How much is that number? Do you mind giving us that number? Just breaking the 2 apart?

The software backlog is -- it was a nonappraisal backlog which would include software licenses, services, and maintenance. Is 115 million -- 115.2. The appraisal backlog is 34.1 million.

Brian Kinstlinger, Sidoti & Co.

If I look at the software license that was probably 1 million to $1.5 million less than you expected and some of the analysts. I'm curious. How much of the shortfall was due to this more conservative accounting, percentage of completion and how much of it was for maybe some delayed bookings?

What do you mean by delayed bookings?

Does anything have to do with not signing enough contracts or are all of the contracts signed?

No. Hopefully we're clear in acknowledging that. The sales -- there is a difference between sales and recognition, but the sales in those divisions is softer. And as I've indicated, we're trying to be really clear that there is some softness in a couple of divisions that are in product transitions and no question about that. And that coupled with some of the changes in the business and increased expenses, those 2 things combined for the numbers that we have.

I'm not sure we can quantify the split between the two, but clearly both were factors.

Let's talk about each one of the divisions. Clearly, Court and Justice is a little bit slow. I think that's understood. Can we talk about appraisal and when you look into the future of '05, do you see any contracts that are going to fall off that could take us lower than roughly $28 million that you're on pace for this year? Or do you think you can add incremental contracts to grow that business in '05?

Well, we've had a couple of years where revenues have decreased there even though we've had significant sales and continue to feel good about our competitive position. But that market place -- I think is such that we would look for -- until we see otherwise, our planning will allow only for flat revenues in that area.

Are there any significant contracts completing in '05? That you can think of off the top of your head?

On the appraisal side?

Correct.

We have a Franklin County, Ohio, contract that I think started out as a total of around a $9 million contract that will be winding down in early '05. That's the largest single contract that's out there right now.

Then if we look at how Odyssey and Orion are doing. Can you talk about the penetration you've made on some of those new products and just a basic outlook? Obviously, you're not going to give us exact guidelines for '05. But where you see that market moving and how that pipeline at least from what you're hearing from some of the companies that you're bidding. From the state and governments or local that you're working with as to when you expect to see some more movement there?

Well, let's take them one at a time. Odyssey has been done with us for some time and people are pretty familiar with it. We have had a number of contracts in that area and we've announced those and we continue to have a really similar pipeline to what we've had over the last year or 2 and we would expect to be signing contracts probably generally at the rate that we have been most recently. So, I think we've made clear that that's not an explosive area for us, but it certainly is steady and we would expect to see business in line with what we've been doing there. On the Orion side, that's newer to the market place. We've had some significant sales. The State of Kansas is one that we announced. We were at the statewide deployment. That was through one sales channel out of our appraisal division. We've had a number of sales in states where other divisions, TSG historically did business in Texas and Oregon, Washington. And so I would say that the reception of that product is very favorable. That we're both selling our traditional, smaller and mid range customers. We're breaking into larger markets with it. We've had success in a number of different states already. We really believe that that's been received by the market very well. Now, along with that, as I indicated, existing sales channels, new sales resources have to learn those products, learn the arguments in selling the products. The competitive advantages. We have to be successful with the initial deployments and develop the reference base, et cetera. And those are the things that take some time that we don't have the benefit of that exist in our more mature business unit. So, some of this lumpiness and inconsistency we will see from time-to-time, as a result of not only having a product that's deployed, but executing on that product and building all of the business structure around it. But the general reception has been very good. And I believe that the market reception will be such that we'll be able to grow that division at the rate that is reasonable to put it together, but a new product in the market place can't be deployed dozens of places all at once initially. The deployment channel and those resources and the product maturity, all of that needs to be managed at a rate that's acceptable and doesn't threaten quality.

Two more quick ones. The first one is, in the last -- during the quarter, ACS won Delaware and Oklahoma City. I saw you were a sub for that Oklahoma City contract, but those are the deals in the 12 to the $18 million range obviously, that you would hope to band as a prime contract, I would expect. I'm just wondering if you've been debriefed on those contracts is why you might not be a prime and maybe you didn't bid on the Oklahoma City as a prime, but what the company can do differently maybe to take advantage of the few opportunities that are out there?

