泰勒科技 (TYL) 2006 Q4 法說會逐字稿

Welcome to today's Tyler Technologies fiscal 2006 fourth quarter and year-end results conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies.

Mr. Marr, please begin your call sir.

Thank you and welcome to our fourth quarter and year-end 2006 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I would like Brian to give the Safe Harbor statement, then I'll have some preliminary comments. Brian will then review the details of our operating results. Then I'll have some final comments and we will take your questions. Brian?

Thanks John. During the 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 refer you to our Form 10-K and other SEC filings for more information on those risks. John?

Okay, Brian. We are pleased with our performance for the fourth quarter as well as the full year 2006. The fourth quarter represented Tyler's 23rd consecutively profitable quarter. While we experienced double digit growth in all major revenue areas including licenses, maintenance, professional services, as well as appraisal services, the mix was favorable as well. Software licenses grew 27% for the year, followed by maintenance, which grew virtually in line with the overall company growth rate. Our business model continues to perform well as we saw annual revenue growth of 15% produce a 22% increase in gross margin, 71% growth in operating profit, and 75% growth in net income. In fact, without the impact of stock based compensation, 2006 would have earnings growth of right around 100% over 2005.

We also continue to see strong free cash flow. In 2006, free cash flow grew 22% to $22.5 million. For the year, free cash flow was 56% above our GAAP earnings. Tyler has broadened its product offering, expanded the reach of its sales and service channels, and with a 27% increase in new license revenue and a 33% increase in software related backlog, we believe the market has validated Tyler's competitive advantages and clear leadership position. The prerequisite for sustaining Tyler's revenue growth ahead of industry growth rates within a business model of producing increasing margins is consistent excellence in the services and continually improving the competitive positions of our products.

While 2006 results are encouraging, it's important to appreciate that these results were achieved while we invested significantly in products, acquisitions as well as building out our national sales and service channels. These investments should serve us well going forwards. Now I'll turn the call back over to Brian for more detail on the financial results.

Thanks, John. Yesterday, Tyler Technologies reported its results for the fourth quarter ended December 31st, 2006. We continue to experience double digit revenue growth across all of our major divisions, and in each revenue category. With substantially higher growth in operating income and net income as a result of operating leverage. For example, with revenue growth of just under 16% for the quarter, we had had a gross margin increase of almost 200 basis points, operating income grew 30% for the quarter, and net income grew 34%.

For the fourth quarter of 2006, Tyler had revenues of $51.2 million, up 15.5% from the fourth quarter of 2005. Operating income was $6.3 million, an increase of $1.5 million or 30.5% from the fourth quarter 2005 operating income of $4.8 million. Net income for the quarter was $4.2 million or $0.10 per diluted share, compared to net income of $3.1 million or $0.07 per diluted share in the fourth quarter of 2005. Results for the fourth quarter of 2006 included total of $431,000 of noncash expenses associated with our share based compensation plan. Of which $37,000 is included in cost of revenues and $394,000 is included in SG&A expense.

Cash flow from operations was 4.1 million for the fourth quarter, compared to $4.5 million a year ago. Free cash flow was $3.3 million compared to free cash flow of $3.9 million for the fourth quarter of last year. The decline from last year's fourth quarter was primarily due to the timing of working capital changes, primarily payroll. For the year ended December 31st, 2006, free cash flow was $22.5 million, compared to $18.5 million for the same period in 2005, an increase of 22%. EBITDA for the fourth quarter of 2006 increased 17.8% to $8.8 million from EBITDA of $7.5 million in the fourth quarter of 2005. A reconciliation of GAAP income to EBITDA is included in our fourth quarter earnings press release.

