泰勒科技 (TYL) 2007 Q2 法說會逐字稿

Hello, and welcome to today's Tyler Technologies second quarter 2007 earnings conference call.

Today's call is being recorded.

Your host for today's call is John Marr, President and CEO of Tyler Technologies. Mr. Marr, please begin your call.

Thank you, Carolyn, and welcome to our second quarter 2007 earnings call.

Joining me from my management team is Brian Miller, our Chief Financial Officer. First, I would like for Brian to give the Safe Harbor Statement, then I'll have some preliminary comments and Brian will review the details of our operating results. Then I'll have some final comments and 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?

Thank you Brian.

The second quarter of 2007 represents Tyler's 25th consecutive profitable quarter. Overall our business continues to grow. Tyler posted results for the second quarter in line with our expectation, and generally with overall solid performance. While we experienced some softness in license revenues which can be inconsistent, we did see a continuation of double-digit revenue growth in software services, maintenance services, and appraisal.

We believe we have achieved the leadership position in the local government software market and have a very good opportunity to expand and solidify this position, consequently we are making significant investments in virtually all of our existing products while concurrently supporting the ramp-up of our commitment to the Microsoft Dynamics development project. Our objective is to continue to grow Tyler revenues, make gains on gross and operating margins, while we invest aggressively in our products, and we believe the model we have built supports this objective. Tyler has invested $11 million in our company stock so far this year and ended the quarter with $35 million in cash and investments, providing us with a strong balance sheet and a high degree of flexibility.

Now I would like for Brian to review the quarter.

Thank you, John.

Yesterday Tyler Technologies reported its results for the quarter ended June 30, 2007. For the second quarter of 2007, Tyler had revenues of $54.1 million, up 10.1% from the second quarter of 2006. Operating income was $5.8 million versus $5.6 million for the second quarter of last year. Net income for the quarter was $3.8 million or $0.09 per diluted share in both this year and last year.

Cash flow from operations was $1.9 million for the second quarter, compared to $625,000 for the same period a year ago. Free cash flow was $972,000, an improvement of $1.8 million over negative free cash flow of $780,000 for the second quarter of last year. EBITDA for the second quarter of 2007 was $8.4 million, compared to EBITDA of $8 million for the second quarter of 2006. A reconciliation of GAAP income to EBITDA is included in our earnings release.

Our software related revenues, which include software licenses, software services and maintenance increased in the aggregate 9.3% over the second quarter of 2006. Software license revenues decreased 14.6% over last year's second quarter. Software license revenue related to our financial products, which comprised approximately 74% of our software license revenues in the quarter, declined 15% from last year.

Four factors contributed to the decline. One, a difficult comparison due to high license revenues in last year's second quarter when we recognized license revenues on certain large contracts including the contract with the United States, Virgin Islands. Two, timing of certain deals that fell early in the third quarter rather than in the second quarter.

Three, deferred revenue requisition of licenses on certain contracts due to provisions that cause us to be able to recognize services revenues, but to defer license revenues until milestones or billings are achieved And fourth, more ASP type service arrangements that result in more revenue being recognized as service fees versus license fees.

Software services were up 17.7% from last year's second quarter and maintenance revenues grew 15.5% from the second quarter of 2006. Appraisal services revenue for the quarter increased 17.6% from the second quarter of 2006, primarily because of high activity in connection with the high revaluation projects which will be winding down this year as that cycle progresses.

The revenue mix for the second quarter of 2007 was as follows: Software licenses 15%; software services 33%; maintenance 38%; appraisal services 11% and hardware and other 3%. For the second quarter of 2006, the mix was: licenses 20%, software services 31%, maintenance 36%, appraisal services 10% and hardware and other 3%. Overall 86% of our revenue mix was software related in the second quarter of 2007, and 87% for the same quarter in 2006.

For the second quarter, our overall gross margin was 37.6% compared to 38.5% in last year's second quarter. Sequentially, gross margins increased from 35.8% in the first quarter of 2007. The decrease in blended gross margins from last year's second quarter was due to lower software revenues in the revenue mix for the second quarter of 2007. The sequential increase in the blended gross margins from the first quarter of 2007 was driven by improvement in software license, software services and maintenance revenues and margins.

