泰勒科技 (TYL) 2006 Q3 法說會逐字稿

Hello and welcome to today's Tyler Technologies third quarter fiscal 2006 earnings release conference call. Today's call is being recorded. Your host for today's call is Mr. John Marr, President and CEO of Tyler Technologies. Please begin your call, sir.

Thank you, Mark, and welcome to our third quarter 2006 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First I'd like to ask Brian to give the Safe Harbor statement; then I will have some preliminary comments; then Brian will review the details; subsequently, I'll have some final comments, and then we'll take your questions. Brian?

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?

Thanks, Brian, and thank all of you for joining us on the call today. The third quarter marked our 22nd consecutive profitable quarter, as we continued the positive trends we began to see in the results since the second half of 2005 and during the first three quarters of 2006.

Tyler's results were, by most measures, the best quarter in our history and exceeded our own expectations for the third quarter. For the first time the Company achieved $50 million in revenues and $10 million in license revenues. These results were 19% higher in revenues than the same quarter of the previous year, and 71% higher in net income.

Business grew across the board. Every division of Tyler achieved year-over-year revenue growth of at least 14%. License fees grew by 46%, positively benefiting our gross margin. Backlog grew again, and is now equal to roughly the current-year revenues. Our trailing 12 months performance has been $188.5 million in revenues, EPS of $0.31, and free cash flow of 21 -- 23.1 million.

Now, Brian, I would ask you to provide some more detail.

Thanks, John. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2006. By nearly all financial measures, this was our best quarter ever. Our results reflected new quarterly highs for Tyler in total revenues, license revenues, gross margin and operating profit.

For the third quarter of 2006, Tyler had revenues of $50.1 million, up 18.5% from the third quarter of 2005. Operating income was 6.6 million, an increase of $2.5 million from the third quarter of 2005 operating income of 4.1 million.

Net income for the quarter was 4.4 million, or $0.11 per diluted share, compared to net income of 2.6 million, or $0.06 per diluted share in the third quarter of 2005.

Results for the third quarter of 2006 include a total of $554,000 of non-cash expenses associated with our share-based compensation plan, of which $37,000 is included in cost of revenues and 517,000 is included in SG&A expense.

Cash flow from operations was $12.1 million for the third quarter, compared to 9.5 million a year ago. Free cash flow was 11.0 million, compared to free cash flow of 9.0 million for the third quarter of last year. For the nine months ended September 30th, free cash flow was 19.2 million, compared to 14.6 million for the same period in 2005. The third quarter is historically our best quarter for free cash flow because we collect a large portion of annual maintenance billing in that quarter.

EBITDA for the third quarter of 2006 increased 37.9%, to 9.1 million from EBITDA of 6.6 million in the third quarter of 2005. Our reconciliation of GAAP income to EBITDA is included in our third-quarter earnings press release.

Our revenue growth spanned all of our product areas. As John mentioned, each operating division of Tyler achieved at least 14% revenue growth over last year's third quarter.

Our software-related revenues, which include software licenses, software services and maintenance, increased an aggregate 19% over the third quarter of 2005. Software license revenues were exceptionally strong, with a 46% increase over last year's third quarter, driven in large part by growth in our financials and our courts and justice products. Software services were up 11% from last year's third quarter, and maintenance revenues grew 13%.

Appraisal services for the third quarter also increased 19% from the third quarter of last year to 4.9 million. The growth in appraisal services revenues is due to increased business associated with Ohio's revaluation cycle, as well as the addition of new customers in other states.

The revenue mix for the third quarter of 2006 compared to the third quarter of 2005 was as follows -- software licenses, 21% this year versus 17% last year; software services, 29% this year versus 31% last year; maintenance, 37% this year versus 39% last year; appraisals, 10 -- appraisal services, 10% for both this year and last year; and hardware and other, 3% for both this year and last year. Overall, 87% of our revenue mix was software related for the third quarter of 2006, unchanged from the third quarter of last year.

