泰勒科技 (TYL) 2005 Q1 法說會逐字稿

Hello and welcome to today's Tyler Technologies' first-quarter 2005 earnings release conference call. Your host for today's call is John Marr Jr., President and CEO of Tyler Technologies.

Thank you and welcome to our first-quarter 2005 earnings call. Joining me today from our management team are Brian Miller, Chief Financial Officer, and Lynn Moore, our General Counsel. First I'd like to have Brian give the Safe Harbor statement. Then I will make some preliminary comments and Brian will review the details of our operating results. And finally, I will have some observations and we will take questions.

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

Thank you, Brian. This was clearly a disappointing quarter for us. While it was Tyler's 16th consecutive profitable quarter and our cash flow continues to be very strong, we were well off our expectations. Later in the call after Brian has an opportunity to review the numbers, I will offer a little more detail regarding our results and their breakdown.

While there was some softness in other areas of our business, the Appraisal and Tax Division's disappointing results that began last year have accelerated in the first quarter. Based on this, we have made significant organizational changes, including reduction in staff. Changes in management, as well, in oversight, at the corporate level.

Based on the first-quarter results, we will be taking a onetime charge in the second quarter of between 1.2 and $1.4 million. Our expectations for the first half of the year are to be profitable and in the second half of the year our goal and our objective will be that these changes will put us in the position to perform consistent with our original goals for 2005.

Now, Brian, if you could, please review the results.

Thank you, John. Yesterday Tyler reported its results for the first quarter of 2005. For the quarter ended March 31, 2005, Tyler had revenues of $40.7 million, down 2% from the first quarter of 2004. Operating income was $654,000, a decrease of 81% compared with operating income of 3.4 million in the first quarter of '04.

Net income for the quarter was $470,000 or $0.01 per diluted share, compared to net income of 2.1 million or $0.05 per diluted share in the first quarter of 2004. EBITDA for the first quarter of 2005 decreased 46% to 3.4 million from EBITDA of $6.3 million in last year's first quarter. 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 6% over the first quarter of 2004. Software license revenues declined 8% from last year's first quarter, while software services revenues grew 6% and maintenance revenues grew 14%.

Appraisal services revenues for the first-quarter fell 35% from last year's first quarter, reflecting the wind-down of major contracts including Lake County, Indiana and Franklin County, Ohio, and a reduction in our work in Nassau County, New York.

The revenue mix for the first quarter of 2005 was as follows. Software licenses, 15%; software services, 30%; maintenance, 38%; appraisal services, 13%; and hardware and other 4%. 84% of our revenues were software related in the first quarter compared to 77% of our revenues in last year's first quarter.

For the first quarter of 2005, our overall gross margin was 32.3%, compared to 35.8% in last year's first quarter. Software license margins for the quarter declined from 71% last year to 65% this year, reflecting the amortization of our software products released during 2004. The blended margin for software services and maintenance decreased to 28% from 31% last year, reflecting increased costs associated with some appraisal and tax software implementations.

SG&A expense for the first quarter was 11.9 million, or 29% of revenues, compared to 10.5 million, or 25% of revenues, in the first quarter of 2004. Higher health care costs and increased sales and marketing expenses were primarily responsible for the increases.

Our backlog at March 31, 2005 was $140.6 million, compared to 140.3 million at March 31 of 2004 and 142 million at the end of the fourth quarter of 2004. Software related backlog was 11% higher than a year ago, while appraisal services backlog was 25% lower.

We finished the quarter with $25.2 million in cash and short-term investments and 7.5 million of long-term investments for a total cash and investments of $32.7 million. Cash flow from operations during the first quarter was very strong at 7.5 million, compared to 5.6 million in the first quarter of 2003. Our free cash flow after capital expenditures was $6.4 million in the first quarter, compared to $3.8 million in the comparable quarter last year.

This was one of our best quarters ever in terms of free cash flow and it is important to understand the cash flow aspects of our business. With major capitalized projects for Odyssey and Orion software largely behind us, our ongoing business model includes much more modest CapEx levels than in the past few years. Our depreciation and amortization has now more than doubled our CapEx and this provides significant cash flow. For 2005, for example, our depreciation and amortization will be greater than $11 million, and our CapEx will be between 4 and 5 million.

Our capital expenditures during the first quarter were $1.1 million, which includes $482,000 of software development. This is down significantly from CapEx of 1.8 million in the first quarter of last year, as our capitalized software development declined by 67%.