Software license margins for the quarter were down from last year at 71.4% versus 71.8% last year. The decrease is due to higher license revenues in the second quarter of 2006, offsetting fixed software amortization expense. The blended margin for software services and maintenance increased to 31.4% from 30.0% for the same quarter last year, and increased sequentially from 29.8% in the first quarter of this year.

The gross margin for appraisal services was 31.8% in the second quarter compared to 32.4% in last year's second quarter. SG&A expenses were $12.8 million for the second quarter of 2007, compared to $12.2 million in the same period of 2006. Second quarter 2007 SG&A expenses were 23.6% of revenues, compared to 24.8% in the same quarter last year. SG&A expenses declined in absolute dollars and as a percentage of revenues from the first quarter of 2007, primarily due to lower health claims costs which spiked unusually in the first quarter.

Research and development expense increased 73% to $1.4 million in the second quarter, reflecting the start of development efforts under our new alliance with Microsoft which we began in the first quarter of this year, as well as other new product development projects. We continue to expect that virtually all of our new development expense in 2007 will be expensed rather than capitalized.

Our backlog at June 30, 2007, was $203.9 million compared to $195.5 million at June 30, 2006, and $197.8 million at March 31, 2007. Backlog related to our software business which excludes backlog from appraisal services contracts was $186 million at June 30, an increase of $10.7 million or 6.1% from the first quarter of this year and an increase of $23.7 million or 14.6% from June 30th of last year. Appraisal services backlog was $17.9 million at June 30, 2007, compared to $22.4 million at March 31, 2007.

In the second quarter we signed 17 new contracts with license fees of more than $100,000 each with average license fees for those deals of $696,000. This includes the Indiana Odyssey contract which has a license fee of more than $7.7 million that will be recognized on a percentage of completion basis over the life of the contract. In last year's second quarter we signed 18 new contracts with license fees of more than $100,000, and the average license fee for those contracts was $532,000. Keep in mind that these are contract signings and that recognition of revenue may be in different periods according to the appropriate accounting for each contract.

During the second quarter we repurchased approximately 599,500 shares of our common stock on the open market at an average cost of approximately $11.99 per share. For the year 2007, we have repurchased approximately 889,000 shares of our stock at an average cost of $12.52 per share. Our remaining authorization of shares that may be repurchases totals 2.1 million shares.

Our capital expenditures during the second quarter were $937,000, which includes $80,000 of capitalized software development. CapEx for the second quarter of last year was $1.4 million, and included $40,000 of capitalized software development costs. Although we continue to spend significant amounts on product development we currently expect that capitalized software development will remain at relatively low levels for the foreseeable future and that virtually all of our development costs in 2007 will be expensed.

Amortization of post-acquisition software development costs was $1.1 million in the second quarter, down from $1.2 million in last year's second quarter. Days sales outstanding in the accounts receivable at June 30, 2007, were 102 day, compared to 102 days at December 31, 2006, and 96 days at June 30, 2006. Our stockholders equity at June 30th was $124.2 million, we continue to have no debt outstanding and ended the quarter with $34.7 million in cash, cash equivalents, and short term investors--investments.

Now I would like to turn the call over to John for his further comments.

Thank, Brian.

We were successful in the second quarter in meeting our objectives even without significant software license recognition. We experienced double digit revenue growth including 17.7% growth in service revenues driven by revenues generated from implementation resources added earlier this year becoming productive, as well as increased software services from ASP customers.

Maintenance revenues grew 15.5%, driven by the continuation of exceptionally high renewal with moderate increases from our customer base, the addition of new customers coming online as well as $283,000 of new maintenance revenues from the ADS acquisition we completed in January of this year. Appraisal service revenues were up 17.6%, driven by full staff levels on our Ohio projects as well as Fulton County, which were sold in the middle of last year.