For the third quarter of 2006 our overall gross margin was 40.2%, up 280 basis points compared to 37.4% in last year's third quarter. Sequentially, gross margins increased 170 basis points from 38.5% in the second quarter of '06. Our gross margin improvement was driven primarily by three factors -- the increase in software license revenues as a percentage of total revenues, improvement in software license margins, and improved appraisal services margins following the restructuring of that business in last year's second quarter.

Software license margins for the quarter increased significantly from last year, at 72.6% versus 67.0% last year. The increase in software license gross margin is primarily driven by increased license revenue, offsetting fixed software amortization costs included in cost of sales.

The blended margin for software services and maintenance was 32.1% compared to 32.2% for the same quarter last year, and increased from 30.0% in this year's second quarter. The gross margin for appraisal services was 31.2%, compared to 27.0% in last year's third quarter.

SG&A expenses were 13.2 million for the third quarter of 2006, and 11.4 million for the same period in 2005. Third quarter 2006 SG&A expenses were 26.3% of revenues and 27.1% of revenues for the same period last year. SG&A expenses for the third quarter of 2006 included $517,000 of share-based compensation expense. Excluding this expense, which was not present last year, SG&A expenses were 25.3% of revenue for the third quarter of 2006. We remain very focused on carefully managing overhead costs to keep the rate of SG&A growth below our overall revenue growth rate.

Our effective income tax rate was 36.4% for the third quarter. The effective tax rate declined compared to prior years, mainly due to a state income tax audit, which resulted in our recording a credit to income tax expense to recognize the benefit of a previously unclaimed -- previously unclaimed tax credits, combined with generally lower state income taxes as a result of a change in our corporate structure implemented in early 2005. The effective income tax rate for the full year of 2006, including the credits, is expected to be 38.0%, and the effective tax rate for the fourth quarter of 2006 is currently estimated to be 40.2%.

Our backlog increased again during the quarter, and at September 30, 2006 stood at a new high of $197.7 million, compared to 146.6 million at September 30, 2005, and 195.5 million at June 30th of this year. Backlog related to our software business, which excludes backlog from appraisal services contracts, was 171.2 million at September 30th, an increase of $8.8 million, or 5.4%, from the second quarter this year, and an increase of $53.1 million, or 45%, from September of last year. New contract signings for our Odyssey court systems and our financial products were primarily responsible for the growth in backlog.

Appraisal services backlog was 26.5 million at September 30, 2006, compared to 33.1 million at June 30, 2006. The decline in appraisal services backlog for last quarter reflected the restructuring of a multiyear appraisal services contract with one client who chose to bring in-house some of the work that we had been performing.

During the third quarter we repurchased 154,085 shares of our common stock on the open market at an average cost of approximately $10.78 per share. For the first nine months of 2006, we've repurchased a total of 987,170 shares of our stock at an average cost of $10.05 per share. Our remaining authorization of shares that may be repurchased totals 1.1 million shares.

Our capital expenditures during the third quarter were $1.1 million, primarily related to new internal IT systems, including a new company-wide CRM system, and include $90,000 of capitalized software development. CapEx for the third quarter of last year was $485,000 and included $174,000 of capitalized software development costs. Although we continue to spend significant amounts on product development, the vast majority of our development costs in 2006 are being expensed, and we expect that capitalized software development will remain at relatively low levels for the foreseeable future, and that virtually all of our development costs in 2006 will be expensed. Amortization of post-acquisition software development cost was $1.2 million in the third quarter.

We also used approximately $580,000 in cash during the third quarter to purchase assets, primarily maintenance and support agreements and relationships with 70 customers, from a former reseller of our MUNIS product in Pennsylvania.

Days sales outstanding and accounts receivable at September 30, 2006 improved to 80 days from 86 days at September 30 of 2005. Our stockholders equity at September 30th was $120.8 million, we continue to have no debt outstanding, and $30 million of available credit under our revolving credit facility.

Now I'd like to turn the call back over to John for his comments on the quarter.

Thank you, Brian. Our topline revenue growth continues to outpace the industry average as we expand the markets we serve and win new business with significant-sized customers. We have now signed contracts for our Odyssey court solution with five of the 20 largest counties in the country, including Miami Dade County in Florida, Dallas County in Texas, Wayne County, which is Detroit, Michigan, Clark County, which is Las Vegas, Nevada, and Tarrant County, which is Fort Worth, Texas.

