泰勒科技 (TYL) 2004 Q4 法說會逐字稿

Welcome to Tyler Technologies fourth quarter and year end earning results conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. Mr. Marr, please begin your conference.

Thank you Dustin, and welcome to our 2004 year ending conference call. Before we get started I'd likes to ask Brian Miller 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, 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. And again, welcome. The fourth quarter of 2004 was our 15th consecutive profitable quarter and we continue to experience profitability and even stronger cash flow in our business.

It's the most profitable year Tyler has had since entering the IT market in 1998. Our top line growth was 14 percent, and we end the year with a very strong balance sheet.

However, at the same time, as we know, the year will be ended with mixed results, given that we were not able to achieve the targets that we set for the Company going into the year. As we've indicated, there are really three primary reasons for the shortfall. First being that our new products primarily Orion, our appraisal product and Odyssey, our courts and justice product, were very well received by the marketplace, and fundamentally strong products, the time line from development to launching, selling, installing, general releasing, and actually recognizing revenue, has proven to be longer than we originally anticipated.

Secondly, we have experienced weakness in the appraisal service market, especially in the second half of the year and to some extent extending into '05, and then lastly this is compounded by some shift in our business fundamentals from expense -- capitalization and amortization and the cost of corporate governance that we had in 2004, that I'll talk a little more about later. Clearly these issues are important issues to Tyler that have our full attention and we -- we are managing these issues aggressively.

At the same time we've had some very favorable experiences as well. Our more established companies, built on more mature products have performed very well in 2004, and based on that performance we are very confident that our model and our strategy is sound, and that ultimately the goals that we have had for Tyler remain the same as they were going into 2004.

We've been able to expand the market presence of these established products very successfully throughout the country, broadening the size and range of the accounts that we work with. They have very low capital needs, very strong cash flow characteristics, good and expanding margins, and we believe that the strategy and the disciplines that we are applying to the other parts of the business, that did not perform as expected in 2004, will result in this type of performance over the long run.

So we are very focused on the issues that we experienced in 2004. We are pleased with the performance of the more developed side of the business, and we anticipate that as we move forward we will see that type of performance throughout the Company. Brian, I'd like to have you review the financials.

Okay. Yesterday after the market closed Tyler Technologies reported its results for the fourth quarter of 2004 and for the full year.

Note that our 2004 results include the results of the EDEN acquisition that we made in December of 2003 from the acquisition date. Our results were in line with the updated outlook for 2004 that we provided earlier this year. For the quarter ended December 31st, 2004, Tyler had revenues of $44.7 million up 14 percent from the fourth quarter of 2003. The EDEN systems acquisition accounted for 6 percent of the revenue growth in the quarter with revenues excluding EDEN growing 8 percent compared to last year. Operating income was $5.3 million, a decrease of 4 percent compared with operating income of 5.6 million in the fourth quarter of 2003.

Income from continuing operations for the fourth quarter was $3 million or $0.07 per diluted share, compared to income from continuing operations of $3.5 million or $0.08 per diluted share in 2003. Net income for the quarter was 3.0 million or $0.07 per diluted share, compared to net income of 3.9 million, or $0.09 per diluted share in the fourth quarter of '03. EBITDA for the fourth quarter of 2004 increased 2 percent to $8 million, from 7.9 million in last year's fourth 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 aggregate 25 percent over the fourth quarter of 2003. Software license revenues were particularly strong at $9 million an increase of 53 percent from last year's fourth quarter. Excluding EDEN systems, software license revenues grew 33 percent in the quarter. The growth in licenses was primarily driven by strength in the financial systems products, MUNIS, EDEN, and INCODE. In addition, the number of software contracts signed this year particularly for our newer courts and tax products, are being accounted for on the percentage of completion basis which generally spreads the license revenues across several quarters as the related services are performed. Recognition of license revenues on some of these projects, also contributed to the fourth quarter growth.

Software services revenues increased 18 percent over last year's fourth quarter reflecting increased revenues from implementations across all of our product lines. EDEN accounted for approximately 14 percent of that growth. Our recurring revenues for maintenance increased 16 percent over last year's fourth quarter, approximately 6 percent of the increase is from the EDEN acquisition and 10 percent is organic. The increase is due to the installed customer base growth, together with certain rate increases.

Appraisal revenues for the fourth quarter declined 29 percent from last year. For the full year appraisal services revenues were down 9 percent from last year. As we've discussed in previous quarters, appraisal services revenues are project driven and depend on the timing of significant projects. Last year's fourth quarter included revenues related to large reappraisal contracts in Cake county Indiana and Franklin county, Ohio, which were either completed or winding down by the fourth quarter of this year.