Our revenue growth continues to span all of our product areas. Each major operating division of Tyler achieves at least 11% revenue growth over last year's fourth quarter. Our software related revenues, which include software licenses, software services and maintenance increased in the aggregate 16% over the fourth quarter of 2005. Software license revenues increased 17% over last year's fourth quarter, driven in large part by growth in court and justice products and other newly released Java-based products. Software services were up 17% from last year's fourth quarter, and maintenance revenues grew 14%. Appraisal services revenue for the fourth quarter also increased 13% from the fourth quarter of 2005 to $5 million. The growth in appraisal services revenue is due to increased business associated with Ohio's revaluation cycle as well as the addition of new customers in other states. The Ohio re-evaluation cycle is almost complete and the level of appraisal revenues in 2007 will depend on our ability to replace the Ohio appraisal services contract.

The revenue mix for the fourth quarter of 2006 compared to the fourth quarter of 2005 was as follows. Software licenses, 19% versus 18% last year. Software services, 29% for this year and last year. Maintenance, 37% versus 38% last year. Appraisal services, 10% for this year and last year. And hardware and other, 5% for both this year and last year. Overall, 85% of our revenue mix was software-related for the fourth quarter of 2006. Unchanged from the fourth quarter of 2005.

For the fourth quarter of 2006, our overall gross margin was 39.6%, up 190 basis points, compared to 37.7% in last year's fourth quarter. Our gross margin improvement was driven primarily by improved software license margins as well as improved appraisal service margins, following the restructuring of that business in last year's second quarter. Sequentially, gross margins decreased 60 basis points from 40.2% in the third quarter of 2006, primarily because of a slightly lower mix of license revenues in the fourth quarter, relative to the third quarter. Software license margins for the quarter increased significantly from last year at 71.4%, versus 68.0% last year. The increase in software license gross margin is driven primarily by increased license revenue, offsetting fixed software amortization cost included in the cost of sale. The blended margin for software services and maintenance was 32.6%, compared to 31.3% for the same quarter last year and increased from 32.1% in the third quarter of this year. Gross margin for appraisal services was 34.0 % compared to 29.3% in last year's fourth quarter.

SG&A expenses were $13.6 million for the fourth quarter of 2006, and $11.6 million for the same period in 2005. Fourth quarter 2006 SG&A expenses were 26.7% of revenues versus 26.2% for the same period in 2005. SG&A expenses for the fourth quarter of '06 include $394,000 of share based compensation expense. Excluding this expense, which was not present last year, SG&A expenses were 25.9% of revenue for the fourth quarter of '06. We remain very focused on carefully managing overhead cost to keep the rate of SG&A growth below our revenue growth rate. Our effective income tax rate was 38.0% for the fourth quarter. Our backlog at the end of the calendar year was $205.9 million, compared to $165.4 million at December 31st, 2005. And $197.7 million at September 30th, 2006.

Backlog related to our software business, which excludes backlog from appraisal services contract, was $183.3 million at December 31st, an increase of $12.1 million or 7.1% from the third quarter of 2006 and an increase of $46.3 million or 33.8% from December 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 $22.6 million at December 31st, 2006, compared to $26.5 million at September 30th, 2006. The decline in appraisal services backlog from the prior quarter reflects the near completion of the Ohio reappraisal work.

During the fourth quarter, we repurchased 46,000 shares of our common stock on the open market at an average cost of approximately $13.20 per share. For the full year 2006 we repurchased a total of just over 1 million shares of our stock at an average cost of $10.19 per share. Our remaining authorization of shares that may be purchased totals approximately 1 million shares. Our capital expenditures during the fourth quarter were $833,000, primarily related to new internal IT systems, included $33,000 of capitalized software development. CapEx for the fourth quarter of last year was $589,000 and included $51,000 of capitalized software development cost. Although during 2006 we spent significant amounts on product development, the vast majority of our development cost in 2006 were expensed.

Amortization of post acquisition software development cost was $1.2 million in the fourth quarter. Days sales outstanding and accounts receivable at December 31st 2006 was 102 days compared to 101 days at December 31st, 2005, and 80 days at September 30th, 2006. The increase in DSOs compared to the third quarter is due to normal seasonality with a relatively large annual maintenance billing at the end of December.