We also continue to sign significant business across all our product lines. During the third quarter we signed contracts with Fulton County, which is Atlanta, Georgia, for appraisal services, the city of Springfield, Massachusetts for a financial system for nearly $2 million, Victoria County, Texas for 1.25 million for a court system, as well as with our court system signing significant deals relative to our Conference for Urban Counties deal, including Tarrant, Fort Bend and Williamson.

Free cash flow for the quarter increased 22% from the same period last year, and exceeded our third-quarter net income by 2.5 times. Year-to-date free cash flow is almost double our GAAP earnings.

Our financial systems division, which accounted for 62% of our revenues in the quarter, continues to perform well, as they have consistently for several years, and grew revenues 19% during the quarter.

We are experiencing solid growth in our court system, as we begin to recognize revenue from some of the Odyssey deals announced in recent months. And we continue to take advantage of the operating leverage embedded in our business model for the trailing 12 months. During the quarter our revenues grew 19%, gross profit grew 27%, and net income 77%, demonstrating that leverage.

2006 full-year results are now expected to be at or slightly above the high-end of our guidance range, as previously communicated. We now expect revenues of 192 to $195 million. Appraisal service revenues are now expected to grow 5 to 8%. Software-related revenues will grow 13 to 16%.

We expect EPS of $0.31 to $0.33. While EPS for the quarter was clearly ahead of expectations, some of that is due to the timing of contract signings. Business is not always linear from quarter to quarter, and our current outlook for the timing of signing business in the pipeline points to revenues and earnings in the fourth quarter that do not reach the levels we achieved in the third quarter. We believe this is a timing issue and not an indication of slowing long-term growth.

We will also see increased expenses in the fourth quarter related to the ramp up of delivering on these new revenue levels, and consequently, again, marginally-lower earnings in the fourth quarter as compared to the third quarter.

For the year, estimated pre-tax expense related to stock options and the employee stock purchase plan is expected to be $2.1 million, or roughly $0.04 a share.

We estimate an effective tax rate of 38% for the full year, including the effect of the tax credits. The fourth-quarter effective tax rate is estimated to be 40.2%.

Free cash flow is expected to be between 22 and $24 million for the full year, with total CapEx of approximately $4 million. Total depreciation and amortization is expected to be around 10 to 10.5 million.

During the third quarter we also affected some changes in our organization. Glenn Smith retired as President of our courts and justice division, and I'd like to thank Glenn and acknowledge him for his strong contribution to the Company. I've been working with Glenn since 1999, when my company was acquired by Tyler, and we've experienced some good times together. And Glenn leaves us with a division that now is based with a sound product and a strong backlog, and we are confident will perform well going forward.

Dusty Womble, Executive Vice President of Tyler, and previously President of our INCODE division, has assumed the direct responsibilities for the courts and justice and Orion division, and Brian Berry has returned as Chief Operating Officer of that unit. Brett Cate has been promoted to President of the INCODE division.

Now we'll take your questions.

Brian Kinstlinger, Sidoti & Co.

I have one question and one follow-up. The first question I have is related to the hiring [and your] backlogs growing pretty aggressively. And so, I'm wondering what kind of hiring has to be done, and what that might mean to your results from an expense standpoint.

It's an ongoing thing. So, we've been in this process for some time, and there is certainly some ongoing run rate for these types of expenses that we have. However, we do expect that in the fourth quarter and into the beginning of next year that that will be at a little higher level than it is traditionally, and that may put some very modest pressure on earnings, as I indicated in our comments.

Again, generally we are in a hiring mode and we're bringing people on. And the cost of those resources, which generally aren't productive for three or four months, in terms of revenue production, after they join us, are pretty much built into our model, but will run a little ahead of traditional levels for certain divisions, especially in the courts and justice area.