The revenue mix for the fourth quarter of 2004 was as follows. Software licenses 20 percent, software services, 28 percent, maintenance 34 percent, appraisal services 13 percent, and hardware and other 5 percent. Overall 82 percent of our revenues were software related in the fourth quarter compared to 75 percent of our revenues in last year's fourth quarter. For the fourth quarter 2004, our overall gross margin was 40.4 percent, virtually flat with last year's gross margin of 40.5 percent. And up sequentially from our overall gross margin of 36.6 percent in the third quarter of '04.

Software license margins for the quarter were up slightly from last year at 75.1 percent versus 74.5 percent last year. As higher revenues offset the increased amortization expense related to new products. We experienced margin pressure throughout the year 2004 as we absorbed the amortization of our new Odyssey courts And Orion appraisal and tax products, while revenues are ramping up. Combined with the percentage of completion, the revenue recognition being used on many of these new contracts.

The blended margins for software services and maintenance declined to 33.6 percent from 36.4 percent last year as we added staff to increase our capabilities to implement our larger backlog and shifted personnel from capitalized software development activities to projects that are expensed. SG&A expense for the fourth quarter was $12.2 million, or 27.3 percent of revenues. Compared to 9.6 million, or 24.4 percent of revenues in the fourth quarter of 2003. Expenses associated with corporate governance and related Sarbanes-Oxley and NYSE regulatory compliance during the quarter and throughout 2004 were extremely high, and the scope and cost of those efforts greatly exceeded our original estimates.

Our backlog at December 31st, 2004, was 142 million, compared to 139 million at December 31st, 2003 and 149 million at the end of the third quarter of 2004. Backlog related to our software business which excludes backlog from appraisal services contracts increased by $14 million or 15 percent compared to last year, while appraisal services backlog declined by $11 million or 24 percent from last December.

At December 31st, 2004, we had total cash and investments of $33.9 million. Cash flow from operations for the fourth quarter was 3.6 million and free cash flow after CapEx was 1.8 million in the fourth quarter. For the full year of 2004, Tyler generated $15.3 million of free cash flow compared with $14 million last year. In both years, our free cash flow was greater than our book income, excluding the HTE gain.

During the fourth quarter we repurchased approximately 608,000 shares of our common stock on the open market, at an average cost of approximately $8.16 per share. For the year 2004, we repurchased a total of more than 1.5 million shares of our stock at an average cost of $8.58 per share. Through last week, in this first quarter, we have repurchased an additional 978,000 shares at an average cost of $6.91 per share. And our remaining authorization totals 1.5 million shares. Our capital expenditures during the fourth quarter totaled $1.8 million, which includes $1.1 million of software development. This is down from CapEx of 2.2 million in the fourth quarter of last year.

For the year 2004 our development declined by 32 percent with the completion of several large software development projects. DSOs at December 31, 2004 were 92 day,s compared to 98 days at December 31st of last year, and 84 days at September 30th, 2004. Our stockholders' equity at December 31st, 2004, was 118 million, and we have no debt outstanding.

Last month we put into place a new $30 million bank credit facility that replaced our expiring $10 million facility which we had not borrowed under. Because of our strong financial position and our consistent profitability, we were able to obtain greater availability and more favorable terms with a lower cost than our old credit facility. While we have no plans to borrow under our revolver in the near future, the new credit facility does give us increased flexibility to take advantage of growth opportunities that might arise.

I'd like to turn the call back over to John for some additional comments.

Thank you Brian. I'd like to offer a few observations on our different lines of business. I have a few comments on the 2004 corporate governance projects, and then review our guidance for 2005, and then take questions.

In terms of the different divisions within Tyler, the financial division as we indicated in 2004, based on products that are more mature was very successful expanding its marketplace geographically, selling larger and broader markets throughout the country, has clearly improved its competitive position in relation to the other systems we've seen in that marketplace, and our experience in that marketplace and the leading indicators of RPs, demonstrations and decisions is such that we are confident that the success we've had in that line of business is sustainable, that those products will continue to improve their competitive position, and that our presence in a broader marketplace will allow us to continue to execute on that plan.

In courts and justice, I think we've acknowledged that this is not the explosive marketplace, that we may have anticipated a number of years ago at this point in time, but it certainly is a steady marketplace. There are clearly a number of processes underway where we believe decisions will be made, and we continue to believe that the competitive position of our product is excellent, and now with success in a number of the early implementations that we've made, and strong references, we believe that this division will begin to perform at least in line with the rest of the Tyler software divisions. And so we're satisfied with the outlook there and comfortable with its position. Our plan for 2005.