We repurchased 1,169,000 shares of our common stock on the open market at an average cost of approximately $6.93 per share during the first quarter of this year. Our remaining Board authorization for repurchases covers approximately 1.4 million additional shares.

DSOs at March 31, 2005 were 83 days compared to 92 days at December 31 and 80 days at March 31, 2004. Our stockholders' equity at March 31, '05 was $111.3 million, and we continue to have no debt outstanding. I would like to turn the call back over to John for his comments on the quarter.

Thank you, Brian. First, I'd like to break down our lines of business for you and then I will talk a little bit about the changes that we are making, and then lastly update our guidance for 2005.

As we have discussed, our appraisal service business continues to decline. It is now at historically low levels and expected to remain at those levels for the coming quarters. Results in the appraisal and tax software business have also been soft. The development of this product being a new product is similar to what we experienced with Odyssey, that the process of developing, deploying, and general releasing the software, satisfying clients, and eventually recognizing revenue is slow and sometimes unpredictable. And since Odyssey has achieved, we would expect this to continue for some time and then result in more consistent performance. Orion has been well-received by the marketplace. It is installed at 25 sites with many of those clients actually live on the product.

Remember, this approach is not our core strategy. Tyler's core strategy is to build technology and platforms that we can evolved to be consistently competitive in the marketplace and consistently meet our customers' needs. That results also in a more predictable business model and more consistent results. With Orion and Odyssey reaching general release, this phase of creating these platforms so that all of our core products have that ability will have been achieved, and going forward, we would expect that our results will be more predictable and more consistent in our software business.

The financial systems division, which accounted for nearly 60% of our revenue in the quarter, continues to perform well and grew 17% over the first quarter of last year. Although license revenues were not very robust, this is largely the result of timing of various projects and typical market issues. Our market presence continues to grow. Our sales channel is strong and expanding and the competitive position of these projects product is industry-leading.

Our Courts and Justice division performed in line with our expectations in the quarter, and Odyssey is performing well in the sites where it is deployed. This supports our sales process well. We generally do not announce contracts until we have unconditional contracts that are fully funded and have consent from the customer on the announcement of those. But to provide an adequate picture of the outlook for Odyssey, I will say that the processes we are involved and continue to move forward, and there are a couple of processes involved with Top 20 counties in the country that we would expect to be announcing very soon. These contracts will be in the range of 4 to $5 million contracts.

We are also in the process, while Odyssey was originally targeted at the high end of the market, in pushing that down into a traditional midsize marketplace as well as into the installed base, and the reception there has been encouraging to start with.

We continue to serve our customers well, with very low turnover. Along with new customers coming online, our recurring maintenance revenue has actually grown 41% over the past two years to 15.4 million in the first quarter of this year. Excluding the additions of the Eden maintenance, our growth would have been 30% organically.

Now I will review some of the changes we are making to address the challenges we have in our appraisal services business. Really we're doing three different things. First, we are reorganizing and resizing the appraisal service and tax division. Secondly, these changes have resulted in considerable changes in the division's management. And lastly, we have made adjustments at corporate to serve our needs better and better reflect our current organization.

With regard to the divisional reorganization staff reductions, we have eliminated around 125 positions. About one-third of these positions would be people rotating off projects that are being completed, but around two-thirds of these are permanent positions in various levels of management and administration of the division. The result of these changes will reduce our annualized cost and run rate by about $7.5 million. We will also be taking a charge in the second quarter as a result of this of 1.4 to $1.6 million, mostly related to severance and other separation cost.

With regard to the changes at corporate, our Company has changed dramatically over the last five years or since the original organization was created. And we have had three senior executive positions at corporate that reflected the needs we had at the time when we were extremely active in the acquisition world, when we had debt and actively managed banking relationships, and today our needs are somewhat different than that. Today, we also have new needs that have emerged and those basically are the operational management and oversight of these divisions, where we need to have better systems and better visibility and staff needs to be deployed on that. And we also have the needs to, on an ongoing basis, support our external reporting and governance needs, which obviously are at higher levels than they had been in the past.

As a result, resources are being deployed and systems are being implemented for the oversight of the divisions. As well, we have created an internal audit function which will eventually be staffed with three full-time positions. And as a result of this, we are consolidating the executive positions into two from three, so we are eliminating one of those positions, and the result of that is that Brian Miller has become the Chief Financial Officer of the Company and Lynn Moore will stay with us as General Counsel.