My follow-up is related to guidance. I agree that this is not always linear. And the fourth quarter traditionally has been your best quarter. Some of it might be timing. I guess maybe you can help me reconcile -- you did about $0.10, if I adjust for tax. What would cause the Company to earn, what the low-end implies, $0.07, or is that just a worst-case scenario if things -- all sorts of projects start to have cost overruns, things like that? What would $0.07 suggest could happen to get to that level in the fourth quarter?

It's really hard to look at quarters. Obviously, we report on them, but we're trying to talk a little more about trailing 12 month performance and the whole year outlook to try to mitigate that a little bit. But literally, the signing of the delivery on an individual contract can be $1 million in license revenue, and it can fall one week or the other and affect -- you can do the math -- pretty close to $0.02 in a particular quarter. And that happens to us. And obviously, that fell a little bit in our favor in the third quarter. And as a result, some of that came out of the fourth quarter.

So I wouldn't at all be alarmed. We look at the year, and we're at the high-end of our guidance, or marginally outside it, and that's really all there is to it. And that's really all that would affect it. Again, we have a little expense pressure, which is, obviously, an investment in being able to perform on higher revenues as we go forward. And again, the low-end of the range is to protect us a little bit in terms of the timing of these agreements if they were to slip into the first quarter.

One last -- I apologize. And I know there's no guidance for '07, nor will I ask you to comment, really, on any particular numbers. But I'm curious about, given the seasonality has changed a little bit, and you've had some lumpy quarters here, was it the middle -- the middle quarters that you have been better than the end quarters. And I know you're not looking at individual quarters, but does that mean you'll have some tougher comparisons? But again, next year, instead of looking at year-over-year to each quarter, you're going to start look more at the year, and there might be some year-over-year smaller growth in particular quarters, but at the year level it might be better?

Yes, I think that's right. I'm not in any position to project year over year or quarter by quarter. Next year second quarter, next year third quarter, it's literally timing of agreements and deliveries that -- you really don't always know exactly when they're going to fall, even weeks before they occur. So, we'd try to encourage you not to look too closely at that.

And you're right; we are not prepared yet to provide guidance for next year. We are in the middle of that planning process, have some visibility on it, and would expect to deliver some guidance probably in January. There isn't anything we're seeing that would lead us to believe that that guidance wouldn't be consistent with what we've said, which is that we are a low to mid-teens topline growth company, with 100, 200 basis points margin expansion as we see that revenue growth. And the details around that are becoming more clear as we go through the planning process, and we'll be happy to share that with you more than likely in January.

I guess the heart of the question, though, was -- is seasonality almost no longer a big factor for you? That's what I -- I asked it in a really awful way; I apologize. But I mean, this year we didn't see any (multiple speakers)

I've always thought that our historical performance implied more seasonality than really exists in the business. And I think as the product line is broader, as we cover more geographies with states that have different fiscal years, that we will see less of that seasonality.

David Yuschak, Sanders Morris Harris.

Congratulations, gentlemen; great quarter. First, as far as your new business backlog which you've got booked, could you give us a sense as to, given your efforts about geographic diversification because you've got good stronger product lines across more (inaudible) -- are you seeing more customers creeping into that revenue stream and backlog as a percentage of the total potential? Could you give us a sense as to some of those dynamics?

I think there's a number of things. There is more business that hits backlog, I think, as contracts become larger and more complex and, in some cases, accounted for differently; a higher percentage of the business not so much on a delivery mode, but moving toward other slower recognition. So that would be something that happens across the Company. But also, our mix of business is changing somewhat. And courts is becoming, as we've expected it to, more significant. And virtually all of that business is percentage of completion. So, virtually all the contracts that we've announced and discussed go into backlog and sit there for some time as we perform and earn the revenue off those, whereas the financial systems are more mature, more off-the-shelf, sold more to the midmarket. And it's not at all uncommon that we contract, deliver and recognize revenue even within a quarter, or that the majority of those contracts certainly get recognized within a quarter when they're signed, so they're in backlog for a short period of time.

But are you getting more new customers because of the expanded product line? Like the courts and justice -- is that getting you introduction to more new customers in your book of business?

Yes, sure.

Is it becoming an increasing part of them?