My understanding in Oklahoma City is that there were a number of different elements to that contract, a number of different products and service deliverables and it may have been broader than what we do on our own. And yet -- so we did bid on the municipal court side of that initially. But they were looking for a prime to be more of a lead in that particular deployment. And I think it was our experience and our own bid that brought us to the attention of Oklahoma City that encouraged the relationship that resulted when where we became a sub on the prime bid because again, I think competitively, our product showed well in the initial process. So, that is a good contract for us by itself. But that's how we become the sub there. There are other areas where -- I think generally, we will be a prime contractor or vendor. But where we can extend ourselves up into that level and break through as a sub certainly we're not going to be adverse to doing that.

The Delaware contract is an example of where we are in the evolution of our products and the maturity of these products that John was talking about. I think that Delaware product was actually bid well over 2 years ago and actually it was awarded to a competitor at that point. And at that point, our Odyssey product was not installed anywhere. And I think my understanding is that those contract negotiations have taken over 2 years to get to a contract period. So, where we are today with Odyssey is very different from where we are when we bid on that originally. And it was a very long time ago.

My last question is just a maintenance question. Well, sort of. You mentioned that the margins in software has come down obviously, volume and amortization. I'm wondering. Not your best cast scenarios but in '05. What are the target margins for software license given the increased amortization and if you expect software to grow at a basic normalized rate, where would you hope to have that software license margin back to be?

I don't know at this point that we're ready to give a target. Clearly, we would expect it to be back above on the license side, back above where we -- again, it is all volume-driven. But above where we were last year and back in that the 80% and above range. But again, we're not ready to give targets or guidance on individual line items for '05 yet.

Charles Strauzer, CJS Securities.

Two quick questions. Most of my questions have been answered, but John, can you talk a little bit about your confidence going into Q4? Obviously, we had some of this work kind of deferred a little bit from the percentage of completion. Is a lot of that more modification related? You're getting customers saying, okay, I'll buy Odyssey or Orion then we're going to implement them but then I need these modifications. Now, is that why these things kind of slipped a little bit?

Well, there are a number of things at play. And really all of the things that we've discussed that had an effect on Q3 and still some of that open in terms of some cost and other dynamics with Sarbanes-Oxley and so forth. But generally, there are really probably 2 different things, Charlie, on the license revenue side. The percentage of completion contracts, it will have to do with obviously, how much of the contract we've completed. Both in terms of hours relative to the total contract, as well as milestones that we've reached. And we're careful to make sure that we're reaching the appropriate milestones with the contract. The contract is having the appropriate level of acceptance. And with a new product, sometimes that can be a little harder to predict. And we wouldn't unnecessarily obviously, encourage a customer to accept something prior to when they were ready to or comfortable in doing that. So, that can have an effect on contracts that we have, that we're executing on that we're clearly going to see the revenue on. But as to know for certain whether that happens in November or January, yes, that's a little bit of an open item and there are a number of projects that would need to happen in this quarter in order for us to have the earnings required to meet our guidance for the year. There are also, as we have discussed before, other contracts for products that would just generally be deployed and recognized if it happened in the time where there's still some open issues and we track all of these different variables. We get better and better visibility as the quarter goes along, but we're far from having certainty on a number of these different issues. And our best intelligence at the moment is that if a number of things occur as we generally would have expected them to, then we still have a reasonable chance to get to the low-end of our guidance and we will work hard to achieve that. We think that is important to deliver on what we gave guidance for initially. If a few of those things don't happen, then we could experience a narrow miss from that and obviously, we've had a lot of variables we've had to manage throughout the year and that would be the result. So, that's kind of what we're managing now.

And just 2 quick follow-ups there. One, if you can, John, talk a little bit -- you're increasing -- the Board increased the buyback. Is that to say that you haven't really found anything attractive on the M&A side? And secondly, broadly we talk about the RFP environment. Are you still seeing it kind of picking up. Obviously, you're seeing some modest growth in spending at the state level and local level. But have you seen it kind of contracted or is it kind of a steady state?

