泰勒科技 (TYL) 2005 Q2 法說會逐字稿

Hello and welcome to today's Tyler Technologies second quarter 2005 earnings results conference call. Your host for today's call is John Marr, Jr., President and CEO of Tyler Technologies. Mr. Marr, please begin your call.

Thank you, Judy. And welcome to our second quarter 2005 earnings call. Joining me today from our management team are Brian Miller, our Chief Financial Officer, and Lynn Moore, our General Counsel. First, I would like Brian to give the Safe Harbor statement; then I'll have some preliminary comments; Brian will review the financial results; I'll offer some additional observations; then we'll take your questions. Brian?

Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information. It may include projections concerning the Company's future prospects, revenues, expenses, and profit. 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. The second quarter was Tyler's 17th consecutive profitable quarter. We're pleased with the considerable improvement we realized over the first quarter and encouraged by a number of clear indications that the recent restructuring is contributing to better results. With our total -- while our total revenues were off slightly as compared to the second quarter of 2004, our license and support revenues were up, indicating strong performance in the new business market, as well as continuing our experience of high customer retention. During the second quarter we made considerable changes to the organization of our appraisal and tax divisions, as well as some changes to our corporate organization, especially as it relates to divisional oversight. We are pleased that early indications suggest that these changes are helping us achieve the desired results.

As we stated during last quarter's call, our objective was to make the necessary adjustments and then return to a run rate consistent with our original plan for 2005 with an organization capable of building on that foundation going forward. In the second quarter, before the restructuring charge, Tyler earned $0.07 with CapEx of only $500,000 and D&A of $2.5 million. There's certainly more we can do, but these results suggest to us that we're on the right track. Now, I'd like Brian to review the numbers then I'll add some additional observations and we'll take your questions. Brian?

Yesterday Tyler Technologies reported its results for the second quarter of 2005. For the quarter ended June 30, 2005, Tyler had revenues of $43.2 million, down 2% from the second quarter of 2004. Operating income was 3.2 million, a decrease of 36% compared with operating income of $5 million in the second quarter of 2004. Results for the second quarter of 2005 included a pretax restructuring charge of $1.3 million. This charge relates to the actions we announced in late April and is primarily comprised of employee's severance costs and related fringe benefits. Excluding the restructuring charge pro forma operating income for the second quarter would have $4.5 million, a decline of 11% from last year's second quarter. Net income for the quarter was $2 million or $0.05 per diluted share, compared to net income of $3 million or $0.07 per diluted share in the second quarter of 2004. Excluding the restructuring charge pro forma net income was 2.8 million or $0.07 per share, a decline of 7% from the June 2004 quarter. EBITDA for the second quarter of 2005 decreased 26% to 5.8 million, from EBITDA of 7.8 million in the second quarter of 2004. Excluding the restructuring charge, EBITDA for the second quarter would have been 7.1 million, down 9% from last year. Reconciliations of net income to EBITDA and pro forma earnings are provided in our earnings Press Release.

Our software-related revenues, which include software licenses, software services, and maintenance increased in aggregate 5.1% over the second quarter of 2004. Software license revenues increased 6.3% over last year's second quarter, while software service revenues grew 1.50% and maintenance revenues grew 7.8%. Appraisal services revenues for the second quarter declined 34.2% from last year's second quarter, to $4.6 million, reflecting the completion of some large revaluation projects that contributed to revenues in 2004. The revenue mix for the second quarter of 2005 was as follows -- software licenses, 18%; software services, 31%; maintenance, 37%; appraisal services, 11%; and hardware and other 3%. Overall, 86% of our revenues were software-related in the second quarter, compared to 80% of our revenues in last year's second quarter.

For the second quarter of 2005, our overall gross margin was 37.6%, compared to 38.6% in last year's second quarter. The overall gross margin for the six months ended June 30, 2005, was 35%, compared to 37.2% for the six months ended June 30, 2004. These decreases were due to cost inefficiencies associated with the decline in our Appraisal Services business, efforts to support our recently released Orion products, as well as additional amortization expense related to new software products released in 2004. Software license margins for the quarter were up from last year at 71.1%, versus 69.9%. The blended margin for software services and maintenance decreased to 31.8%, from 33.2% for the same quarter last year.