Courts and justice has, certainly, in terms of backlog, has grown significantly faster than the other lines of business. And now we're seeing that actually in revenue recognized. So, that division is clearly growing above the overall company growth rate.

The follow-up question would be tax appraisal software. Can you give us an expectation, maybe that becomes more important in 2007 as you -- I think you've kind of -- the initial plans were anyway that that becomes -- gains more traction next year.

I don't -- I would not think we would bake a tremendous amount of that into next year's plan. As with Odyssey, it took longer to get to this point. It's now a very good contributor for us. We're very enthusiastic about the next several years with Odyssey. I think we're at least a few quarters, and maybe beyond next year, from seeing that reliably from the new tax and appraisal products, which I think is what you're referring to. A number of the existing products continue to perform as they have in the past. But for the new product to contribute at that level, that's still a little ways away.

But you still would expect some kind of ramp next year in the tax and appraisal? There will be some contribution (multiple speakers)

It won't be that significant to the overall company.

Tom Meagher, FBR.

Brian, just a quick question for you. Did you give a new bookings number, or a contract bookings number, in the quarter?

We don't specifically give a booking number; we give -- we just give -- update the backlog at the end of each quarter.

I think you said that was roughly a 1-to-1, or basically a year's worth of revenue was in backlog right now?

Backlog right now has 197 million, which is just modestly above what our guidance for this full year's revenue is.

Okay. Secondly, from the standpoint of the sales force integration, I know you guys said a couple quarters ago that you'd largely accomplished that. And I know the strategy behind it was eventually you would like to slide updated -- or upgraded, I should say, Tyler products into places where perhaps an Eden Systems product had been there before. I'm just wondering how successful has that strategy been? Are there any specific contracts or anything you might be able to cite where you've been able to utilize the existing Eden relationship, and as I said, bring in a higher-grade Tyler product to replace what's in there now?

There's two parts to, I think, your observation there. The first one in terms of integration has been completely executed on, whereas just last year we literally could have had a city or a county see three different Tyler reps representing three different Tyler financial products, and every account in the country would have only one Tyler rep that would be responsive to them. So, there is no overlap or redundancy or repetitiveness in that channel. And I think there's a much clearer presentation to the marketplace than what we had a year ago. And obviously, we begin to see some benefits from that in terms of the cost of the sales channel. So, that's going very well and, I think, has been productive this year.

The second part of your observation I want to correct a little bit. We have three different financial products that are still actively sold -- our INCODE system, our EDEN system, and our MUNIS system. They're all products that are really in the productive part of the product cycle. They're all very competitive. They can be more or less competitive with one another, depending on the particular segment of the market. So, each of those reps can sell any of those products to a particular client, depending on which one they believe best meets that client's needs, and occasionally might offer two, if they felt the client should be involved in making that determination.

But all three of those products will continue to be enhanced and improved and invested in to support the existing client base needs, as well as be responsive to the segments of the market where they're most competitive. So that -- I think you're a little misled on that assumption.

In terms of talking about -- we're talking about future products that are really on the drawing board, that -- beyond the useful architecture of these existing products, which we would expect to be a number of years out, yes; they will be next-generation products, which will include all the best practices of these different systems. And those products will be offered to all of those customer sets, and at that point, further consolidate the customer base.

Charlie Strauzer, CJS Securities.

John, just two quick questions for you. One is, when you look at the backlog -- obviously, courts and justice is doing very well -- and you look at the Texas procurement contract you guys got. If you look at it now, how much do you think of the overall contract is in the backlog now? And how many of the, I'd say, the remaining counties are left to kind of procure the offer from you in Texas?

Brian, you may know those numbers better than I do.

Obviously, there was originally a $12 million-plus license agreement that covers all 37 counties that are part of the CEC. And that is in backlog, and we're recognizing that ratably, basically, over the next five years -- over a five-year period that started earlier this year. And I believe now there are five or six of those counties that have signed up to implement the product. And each of those customers then signs a separate services and maintenance agreement with us.