Ok, well, we're down to about 1 million shares in what the authorization was. We have executed on the authorizations that we've had before and bought stock regularly and had a pretty disciplined approach to that. We'll continue to really have a long-range view of our stock and we feel good and bullish on our stock over the long-range, but in the short range, we want to have the flexibility to manage that appropriately. And if there was softness in the stock and our long-term feeling is very strong, then obviously we've become more aggressive than we've been most recently. If not, if we have current conditions as we have, we'll probably continue to be a buyer of the stock consistently with the way we've bought it over the last year or so. We do not have a long list of real qualified acquisition candidates at this point. We're consistently looking at different opportunities there. We have some areas of our business where we think an acquisition potentially could be a real opportunity for us. But no, it hasn't been overly active and if we have an opportunity to buy our stock, we still consider that one of the best ways to use our resources. Now, in terms of spending, I think things are generally at best where they've been in terms of courts and justice and appraisal. You see that in the results. It may not be a particularly strong market now although there are certainly decisions taking place and we're still a company that should be able to carve its business out of that market place. I think on the financial side of the business, which is half our business now, and the faster-growing part, I think the market is pretty good. I think all of our leading indicators and in the case of financials it really comes from 3 different divisions. So, I tend to put a little more weight on it as being more of a macro piece of information than when it is a single division for us or a single sales channel. And all 3 of those have good leading indicators. They've all been performing well and I think our competitive position, our market presence, as well as the market condition itself are all favorable in that segment.

Just a follow-up on that on the financial side. With the Oracle/Peoplesoft war that's been going on. They've been usually a competitor on the larger opportunities. Has that opened up any doors to you at all?

It hasn't been a bad thing. Peoplesoft has already acquired J.D. Edwards. If you go back prior to that, J.D. Edwards and Peoplesoft would have been more direct competitors of ours than Peoplesoft and Oracle. We saw J.D. Edwards quite a bit. Peoplesoft may be a little bit less, but reasonably regularly and we really see Oracle pretty infrequently. So, we've already narrowed 2 competitors to 1. And I think that's been somewhat of a positive if the current contemplated transaction occurs, obviously it narrows it to even further; 3 to 1. And what will be interesting will be to see if they go after the traditional market of Oracle, which will probably be larger clients and maybe more commercial or whether they maintain the current presence they have in local government. But these are really external issues. We don't control and we don't consider to have an awful lot of effect on what we do. We really manage our business to focus on a competitive position. Really study the feedback we get from the market place. Use that to direct our resources and improve our position, build our channel, and focus on these things that we control. But generally, what's going on there is certainly not negative for us and probably marginally positive.

David Yuschak, Sanders Morris Harris.

Help me out on this percentage of completion note, because it is my understanding for the most part, your contracts would probably run no more than a year. As you look at the current quarter, how much of that business is now being exposed to a percentage completion maybe compared to what had been in the past? And what dollar amount did you actually do in the way of software percentage completion revenue in the quarter versus your traditional way of recognizing software -- sales?

One place to look, David is if software-related backlog is up $7 million, traditionally, selling a more mature product, maybe even from the same division, but a mature product that would require less than in the way of services, less in the way of modifications and enhancements and the things that trigger percentage of completion. If you had sold them that product, you may have delivered that product and it may have triggered all or a significant license recognition within the quarter. We're selling the same customer a contract for the same number of dollars, but because the product is newer and because the services that are required to deploy it may be different, include more modifications, more integration, it becomes a percentage of completion. So, our business and our contracts really aren't that different. But what we recognize in that particular quarter obviously will happen over a longer period of time. I think you're right. Generally, software license contracts wouldn't be much more than a year. I would say generally 8 to 12 months would be the typical cycle. So, that -- the majority of those sales will be executed on over the next 2 or 3 quarters.

So we should just look at this thing as more of -- with this percentage completion be more smooth because of it compared to the lumpiness you've had maybe traditionally in the past because of the new products?

Yes, I think that's true.

As far as your resources for allocating to Odyssey and Orion to get them to where you need them to get the profitability desires you need, what kind of resources, as far as sales and marketing and whatever else you might need, are you spending right now to get the products positioned in the market place?