License fees were off 14.6%. After the first quarter, we discussed that licenses were a little soft and we guided a bit lower partly for this reason. Even though our results are consistent with this expectation, softness continued into the second quarter. At this point, certainly you can expect us to continue to practice conservative revenue recognition as well as promote our ASP and annual or software as a service models, and this could unfavorably affect short term license recognition, however, I will report that modest weakness we acknowledged last quarter seems to have been short lived. Our current experience is the market for our products has returned to at least normal levels and our competitive position is positive.

SG&A expense as a part of revenue were down from the same quarter last year, and from the first quarter as we continue to leverage our efficiencies of our business model. EBITDA increased 5% over the second quarter of 2006, even though R&D spend has increased 73%, and we continued to increase staffing as we add capacity to deliver on our record backlog.

Free cash flow increased by $1.8 million from the second quarter of last year. CapEx remains low as we expense virtually all the substantial resources committed to our aggressive development efforts. Our cash position remains strong at $35 million as we head into the third quarter which is historically the highest cash generating quarter.

We signed a number of significant contracts during the quarter, including Hillsborough, Oregon, Lamar Consolidated Independent School District in Texas, each in the $1 million range in our financials division. We also signed contracts with Tucson--United School District in Tucson, Arizona, and Russell County Public Schools in Lebanon, Virginia for our Tyler Educational Management System. We signed another state-wide contract in our courts and justice division with the State of Indiana for $11 million, and we sold our recording system to Orange County, Florida for $1 million. Our backlog increased across all divisions with the exception of appraisal services.

Our outlook for the full year, 2007 remains essentially unchanged from the guidance provided in April of this year. We continue to expect revenues of $218 million to $222 million. We currently expect fully diluted earnings per share to be in the range of $0.37 to $0.42 a share with fully diluted shares of approximately 42 million.

For the year estimated pre-tax expense related to stock options and employee stock purchase plan is expected to be $2.5 million or approximately $0.05 per share after taxes. We also estimate an effective tax rate of approximately 39% for 2007. Free cash flow is expected to be between $24 million and $28 million with total CapEx of approximately $3.5 million to $4 million for the year.

Now we'll take your questions.

We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS)

Your first question comes from Charles Strauzer with CJS Securities.

Good morning.

Hey, Charley.

Hey, how are you, John?

Good.

Question for you--it really goes to the segments, when I look at--first of all the segment--the software license segment, what shall we expect there in terms of overall growth given the lumpiness and timing with that, are we still kind of on track for what you said last quarter?

Yes, I think the update we're providing is a little more favorable than what we reported last quarter. At the end of the first quarter, we indicated that was one of several reasons why we were a little soft in the quarter, and guided a little lower for the year, and at this point, that softness occurred in the first quarter in terms of licenses recognized in the second quarter, it continued, but as I just indicated, our experience in the marketplace in terms of the size of the marketplace itself and the position competitively that we are in in those situations is such that I want to kind of temper what we said at the end of the first quarter. I think, again the market itself and our position that that was a short-term issue and doesn't exist at this point.

Excellent, and then just looking at appraisal, the margins had a good pickup sequentially this quarter. What kind of drove that?

What drove the sequential increase in the appraisal margins is that your question?

Yes, sequentially from Q1 you had a pretty decent jump in profitability in the appraisal services side, is it just better utilization?

Yes, I think the revenues were up a bit, a bit more than we expected. The margin was actually a little bit lower, but the gross profit was higher, and it's just a--we're really kind of in the meat of a couple of--winding up some projects in Ohio, and so there was just a little bit higher revenue level there than the previous quarter, up about $1 million.

And Ohio is still on track really in terms of the wind downtime table you'd laid out previously?

Yes, that starts winding down, really, in the second half of the year.

Great. Thank you very much.

And our next question comes from the Brian Kinstlinger with Sidoti Company.

Yes, hi, guys. Two questions, the first one is are you still in the market for buying back stock this quarter? Will you be in the market when--when the, sort of--the period--the (inaudible) from doing that, will you pick that back up, I'm sorry as I mumble that question?