Stockholders equity at December 31st, 2006 was %125.9 million, we continue to have no debt outstanding and in January, we terminated our revolving credit agreement, which we had never utilized. We still maintain a $10 million secured letter of credit facility under which the bank issues LCs to assure our surety bond facility. We believe we would be able to access debt or equity financing on reasonable terms if we had a need for additional capital, something that we currently do not anticipate. Now I would like to turn the call back over to John for further comments.

Thank you Brian. Our 2006 results provide validation that we're in a good market and have a sound business model. However, it is equally important to point out these adults are only achieved through the daily high level execution of 1500 dedicated Tyler employees. Collectively, our employees are Tyler's competitive advantage. We built products and deliver services that are most robust and more targeted to our customers and marketplace than anyone. That is a direct reflection of our staff's skills, experience, subject matter expertise and their commitment to Tyler and our customers.

Turning to our products, financial systems continues to be the foundation, representing 60% of all revenues in the quarter. In the fourth quarter, Tyler sold 34 new customer financial systems across 21 different states. As part of our long-term financial product strategy, we recently announced a new strategic relationship with Microsoft. Through this partnership, Tyler will codevelop Microsoft Dynamics For the Public Sector. This product will be marketed internationally as well as domestically into the federal, state and local markets through the Microsoft partner channel. The partnership will provide Tyler with the opportunity of significant incremental revenue for markets we currently don't address. The product will also be marketed directly by Tyler into our traditional market, as well as be made available to our existing customers.

We're very excited about the potential of this relationship. Certainly Microsoft's brand, development platform, ability to closely integrate to other Microsoft products as well as their market reach and customer base represent a great opportunity for Tyler. We are also pleased that Microsoft, the world's largest software company, recognized Tyler as a partner in equally qualified to add value to their public sector solution. As I indicated earlier, it is critical that while achieving current results,Tyler continues to invest in products in order to serve our customers and enhance our competitive position. This project represents that type of long-term commitment. While we're enthusiastic about the Microsoft partnership, it's important to emphasize that the return on this investment will not be seen for some time. More than likely, we will see limited revenue in 2009 and meaningful revenues only begin to build in 2010. With this in mind, our existing products continue to deserve focus and many of our resources.

The total number of developers on our existing MUNIS, EDEN, and INCODE financial products has grown 18% since this time last year. These are today's products. Each of these products serve important market for us, and we will continue to do everything we can to maintain and improve their respective competitive positions. These products all have many years left in their product cycles, currently represent the best combination of current technology combined with high quality and robust functionality that the market has to offer. We currently see the financial market as seasonally soft, but expect as usual that that will pick up as the year progresses.

Moving on to courts, it's taken a while, but at this point I believe it's fair to say that Odyssey has achieved broad market acceptance and enjoys a very strong competitive position. We have now been selected with by five of the largest 20 counties in the country, selected for statewide deployments, as well as successfully sold the system into our traditional mid market base. The courts market appears to be more robust than we have typically seen and we have focused on building capacity to respond to strong demand for Odyssey.

Our tax and appraisal division performed very well in 2006. After a major reorganization in 2005, management of this division led a tremendous turn around. While all other areas of Tyler experienced growth in revenues and earnings, this division contributed the most to our overall 2006 earnings growth, turning a disappointing loss in 2005 to a meaningful operating profit. At the time of the reorganization, we said we believe this division offers complementary products and services to our customers further enhancing our vertical presence and that it can be a steady $40 million division generating 10 to 12% operating profit, that's pretty much where they are today.

Last month Tyler acquired Advanced Data Systems. ADS is a leading provider of financial systems to small and mid size school districts, mostly in New England. They have an attractive product and enjoy an excellent reputation. We believe that their staff as well as their 200 customers fit well within our financial division. On their own, they're a good small company with about 50% of their $3 million in sales coming from maintenance contracts. However, we believe that there is demand for their products outside New England, and that we can reach those markets through our existing sales channels. It's a relatively small tuck in type of transaction, but I believe high in quality and mostly complimentary with some up side over time.