Now lastly, what I would like to do is update our guidance for the balance of the year. Basically, the disappointing results of the first quarter and the charge in the second quarter will mean that we will be profitable in the first half of the year, but obviously at considerably lower levels than we first anticipated. We earned $0.01 in the first quarter of the year and we would expect to have our results in the second half, including the charges, to be at or marginally above those levels. So our EPS for the first half of 2005 will be in the $0.02 to $0.04 range.

Our objective and the goal of the changes that we've made is that our ability to execute in the second half of the year will be the same as we intended it to be or believed it to be going into the year. So consequently, our expectation for the second half of the year would be earnings in the area of $0.13 to $0.16 per share.

Revenues for the year are expected 172 to $174 million. Appraisal Service revenues will decline 30 to 35% and software related revenues will grow 8 to 10%. Our effective tax rate will be 41% and our CapEx is expected to be 4.5 to $5 million, well below last year's level. Now we will take questions.

(OPERATOR INSTRUCTIONS) Charles Strauzer, CJS Securities.

If you can, just walk through a little more in detail if you can about could the action plan you're putting in place now to kind of streamline the organization improve the internal communications and reporting, the types of systems you might be putting in place? Also, it was only about a month ago that you gave guidance -- obviously, there was a lack of communication on certain parts there internally that caught you off guard and us off guard as well. Just reassure us and give us some more detail on what plans are being implemented to prevent this going forward.

Sure. Well, a number of these changes or some of these changes and some of these issues, obviously, we had some awareness of and we were in the process and we have talked about kind of a transitional approach to our Company. We had deployed a person from corporate out into that divisional area. We had begun to have certain systems implemented to get better visibility and better information from the divisions as we saw the weakness start to manifest itself late last year.

There were a number of things in their business that continued to evolve more rapidly than they expected them too. We were less aware of that at the corporate level than we would like to be. The changes we are making clearly will allow us to drill down literally into projects and into the specific things that drive revenue recognition and drive the financial results going forward so that we will get better visibility on that.

As I indicated, we have been in the process, I think, of evolving how our corporate organization exists to better reflect and serve the needs we have as a company today. At this point, the two significant needs we have obviously are in the external reporting and governance area. We really separated that into a staff that can, on an ongoing basis, manage that and eliminate the conflict of managing those processes with running our business.

We have also established organizational oversight with some of the lead people from the divisions that have the experience in running these businesses, and within Tyler we know have been very accurate in having visibility within their own divisions. So we have made two significant changes there, and as a result of making those changes, we don't need the level of executive leadership that we have had historically at Tyler, so we have consolidated those three positions into two.

And what is the thinking to make the unit heads, if you will, more responsible or ultimately give them more say so about getting back to you and making sure that they are getting from down the line as well?

Well, different divisions -- certainly some of our divisions have done this exceptionally well. We have a record of 4, 5, 6 years of certain divisions being extremely accurate, projecting exactly where they are and having the right criteria, followed to identify changes in their business and react to it. And in this particular division, that did not exist as well as it does in other divisions, and we are implementing those systems that have been very successful for us in the other divisions in there, and then we are integrating those so that we get a full and clear picture of Tyler and where it is and what is changing in our business so that we do see these things earlier and we are able to make the changes that we are making now earlier in the system.

Got it. And just generally about the pipeline overall, not just about Odyssey, but in general, what are you seeing there? Are you seeing any pushback from clients? Are they forcing these deferrals at all? Are they forcing delays in implementations because of budgetary issues? Talk a little bit more macro if you can.

In the financials area, we actually did have a little bit of a soft quarter, certainly nothing in relation to what we saw on the appraisal side. But that is not anything I would read into. That market is pretty good. We had a couple of deals that did not get funded. We had a couple of deals that slipped, which are things that happen, but again, I don't see as out of the ordinary. The pipeline, the activities, the demos in the competitive position of all three of those products is very strong and we are very comfortable.

As we indicated, it grew 17%. It is really going on five years of high teens to 20% annual growth, and we really believe we've done right things there for that to sustain itself. And we believe the external issues in terms of the marketplace and our competitive position and the consolidation among some of the competitors is going to enable us to do that. So that story is unchanged and it is obviously becoming proportionally a bigger part of our business, so that is a good thing.

On Odyssey, I did indicate that if I were to just say we've got a good pipeline, we feel good about it, that would sound obviously very repetitive to what we have been saying for some time. We do not announce deals until contracts exist that don't have conditions on funding or anything else, and the customer is at a point in its selection process where they're comfortable going public with that. And we are short of that in some sales processes, but we are clearly at a point where, as I indicated, there's a couple of deals that are nearing that point that we would expect to be announcing relatively soon.