SG&A expense for the second quarter was 11.3 million, or 26.1% of revenues, consistent with the second quarter of 2004 of 11.4 million or 25.8% of revenues. SG&A expense was also down sequentially from $11.9 million in the first quarter of 2005. Decline in SG&A expense reflects the results of cost management efforts, including reduced overhead costs resulting from the restructuring actions taken during the second quarter. Our backlog at June 30, 2005, reached a new high of $153 million, compared to 147 million at June 30, 2004, and 141 million at March 31, 2005. Backlog-related to our software business, which excludes backlogs from appraisal services contracts, was 125 million at June 30th, an increase of $15 million or 14% from the first quarter of this year. Appraisal services backlog was 29 million at June 30th, a decline of 2 million or 8% from March 31st. At June 30, 2005, we had total cash in investments of $29.6 million. We had negative cash flow from operations of 269,000 for the second quarter and negative free cash flow of 828,000. For the six months ended June 30, 2005, Tyler has generated $5.6 million to free cash flow, compared to 9.3 million in the six months ended June 30, 2004. The decrease is attributable to lower net earnings, including the restructuring charge, which was paid primarily in cash. In addition, cash from operations in the prior year included substantial collections of accounts receivable, primarily due to completion of two large appraisal contracts. Cash flow during the second quarter is typically slower for Tyler than other quarters due to the timing of maintenance billings.

During the second quarter, we repurchased approximately 411,000 shares of our common stock on the open market at an average cost of approximately $6.47 per share. For the six months ended June 30, 2005, we repurchased a total of 150 -- I'm sorry, 1.58 million shares of our stock at an average cost of $6.81 per share. Our capital expenditures during the second quarter were $559,000, which includes $295,000 of software development. This is down significantly from CapEx of 1.8 million in the second quarter of last year as our capitalized software developments declined by 72.7%. We expect that capitalized software development will remain at relatively low levels for the foreseeable future. Amortization of software development costs was $1.4 million in the second quarter. Days sales outstanding and accounts receivable as June 30, 2005, were 97 days, compared to 92 days at December 31st. The decrease in DSOs at the second quarter reflects the high level of annual maintenance billings at June 30th, which increased receivables while the revenues are initially deferred and amortized over 12 months. Our stockholder's equity at June 30, 2005 was $111.1 million, and we continue to have no debt outstanding and $30 million of available credit under our resolving credit facility. Now, I'd like to turn the call back over to John for his further comments.

Thank you, Brian. As we have discussed, during the quarter we eliminated 120 positions, representing $7 million in annual costs. This process has been completed and we'll be moving forward. For the second quarter, appraisal services results were in-line with expectations and gross margins expanded 400 basis points. We're experiencing a better market and with some recent awards, we have good visibility for the balance of the year. On the software side of appraisal and tax, we've also made considerable progress led by the $10 million award of the statewide software and service contract for the state of New Jersey. While Orion remains a new product without the broad market presence or customer base required to perform well financially, we are making progress. The Texas projects performed well during the quarter, allowing us to recognize certain revenues ahead of schedule. We were successful in signing some new business and we have good visibility on other meaningful opportunities. It will take some time for Orion to contribute financially as was the case with Odyssey. But we're pleased with the progress we are making with our customers and the reception Orion is receiving in the market place. As I've said before, this is a task that we executed with Odyssey and we are in the middle of with Orion. Once completed, we will have excellent products built on architecture and technology that will allow us to deliver more consistent results.