The appraisal software business, that product ORION is still a little earlier in the curve of the evolution of a product than Odyssey, so that's a product that I think the ability to install a number of installations at a time, and recognize revenue on a timely basis, those revenues we experienced with Odyssey last year say, will continue for some period of time into 2005. However, again, that product is very well received by the marketplace, both our installed base and traditional markets, as well as the higher end new opportunities that it was targeted.

As we've discussed before, it's installed in a statewide implementation in Kansas, it's also installed in as many as 20 different sites in our traditional and installed marketplace, where the system is being used in revaluation work. It has generated tax bills and collections are on-going, so it's a well received product in the marketplace, and again, our anticipation of its success down the road remains what it was initially, but again, the timing there is a little longer than we originally anticipated.

The appraisal service market, we are basically planning on a go-forward basis that that market on the high end where our competitive advantages exist will be weak and in the '05 plan and beyond, we have allowed for what is really a traditional bottom to the level of revenues that that division has -- has experienced, and that's in the 20 to $22 million range. It will be in 2005 only about 10 to 12 percent of our overall revenues, and we're making the appropriate adjustments to get the margins back in line with the new revenue level.

On the governance side we had a very involved, very large project on corporate governance in 2004, as all companies have experienced, and as we've reported before as Brian indicated, our costs for these types of external services, primarily auditing, in the past were around a half a million dollars prior to 2004 and in the end, we will spend over $2 million in 2004, so it's a quadrupling of the cost, and it's a doubling of the costs that we expected in 2004.

It was also a very consuming project in terms of our own resources, and I do want to compliment Ted Bathurst, our CFO, and all the staff at corporate, as well as in the divisions, for completing this project, and I am happy to report that while this was a very involved process, we have passed the process. We have no material weaknesses to report, and passed our internal controls tests, and this is agreed to by our auditors, so the results are something we're very pleased with.

On a go forward basis we expect these external costs to be more in the area of $1 million, so they'll be down significantly from 2004, but again at the same time, significantly higher than the levels in previous years. We believe we've made the arrangements in terms of resources. We have added some internal resources, and allocated the responsibility, so that this project on a go-forward basis will be managed in a more routine basis, while it will continue to be a significant project, and that we will be able to have excellent external reporting.

We will be able to manage our controls efficiently and that we'll be able to get back to focused on running our business with a lot of resources that were involved in this this year. That will include a lot of different processes internally, where we will consolidate processes at the different divisions that have been different in the past. That can be the same going forward, the different information systems will be brought together, and that certain parts of our operational accounting will be consolidated as well, so that we are in the process of making a number of changes internally, to make this process more manageable going forward.

Lastly, in terms of 2005 guidance, the outlook remains the same, as we communicated earlier this year. Overall revenue will likely be 6 to 8 percent higher at 183 to 185 million. This is comprised of an increase in software related revenues of 13 to 15 percent, and a decline and appraisal services revenues of 25 to 30 percent.

While we don't give quarterly guidance, we would say that the second half of the year should be significantly stronger than the first half of the year, and a number of the issues that we experienced late in 2004, will continue into the early part of 2005 and consequently, we would expect that the first quarter will likely be marginally below the first quarter of 2004.

Our effective tax rate is anticipated to be 41 percent, and fully diluted EPS of $0.28 to $0.31 including new expenses for stock options and our employee stock purchase plan of $500,000 after taxes, or $0.01 per share in the second half of the year. Total CapEx for 2005 should be in the area of $6 million, below last year's level, with capitalization of software development again declining to around 3.5 to $4 million.

And Dustin, we're ready to take questions.

We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] We'll pause to assemble our roster. Your first question comes from David Yuschak with Sanders Morris Harris.

Congratulations gentlemen on what I think was a very commendable quarter for you given some of the difficulties you had. As I look at my previous model before you guys did the revisions to your forecast, on the revenue side of it, you guys turned in I thought was an excellent fourth quarter. Maybe a little softer than what I had anticipated on software licenses, maybe that was being more aggressive on my part but I thought the other items performed exceptionally well. And Gross margin may be off just a little bit. It really did seem to come down to the SG&A thing really hurting you in the quarter, and how much of that would you say would be the impact of -- of the corporate governance, as well as maybe doing some things structurally to change the sales initiatives to boost that effort as well?

I think externally, Brian, you probably have the numbers, around $700,000 in external costs?

700,000.

Around $700,000 in the quarter, David. We also had on the cost of sales side, our amortization I believe was up, almost a corresponding number around $600,000. So we knew we had some pressure on margins, but we would agree, that the quarter was reasonably good. It wasn't good enough to make up what we experienced in Q3. And licenses actually performed pretty well. We were up 50 percent over the same quarter the previous year and 33 percent of that I believe was organic so we experienced a pretty good quarter from that perspective.