We have some early deals back into their installed base in the traditional midsize market, and I think that is maturing into a more consistent player and contributor. Most of their contracts are a percentage of completion, which is part of the reason their results have been a little weak going backward, but they are also a reason why they will be more consistent going forward, now that we are into those implementations and the new awards are little more consistent. So, Odyssey, as we have said, is not the explosive division that maybe at one point we had an expectation of, but it is becoming a very consistent contributor to Tyler. So we feel good about that.

We have also indicated the appraisal service business, our planning is that it stays at the lower levels that it is at. It is a cyclical business and it could very well come back to a higher level, but for now, for our planning and yours, we are going to assume that it will stay generally at that level.

Thank you.

David Yuschak, Sanders Morris Harris.

Could you maybe help us a little bit on the gross margin too? Was there some issues with some of your contracts where you did have some cost overruns and some execution issues that may have developed that are keeping you from recognizing revenue there? Could you just give us a sense as to if there is any -- it does sound like from what you're saying there were some corrections that you're taking place, that there are execution issues that have been out there that have been nagging at you that are preventing you from recognizing some of the business that you already have booked.

On the license side, as we have mentioned before, some of these initial implementations of the Orion system, because they are the first implementations in the various spaces we're going into, we have a more conservative revenue recognition on those, and they are either recognized on a percentage of completion or in several cases on a completed contract method. So we recognized little or no licenses on a number of those contracts and are recognizing services revenues only.

So on the license side, we have got the full amortization in our financials, but have not gotten to the point in those projects where we've reached those milestones that enable us to recognize the license revenues. But that clearly is depressing the license revenue side to a level this quarter that is the lowest we've seen in some time.

On the services side, basically those same projects, the level of cost we incurred during the quarter as we have worked through this project have been higher than we would normally see in a more mature product, and that depressed our services and maintenance revenue -- or blended gross margin pretty much specific to those particular products, and just kind of a factor of those initial installations of that product.

Are you saying that it's just because in initial installations that you're running into some issues in getting them done? Or just new because it's something that you're not familiar with?

That is somewhat typical in the process, David. So we are in the development process, say, in Orion. A lot of that development was actually capitalized. As I indicated earlier, we have actually deployed that product in about 25 sites. I think 15 of them are live on different products. And as part of the natural maturing of a product, you learn issues that would make the system better, perform better for the client that you deal with. And it is really the same resources that we are developing in the first place, and it is really kind of a late stage of the development of a product anyway.

But now those resources are deployed a little differently and they are expensed instead of capitalized. So we have still got the dynamic of higher amortization and resources that were capitalized previously that are still working on the same product, maturing it and making it more marketable that are expensed now. So obviously, without the higher level of license sales, that puts some pressure on gross margins for the time being.

You indicated there's 15 other installations where -- those things went well or are they just more higher cost in getting this done stuff done initially, or --?

Again, I think 15 of them are live. The product is relatively new. People are generating tax bills and values on their properties and achieving the things they want to with those systems. With any new product, obviously, we go out and visit with those clients and we learn of needs they have. In the software business, it is not always tangible. I think it has gone well in the sense that the product does what it was designed to do, that it meets the requirements of the contracts we have with the clients.

But there are other things you can add to make the product that much more valuable to us and the clients, to satisfy the client further. And those are things that we're doing. Our experience is if we go beyond the contract maybe specific need, but go to a point where obviously we satisfy those clients further in several states and a couple dozen clients, we end up with a product that is much more marketable. And we are in that phase of the deployment of the system.

As far as that respect -- I can understand when you're launching new product that there is a loss leadership thing here until, like you said, you get fully implemented, get the bugs worked or issues enhance the product. Is for the most part a lot of that behind you or you think that's still going to be out there for the next three, six months on Orion?

It will be there in a declining way for the balance of the year. Q2 will be for Orion not a lot different than Q1, and then we will see a shift in the second half of the year of people being back on core development issues, if you will, and a smaller percentage of those resources on, say, customer issues or supporting the rollout types of issues.

And obviously, then forever you have resources deployed on customer issues as your customer base grows, but it will be more proportionate to the revenues there.

One last question. Beginning of the year, you did make some changes in sales and marketing in both Court and Justice and I think Orion as well. Could you just give us an update as to how that is developing and what things you are seeing out of that, those particular changes that either encouraging or not so encouraging?