Our 2007 guidance remains unchanged. We expect revenues of 218 to $222 million, diluted earnings per share of $0.39 to $0.44, with fully diluted shares of approximately 42.4 million. For the year, estimated pretax expense related to stock options in the employee stock purchase plan is expected to be $2.5 million or approximately $0.05 per share after taxes. We estimate an effective tax rate of approximately 39% for 2007. Free cash flow is expected to be between 25 and $29 million, the total CapEx is expected to be between 3.5 and $4 million for the year.

Our guidance for 2007 includes the estimated effects of earnings on earnings and free cash flow for the planned product development including costs to broaden the functionality of Microsoft Dynamics AX for the public sector under a strategic alliance with Microsoft. The actual amount and timing of those costs and whether they are capitalized or expensed will likely vary from our current estimates. We will continue to refine our guidance as these developments and plans evolve. Now we will take questions.

We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. We will pause momentarily to assemble the roster. Our first question comes from Brian Kinstlinger, Sidoti & Co, please go ahead.

Hi, good morning.

Hey Brian.

The first question I had, do you guys have, or do you track a bookings number and how it compared in '06 versus '05, the number of announcements we had was so many more than last year, and there's a backlog growing. I would like to see if you can quantify the actual bookings numbers.

We don't actually track -- well, we track it. We don't actually disclose that number. We just give the backlog at the end of each quarter. Clearly bookings are up significantly over last year and a big piece of that is in the Odyssey courts area.

And the backlog you've talked about it's grown nicely, it's growing much faster than revenues, so maybe talk about the challenges or the plans you have this year in terms of hiring people to get through that backlog and turn that into revenue, maybe you can give us, developer head count or is that consultants in the integration that you need to hire, what kind of growth we will see there?

Okay. Yeah, the financial side of the business continues to perform pretty, pretty steady the way it has in the past, mature applications, they're generally delivered and recognized relatively quickly from the time that we get the awards in the marketplace. And things kind of go on as steady there. The big difference is the new business on the Odyssey side. Those contracts are handled quite differently. As you know, some of them are pretty large, multi year type of deployments. And the revenue recognition that goes along with them is usually percentage of completion base so the license revenues are recognized over the length of the project, which as I said can be a multi year type of deployment. So it goes into and remains in backlog considerably longer than the way our financial business works.

We do have a nice backlog related to the courts systems. We have probably about doubled our capacity in terms of delivering that and maintain very high quality in the resources that we have in delivering those as we anticipated this business. We can continue to add resources and capacity to that channel as well as leverage of resources and other parts of the company that can help deploy those projects. So we are again, kind of earning that revenue and working it off at a good rate and being responsive to the contracts, but our experience in the marketplace is strong enough that we continue to win new business at least at the clip that we're earning it off, and I think that's where you see combined with the revenue recognition the backlog growing at a higher rate than it it has traditionally.

Follow up to that one question, is there a place you need to hire more people to get through that backlog in response to your customers not being able to maybe get the system as fast as they want or is it sort of status quo, you have the people and you work through it the way it is, sorry.

We're certainly able to be responsive to the commitments and contracts we're making. And I don't think that's an issue, I don't think we have the marketplace requiring these deployments at a faster rate than we're being responsive to. At the same time there's no question we're hiring. The biggest areas of us hiring right now are in the Odyssey deployment channel, some of the Odyssey core development and other integration and conversion types of resources to support the growth they are seeing there. Along with some development in the other areas of the company.

Okay. One last, two part question, completely unrelated. First, Brian, if you could touch on the DSO, like last year it's high in the fourth quarter, maybe talk about why that happened. Then the other question I have, I'll get back in the queue, for John is revenue guidance did the same is, you acquired about a $3 million company, maybe discuss the dynamics of that, thank you.