On the maintenance side, which is also a very good revenue line item, I believe we were up 16 percent in the quarter, and if you understand how the maintenance works, that's kind of an on going run rate, so when you add to that it generally recurs and gets built on, unlike licenses where you obviously need to go out and find those again. So I'm pleased with that as well to see maintenance growing above the Company's overall growth rate.

Let me just -- a comment you made there and then I'll have my followup question. You said there wasn't enough to catch up what you thought you could do from the third quarter's shortfall. Is that one of those percentage accounting issues that kept that from being better at the top line?

There's some of that. There's some of these expenses we discussed, we indicated after we had some shortfall in Q3, that we thought we had a reasonable chance of getting to the low end of our guidance, or only marginally below it, and obviously that didn't happen and we weren't able to make up that difference.

And there were a number of these ORION deals that are in process like -- for the most part are use the system, and a lot of cases have generated tax bills or collecting on them in active accounts, but haven't reached a point where we would recognize license revenues, so there are, I think, about 20 sites live with that, and very nominal amounts of license revenue that's been recognized on that product, and that was probably at least half of the miss.

And then the follow up on that 13 to 15 percent guidance on the software, that's all software maintenance --

That's right. That's software and all related services. It's really everything except appraisal services.

And as far as that 13 to 15, how much would you be including in there for ORION and ODYSSEY and I know you've made some changes in there from the sales point of view, as far as trying to improve the prospects on that. Give us an update of how much that mix is, you think could be the two products and how -- and maybe give us an update on some of the changes you made there, to try to boost sales and what you may be doing to boost sales for those two products?

Well, the -- the way the plan is put together, the divisions basically review their business and put a plan together, and I'm not sure I have an exact breakdown, and we haven't generally reported the licenses.

I will say on the ODYSSEY side, we're basically are talking about contracts in hand, and contracts that we have a very reasonable expectation to be successful on, in the timeline that will allow those revenues to be achieved this year, so I think it's going to be a relatively conservative approach in terms of those assumptions, and you know, they're relatively modest license amounts in relation to the overall number.

On the ORION side, again, these would mostly be contracts. Actually a lot of these are contracts that are in place, and installations have actually occurred, but we haven't reached the point with the products general release cycle, and other milestones at the sites where those revenues would actually be recognized. I don't know, Brian, if you have a general number as to what percentage of those licenses are.

I would say that together they're a third or less of the overall projection. I would say that's accurate.

That's helpful.

Okay. Thanks.

Your next question comes from Michael Lewis with BB&T Capital Markets. Go ahead, sir.

How are you doing today?

Good. How are you?

Brian, if I could just get clarification on the interest expense to FASB 123 charges, are you expecting all the 500,000 to hit all until one quarter, or should we just evenly spread this between third and fourth?

Evenly spread.

Okay. And Brian, also in your comments you discussed some rate increases in the software services side. Can you elaborate a little bit on what products are being increased -- or price increases there?

That was on maintenance. Generally each year we have annual increases in our maintenance rates.

Okay.

But that's a factor in the increase, as well as the new maintenance contracts associated with new license sales.

I just missed that then. And John, if I could just ask you, how tied in is the appraisal service business to the other segments like the software services or software licenses, and are these systems integrated into a package offering, or exclusive to one another?

Well, appraisal itself, software is reasonably portable from states and -- from one state to another, or one region of the country to another. Taxes is generally not. So I think the way you -- you'd want to look at that business is we would move in a direction.

We would have certainly few appraisal systems, and when we have had several in the past, so there's a lot of consolidation going on there, and it is our view that we would have no more than a couple of appraisal systems further out, that would be able to be utilized in most of the states throughout the country. All the states we'd be interested in doing business in.

We would however for some time, have a number of different tax systems, so for example in New England we have as many as a 100 tax sites in Massachusetts and certain states like that, that is part of our MUNIS system and will continue to do that, because it's very unique to that particular state, but that tax system would be over time more seamlessly integrated to our newer appraisal software products offering more value to the customer , and in the end leveraging different systems from different divisions into our different customer bases.

In other states, like Texas, where we're replacing our installed accounts with the ORION system, ORION would be both an appraisal system and a tax system. Every state is looked at individually. We have to look at the current offering we have, its competitive position, what we're doing in the way of retaining customers, how competitive we are, and we make a decision on which tax solution is targeted to what state or region of the country.

So they are related, but there would be a different mix of products in different states and different regions.

Okay. Now, if you're expecting to see 10 to 12 percent in appraisal in '05, can we assume maybe a flat -- the same contribution in '06 maybe 10 to 12 percent, or are you guys internally expecting to see a slight decrease? I know you haven't given '06 guidance, but just for modelling purposes?