That is mostly, I think, in the software sales area (multiple speakers) of sourcing and appraisal. To be honest with you, we will focus on maturing and getting strong customer references out of the Orion project. So we will not be as aggressive with that over the coming few quarters until we are in a position to deploy many systems at the same time; with an immediate customer base of 25 clients, that is quite a bit. We have said before we don't think we will be sales constrained there. We think we will need to mature the organization as we are to have the capacity to deliver the business that is out there. So we are not as focused on the development of that in the marketplace right now as we have been.

And as I indicated earlier, many of those resources are kind of redeployed or more focused. It's the same team on the Courts and Justice side. In addition to staying active in the high-end market and, as I indicated, some results on the horizon for that, we are going back into our traditional customer base and introducing the system there and into the midsize market.

That had some product needs that had to be achieved before we were able to do it. Our high-end court system is more of a case management system and the midrange is more of a fully integrated or justice system, which really has a set of broader applications. So with that largely complete, those resources have been redeployed into the customer base in the midsize of the market. And I think as I indicated, we have some larger accounts that will be coming online which will be a good result of that, as well as smaller deals into the installed base that we won't be announcing individually but are starting to have some traction.

So some of those changes you made on that software side for Court and Justice at the beginning of the year, you're getting encouraged by (multiple speakers) changes made there?

Right.

Thanks.

Michael Lewis, BB&T Capital Markets.

Brian, is the current guidance worst-case?

Not necessarily. We think it is the most reasonable and there is a range there. That is to say, we think it is reasonable guidance; it's based on the best information we have. It doesn't have a lot built into it that we don't have pretty good visibility over right now. So I would say what we have in there are things that we think we have pretty high visibility. But we think it is reasonable guidance.

That's key -- the visibility aspect. So you pretty much understand what needs to happen in order to get to the low end, high end of the current guidance?

That's correct. And we're monitoring those things very carefully on a very frequent basis.

And not to -- I hope I am not repeating someone else, but can you go into some more detail on what types of internal processes you have set up to monitor the different segments' operations? Are you buying new systems? Are you tracking differently? Can you just give us some more information on this, please?

We're not really buying a new system. In fact, it is important to point out that our historical reporting and our external reporting remain very accurate and very sound and I think a very good system. The management information within periods and looking forward is a little fragmented by divisions. And it is important to point out there is well that that actually has served us well, letting the divisions originally, subsequent to their acquisitions, operate in some ways largely as they had and keep their entrepreneurial way about them has served us well.

Even the appraisal division, as we know, grew from a $30 million Division to into the mid-50s after we acquired it and it became a very good contributor to earnings and cash flow within Tyler. We have been in the process, obviously, of evolving that and having a little more oversight at this point in time and we have escalated that.

Some of the examples would be, again, in some other divisions there are more sophisticated systems, more regular management meetings, reporting all the way down from a product or project manager that's managing a software implementation or appraisal service project, and having the ability to pull those together on a regular basis and literally know when milestones are being met, when billable days are being achieved, etc. and rolling that up to have real-time information that we can make better decisions on.

And it is those processes that exist in certain divisions that are being extended into the other divisions, the leadership of the financial managers in the divisions that have those, taking more of a lead role throughout Tyler to consolidate that and provide it to us as senior management. And as I said, as a result of that, those resources are being deployed differently. And then in addition, organizing an internal audit function and external reporting function to not interfere with the management of that we believe will position us to have better visibility and make better and more well-informed decisions going forward.

So how long do you anticipate it will take to have these -- I guess you would call them new systems aligned throughout the organization? In other words, how long is it going to take for the people to learn what the other people doing successfully?

The other people that are doing it successfully are being leveraged. We are adding some resources to those groups and extending them into the other divisions in order for that to be helpful to us and to provide us with valuable information sooner rather than later. That cannot mean immediately, obviously, because there is a learning curve for those people going into those other divisions.

But I will say I really believe that on a weekly basis, the information we get will improve going forward and it already has. It is how we have discovered where we were and are, and it's based on that information the decisions were made in terms of the restructuring.

So I guess to give you an idea, I think what we have today is meaningfully better than what we had just a couple of months ago, but I certainly think over the next, say, one to two quarters there will be room for further improvement and then at that point I think we will be at the level we want to be at.

And just a final question, more positive than negative. You talked a little bit about 20 large counties. Were they looking at the Odyssey software?