I don't think our strategy has changed at all. So certainly if we have the opportunity to buy stock the way we did in the second quarter, we--we would be active and expect to continue to execute on the authorization. If--but we'll look at the market and our buying will be based on the value we see there.

And in terms of the software backlog, turning that into revenue, is that just a matter of hiring people, is that a matter of--just give a sense for what has held back the opportunity to move that backlog into revenue a little bit quicker.

Well, it depends on which divisions and products we're looking at, a lot of that, as you know, is the Odyssey system, much of the financial systems are recognized more quickly and either don't go in to or don't spend much time in backlog, and to trigger those recognition events are a number of things. I think we're appropriately conservative on that, though sometimes it's a matter of just , yes, hiring the people or having the people deployed and working those projects and putting in the hours on the percentage of completion basis, but there can be a number of other things that could slow that down as well.

There could be acceptance issues, that even though we have delivered the hours, until we get those acceptances, we don't recognize licenses on those. In some cases if there's any risk of collection, we'll actually not get ahead of cash flow. So there are several different things that have to be met in order to realize recognition of those license revenues, and again, all of them have to be met.

So it is slow recognizing it sometimes. That isn't an indication that we're not performing on the contracts. We have delivered software and significant services on a lot of these contracts, and recognize the service revenue, but in a lot of cases, the licenses stay pretty far behind that line.

Okay, last question I have is a couple of the states that you worked in have either passed or are working on passing property tax relief, and I'm just interested if at all might this affect your business and the budgets for some of your clients, or do you think that will have no impact on your business?

I appreciate that. A lot of people raise that to us.

We certainly haven't seen anything that would effect us and the things we have seen so far, I think so long as they assess property values and generate bills based on them regardless of what the rate is, they are going to have to do the things we do and it would have really no to low effect on your business.

If somebody completely eliminated property tax assessment and billing at the local level, obviously that would have an effect on us, but that would be a very radical change that I think is pretty unlikely in most of the states we have followed this in.

Let me ask in a different way, and maybe I didn't ask it right or it was misunderstood. From what I understood--

I got you, yes.

--a lot of your clients, the local municipalities get their money from property taxes. If that overall budget surplus--it's actually pretty good right now as of--headed into this year--declines will that effect the budgets of your clients? Not necessarily on the appraisal side but overall.

It could marginally, but as we've discussed before, everything we do--a number of things to consider here why it typically doesn't effect us as directly as it would other types of local projects, everything we do is essential. So to the extent that there are budget pressures on local governments, it will be the discretionary things that get hit first, and running a courthouse, paying teachers, and generating tax bills, etc., the things we do are things that are essential, so they are not things that they cannot support if there are new budget pressures.

The other part of it is we very rarely see anybody go out and buy a system because they thought there was a better system than the one they were currently using. They generally go out to bid and replace systems when the system they have is getting to a point where it isn't any longer reliable, and they need to put a new system that will be reliable going forward.

So for those two reasons and the third one, which is that there are local property revenues, which are real estate tax bills, utilities, fees and things locally, those are very stable revenues. So those three things generally have protected us well from the more volatile revenues local governments get from the state and federal government, but sure, if there were a lot of pressure it could have some marginal effect, but I don't think it would be that significant.

And at this point we're also very geographically diverse and not particularly reliant on any one state or region.

That's helpful, gentlemen, thanks.

And next we'll go to [Trey Kupin] with Banc of America Securities.

Hi, thank you. Just a quick question around the sales and marketing costs. What would be the reasonable expectation for the rest of the year? I mean, I know this quarter they came in a lot lower than we expected, I mean, do you think it's going to be--continue to be kind of below the 24% of revenue range, or what should we look for there?

I wouldn't expect them to decline significantly as a percentage of revenue at this point. Around the same range would be reasonable, as you know in the first quarter we had around that $550,000 more of healthcare costs than we did in the second quarter. So part of the declines from the first quarter to the second quarter is the absence of that unusual spike in the health claims, and then, as revenues rise, clearly we'll see higher commission levels that go with those. So the level or slightly below the level we're at in terms of a percentage of revenues is where we would be--we would expect to see them.