And we don't have enough visibility, but I would say that you would leave the revenue number on an absolute basis flat. And over time that would actually therefore decline as a percentage of our revenues, and we'll let you know if that market changes, and that assumption should be different, but that's the way we're operating.

And just one more and I'll get out so everyone else can get in. If at some point we don't see a recovery in appraisal, would it make sense to potentially shed this unit?

I get asked that on a lot of calls obviously, and a lot of dynamics to that question, and I think what we've said before is true. We're operating at a lower revenue level. There are things we need to do organizationally in the Company for that company to perform well or that division to perform well at that level, those steps need to be taken.

We need to execute and achieve those results. We believe once we do that, that it will be a small percentage of our business when we do that. It will contribute to profitability of the business, and it will be a service that adds value and offering to our customers, and ultimately allows us to attract customers we might otherwise not have, and retain other customers. If that doesn't prove to all be true then obviously we do it within the interest of the Company, but I believe we need to make the adjustments we're making, regardless of what our interest in that division in the long run would be.

Okay. I appreciate your time. Thank you very much.

Sure.

Your next question comes from Gary Abbott. Go ahead sir.

Given that it's pushing mid-March here, can I get you to take a stab at where you think backlog will finish Q1?

Well, there are a lot of dynamics to that that we generally don't project out backlog at least publicly. We would expect at this point that the appraisal backlog would be down sequentially, and that software related backlog would be most likely flat to up a little bit.

Okay. As you guys sort of -- and maybe this is somewhat related to the last question, but from a larger perspective, did you guys look at your business, if the software backlog were not to achieve the same trajectory as it did you know, last year, so putting you maybe toward the lower end of your growth assumptions, or something like that, to what extent do you sort of manage the cost structure off the backlog, versus retrospectively, you know, on -- you know, off of sort of the Q3, Q4 type reports?

My experience is backlog has been used more externally, but by you guys, than we do internally from a management perspective. There are -- as Brian said, a lot of dynamics that go into a backlog that when you look at the total number in aggregate, it isn't that meaningful to us. For example, one of the reasons it's up right now is that we're contracting for a lot of business as we've indicated, that's for new products that we don't recognize revenue as quickly on.

That will change over time as those products become more mature, and can be deployed and we can achieve the milestones and the -- and the points at which the revenue would be recognized. There's a lot of other software, the more mature products that literally get sold -- may get sold and be deployed and recognized on, before an end of a quarter ever occurs. So backlog would clearly not be an indication as to how much MUNIS or INCODE or how much EDEN we're selling in the marketplace.

So there are a lot of other leading indicators that we looked at, in order to build this plan. Obviously sales forecast and contracts and awards and indications going forward from there, so I'd be careful to put too much emphasis on it.

The other element of backlog that's significant is maintenance and while maintenance contracts get worked off every quarter of a -- of an amount that was contracted for gets worked off, the reality is since -- since the renewals are 98,99 percent, those fluctuations really mean nothing to us at all.

And then last question. Did I hear you correctly, Brian, did you say you bought back 978,000 shares since the end of Q4?

That's correct.

This quarter?

This quarter.

So share count should be down meaningfully in Q1?

Yeah. I think February 28th it was a little under -- our actual shares outstanding as of February 28th was 39,879,000. So our actual shares are below 40 million now.

But that won't fully show up until Q2, because they were bought throughout the quarter obviously.

Right. The weighted average, I understand. Good. Thanks very much.

Your next question comes from Charles Strauzer with CJS securities. Please go ahead with your question.

Hi, good afternoon. Just, John, if you can talk a little bit -- you're looking at single digit top line growth in '05 as your guidance. You've done better than that in the past, and I realize now that you know, obviously that appraisal is kind of at a -- hopefully at a bottom now, and assuming that it is at a bottom, where, you know, long-term or how long-term do you think you can get the growth to kind of accelerate again, and what kind of the -- what are the broader steps you're taking that maybe you can share with us to reinvigorate growth a little bit?

Well, I think in a normal marketplace and certainly we have targets and we do things to expand our market and the position of our products to give ourself an opportunity at growth above these levels, but in the normal marketplace based on our current offerings and our current market presence, as we indicated, our software business looks to grow 13 to 15 percent, so in the mid-teens at this point in time, and the dynamic of a significant drop in appraisal service software, along with that becoming a far less significant part of our business, would mean that that is generally the level of growth in a normal market without anything exceptional occurring going forward. In the mid teens.

Right. But I'm saying, is this kind of the -- you know the run rate we should always expect, or are there things that maybe as ORION really kicks in and customers adopt this more, or maybe you see a pickup on the court side, you know, can this ever be a low double digit top line grower again, or is this kind of what -- excluding acquisitions, you know, organically is that the rate you think this can grow at in terms of the pipeline in the next couple of years?