I must have misspoke. I mentioned two counties that, to give you an idea of their size, are within the top 20 counties of the country in terms of size. So we have two counties that are top 20 sized counties in the country that, again, are far enough in the process that we have reasonable certainty it is our business, but not quite far enough to specifically announce the names and numbers. And those contracts will be around 4 to $5 million each.

Okay, thank you.

Gary Abbott, Merriman Curhan Ford.

First, I'd like to say congratulations to Brian and (indiscernible) my best wishes. So some questions. First, detail. What is the actual software backlog number for the first quarter? I (multiple speakers) you said 11% growth.

The first quarter total backlog was 140.6. Of that, 31.1 is appraisal services and the 109.5 is software related, which includes maintenance, licenses, and services. And a year ago, those numbers were 140.3 in total, 41.5 of appraisal and 98.8 of software.

You mentioned you capitalized a little under 500K of software in Q1. Do you expect that to be a comparable cap rate sort of -- really going forward into the future, or do you expect any changes there?

It would be in that general area. For the year, it should be in the $2 million and under range.

Okay, in the guidance, if you were to look of the software business, the city financials were about 60%. Do you anticipate that will be roughly where it finishes out the year or just given what you said about the Courts, do you expect courts to have a strong comeback? What sort of proportion do you expect financials to represent in the year?

I haven't done that exact math, but I would say that that would hold pretty much consistent throughout the year. I do think Courts is, as I said, in a mode where they will start to see a little more consistent growth, but it will only be in line with financials. So I would say it would stay at that level and if we think appraisal is going to be flat, it could be a couple of points higher actually.

Okay, on the -- within the guidance that you have given for the year, do you have one of these 4 or $5 million sort of Odyssey deals rolled into it?

Those deals are percentage of completion deals, and given where we are in the year, that there would not be expected to be major contributions to revenue and earnings from those deals.

Mostly no is the answer.

Mostly no, so presumably --

There is always a little bit of new business toward the end of year in a forecast, but the vast majority of their plan is based on contracts that existed at the beginning of the year, and their new business is, we are saying, is at least as good as we would've expected. So that there is very little new business, and whatever there is, obviously it's been accounted for at this point. So most of those revenues will probably begin very late this year and be mostly in next year.

John, if I can sort of peel back the onion, you have been hesitant to talk about very large Odyssey deals up until right now, because years ago we sort of were expecting them and none ever came through. So just kind of given your willingness or your change in position, is it fair to assume that short of maybe some contingencies you actually won one and maybe it is funding or something like that?

Yes. We have one (multiple speakers) in the past, but they obviously weren't predictable in terms of timing and we stopped doing that and that is our practice now. But I thought to today basically say the same thing we have been saying would not be providing an accurate picture of where we are. There are two deals that we are certainly the only solution they are considering at this point. They are in various stages of what I mentioned earlier, contracts being finalized, funds clearly existing to fund them, and obviously getting the consent of the customer to specifically announce them. And so we have as much certainty as you can that those deals are ours and will happen relatively soon, and when we meet those criteria I mentioned, we will announce them.

Another question. If you look at the guidance first half of the year versus second half, I hear a revenue number first half in the low 80s and I hear a revenue number in the second half in the low 90s. Given the trend in software backlog -- actually, I was surprised the number was good given the quarter you put up, but even so it's sort trickle up. Just sort of given that direction, implicit is that you have to win a lot of new business. Is that -- so you are pretty much guiding off the pipeline more than the backlog? Is that a fair assessment?

I guess there's some of that. The suffer traditionally has been stronger in the second half and it does grow. Maintenance grows every quarter. Our professional service billings has been growing consistently. And the core part of the business grows more consistently obviously than the licenses, but as we extend that out, that is basically what it comes out to.

And more of this is because of the nature of the Orion projects and with more Odyssey in there, more of these are -- and to some extent some of the larger financial systems projects are percentage of completion, so more of that backlog, again, we have visibility over when we expect that to come out.

Okay. And then last question -- I don't follow the politics as closely as you do. Is 2005 a relevant election year? Is there anything political about this year that would be any different? I usually think of the even numbered years, but --.

No.

Thank you.

Brian Kinstlinger, Sidoti & Co.

Just a couple of questions. I'll try to be brief. One question related to margins. You were talking about it for a while and I just wanted to talk about the software. It has been in three of the last four quarters in the 60%, now in the low 60% range, and historically you've been much higher. I know you have talked about some reasons so I don't want to look at the past. But I want to look at the future, and when do think you can get back to the 70 percent and higher range?