Okay, great, and then also just kind of following up on the hiring practices, could you comment on the market out there? How hard it is to find the talent that you are looking for right now especially if you are trying to ramp-up Odyssey?

It's just a process. We don't see the market as--as impeding that. It's--we do find the quality people, we're in markets where we're pretty well-known.

We're typically an employer of choice and generally get a number of qualified applicants for all of the positions that we advertise. We bring a lot of people in through our own employees and relationships they have had at other places so that's not an issue. We would not expect to not hit our hiring target because the people weren't available.

The process and the time it takes to bring them in and make them efficient and productive, is just matter of transferring the subject matter expertise and making sure that they are in a position to deliver the same high quality service that our long term employees have. So for that reason, generally, it's a couple--a few months to get a person on board, and then it's on average three, four, five months before they are going to be able to be productive in a billable sense at a customer site.

Okay. Great. Thank you, and then just finally, what do you expect--the Indiana deal to start contributing revenue that you can recognize? I mean 4Q or--?

Well, we may be there, I would have to check, but it's a very quick startup, but that again will be predominantly processional services revenue, regular billing rates for professional services. It won't be until we achieve something and we get paid some license revenue, and again, the criteria I mentioned before that we'll recognize license revenue. So for the second half of the year, we would expect to be billing professional services, but very nominal license revenue to that site, and it will probably be the beginning of next year that we will start to see some significant license revenue come in.

Okay. Great. Thank you.

And next we'll go to David Yuschak with SMH Capital.

Good morning, gentlemen, and good quarter, expecting good things second half, but let me ask you when you mentioned about in your press release seeing what looks like a very promising pipeline, could you give us a sense as to where--what things are kind of giving you that level of confidence in the pipeline getting better, and is there anything in particular that you see in the marketplace that's giving you that conclusion and or--and/or product lines?

Yes, sure David. Really, two different things what are the size of the market and the decisions we see being made in the next 6 months, next 12 months, and then what is our competitive position and what level of confidence do we have in terms of what our participation will be in those deals. Again, in the first quarter there was some softness in the market in certain segments, financials I think mainly, and maybe we had lost a couple of deals that historically we thought we might have won and we shared that with you.

We track these deals--not just the deals we win in a particular quarter which are pretty easy to quantify, but we have specific matrix's with where they are in the process, and how many cuts they've had and what the elevation process has been, etc., that try to bring some objectivity to the way we rate these different opportunities in different markets and we literally have some pretty good history on what the sizes of that market is by product. We would rather not share a lot with that obviously, it's competitive information, but that's something we watch closely, and the numbers we have not just for awards, but for the second and third level type of opportunities in terms of the time lines are pretty robust.

They are as I said at least normal maybe marginally above what we have seen in recent years there. So I think the market we're comfortable saying is back where we would like to see it in terms of meeting our objectives, and then recent decisions and awards have been favorable, I think we have--feel good about our competitive position from that, and then, again, tracking a little less objectively, but, following very closely how we're comparing on the processes that are ongoing in terms of the results of the demonstrations and the reference checks, etc., we feel pretty good about our competitive position being real strong there.

So that's a process we go through regularly and then we go through it in a lot of detail generally the week before earnings release in our operating meetings, and again, we're encouraged by what we saw.

Your successes you have had with the wins in Indiana and other places, Texas with the courts and justice, is that kind of giving you the increased visibility as far as when you mention about your competitive position, you have had good product line, but being a little small company like you have been, is that kind of giving you the visibility to start--as you address those markets feeling comfortable about as you rate your opportunities that's giving you the kind of visibility to start building up that pipeline as well?

It does in that line of business, but in the other lines, we have to look at decisions that haven't be made, because in order to literally make a little bit of the third quarter number and a lot of the fourth quarter number, we need to believe that the volume of business is out there and our competitive position is strong enough that we're going to win deals and deliver on them and recognize revenue by the end of the year and into next year, and things like financials which is 60% of our business. So, again, we track those real closely and again, comfortable the market is pretty good and feel good about our position on those deals.