Yeah. We build products and look at markets and extend the sales channel, and our objective is to always give ourselves opportunities at that upside. But I think realistically in terms of building a model, again in that low to mid teens as a growth rate -- as appraisal service bottoms out and levels there, is what you should look at. And it obviously we're always trying to build the best product, and have as broad a market presence as we can have, but I think that's the level that you should assume with some margin expansion over time, and that's the way the model works.

Got it and shifting now to the acquisition side. There is activity in the space, and there has been activity for some time now. You've talked in the past about getting into new areas maybe like education and other areas. I know that really nothing's kind of come to fruition, but are you seeing at least some opportunities coming across your plate that maybe are more interesting now than they had been, or are prices getting more in line? Can you talk more about that?

Yeah, I would say that -- I would say we -- we took more than a cursory look at 6 or 8 opportunities this past year. I would say I'm -- I'm a little surprised at nothing in terms of what it had to offer and valuation and -- and all the variables we'd look at ended up getting executed on, but we did actively look at a number of opportunities, and we'll continue to do that, and I would expect that from time to time, something will meet our criteria, and '04 given our disciplines, that did not happen.

At the same time, I think we're in a better position to seriously give consideration to building new products than to simply acquiring them. Products built on the platforms that we now have experience with, that are more seamlessly and fully integrated to our other products, that are more consistent with what our existing sales channel sell, are things that I think we -- we will have an opportunity to do going forward as well. So that's something that over time you'll see more of as well.

Obviously those take longer than --

That's right. They do.

So we shouldn't obviously build that into our thinking in the meantime.

That's right.

Thank you very much.

Your next question comes from Brian Kinstlinger.

I wanted to dig into the gross margins of the business. The software license revenue I would agree was very strong. In fact, it seems to have grown 53 percent and obviously some of that was acquisitions, and that's your higher margin business so you'd figure your gross margin for the fourth quarter would have risen, but if you look at each one of the rest of your segments, pretty much every one of them have had just about a substantial reduction in the gross margin, so maybe if you can take a look at them and discuss what's going on, on each one of those line items that's really affecting those businesses?

Brian may be looking for some numbers to share with you. As he does, just generally, we've talked about a number of things that occurred in '04. Some of which we knew of certainly. That are things that occur as the company grows and transforms itself, that don't necessarily repeat themselves on an on-going basis.

In 2004, I'm pulling from memory, I believe that we're -- I believe our CapEx was -- was about $2 million less in the way of software than it was in the previous year, and I believe our amortization was about $2.2 million of software products we've built, $2.2 million higher, for a total swing that goes to expense of $4.2 million. That is not something that's going to repeat itself anywhere near to that degree on an on-going basis.

As we've indicated for a short period of time, it puts a significant shift or pressure on those margins. So I think that's part of what you saw -- as in the fourth quarter for example, where even margins didn't expand, but I think we absorbed an increase of $600,000 in amortization alone that period.

And where does that hit the amortization, because I would have figured it hit on the software license line which was relatively flat, actually did pretty well, I'm talking about the other businesses, the maintenance and services, appraisal services and -- ?

That's true. The amortization would hit the cost of sales on the software licenses. The increase in expenses for -- for expense development would hit the maintenance or service line.

That's correct.

So it is spread across the two, but in aggregate it's a pretty significant number. It's also a good point to make because I don't want the market to think, as we work our way off capital projects, that that means we are not making the investments that we have traditionally in our product. These staffs are staying relatively the same, in terms of size and capacity in these products that have been deployed, continue to be improved significantly competitively in the marketplace. It's just that those costs are expensed.

So when I take a look, I exclude soft line -- I know that the margins have been pretty stable for a time there, and they can sway back and forth a little bit. If I look at maintenance and I know we don't have that much control in hardware but also appraisal services, you ended the year at certain margin share for the year. Do you think when you look into '05 that those are going to improve or they're just going to level off at where they are now?

I think we can expect to see improvement really across the board in all the areas. Appraisal services will end up being a lower margin than we've historically had at the lower level, but there's not as much leverage in that business, in terms of the revenue grow the margins don't shift as much, but we are going through the process of making sure that the expense side of that business is appropriate, so that the margins are reasonable and closer to our historical margins, so I think we would expect even at the level of revenues would be lower. We'd expect to see margins better than we saw in the fourth quarter. The fourth quarter was a pretty low point.

On the services, software services and maintenance, as John said, the costs of people who were formerly working on capitalized projects, all of our development expenses that are not capitalized and amortized as license costs are expensed as cost of maintenance. We have a relatively small amount of R&D that's below the gross margin line, and most of our development costs are expensed as cost of maintenance.

So would SG&A go down in that sense? Maybe I'm being -- some of those expenses in the gross margin lines are getting expensed in the SG&A line?