I'll touch on the DSOs, receivable. They typically do spike up at December, then spike up again at June 30th. Those are both major maintenance billings periods. If you will recall we have most of our maintenance is billed annually in advance and there are different dates on which that happens. Some of our products we bill on customers renewal dates, but there are large spikes in those at December 31st and again at June 30th.

So you see a large increase in receivables with that, but those revenues are recognized over a 12 month period. So there's not a corresponding increase in revenues associated with that billing, so you see the DSO calculation spike up, then you see that followed by extremely strong collections and strong cash flow in the first quarter and the third quarters respectively.

In regard to the acquisition, sure, there's some more revenue there that was not in the original plan the guidance was based on. However, those plans, the last 10, 15% of the revenues in those is plans is a pretty dynamic equation with a number of different variables and, some combination of those things has to happen and is expected to happen to reach the guidance and I just don't think that we would want to change that necessarily this early in the year for a small acquisition of about $3 million. However, obviously those revenues are incremental and make the revenue target that much more reasonable or potential ability to move to the upside of that at some point throughout the year may be a little more likely. However I would caution on the earnings side, generally even good acquisitions like this generally have a hard time contributing to anything incrementally in earnings in the first year.

Obviously, whatever margins we achieve on $3 million of revenues is going to be pretty insignificant to our overall performance, but even with a profitable acquisition, you've got purchase price accounting on maintenance contracts which is half of their business, and really kind of typically a rather, not normal type of an accounting environment for certainly a few quarters after acquisitions. So there could be some marginal up side on the revenue, probably not anything, mostly from an accounting standpoint on earnings this year. But, be a nice foundation and a nice little tuck in on subsequent years.

And your next question comes from Tom Meagher, FBR, please go ahead.

Thank you, good quarter. Let me start with a quick clarification. John, did you say the tax rate you were expecting was 39%?

Yes.

I think the in the press release, the copy we got said 38%.

Let me correct that, it is 38%.

It should be 38, okay, thanks Brian. Secondly, in terms of the appraisal business, have you seen any negative impact from the weather that we have been having in the first couple months of the quarter.

Actually we have. Good observation. I don't think it's that material, like I said certainly doesn't change annual guidance for 2007, but it is possible that we might be off, a couple of points, a couple hundred basis points on appraisal gross margins in the first quarter as a result of resources that can't be fully deployed in the weather. Again, I don't see it being real material, but we will see some marginal effect in the first quarter.

Then just finally, talking about your M&A strategy, would you characterize it it as being more product focused or more geographically focused or some combination of the two.

Probably more opportunistic. It probably is more geographic in customer base, continuing to expand our leadership position in terms of the market and customers. I don't see a lot of new products that we would be remarketing coming in consistently, but we have been pretty disciplined, looked for high quality assets, good customer bases and products that have life left in them and customer bases that would benefit from our other product initiatives further down the road. When we find them we do a transaction. But quite frankly, finding those -- assets of those quality at reasonable valuations has been a challenge.

Okay, thank you very much, I appreciate it.

Yes.

And your next question comes from Charlie Strauzer, CJS Securities, please go ahead.

Good day. Two quick questions. If I look at the guidance for the year how should I think about gross margins trend by segment over the course of the year or full year basis.

You mean by revenue type?

Yes, I mean if I look segment broke down, if you look at the gross margin trends for the year, do you expect any specific outliers from that or can you give us a little bit more granularity there?

On software licenses, the cost of those licenses is relatively fixed, amortization of our development cost. So the margins there really vary pretty directly with the level of revenues. So the incremental margins are very high. Although we didn't break it out by revenue type, we did note in our guidance we expect as in prior years that kind of in the area of 60% or more of the revenues would come in the second half of the year. We would expect in the second half of the year the margins to be stronger on the license side.