There isn't a lot of incremental resources being brought on-line to market, David. It is really retraining and redeploying the existing sales channels. But these people -- the point was -- they've been selling a particular product a certain way with -- that had different functionality, different technology, different advantages in the market place. And retraining and bringing people up to speed and getting these products established in different market places is a transition, but we don't see a significant difference. We haven't had a significant difference and we wouldn't see a significant difference in the number of resources in the sales channel. It is more of a transition from other products and other sales strategies and arguments to newer ones. And some cases, especially with Orion, that product will be sold over multiple -- it has already been sold over multiple Tyler sales channels and there are a number of other sales channels. It ultimately will be sold over virtually all of our sales staff. And it really is emerging and it is the first true Tyler Division and product, if you will, that gets sold and deployed by a number of different divisions within the Company. But a person who traditionally sold a financial system in New England or Florida, this is a big change. In the process to get them to appreciate this particular product. The differentiating criteria between this product and the rest of the market place, maybe even selling to a different office in local government is something that takes time and something that obviously we're investing in right now. But I don't think the headcount will change significantly.

Now, the software backlog is set -- that has Orion in it or is it over an appraisal?

No, that would be in software.

I just wanted to make sure that you didn't separate the 2 entities and their related services.

Jack Salzman, Kings Point Partners.

I wonder if we can get a little bit more granularity on this Sarbanes-Oxley external cost which I think you indicated was going to run somewhere between 1.7 and 1.8 million. Now the external cost presumably are where you have to -- I guess by law or go to an outside auditing service to consult with the internal auditors things of this nature. Is this where the incremental expense is and would you consider this to be a one-time expense or a recurring expense? I wonder if you could just elaborate a little bit as to what that money represents? Where is it going?

This is Ted Bathurst, the CFO. Sarbanes-Oxley the 404 requirement has to do with Management's assets [indiscernible] regarding its evaluation of its effectiveness over internal controls. And if you look at Tyler and how Tyler was put together, even though we have many processes that are centralized, we do have what we call a "multi-location situation." So, in terms of documenting and evaluating these controls and ultimately testing these controls, we made a couple of decisions. One, we felt that I.T. was important in this evaluation so we needed assistance in terms of testing I.T. controls. And the other thing was we needed some degree of assistance in helping us assist in the testing, our own testing of those internal controls. And so we engage the third-party in effect internal control firm to assist Management in our testing process. And I would envision that the documenting of that process is considered one time. We still have the effort to continue to monitor those controls and we do have to going forward have to test annually those controls, but the one-time surge of documenting both our I.T. and the business process controls is a one-time cost. Now, having said that, we have 2 components of our external audit. We've always had our external auditor do their annual audit of the financial statements and that fee is presented in our proxy of last year. And in addition, they're required to do what's called a "timely review of the quarterly financial statements" which is done each quarter. That total cost was usually about $450,000. Now, having said that, the requirement is the first time this year for accelerated filers such as ours, but they have to assert to our evaluation. They have to agree or disagree with our evaluation which means they, too, have to document our controls, but for the most part, they use our documentation but they, too, also have to test our internal controls. And certain areas, they can rely to some extent on our testing in certain cases, they have to do their own testing. Now, that cost is also incremental this year and that's been a very sizable cost. Because mostly the firms are doing it on a time-and-material basis. So, this year, we've had external cost to a third-party advisory to assist Management and we also had third-party costs to our external auditors in their assessment of this internal control. Going forward, like I said, I would envision that Management still has to do its testing and that's going to be a combination of our internal people and maybe some degree of external assistance that would be much, much reduced from what it was this past year. And then the external audit costs, I would envision will be a slight degree below what the aggregate cost is for their 404 and of their annual audits of the financial statements. Does that pretty well clarify what's happened this year?

To some degree. What you're saying is -- you guys originally expected about 1 million less in external costs. That million was what, the outside auditing procedures to confirm your internal controls?

Right. The combination of those things. We spent 4 or 500,000 traditionally. We allowed for maybe 7 or $800,000 in this year, and it will turn out to be 1.7 million or 1.8 million.

I'm just trying to get the feeling for what it would be as an ongoing expense.