We have a couple of million dollars that's called R&D that's in the SG&A line, and that's pretty consistent from year to year, and I wouldn't expect that to change a lot. We don't invent a lot of things. The development costs for enhancements to existing products, new features, those sorts of things the vast majority of our development costs get expensed as costs of software services and maintenance.

So as John mentioned, we've shifted resources from projects that were being capitalized to projects, and we're still doing development efforts, and so those are additional costs that are in our cost of services and maintenance, but that level of that personnel level and that cost level, should be relatively stable and as -- again, as the maintenance revenues grow, and as our service revenues grow, again we would expect to see margin expansion going forward.

And then I want to look at the SG&A for one second here. Clearly it sounds like year end corporate governance costs a little bit more maybe a quarter of a million dollars or so, than typical other quarters. Maybe -- I'm not sure but if you look at the June quarter and the December quarter, total revenue was the same, yet you had a significant bump from the SG&A lines, and I know there's some variable expenses and some fixed expenses, so I'm wondering, it's almost $1 million. You know, what is the difference there, and what is really the big variable pay in SG&A that would cause that to bump up?

Well, the biggest difference is -- is that more of the -- the Sarbanes costs were in the second half of the year. I mean, those were expensed when the -- when they were incurred, and there was more of that in the second half of the year. The -- and then we did have I think in the fourth quarter a higher level of some selling costs associated with some specific projects that we were pursuing that we had probably a higher than usual marketing cost associated with a couple of contracts that were being pursued.

Okay. One maintenance question. Is -- you mentioned the overall shares outstanding that you thought for the -- for your stock as of the end of February. What about the diluted share count roughly?

The difference between fully diluted and primary should be -- should continue to be right around that 3 million share range, as it has been for the last couple of quarters. The -- the dilutive effect of options and warrants is about 3 million shares.

Okay. Thank you.

Your next question comes from Tim [Harch] with Brown Brothers, please go ahead with your question.

Hi. I had a quick question just about the free cash flows in the fourth quarter. In the first three quarters, the income had exceeded the free cash flow, and in the fourth quarter it looks like the free cash flow was less than net income, and I was just wondering if -- what working capital items or other items were the reason for that?

Yeah, I'd have to dig a little bit to find out exactly what the working capital changes were there. It's primary -- probably a dynamic that's related to the changes in our deferred revenue. We have a lot of maintenance that gets billed in the fourth quarter, and goes into the deferred revenue side, but I'd have to dig a little bit to get you a -- a fourth quarter specific answer on that.

Okay. Just another sort of followup question. On the 2003 balance sheet, was there a small adjustment to that in the current -- the working capital for the two items, for current assets and current liabilities?

For 2003?

Yeah. It looked like the ending year balance sheet had changed slightly by about $4 million in the working capital items of current assets and current liabilities. Both had gone up by 4.

Not to my knowledge.

Okay. Thank you.

Once again if you have a question, please press star one on your touch tone phone. Your next question comes from David Yuschak, please go ahead sir.

As far as you're looking at the revenue line guys on a longer term basis, and as you looked at where you've been this past 12 months on your top line, are you finding more of your revenue still comes from under the existing customer base, or is geographical expansion becoming more important , and your geographic expansion with particular products you're helping out the most in that area and where do you see ultimately kind of seeing your growth come in -- from either new customers, or more revenue per customer as you broaden your product suites as well?

I don't think there's been a shift there as we have more customers and larger customers, certainly obviously it grows proportionately with that, but clearly, any increase or the upside on that growth rate, comes from new business. And from new customers and -- and generally, again, accelerating that generally comes from broadening your market, whether it be geographic or a broader breadth of product or selling customers of different sizes or complexions than before, so you know, we're clearly a low to mid single digit growth Company exclusively on installed base growth. That is not where the big opportunity is, and the balance of that comes from new business and -- and again, the upside comes from new business and new markets.

Are you finding because of the general overall slowdown we're seeing in technology spending the last couple of years, is it getting to be more expensive to do that proposition?

No, I don't think so. You know, the pricing has stayed pretty stable and again, we appreciate, you know, the macro things that you mention and that we see, but this is still a multibillion dollar industry. Local government IT and we're just a couple hundred million dollar company, and our experience is, that where our products are strong, where they're more mature, where the sales channels exist and the market presence exist, you know, we're clearly able to achieve the results that we're looking for, and we -- again, expect as we apply those things to the newer products, that we'll get those types of results there as well. So you know, we read the other results as well, and we do not consider the issues we experience to be market issues, other than I would say the high end of appraisal services.

So but the financial suites will have to continue to be the leading edge of getting for that new customer base. Is that fair to say?