Okay. I'll get back in queue. I have got some follow-up.

Okay.

And our next question today comes from [Rujit Sataria] with Thomas Weisel Partners.

Yes, hi, good morning, guys. I'm speaking on behalf of (inaudible - highly accented language). I have a question on your cash and cash equivalent. It seems it went down by close to $5 million to $6 million quarter-over-quarter, so just wanted to get some more color on that.

Well, we bought back almost 600,000 shares of our common stock, so our free cash flow was a little under $1 million, and then we spent a significant amount on the stock repurchases, and that's primarily the decline in the cash as a result of our stock repurchase program.

Okay, and you mentioned about softer financial products in the note. Could you give us a little bit more color on how are your justice and other property and tax products are doing, and what--what do you expect--are you seeing better traction in those products, and what are your expectations going forward?

Again, on the financials, we reported some softness, it was one of several things that only add up to a few million dollars in the first quarter, and we're saying now that that did seem to be an isolated event, so it's very normal right now. In the other areas, there isn't as much volume of business, there aren't as many courts and justice decisions, but the significant decisions that are occurring we have fared well in. Obviously in the end there was a very current decision, obviously all of the major players in the marketplace took place there, it was an arms length decision and we were successful, and we feel we'll continue to do well in those types of situations.

Yes, fair enough, and just one last question on your headcount breakdown, could you provide us with that?

By functional area?

Yes, R&D, G&A?

Yes, we ended the quarter with right at 1,600 employees. Roughly 150 in G&A, administration and finance, roughly 140 in sales and marketing, 420 in development, 250 in the appraisal services business, and 640 combined support and implementation.

I see, and are you--since appraisal business is not a big part, are you planning to break those people who are there or shift around or anything?

That thing moves up and down in accordance with projects there. A big part of the staffing there are data collectors and field personnel that are generally hired to work on a project basis and at the conclusion of a project if there is not another project in the same region, they would typically go away. So the headcount in appraisal services went down roughly 30 people in the second quarter from the first quarter level, and it would continue to adjust as projects wind down or start up.

Okay. All right. That's it for me. Thank you.

And next we'll go to [Bell Warmington] with [DelWar Capital Management]

Yes, one quick question, I'm not--exactly your revenue? Do you have a big business with the federal government or it's all local?

No, virtually all of our business is with local governments, cities, counties and school districts, courthouses, we do have some state contracts, but even those generally is a situation where the state is procuring a system to be distributed throughout the state into local governments.

We have no revenues right now from the federal government.

Thank you.

Yes.

And our next question comes from DeForest Hinman with Paradigm Capital Management.

Hi, everybody. Can you just give us an update on the Advanced Data Systems acquisition and how that product is selling? I guess you said you were going to be selling it in the Spring of this year. Just kind of your initial thoughts on the customers and their acceptance or not acceptance of the product?

ADS, the system for small financial systems for school districts?

Yes, and I think you in the past you also talked about working on a product for attendance and grading as well.

Yes, okay. Those are kind of two different things.

ADS is an acquisition we did in January of this year. It was relatively small company, a few million dollars in sales, half of that maintenance. Those customers have received it well, the employees have received it well. The retention is where you would expect it to be, very high, and they have sold a number of systems in their traditional market and the product has been introduced to the broader sales channel. So that's going well, but it isn't that big or material a deal, so I don't want to overstate it.

The other side of it is the student information system, the company Mazik we bought which we refer to now within the Company or in the marketplace as Tyler Educational Management Systems, or TIMS as an acronym, and I mentioned two deals in our remarks that we had signed recently. So that--it's a new product, it's a very exciting product, it demonstrates very well.

We have won a few deals, but the revenue is still very light in relation to our company size, so it isn't contributing a lot to revenues at this point in time, but we're very committed to it, and it's showing well, and I think over a period of a year, year and a half it will emerge as a better contributor, but right now those revenues are pretty insignificant. Through that acquisition, however, we did get offshore capacity in Pakistan and we have leveraged that to do some development in our other divisions, and that's been a very good experience, very productive and very cost effective. So that's something we have gotten out of that acquisition that's been a good experience.