For the quarter our Financial Systems divisions represented 60% of Tyler revenues, and were up 8% over a strong second quarter in 2004. We continue to improve the competitive position of these products, expand the capacity and quality of the sales channel, as well as broaden our market presence. In the second quarter alone, Tyler's financial products added 47 new named accounts in 25 different states, supporting our position as a market leader. Our Odyssey division is executing well on the business it has. They continue to have a strong forecast and a large county and state market place where the product was first launched. And at the same time, we are having success offering the product to our traditional mid-market customers. Going forward we expect Odyssey to perform in-line with our other established software divisions. For guidance our outlook for the year as a whole has not changed since the last conference call. Our guidance for the second quarter was for EPS of $0.01 to $0.03 after the restructuring charge. We exceeded that estimate partly because restructuring charges were slightly below our estimate. But primarily because some of the software and service revenues that we had forecasted to occur in the second half were pulled forward into the second quarter. This does not change our estimate for the year, it just changes the timing. We now expect EPS for the second half of 2005 of $0.10 to $0.14 on revenues of 171 to 173 million. Appraisal service revenues will decline 30 to 35% over 2004 levels, and software-related revenues will grow 6 to 8%. We expect an effective tax rate of $0.41.3, total CapEx of around $3 million, and total D&A of 10 to $11 million. Now, we'll take questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of David Yuschak with Sanders Morris Harris.

Gentlemen, good quarter for you. Certainly does suggest that your problems were temporary in nature. Encouraging to hear what you have to say about the second half. One thing, Brian, on those receivables from the second quarter to the first quarter had a good pop. Could you maybe explain that, even the your DSOs remain at the end of the year were only up modestly. That was a pretty good pop I think quarter-to-quarter if I remember right, I don't have the data right at my hands.

Our financial systems division primarily our MUNIS product group, bill their annual maintenance annually at June 30th, so that always gives us a strong increase in receivables at June 30th and in turn, leads to strong cash flow as we collect those during the early part of the third quarter. And as that division continues to grow and those maintenance revenues continue to grow, that pop becomes more significant each second quarter.

So then cash flow issues about free cash in the quarter really isn't more functional than the receivables popping like they are then anything else?

That's correct.

Okay. John, could you give us an update maybe on that -- you had indicated on your last call you had a couple of potential nice court and justice products for Odyssey. Could you just give us an update as to where that might stand?

Yes, certainly, I would have expected or like to be able to share the names with you by now, but as I said in the last call, we're kind of pretty careful to make sure that all the contingencies and the award, as well as the clients ability to sign off on the announcement, need to be in place. One of those is actually contracted. But, again, there are some funding contingencies that we're not particularly concerned about. But with those, we have chosen not to announce the name or the contract. But both of those contracts that I referred to, and I think I said there are two top 20 counties in the country, the contracts are between 4.5 and $5 million. And, again, I think one of them signed and both of them are moving forward and we believe to be our business.

As I also indicated there are other opportunities like that in the pipeline so the large county and the state level business is still an opportunity we feel pretty good about, while it's been slower to materialize than we thought a couple of years ago. But we've also now reached a point with the maturity of the product, where we're offering that back into our traditional mid-market customer base. And there has been a number of those types of projects starting to get under way as well. So, we see their results going forward being more consistent and more in-line with the other software divisions that are better established.

As far as, Brian, on the SG&A line. Is that kind of a good number to go forward on as far as growing that, given the restructuring and downsizing and everything that you guys are going through?

Well, it's -- yes, I'd say -- you have to remember the restructuring took place -- most of the headcount reductions were at the end of April, so we didn't get a full impact of that in the second quarter and we will in the third quarter. But it's in the ballpark of the baseline. I think the baseline might be subject to some other things like healthcare costs, fluctuating around, would be maybe slightly below where we are right now.

Okay. Now this is kind of a two-prong question. One is the problems you've had in the last two to three quarters certainly take management time away from you being able to do productive things with that to create wealth and value for the shareholder. What things as you look out, now that it's behind you, do you think could be potential pleasant surprises for you from an operational point of view, from an execution point of view, that could get you better-than-expected results from your guidance?

And two, the budgets -- governmental budgets right now look awfully darn good to see some of this funding begin to pick up. And so the market looks like it's certainly in position to listen to a pitch from you guys for new opportunities. So just give me your sense as to internally as well externally the environment that you guys think you can work to get you back on track and things we maybe expected from you two years ago?