Well, it's become more than half our business now. And it -- more than that in terms of operating profit, and clearly it has to sustain its performance, sure, for us to meet our objectives but again, we feel those products consistently improve their competitive position, and clearly we're addressing a broader market than we were a year or two ago.

Okay. Then one question on the governance issue. Was there anything out of the governance issue as you closed out the year that was a surprise on -- on what you needed to -- to bolster or can you maybe give us a little more clarity on some of the extra costs?

On the extra costs?

Was there something that needs to be done internally to fix something, versus just a lot more man hours to getting this thing actually implemented and reviewed?

If I had to generalize our corporate governance process so to speak, we did spend a lot of what I would call resources in the area of IT. Being the nature of the background of Tyler and how the technologies companies all formed itself, we had to probably formalize more policies and spend more effort in that regard. That type of cost was one-time, and obviously we still have to test this stuff, you know, going forward, but the initiation of the policies, is just a one-time effort.

The other thing like John mentioned, you know, we found out that, you know, there is some degree of decentralization, and we are working to centralize those things that make sense to centralize, and to get more standardized so that in terms of the documentation, and some of the other things that we had to do to meet the criteria in section 404, we do it just one time, and then we only have to test it one time. So that's what we're looking at. I wouldn't say any of this was a surprise, but the depth of how far we had to go as more and more of the policies and mandates and opinions, as to what the legislation really required, that's sort of where the surprise really came.

If I'm hearing you right because you were decentralized and maybe the business was going well enough for you that that wasn't an initial focus, but ultimately that expense should be to a better managed company and a more centralized approach to what you're trying to achieve in the marketplace, then maybe having that decentralized. Is that fair to say?

Yeah, that's fair to say and that is what we're doing and you have to put it in perspective and to be fair to the last several years of the business, when these companies were acquired, we -- we told them, they told me in my case that those companies would be supported and they were.

You know, the companies worked well together, but they were left largely alone to continue to pursue the objectives they had, and to entrepreneurially, and now this is largely, for most other than EDEN, kind of a five-year period of time, and you know, governance is another good reason, but I think after that period of time, we've clearly reached a point where we can look at the systems and the processes that can be consolidated, and make us more efficient without interfering with the management of the divisions entrepreneurially to meet their objectives, and that's exactly the process we're going through.

Well I think any expense makes you guys -- makes the company better, and you have to applaud, and that's money probably well spent.

Thank you.

Your next question comes from Michael Lewis with BB&T Capital Markets. Please go ahead, sir.

Can I ask a quick question with regard to accounts receivable we saw a slight spike sequentially in the fourth quarter. Is this mostly due to timing or is there something else here?

It's mostly due to maintenance billings.

Have you been able to receive this going into the first quarter so far?

That's a typical fourth quarter spike and we bill a significant amount of our maintenance contracts renew on January 1st, we bill that in December, and those are typically receivables that are paid probably more quickly than our overall receivables base. So we've -- those would be the things we collect most quickly, so cash flow in the first quarter has been as is typical, relatively strong.

So that could be most of the reason that we saw the decrease in fourth quarter cash flow? Right? Free cash flow?

Yeah. A lot of that has to do with the timing of the -- those -- those kind of spikes in maintenance billings, and they're particularly strong in the third quarter and in the first quarter, in terms of the collections.

Thank you very much. Thank you.

[OPERATOR INSTRUCTIONS] Gary Abbott.

Hi, just got an e-mail and I see you found your 10-K so I assume that you guys are fully SOX compliance in there there's no material weakness? Is that correct?

That's right, and I think we indicated that earlier, yes.

I'm sorry I didn't catch it earlier. Thank you.

At this time there appear to be no questions. I'll turn the call back to you.

Can I make one additional comment? There was a question of the reclassification of last year's balance sheet. We had an acquisition Eden, in December of last year and their process in the past is to send out billings in December for next year's full year maintenance, and we recorded that billing as receivables and the corresponding deferred revenue in the December 31st '03, balance sheet and after a discussion with some advisors, we decided that it was more proper to net the billings and the deferred revenue, because in effect those maintenance agreements were effective January 1st, so we are doing that accounting prospectively, as a full 31-04 so we retroactivity reclassified that piece of our balance sheet, and there was no impact on working capital.

And another thing that we did do is that, in one of our entities we have what's called a longer term lease and there would be some degree of hardware associated with that, and we previously had the hardware aspect of that lease classified as a receivable, and we reclassified that as a nonrecurring contract in progress.

Okay. Thank you, Ted and thank you, Dustin. We appreciate everybody joining us on this call today and if you have any further questions, don't hesitate to call myself or Brian Miller. Thank you.

This concludes today's conference call. You may disconnect at this time.