We have -- and I think we talked when we originally signed the contract, that we thought that this -- depending on the number of those customers or the members of CEC that ultimately signed up, this could be a $30-plus million total relationship. And it's really -- at this point it does cover the whole five years. We certainly didn't expect that all of them would sign up up front, and I would say the number that have signed up at this point are really pretty much in line with our expectations going into the contract.

So, like we said, of the 37 million, we've had five or six -- or 37 potential customers, five or six of them have signed agreements so far. And we would expect in the coming quarters, and out over the remaining term of the agreement, that more of those would sign up. But the timing of that is a little hard to predict.

But in the backlog, only what's in the backlog going (indiscernible) people actually signed for it; not the whole 37 (multiple speakers)

(multiple speakers). We said in the remarks, I think there were about $4 million in this quarter which would be services above the original license, and I think there was one or two contracts prior to this quarter. So, that's low to mid-teens, maybe, in the backlog, relative to CUC-type clients.

So there's more to come, obviously?

Oh, yes.

John, if you look at the long-term picture, obviously, you look at the -- the three-year cycle of Odyssey, which is roughly kind of how long it took from introduction to recognizing revenue and kind of making it more of a regular product. Now you've got Orion coming on next year, and probably will start to benefit more in '08. You've got the education, probably, starting to be introduced next year. It sounds like you're kind of building up a very good kind of step-stage growth pattern for rollouts of new products for the next like, say, three to five years. Is that the best way to kind of look at it?

Yes. We've said from the start there really are three different strategies in growing revenues in the interim period. One is geographical expansion, which was the first one to really return on us; we've been able to spread throughout the country and leverage products that historically were regional. Very successful, and we've been doing that for some time. And I think that's where the financial revenues grew best over the last few years.

Secondly, as we indicated here, listing these large court deals, as well as some large deals of the other products, is growing up in the larger environments. And thirdly is broadening the offering. And it is important to point out we're doing a number of things in terms of building our service channel and delivery channel, as well as investing in the Orions in the school system to sustain this growth into the future. So, those are still in the investment mode that we do as part of our business, and we would expect would be products. Could they contribute next year? Maybe somewhat. But really beyond that will be products we can rely on to sustain the growth.

I would caution to say I don't think that now that Odyssey is really starting to kick in, I don't think either of those would be as explosive as Odyssey is in terms of the revenues we're looking at right now, simply because they tend to be smaller sales. Appraisal and tax can have larger sales, but schools certainly are smaller sales. So, the volume of accounts will be high, but the revenues per account would be probably more in line with our mid-range financial system sales rather than the large court sales.

Got it. And then just lastly, obviously, you're going to have quality problems as this cash flow continues to mount. Share buybacks have always been kind of on the forefront there, and the occasional acquisition. Kind of prioritize for us the uses of cash right now.

We do look to be opportunistic there, and we are consistently evaluating different acquisition opportunities. We're pretty disciplined there. We like good, quality assets at fair valuations. So, they're not all that frequent with that discipline. But we'll continue to be in that marketplace, and opportunistically buy our own stock back, obviously. That is at a different level, and we may not have the opportunity to be as aggressive there as we have been in the past. So, we'll kind of take a wait-and-see approach on that.

Kevin Sonich, RK Capital.

Any change in the quality or the length or the duration of the backlog? I know once a year you give the portion of the backlog that's recognizable in the next 12 months. So, we'll have to wait for the K for that. But just if you can maybe talk to that a little bit.

Okay. I don't think there's any significant change in the quality of it. Again, some of the new court business is performed over a longer period of time because of the accounting on them, and they tend to be larger deals. So, some of those may stretch over a longer period of time and into years that are further out. On the other hand, a lower percentage of that backlog is appraisal services. So, in terms of quality, there's a higher percentage that's software. The appraisal services revenue is a little lower-margin, and certainly is performed over a longer period of time. So, I think the quality, in terms of the types of revenues and the margins associated with them, and the timing of those revenues, is at least neutral, if not a little bit better than what it's been traditionally.

You had mentioned the fourth quarter from a P&L prospective relative to the third quarter being a little less robust. And that's understandable, especially given the timing issues and the chance of something like that occurring. But from an order perspective, just looking at your backlog and the way that's grown, especially on the software side the last couple of years, I think the gentleman's comment earlier that the fourth quarter has been very strong for you is a good one. Is there any reason, from an order perspective and a build in backlog, to not hope for the same type of seasonal effect?