Well, I think externally we haven't done anything in a while as you know, we're certainly active and look at things. And that market place just hasn't been such that we've seen opportunities that we think benefit our shareholders. So I don't -- I wouldn't encourage people to factor a lot of that in currently. Internally we think the market place is pretty good. It's not overheated. It's funny how it swings kind of in the press. But the market place is pretty good. As I commented on the financial divisions, I think they're clearly a national player now, participating in all of the deals or certainly the vast majority of the deals we would want to be in. And moving up the ladder in terms of the size and range of the opportunities that we're successful in.

And we have only growth rates factored in that are consistent with or a little below our traditional growth rates in those spaces. And we think that at some time, those larger opportunities and more of the high-end opportunities will come our way. And that's probably one of the better opportunities for us to have upside potential. But we manage the business based on really what we think are reasonable growth rates and managing our costs to expand margins within those levels and encourage you guys to do your forecasting on that. But we certainly manage the sales force and the competitive position of the products in a way that we give ourselves opportunities to win deals at higher levels and to broaden the market place to support a higher level of business.

Now, just one last question. As far as the courts and justice are concerned, next year 2006 should be a better year from -- just to be able to absorb some of that charges for the depreciation and amortization of that particular product suite. Is that fair to say and then maybe 2007 is when Orion becomes a more mature product?

Yes, well, that's right. Because they have a pretty significant cost of the product in the amortization and because it is pretty fixed, obviously, the amortization part pretty much entirely fixed. They have more leverage than the other divisions at this point. And obviously the next couple of levels of growth that they attain will broaden their margins more significantly than the other divisions that don't have that dynamic. So that's fair to say. But, again, we're not forecasting explosive growth for them. We just believe at this point they'll continue to win a few of those larger deals as we go forward. And they'll support those and complement those with business from their traditional market place and grow pretty much in-line with the other divisions. But they will benefit a little bit by more leverage in their financial statement.

Okay, so that won't be the drag in operating margins basically in 2006?

Right.

Okay. Thanks.

Your next question comes from the line of Charles Strauzer with CJS Securities.

Good morning, John. And good morning, Brian. Couple of quick questions for you, John, first of all you've coupled with the cost structure orders now, we know that you've taken a pretty good chunk of cost out and some headcount or do you think there is some minor tweaking that still needs to kind of go on?

Excuse me? I guess I didn't hear the whole question.

Just was curious, are you comfortable now with the cost structure you have given all of the changes that have been made?

Yes, I think -- as I said, we wanted this process or this restructuring to be comprehensive and complete. We don't want to remain in that mode. So we were pretty thorough in identifying the opportunities for change within the divisions, as well as within the rest of our structure at corporate, et cetera. And in our view, we made the necessary changes to get the organization, the structure, and the cost in-line with where we think the revenues are and we consider that process complete. Obviously, any different experience in our business could affect that. But currently we believe we're done with that.

Okay. And just one more question. John, when you talk to the folks in the Odyssey unit and you've talked to them about the pipeline and kind of what has happened in terms of a pretty lengthy sales cycle versus what your original expectations were. What do you think is really happening at the state and county level in terms of it taking so long for some of these procurements to [indiscernible] out and then awarded? And then secondly, are there availabilities of funds from say like Homeland Security or talk of making those funds available to the court levels to help upgrade their technologies that you're hearing from the Federal side?

Well, the market place is finite. There aren't as many courts, obviously, and as many large courts in the country as there are financial opportunities or tax and appraisal opportunities, where those exist, really multiples of those exist in every government; at the school, at the city, at the county. So it is a smaller market just by definition. And we're participating or have been to this point in a relatively small part of that market place. So I think it's a pretty small market place or it has been the last couple of years with us focusing on the high-end. And therefore, there are literally only a couple of dozen active prospects at a time in the country. And some of those don't make decisions on a timely basis. And we don't win all the deals. And you do the math, it results in our performance. A few deals a year, really, over the last few years.

We have nine contracts. We're working on a couple more as we said, and that's really the result of that market I just defined. So what do we do? We keep working on our competitive position, improving our market share of those large accounts, but they are what they are. And then we broaden that market, which was always the goal to enter it at the high-end and then drill back down into the middle tier, and we've done that. And, again, we're not recognizing names in this call and haven't been through the process of getting those approvals. But I think there were three -- what I'd call traditional accounts signed in the last quarter for Odyssey. So that is what the market is and we're running our business based on that experience now.