Clearly we -- actually it has bounced around for the year -- last year it was 71% on licenses and fourth quarter of last year it was 75%. Clearly, the costs are primarily fixed there. It is the amortization of our development costs; we have products that came online last year were released and now we have that amortization in our costs every quarter. There is relatively little of that left to come, and so the level of amortization and the cost of software licenses is pretty close to where it will be. And so what drives that is the level of revenues, licensed revenues that we can recognize in any given quarter.

Basically at about $7.5 million, you are closing in on 70% gross margins as I look at it historically? Is that --?

That's pretty much right, yes.

The other question I had was related to Court and Justice and appraisal. Should the high level -- has there been any change of who is running that business now? Obviously, there's been some management layoffs. Who is running those two at the upper executive level please?

In appraisal and tax, both software and appraisal and tax services, really the organization is fully reorganized. And there were very senior positions that do not exist anymore and some of those people who won't be here anymore. I would really rather not get into specifics of who they are on this call, but yes, there were people that had president or vice president divisional level jobs that won't be with the company anymore.

And at Court and Justice, is Glenn still running that business?

Yes, he is.

So it sounds like for a long time we have talked about rightsizing this business and making it a little bit leaner. It sounds like the Company is headed in that direction and it is encouraging, so earnings power should be a little bit stronger. And I'm wondering -- you have a sizable position in cash and I'm wondering in the past you've done some Dutch auctions, I believe, if I recall. It that something you were thinking about? It seems you have the ability with the stock prices now (ph) to buy about 20 to 25% of the stock; there is a lot of shares out there. So I'm curious what your thoughts are -- and you have been aggressive in the past on buybacks -- what your thoughts are right now.

I don't think we would be doing anything at that level. As you said, in addition to the Dutch auction we did a couple of years ago, we have been active in the marketplace and we have been able to buy a considerable number of shares just through the market. And that would be our approach going forward.

We have got an authorization of 1.3 million now. At the right levels, we'd expect to execute on that. And that's more of an ongoing process. We clearly do want to stay in a position to execute on strategic and appropriate acquisition when they present themselves and add value to the Company other ways as well. So I think our practice going forward would be more like it has been over the last year or so.

Okay, and the last question I have -- if I look at 2003, you had an operating margin of almost 11%. Clearly, things have happened that have changed that, and now if I look into 2006 without sticking you to too many numbers here, clearly you're cutting a lot of costs out of the business. Do you think it is reasonable to assume you can achieve that margin in '06 or do you think that it is going to take a little bit longer than that?

Yes, and as I said, what we would really like do is we are disappointed in obviously what's occurred. We've taken, I think, pretty aggressive action in terms of the staffing levels and the organization to address that; that is obviously going to clearly show in the results of the first half of the year. But actually, we expect the second half of this year to be very consistent with what our original expectations were, and that is what we would like to do, and be going into 2006 with that experience behind us and a better outlook.

Those 00 - those second half results -- I haven't looked at the numbers close enough, but would that assume a little bit lower revenue and a little bit higher margin, given the layoffs? Than you were first looking at? Maybe the same (indiscernible) numbers, but is it going to be lower revenue offset now by a little bit higher margin because of some of the layoffs that you have had?

Maybe to a slight extent, but most of the headcount reductions we've made we don't expect to have the effect of lowering revenues. They are really getting the costs in line with the level of revenues that we have communicated.

I don't think the revenues in the second half will be very much below our original expectation. That hasn't changed much.

This just gets the costs in line with the '06 expected level of revenue.

The only reason I say it, it appears that if you dropped $7 million in annual expenses and had the revenue expectations being the same -- believe me, by no stretch of the imagination am I telling you to put out bigger numbers -- it would seem that your earnings numbers would be better.

In the second half of the year?

Right. If you have the same revenue expectations but yet you cut out $7 million in annual expenses.

They are what they are. There may be some other dynamics at work against that, but the issue of higher amortization and lower CapEx and therefore more people being expensed as we indicated will continue. So they must be somewhat balancing.

All right, thanks.

Jack Salzman (ph), Kingspoint (ph) Partners.

I guess I have -- I don't want to beat to death the more granular issues, but you have now had three bad quarters in a row. You sort of sensed this from the first time you revised the guidance. And I'm just wondering, particularly in this last disappointment, what has happened in this three months that you guys missed? What process broke down that you did not anticipate? Is this a managerial issue? It is an execution issue? Are the guys just coming back way too optimistic about the orders they're going to write?