Well, I guess we're commenting based on the information we have right now, and the information we have right now is that just the timing of the awards that we see in the current forecast is not that robust for the fourth quarter. So, we're just relaying that.

When we look at the whole pipeline, it's not an indication at all that things have slowed or that our competitive position has been affected. We feel real good about that, and look forward to, I think, a good '07. But we are a month into a quarter, and it looks like it's just not that robust a quarter from an awards standpoint.

So, that goes to the -- that wasn't just the P&L you were talking about there, obviously. Okay. In terms of the hiring that you're planning on doing, how many people are we talking about roughly? Maybe if you can give us a range. Are we mostly talking about sales folks or service people?

Again, there are always a handful of salespeople being hired and trained, new additional positions, as well as whatever turnover we have. And that exists in development, on help desk and throughout the Company. And there's always an ongoing cost to bringing these people in and ramping up. So, that's just baked into our regular model and wouldn't have any effect on the typical quarter. I think currently, especially in courts, that's beyond what is typical. So, we will have -- in terms of what's unusual, we would potentially have, say, two or three-dozen more people going through the training and coming up to speed process in our service delivery channel than normal. And those costs will be in there ahead of the revenues.

Two or three-dozen above normal in terms of service (multiple speakers)

Maybe not all at once, but over the next quarter, over the next couple of quarters. Correct.

So, this is really a response to what you've already booked and have yet to implement and train, etcetera, as opposed to looking at the pipeline of opportunities and realizing that you don't quite have enough sales individuals to go out (multiple speakers)

Not so much sales. Again, it's mostly delivery. Sales in courts and justice are very productive. They tend to be bigger deals. And our current staff with the typical additions to it has the capacity to be responsive to the opportunities we're working on. But the contracts themselves, just as you indicated, as well as the business -- we have a high degree of confidence will materialize over the next few quarters -- requires that we gear up a little bit quicker in that area of our business than we have been.

Lastly, wondering if you can comment on the overall market environment. It almost seems like you've got a lot of this market to yourself, and the deals in many cases now are pretty good-sized deals. Are you seeing anything new in terms of competitive responses for either some of the mid-market ERP companies out there, or some of the bigger guys making a better vertical effort to get into this space?

Not really; I don't see anything new. There are fewer players, and they're certainly out there in the marketplace. And obviously, a lot of the processes are very competitive. But our market shares remained pretty good. And I think with the success of a number of installations that have some time under their belt on the court side, along with what's always been a very competitive product, the complete offering has become more competitive.

(OPERATOR INSTRUCTIONS). Ruchir Lahoty, Thomas Weisel Partners.

Great quarter. A couple of questions. First, on the appraisal side of the business, as I look at the numbers, backlog for the appraisal side of the business has gone down. Is that a trend that you should see going forward? Would contribution to revenues from appraisal services go down going forward?

Actually, no; I don't think it's a trend. We look to that business to be relatively flat, although as I indicated, it will be up 5 to 8% this year. And the miss on being flat will probably be to the high side, but not significantly. But we could see some modest growth there. Mostly the backlog falling off a little bit there had to do with reviewing some existing contracts that were long-term contracts with some of our larger clients. And as those were restructured, some of the out revenue went away.

Okay. You haven't given this out yet, but is it possible to know what was the deferred revenue at the end of Q3?

Sure. Deferred revenue at the end of Q3 was 52.8 million.

Okay. Which is lower than what it was at the end of Q2. Any reason for that?

The reason would be, as Brian looks, is the end of Q2 is the biggest renewal of annual support agreements. So, that kind of spikes up then, and then you work a quarter of that off during the quarter. So, that really doesn't mean anything. Because again, 98, 99% of those get renewed. So, whether there's nine months left on one of those agreements or three months isn't something you want to put too much into.

That's right. It was 55.8, but we amortized off some of the maintenance part there.