All right. That was it. Thanks.

Sure.

And next we're return to Charles Strauzer with CJS Securities.

Just following up on DeForest's question, also John you mentioned the two acquisitions but you didn't talk about the pension acquisition you made last year too, anything new that you can update there?

No, that would be much like the ADS acquisition. It's similar in size. They are good--it's a good tuck-in acquisition, the people and management have fit well, and we have--to my knowledge not lost any customers, certainly not had any meaningful attrition, and we are, as we said--we're including that in some of the bids to our other markets, and doing some business, but we also hope and believe that over the long run, Tyler will be in a position to do some more significant deals with that product than they would have been able to do on their own, and we are active in some decision processes that would be more significant.

So it's safe to say there's a decent pipeline for those types of opportunities--?

Oh we don't find a lot of them, but those are two good examples of them that have been great fits.

Good stuff. And again, thanks, and John and Brian, look forward to seeing you next month at our conference.

Okay.

(OPERATOR INSTRUCTIONS)

And we'll return to David Yuschak with SMH Capital.

Following up a little bit on that education comment you made, John. I think--and correct me if I'm wrong--I think I might have asked you a quarter or two ago, that you really--the product really wasn't going to be positioned until next Spring because of some of the things you needed to do--

Right. The way we described that in our view and strategy in doing the acquisition was we had for a long time considered building a product like that, and we all know from our successful efforts with Odyssey and products like that that even though they are successful and now generating great contracts, it's a very long process.

This product was largely developed but not fully out of the development process, not widely deployed and installed, didn't have the resources all around it, but in our view, I think what we said was if that whole process to selling and installing multiple systems at a time and being profitable is a five or six year process, which it generally is, we were probably buying a product that was about halfway through that process, and that's exactly what we found. So, we have had it for 18 months and we're nearing the time where it's much more of a complete product, it's installed in a number of place, and getting closer to a time where you would be doing multiple parallel installations and starting to realize meaningful revenue, and that's pretty much where it is.

So right now--is producing the revenue right now on stream then with where you thought you would be compared to expecting more in the Spring next year?

Probably not but again it's insignificant, it's a few hundred thousand dollars one way or the other, but the revenues are very light and that's an investment. We--we are investing in that product and those resources to be in a position to have it be a catalyst for future growth, but currently, the revenues are very light and they're certainly in excess of the expenses.

Yes, but I've always taken the attitude it may be light but if--some of the acceptances are getting a little bit sooner than what you thought it does say something about the quality of the product you are bringing to the market to.

That's kind of ongoing, David I can't say we have done enough business to claim we're over some hump at this point in time, but the product is exciting to us, the end of the market when we show it, we have the same expectations for it over the long run. But we're not--it's not like a quarter or two from now you are going to start seeing Odyssey level business that's a little ways away.

Now, one other thing, as far as the quality--I mean, the resources you need to continue to move forward, particularly see good pipeline and you start getting more wins, is there any resource allocations that you need, or feel like you may need to ramp up on to get you further down the road that may be a little more of a burden as the business picks up?

Yes, sure we're adding resources and product areas and service areas regularly, and marginally growing the sales channel, but those were my comments in the remarks that, we're a blend of a company, between a growth company and an established company, and we have a model, we believe, that anticipates the resources we need to meet those objectives, and where we can grow our revenues and expand our margins while we're making those investments and growing the Company's resources.

So we really don't believe we have a situation where we're going to be telling you that we can't be as profitable as we think we ought to be because we're trying to ramp-up for something. We believe we can do those things concurrently.

Okay. Good. Thanks.

At this time, there appear to be no more questions.

Mr. Marr, I'll turn the call back over to you for closing remarks.

All right. Thank you, Carolyn, we appreciate your time on the call today, and if there are any further questions please call Brian or myself. Thank you and have a good day.

And that does conclude today's conference. Thank you, everyone, for your participation.