It is kind of hard. We have very little ability to control parts of this. We don't have our -- the controls -- the cost we have internally that we manage, we don't have these kind of overruns. We're not in a position to manage these costs the way you are others. But as Ted indicated, we're going to need to audit these controls and manage this documentation and do this now indefinitely. It is not a task from that standpoint. It is a new procedure. We need to maintain going forward. But I don't know. If you're looking for a guess, somewhere maybe a little less than half of this, may go away as costs that were part of establishing it for the first time. But certainly, at least half of the increase will repeat itself. So that percentage is going to be something we'll have to see play out. I can tell you we're watching what other companies do. We're reviewing this. We're looking at our own organization as Ted indicated, we're very decentralized. We have a number of different divisions in where we can change the way we do business to be more efficient, manage our own internal cost, as well as make ourselves more auditable by the outside world and reduce those costs we're prepared to make those changes. It is impossible to make those changes this year given the monumental task of getting through this process in the first place. Once through this, we'll review our own organization and work with our outside partners to try to create an organization where it can be efficient and cost-effective to achieve the results we have to.

Let me just shift gears, John. Looking into '05 and forgetting about the quarterly lumpiness in terms of just the general ebb and flow of your business model, you're running a 10% organic growth rate on the top-line. Given the long lead times and looking at your backlog, it would suggest that there is a high probability that you should accelerate your organic growth rate of 10% next year. Again, not to focus on all the quarterly end. Would you say that's a fair assumption given the state of the economy which you've been bidding on, the long lead times in place, things of this nature? Would you think 10% should be at the minimum?

Yes. We're not prepared to give next year guidance at this point. But we would think that the top-line growth should be north of that. I don't know, 12 to 15ish (sic) percent. Don't really want to get too specific now. But we would agree that that should be on the low-end of the range. And we would expect that obviously as we grow, we'll still benefit from leverage and we've got new leverage line items with our amortization that are -- that should be stable going forward. So, we obviously see a greater growth on the bottom line. And obviously the appropriate time will be more specific about that with some better guidance the next year.

One last question if I may. Do you sense that there's pricing pressure by the states or do you feel that it is not really an issue of pricing the product?

Maybe in a few pockets. We just had our operating meetings earlier in the week with all of the divisions. And there may be a few cases where particular vendors or particular products are seeing a little of that. I think I heard it 2 or 3 times in 2 days of meetings. Which I don't consider to be significant. I don't think that's the case generally. I don't see evidence that the general pricing of the software products or the services is changing in any meaningful way. So, we would expect that if we can maintain the current pricing level and continue to grow and sell more of the same products, that we'll continue to see leverage in the statement.

Gary Abbott, Merriman Capital Management.

So, just a couple of follow-up questions. First, do you guys have a duration of the software backlog number? An estimated duration over what period of time you expect it to run through the income statement? And then second question, if you were to look at the revenue shortfall this quarter, call it $4 million. If you were to look at that number, how would you split it out between milestones that were not achieved versus maybe perhaps new business that wasn't begun or revenue recognition on new business versus through backlog?

With respect to the timing of the software backlog as John indicated earlier, most of that would play out generally within a year. The part that the maintenance component of that clearly would play out in the year or less. And most of our software implementations generally would be in the 8 to 12 month range and in a few instances in larger projects like Minnesota, would go on perhaps as much as a couple of years. But in general, on average, say a year or less.

Do you actually track a duration number though?

We don't actually quantitatively have a number.

Gary, the only contracts we signed -- generally, as was observed earlier, most selling and deploying of software generally would occur within a year. Obviously, I think all of the maintenance or certainly most of the maintenance is within a year and on average, you might not have more than 6 or 8 months left because obviously you're always working it off. The only segment of our business that has consistently has multi-year contracts would be the ASP and other E services types of contracts. I would say that couldn't be more than 10% of the number Brian gave earlier. And those generally would be 3 or 4-year contracts and if you average where we are in that process, you wouldn't likely have more than 2, 2 1/2 years left.