You know, there really -- there are other opportunities to use Odyssey in terms of going after other municipal agencies like police and justice away from the court systems that you can leverage the technology --.

Well, the platform we used in the Orion project, but the product itself, no, not really, it's a courts and justice system. And the platform and the technology we built is available to us to use on other projects and it is a very nice platform. It demonstrates exceptionally well. It has all the right buzzwords and architectures for those who are interested in that. So that's an investment we may be able to leverage. But the functionality and the application itself is very targeted.

And what about Federal opportunities?

No, we really don't see a lot of that.

Okay. Thank you very much.

Your next question comes from the line of Tom Meagher with FBR.

Yes, good morning. First, Brian, congratulations on moving into the CFO slot. John, could you discuss the reorganization a little bit more in detail. I think you mentioned in the Press Release, reductions in SG&A both in Dallas and I think the subsidiary offices. I'm just wondering are the subsidiary offices now just populated by salespeople or is there still some SG&A assets out there as well? In other words, have you consolidated most of the SG&A into the corporate headquarters in Dallas?

No, not at all. Corporate is actually smaller certainly in absolute dollars and as a percentage then it was a year or two ago. So we're not growing that. We're doing still most of those things in the divisions, but doing them much more consistently within the divisions using more and more of the same systems. The rollup and the oversight is easier and more active and we're executing on a lot of that.

Most of the changes were in the Appraisal and Tax Divisions. And as we've discussed before, they grew to a point where they were managing $38 million in Appraisal Services business. And through evolving their organization of that level, they really grew a couple of additional levels in their organization that may have been appropriate at that level of business that as we went in and restructured, we really paired out or restructured out of that. So there were maybe six different steps or levels between an appraiser on the street and the CEO of the division. And we've reduced that by a number of steps or levels and eliminated those positions. The result is an organization that can still do the work and be as responsive to the client. But doesn't require few of the levels that were in there previously.

Okay. And that kind of leads me into my next question then. Was to kind of get some sense of how committed longer term you are to the Appraisal Services business? Obviously, I think it makes some sense to hold onto the software piece of that business given its high margins. But with the labor element, if you will, of that unit be better off somewhere else given the volatility that you've seen there over the last couple of years?

Well, and I think what we've said on previous calls, is that division has performed well in the past for us and it certainly can perform well going forward. And it was our responsibility to reorganize it so that it can make reasonable margins for Tyler and contribute and be a part of our Company, and other service we offer our customer, help us leverage software into those accounts and those types of things.

And we think we've made those changes and we think it's well on the way to contributing financially. And offering those incremental services and customer opportunities for us. Having said that, we'll obviously evaluate as we go forward whether or not it's critical that it be within Tyler, or whether it has more value to somebody else. But our focus has been on correcting the issues within the division and we think it's on its way to having been corrected.

Okay, and then just the last question was, has there been any thought to perhaps branding your offering as you go to market with the Tyler name as opposed to the individual unit names, I guess most of which came into the structure through acquisition? I know some of the other companies out there have done that. Just curious whether you guys have perhaps considered that as well?

We're doing a lot of that. I think -- as I go around and see different divisions and people I'll literally ask them who they tell people they work for and what they do. And the answer we're looking for and see more and more is that our employees say that they work for Tyler Technologies. Not that they work for MUNIS or Eagle or EDEN. And that they sell a product that is named MUNIS, or a product that's named InForum Gold or Odyssey or something like that.

And from my experience, more and more employees, and I would say a majority now would tell their neighbor or somebody on an airplane who asks them that they work for Tyler Technologies, not the divisional name. And would see themselves as somebody that sells or supports or provides services for one of its products. And I think the same is becoming true of the customer base, that they believe they're Tyler customers, and they use the MUNIS product or the Odyssey product or the Orion product. Our trade shows, our advertisements, most of that is all geared around that at this point. So we've made a lot of efforts in that regard.

Okay. Thanks very much. I appreciate it.

Your next question comes from the line of Brian Kinstlinger with Sidoti & Co.