On the services side, the incremental margins on new revenues aren't that different. So we would expect to see them improve throughout the year, but not as dramatically. So in general I guess maintenance and services we expect to see some sequential improvement through the year, but again it varies with the revenue level. Appraisal services, as John mentioned, in the early part of the year, likely are going to have some pressure on the margins and more likely to be stronger in the second half of the year.

Great. Then John, you look at the Microsoft partnership and think back, six, seven years ago when you kind of embarked on building a new core framework for the Odyssey platform, which then turned into Orion, is this a similar type of a -- on a redevelopment kind of down the road, that's how we should look at this, is this a new product, kind of new core framework?

Yes. But this is an additional product. It won't necessarily replace our other products. They will continue to live the product life cycle that they would have absent this type of project. So it's not being done to necessarily replace the products, those other products have very strong competitive positions and I think are going to continue to be better products on the marketplace for some time. So this is a new product development effort, but it's incremental to the others. Unlike courts or appraisal, where obviously there isn't anything like courts in the commercial sector, there's not a courts for commercials that you can then kind of refit for government, obviously financials and payrolls, while we have always believed those products need to be very ready out of the box, for government that allows you to have pretty well defined scope and to execute projects on time and on budget and that's been a strength of Tyler to be able to rein in these projects and execute them with a lot of predictability and reasonable cost of ownership to the marketplace. Not always seen with products that are on the commercial side as well.

But there is clearly a core to those systems that is similar from commercial to the government and traditionally the marketplace has had to choose between a vertical oriented system that's very specific to their needs and a very powerful horizontal type application from tier one type software vendors that is difficult to make do the specific things for the government. This project is designed to provide the best of those two different worlds without the noise around them. That's really what we're doing with them. So we're taking their development platform and their core functionality that is very strong and very robust, very integrated to other Microsoft tools and yet really reshaping that application to have the functionality that government needs and as importantly, not have the noise that's not important to government that's in the commercial systems.

Is it kind of a more simplistic way to look at this, when you look at larger municipal opportunities like larger cities like say New York or Boston where they may go with somebody like an SAP or an Oracle, is this going to make you more competitive in that environment do you think?

Absolutely. I think having the horizontal and core technological functionality that the Microsoft type of company provides, then our extensions for local government is going to make it a very appealing system to those governments and I also think that partnering with Microsoft and having the Microsoft brand will be a way that a relatively small company like Tyler can compete with the kinds of companies that typically are successful in that space.

Basically taking your best of breed off the shelf capabilities and putting in a customizable feature with some of this new operation ability.

Right.

Got it, very good, thank you very much.

Sure.

And your next question comes from David Yuschak, Sanders, Morris, Harris, please go ahead.

Congratulations guys on a great year. The acquisition of the Advanced Data Systems, could you guys give us an idea how much business you do in the school districts today relative to some of our other traditional government entities?

We have about 3,000 cities, counties and school districts using our financial systems. About a thousand of them are schools. And that probably holds pretty true if you go through new business as well. That maybe around a third of our new business, are schools on a dollar basis, probably fewer on a number of new customer basis, so it's a meaningful part of our financial business. All our divisions don't play in the school market. MUNIS does to the greatest extent, but it's a meaningful part of our financial business. However, while INCODE does a tremendous job offering $100,000 turn key solutions to small cities and towns, and can do that profitably, where MUNIS doesn't scale down quite to that level, and Eden doesn't scale down quite to that level, this is the same thing on the school side.

ADS can do those small and mid size transactions, they can make money on them, reasonable margins, get them on the customer maintenance rolls, and that's their business model. MUNIS struggles a little bit scaling down to that size range. While it's somebody we have been very aware of over the years and they do a really nice job, we don't compete directly with them that much, only maybe 10 to 20% of the time do we actually end up in situations where we're competing directly with them. They will be mostly complementary even in the northeast, then there's market outside the northeast that they haven't reached that we should be able to introduce them to.