We don't always control the timing of when we expect something to or when something works out of backlog as well. I mean we may expect that a deployment may take place a quarter or 2 quarters down the road. But the customer has some input on the timing as well. There may be timing issues that -- with respect to the scheduling that they controlled that may cause when something comes out of backlog to vary from when we would have originally expected that to occur.

Milestones versus sort of new business. In terms of how --?

I don't know if we can quantify. But there were some licenses or projections in the license side and on the appraisal and on the court side that weren't met. And had they made sales for software, that could have been deployed and recognized, they would have made that. I would say, clearly, we didn't make some sales that we would have expected to. So, I would say more than half of it. 2/3 of it or so, let's say would have been having some softness in the sales. And maybe the balance would be sales that were made but are deferred.

David Yuschak, Sanders Morris and Harris.

It's just a follow-up a little bit more on these milestones [indiscernible]. Because the software services that you had in the quarter were pretty solid. Is there any way we can look at the software services relative to the revenue recognition you need to on a percentage completion at all to help us out, getting a handle on how much of an impact it might be over some time period that we can be better at forecasting that? Kind of thinking about the relationship between the services and the licenses.

I don't know, David. The other thing you have to appreciate is still the majority of our licenses aren't recognized on POC. So, I think to start making estimates there would be difficult and would change -- I don't think it would be real reliable for you. We're focusing on some of the products that are newer and evolving and creating this lumpiness. The reality is our financial products have been doing very well. And each of those divisions has added professionals that do training consulting and conversions and those Billings will show up on the financial statement. So, you'll see growth there and those are obviously revenues that are associated with deliverable licenses rather than POC. So, I think it would be hard to come up with an estimate you could apply to that.

Then as far as the pipeline is concerned. Product-wise, as you look at between now and through next year, the pipeline, does it still suggest then financials will continue to -- can financials continue to perform as you visualize the pipeline today as it has here this year, recognizing you have already layered in Eden to add to your growth this year. I'm just kind of curious as to how you envision the pipeline as you see it today and how it may unfold as of next year.

Our outlook has a number of variables. Some them subjective, but as I indicated earlier, those divisions have done very well. I think combined. They represent a significant player in that market place now. And it is based on fundamentals we've put in place in terms of having presence now. I think a pretty strong presence around the country and clearly improved competitive positions. Moving up into larger opportunities which is critical to sustain this. And you know, we obviously need to stay very focused on it, but we do believe that the growth we've had on that side of the business is sustainable.

Looking at my own projections, the 2005 did need to get some help out of Odyssey and Orion just to get to where my numbers were. And so it goes back to the issue you discussed. You just need to get the critical mass up there. Otherwise, you become too sensitive on a quarterly basis to some of the extra costs. One other thing, this has been a politically-charged election year. Are you seeing anything in -- as you got in talk about projects and all that some things may be being just stretched out depending upon how this thing plays out at the election?

I don't think the presidential election has any effect on our business. The local politics occasionally do and occasionally, you'll have somebody who is in office running for re-election, and some of these local treasurers are elected. Local assessors are elected. Certainly counsels and mayors and so forth. Sometimes people will just feel that it is not appropriate for them to make a commitment like that very late in a term and should they lose -- have someone else inherit it or maybe just don't want to do anything that draws attention that late in the term. So, there is always some of that. But it is not -- it isn't any greater or less based on what's going on at the presidential or national level and those elections take place at least every 2 years, and usually there is a local election every year. So, I'm not sure the cycles creates any meaningful impact on our business. There are some decisions deferred based on local politics, not national.

That's what I was kind of driving at just because of the idea of getting near and end of a term. You're saying there is nothing abnormal this year compared to anything in the past?

Nothing unusual. Sure if we pulled all the reps, we could get some names of places where people are waiting for the election to make a decision.

But it all balances out. It is a typical year for you.

Yes.

Charles Strauzer, CJS Securities.

One quick question. When are you free to start buying back stock in the market? When is your blackout lifted?

Generally after 48 hours after earnings release. Debra, do we have any further calls?

Gentlemen, there are no further questions at this time.

Thank you very much for participating on the call today. If you do have any further questions, feel free to call Brian or myself. Thank you.

Thank you for joining us on today's teleconference. At this time, you may disconnect.