Question, looking at the guidance, I'm curious with all the comments that seem bullish, at least relatively bullish in the second quarter being better-than-expected. The guidance I can understand for the full year for earnings being flat compared to where you guys had mentioned last quarter. But it appears that revenue is down about $1 million. And in your comments if I look at the two press releases it comes from software-related services or software. And it appears or at least it sounds like court and justice is doing okay. Obviously, it sounds like financial software is doing very well. So I'm curious why the reduction in guidance by $1 million? And if there is 1 million less than a little bit higher margin business, how you maintain that earnings guidance?

There's $1 million within the ranges we give -- I'm not sure -- I wouldn't read too much into it. And it's generally -- we don't -- I don't want to say we don't look at revenue growth, but that small of a difference is generally just a result in the mix of business that we do. And obviously as we look at the balance of the year, we're focused more on earnings and that's where we've said there really isn't any change, which technically there is a change we've eliminated a couple of cents from the low-end of the range. And if you were to combine the second quarter and the second half, we now have I think a range of $0.16 to $0.20. Whereas at the end of the call before, it would have been 14 to 20.

So I mean, I appreciate maybe if you look at all of those numbers that may suggest $1 million less in revenue. But we look at it that way that our guidance was $0.14 to $0.20 at the end of the last call it's now 16 to 20. Better visibility. More probability of executing on it. And we'd like to imply a marginally better outlook. Certainly not something meaningful different than what we suggested in the last call. But if the revenue does look off $1 million, it's more than likely just a mix of revenues.

Right. And what I was just trying to I guess understand is it's coming from software services and I do appreciate that earnings are unchanged. But it just appears that the bullish outlook and all the things going on, that revenue would also be coming in. And a lot of the earnings it appears right now is coming from the cost cutting. So I'm trying to look longer out.

Well, the licenses right now -- as we've said that most of the Odyssey and Orion projects are POC accounting and those are the contracts that generally are much more service intensive. So the higher licenses in relation to software services would be a result of probably the financial divisions where we deliver a product and recognize revenue for it. And those products have lower service deliverables in relation to software dollars, which is an objective of ours. Obviously, we would like to grow the license revenues more quickly than the service dollars.

I was just going to add basically to that thought that, particularly with Orion and Odyssey where we have percentage of completion or completed contract accounting to that [indiscernible] probably refining these estimates mostly has to do with as we refine the estimate of the progress and the timing on those projects. And it's just a matter of the flow of those projects and as we get farther into the year, we just get a little better visibility over what will happen with those over the rest of the year.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Gary Abbott with Merriman Curhan Ford.

Okay. Thank you. Sort of on that last line of questioning related to the software backlog. So if you're looking at a $15 million sequential increase, would it be okay to sort of assume that 10 of that 15 million is New Jersey? And that's a multi-year sort of scenario. And then if you can kind of give us some color into the other 5 million. Is it that same sort of multi-year type deals or are they [indiscernible]?

Well, you're correct, the 10 million of that is from the New Jersey project, which is roughly a two-year kind of project. I'd say part of it is Orion and Odyssey, primarily some new Odyssey deals. John mentioned that they were three of the kind of smaller deals in the quarter, those would be percentage of completion deals. And then part of that increase also was in our Financial Services businesses, which is more noncontract accounting. But probably two-thirds of that is in the contract accounting world.

Actually, Brian, if you don't have this now, if you could provide it on future calls? Do you have some sort of duration number of the backlog, sort of a weighted average time frame that you expect to recognize it? Because it would stand to reason like -- just related to the question about tweaking -- tweaking the numbers. So if your duration went up slightly, that might account for that 1 million.

Yes, we can take a look at that. It's not a real precise process. I mean there's a significant chunk of backlog that is maintenance and that's all, obviously, within the next 12 months. And the contract accounting, part of the backlog is -- it's hard to exactly determine the duration. We have an expectation, but clients dictate a lot of the timing of our projects and can delay those or accelerate them from time to time. But we could look at whether we -- whether there's maybe some color we can provide around that.

Okay. Another question. How much of the Q2, the sequential license increase, how much of that was due to the Orion business that was actually pulled forward?

It would be a few hundred thousand --.