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

Speaking, guys, of the more complete product, you landed that project in Georgia where they signed up your whole fleet of projects -- products, I mean. Is that an anomaly? What kind of sense do you see in your own marketing efforts that a full suite now is giving you opportunity to do things like that? And is that kind of something that could be out there in a way of acting as a potential benchmark for future business?

I think it takes a long time for the marketplace to change its habits, David. But certainly we're pleased with that, and we'll certainly try to use it as an example to other counties. I think it's more likely that what we'll see in terms of, say, the next couple of years would be good, loyal, existing Tyler clients with one division look more and more to the other divisions for their other solutions. So, I think it would be more typical that someone who has bought a court system or has bought a financial system from us, that we would have an advantage leveraging our other products in there.

Monday I was at the MUNIS user customer conference in Chicago. There were 1200 customers there. And they're not -- it's a very early leading indicator, but to see the folks go to the tables and booths that are long-time, loyal MUNIS customers, and learn more about our educational system or our public safety system, is encouraging. So, that is one of the initiatives that takes longer than some of the others, say, the geographical expansion we've had. But clearly it's part of the strategy.

As far as -- you indicated you've got five out of the top 20 counties now on the court and justice. Is that kind of visibility in that kind of marketplace giving you the ability to upscale the size of the contracts, whether it's for MUNIS or other things that you're doing there? Is that helping you at all in moving up the project size with new customers?

Yes. Well, they by themselves are, obviously, significant. And I think I highlighted four or five other deals that were average of a couple million dollars each. So, we are seeing more and more business in that size range. I don't think we're changing our price point much; we're okay with that. And I think the volume itself will give us the margin expansion we're looking for, and keep our competitive position strong.

So, this whole -- the projects having broader products, bigger visibility, it's just giving it an overall good tone to larger, larger contract awards then?

Yes. That's -- again, that's been a longer-term process than the geographical expansion. And a lot of it is just a cultural thing. There are certain names associated with tier 1 type opportunities, and we have the functionality and the technology and the service capacity to deliver there. And as we win handfuls of deals like the ones we highlighted and perform on those, we think they'll bring more business and we'll have more and more credibility in that market.

One last question. You had indicated, I think, [you're just] following a new CRM system across the Company. One, what do you -- what's that going to get you that [you] didn't have before? And two, is there any other ERP systems that you may want that you're going to need or want to install here in the next year or so?

I'll take the second one first. That is -- no; there aren't any other projects like that that are imminent. There's always some IT initiatives going on to stay current, but nothing like that. Our financial system is something we would expect to stay with. So, this is something we've been looking to do and have been now working on for some time.

It probably does two things for us. Each of the different divisions basically have the CRM systems that they had prior to Tyler. Some of them are homegrown. Some of them are various applications. And so it gives us a newer, more state-of-the-art product that has functionality beyond what we have had before, and higher quality to it. So, I think it should, in each of those areas of our business, improve our ability to be responsive to the client.

The second thing it does is it integrates the Company, so that ultimately, when you talk about the site where we sold most Tyler products to a single site, it will enable them to call or e-mail or contact one way or another a single point. And those calls and e-mails can be distributed automatically to the right help desk. Those help desks will have the information in front of them for all the different applications. Somebody who had an appraisal product of ours out of Plano could see that there was a tax call that was handled in Portland, Maine that morning, and what the details on that are. So, it will present the Company and our service deliverable as much more integrated to our clients in the marketplace, and put us in a position to share that information and knowledge base, and be more responsive to the client.

It also should help in the sales initiative.

(multiple speakers)

No question about it. Prior to this, we might go to an opportunity like that and literally give them three different places they would call for service to different Tyler products. And now there is one place that they can contact us. And all the calls and all the information [are routed] properly. And then, whoever the service provider is they ultimately reach, they will have the benefit of all that customer information, including information from other divisions and other products outside that facility.

Great. Thanks a lot. Doing a great job.

It appears there are no further questions at this time. Mr. Marr, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, Mark, and thank all of you for joining us on the call today. If there are any further questions, feel free to call Brian or myself. Thank you.

That does conclude today's conference. Thank you for your participation. You may now disconnect.