It just seems that there's a disconnect between the expectation levels, and this has been going on now for nine months. So I wonder, John, if you collaborate a little bit on what you have instilled in terms of change other than obviously you're getting rid of some people, you're downsizing. But there seems to be an issue of either you're pricing wrong or the product is wrong or the input from the sales force is just way too optimistic, because this has been going on now nine months. So I wonder if you could address that issue, particularly in this last three months.

Yes, well, I think it is really a combination of all of the different things you mentioned, and so we agree with you from that perspective. I will point out that if you look at the company, the way it's organized and the way the revenues break down, this is about one-third of our business that has not done a good job projecting what its results will be, and as a result, doing the right things in terms of managing its business. And we agree with you from that perspective.

The other two-thirds of the company for years now -- and it has continued into this year -- have had exactly the opposite results. They've been extremely accurate in projecting that and managing it and making the right decisions based on that information. And we are at a point, I think as you are, based on your question, that the misses that began in that division last quarter that we were kind of as a process making adjustments to deal with, we are at a point where that is not acceptable. And very significant changes, not just in staffing levels and cost levels, but in the organization, the accountability within the division, and the oversight outside the division, which is very active now, has been changed considerably, and considerable changes have made to accommodate that.

We just our quarterly meeting and the management from that division as well as the people that provide the oversight of that division are very different people with very different processes in place. And we appreciate that regardless of what we say on this call, our results will have to be more consistent with our guidance going forward to have people appreciate that those are the right changes.

Specific to the appraisals operation, John, obviously even in the best times it is a cyclical business. It creates a volatility in the earnings streams, and this is not just having a bad year. This is a major pullback in this business. You are down significant revenue streams. What is the reason for keeping it, trying to fix it up, trying to get new people to get it back on its feet? What asset does it bring in the totality of the company that you envision in the next three to five years? And can you actually bring it to a point where the cyclicality will be minimal at best, or again, is that a hope?

I'm trying to understand why you want to keep this business now that it has basically fallen apart, why you want to put time, effort, and money into rebuilding it.

Well, we have an asset that is not performing. And I think for it to have value to us or to anyone else we have to fix that, and it has to perform better and it has to have a better and more credible outlook. So we have said that before and I think this quarter, taking pretty dramatic steps in order to achieve that.

It is not the most strategic asset we have. It is something that is a complement to the other things we do for our customers. 2001/2002 it was a great performer, generated a lot of cash for the company and has been a contributor. But it is not the most strategic asset. We need it to be in better shape and perform better, and at that point, it will have value to us whether it is internal or externally.

I would agree with you -- we will not allow this business to fluctuate up and down in the way it has historically, given that it is not strategic, it does not have that kind of value to us to have it have explosive growth to be followed by this type of a decline and put this kind of pressure on our earnings. So that is something we clearly will avoid going forward.

Just to switch gears on different divisions. Do you feel that the price points are correct in all your product lines right now? Do you feel that the execution by the sales force is where you want it right now? I wonder if you could elaborate a little bit on that.

In the other areas, we do. We are in a position actually in the other areas to be more aggressive on price if we had to be. We are always concerned about the direction of the marketplace, but there have not been any indications that the pricing is becoming more competitive or there is pressure on that. Our pricing has stayed generally the same for a number of years and our model just assumes that it stays at those levels. As I indicated earlier, the recurring revenue continues to increase very nicely, and that puts us in an even better position to be competitive when we need to be. But we are not seeing that kind of pressure in the marketplace.

Okay, thanks.

George (indiscernible), Fidelity investments.

Where do you see your greatest opportunities going forward?

I think the strength of the Company is still the financial areas and the moves we have made to broaden the geographical reach of that sales channel and the presence we now have in states that we weren't in just a year or two years ago is the most predictable and sustainable growth that the Company has. As I indicated earlier, the Courts and Justice division I think has gotten to a point in terms of the reception and maturity of the product and the referenceability of it and its customer base that it is going to be a more consistent provider going forward.

So certainly in the interim term, the next couple of years, those will be the strength of the Company. And then subsequent to that, our expectation is that Orion would start perform as Odyssey is now and be a contributor as well.

(OPERATOR INSTRUCTIONS) At this time, there appear to be no more questions. Mr. Marr, I'll turn the call back to you for closing remarks.

Thank you for joining us today and if there are any further questions, please feel free to call Brian Miller or myself. Thank you.

This concludes today's Tyler Technologies' first-quarter 2005 earnings release conference call. You may now disconnect.