Yes.

-- type of number. It wouldn't be a real significant part of the overall number. But it was all incremental to what we allowed for.

Did the financial divisions have any large deals that were somewhat surprising? I guess I --.

I don't know about surprising. But like I said, we signed across those divisions, 47 new names. We were pretty successful in the installed base. They came from 25 different states, which is clearly a national presence at this point. So that's not so much of -- within a quarter winning a big name or a few deals we've really been working on so much as just a sales channel, with a lot of capacity now and chasing a lot of deals with products that are competitive. And in our view something that will perform and has performed pretty consistently going forward. So there weren't any real significant names that stick out to me within the quarter. But there are more deals in say 800 to $1.2 million in license range. There were a considerably more deals in say the 4 to $800,000 license range. The average deals are up considerable. And we're happy with the direction of all those indications.

I guess, John, so what I'm hearing from you is pretty solid execution. If you sort of back out that one or the surprise that was related to the Orion milestones, would you have expected the license revenue to be sort of in the 7.5 million range? It looks to me like it was substantially higher than I would have expected.

Yes, I'd say it was only up, again, -- we're only a penny or two over where we thought we were; two pennies over. And some of that was lower restructuring costs. And I'd say that difference was predominantly the Orion stuff coming forward. I'd say the other things performed probably just marginally above their plans. But their plans are obviously -- represent some growth over the previous year.

Okay. Apparently their plans are higher than my plans for you. Last question, on the CapEx side, I see you guys lowered the CapEx number for the year. Does that reflect deferral of capital expenditures sort of two times when revenue ramps faster or does that --?

No.

-- reflect stuff related to stuff that you might have restructured away and the needs have changed?

I think that's a good question and important to understand. There is a little bit of redeploying some Orion resources, as would be typical with the rollout of a new product, rather than focused on adding functionality or extending technology in a new product. There are some resources that temporarily get redeployed to take care of customer issues and new product issues in order to help those customers be successful with a new product. So there's a little bit of that going on right now. And obviously we'll do that as long as the customers require that service.

But absent that the significant reduction in CapEx is not deferring investments in the product or not at all making smaller investments in the product. It's simply products like Orion and Odyssey and some others, getting to a point where they're generally released products, they are in the market place, and the resources that are working on them begin to get expensed rather than capitalized. So I think it's important for people to appreciate that our investment in the financial products, in the new products of Orion and Odyssey, our investment in those products competitive position is at the same levels it was at when our capital expense was considerably higher. It's just expense now rather than capitalized.

Okay. Last question sort of related. If you don't mind, sort of throwing out a number or a range. Can you give us some thinking about what to expect for cash flow and free cash flow for the second half?

Well, the second half will be stronger, particularly the third quarter is strong for us. And I think at this point we're still expecting something in the mid to upper teens for the year.

Okay. Thanks a lot. Nice job.

Thank you.

Your next question comes from the line of Jack Salzman with Kings Point Partners.

Hey, guys.

Jack.

Just very quickly. Can you bring us up to date on the expenses involved with Sarbox? And can you give us an estimate of what you think Sarbanes may be costing you for next year?

Well, the expenses are lower than they were last year. We've shifted some of the expenses also from external expenses to internal expenses. And that we've added part of our reallocation of where we spend our money at corporate. We've brought in established an internal audit department. And we're doing some of the things that we outsourced last year internally. But our costs are somewhat lower this year and they're probably this year at about the level we would expect them to be going forward.

Brian, is that like 2, $2.5 million?

Well, the external costs are roughly 900,000 to 1 million on the total audit, and Sarbanes costs of which about half is audit and about half Sarbanes. And then we have the internal costs. But last year we probably spent close to 1 million. So this year we will probably spend -- I'm sorry, close to 2 million. This year we're spending around 1 million externally. And then we have some more internal costs. So we are significantly below where we were last year and probably at about the level we expect to be going forward.

Okay. Thanks.

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

Okay. Well, thank you for participating in the call. And if there are any further questions feel free to call Brian or myself. Thank you.

This concludes today's Tyler Technology second quarter 2005 earnings results conference call. You may now disconnect.