On the school side, then to the acquisition you made last year, the calendar apps, the absentee stuff and all that. How does things, because last year couldn't have been meaningful just because you missed the the season. How much, are you expecting much out of them this year and if not what can be the potential and what might you need it to see there to get traction it this year when it comes to the selling season.

Well, I think we said when we acquired it that if you use odyssey as an example, it's a five or six year cycle from the time you begin to design a new system to where odyssey is now, implementing several or many systems at a time and beginning to perform financially. That's a very long process and rather than start from scratch, we thought there was a very attractive system on the marketplace that we could acquire and did, and that the purchase price was generally what the cost of the first, say, three years of that five or six year cycle was. That's exactly where we entered that cycle, which means that we knew and there is a couple of years of completing that product and working with the early adopters and making it more mature and robust so it can be sold to many sites at a time and perform financially. This past year, '06 was certainly a year of investing in that.

'07 will be a little different mix, I mean there will be more investment than there will be revenues, no question about that. And probably, the following year those would start to balance and become hopefully profitable and a contributor beyond that. So you can see it's a very long cycle, we're committed to always have something developing in a company like that. As our company has grown, those investments are much more reasonable proportionately, than, say, they were when the Odyssey project was going on. But that's kind of the time line. It is definitely still in an investment mode. We're happy with the product and the potential of it down the road, but certainly not contributing yet.

Thanks a lot.

The other thing David I will mention we have done there as we indicated when we acquired that company, they had an offshore development capacity and are leveraging that and growing that and that is making a contribution both in our ability to be responsive even in areas like we have discussed with Odyssey there are a number of people working on the Odyssey product in the offshore facility as well as some other initiatives. So there's a cost benefit there as well as an opportunity to be more responsive to customers in the marketplace than we otherwise would have been.

Okay, sounds good, appreciate it.

Sure.

[OPERATOR INSTRUCTIONS]. Your next question comes from Ruchir Lahoty, Thomas Weisel, please go ahead.

Hi guys, good quarter.

Thank you.

A couple of questions. First one deferred revenue number at the it end of this quarter.

The deferred revenue number?

Yes.

Deferred revenue, hang on just a second.

Maybe you can come to it --

Okay, here it is. It was $62.4 million.

Okay, that's a decent bump from 52.85 in the previous quarter, something expected or are we seeing better, or the same around?

No, that's it pretty much expected. Again a lot of that's maintenance so the maintenance billings at December go into the deferred revenue side. Then again with a lot of the signings, particularly in the Odyssey world, that those, the the majority of that contract goes into deferred revenue, then gets recognized on a percentage of completion basis, at least to the extent we have been paid for it.

Okay. Another question, one of the contracts that was won a couple weeks ago was an ASP model in Illinois. Could you just outline as to how this contract was structured, how the revenue would flow in and so on.

Typical ASP engagement for us, there's one price for the client and it includes really recovering the services required to deploy the site initially, it's a new customer. So it includes those services, includes what would be maintenance types of services in a typically deployed engagement, the hosting cost as well as a percentage of license purchase on an annual basis. So it really annualizes the license purchase and recovers the services over time and becomes more of a recurring relationship.

At some point do you envision going into transaction based mode?

I don't think so. I don't know that it would be that advantageous given our customers have very stable numbers. The number of tax bills and employees and those things aren't nearly as volatile as growing and shrinking customers would be. The other thing is that it wouldn't serve our marketplace well. One of the things we try to do is have very predictable cost for our clients. They don't want surprises. They don't mind paying fairly, we certainly have a business model that allows us to earn reasonable margins, but they don't like surprises and that type of volatility. So we do prefer more of a recurring are revenue model and we do what we can while serving our clients to move in that direction. But probably wouldn't move to transaction based.

Okay, thanks so much.

Sure.

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

Okay, thank you. Thank you all for joining us on the call today. If there are any further questions feel free to contact myself or Brian, have a good day.

This does conclude today's conference. We thank you for your participation.