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Operator
Welcome to today's Tyler Technologies third quarter 2007 earnings conference call. Today's call is being recorded. Your host for today's call is John Marr, President and CEO at Tyler Technologies. Mr. Marr, please begin your call, sir.
John Marr - President & CEO
Thank you and welcome to our third quarter 2007 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First I'd 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 questions. Brian.
Brian Miller - CFO
Thank you, John. During the course of this conference call Management may make statements that provide information other than historical information. It may include projections concerning the Company's future prospects, revenues, expenses and 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?
John Marr - President & CEO
Thank you, Brian. The third quarter of 2007 represented Tyler's 26th consecutively profitable quarter. Results were very much in line with our expectations and consistent with our long-term strategic plans. By most measures including revenues, operating income and free cash flow Q3 was our best performance ever. We were particularly pleased to achieve these current quarter results while at the same time we experienced robust adoption of our subscription based services and software as a service offerings. Adoption of these services are valuable to Tyler in the long-term but generally have a negative impact on the current results. During the quarter we completed the acquisition of EDP, a Texas based company focused on school financial and administration markets. EDP will bring a strong customer base, enhance our recurring revenue maintenance as well as add experienced staff with strong subject matter expertise in the Texas market where Tyler has a growing presence.
While we reached new highs in revenue and operating profits or backlog expanded as well to a new high of $225 million. In fact for the trailing 12 months Tyler has revenues of $210 million, earnings per share of $0.37 and free cash flow just over $25 million. Now I'd like for Brian to provide more details on the operating results for the quarter. Brian?
Brian Miller - CFO
Thanks, John. Yesterday Tyler Technologies reported its results for the third quarter ended September 30, 2007. By nearly all financial measures this was our best quarter ever. Our results reflected new quarterly highs for Tyler in total revenues, operating income, free cash flow and backlog. For the third quarter of 2007 Tyler had revenues of $54.9 million, up 9.6% from the third quarter of 2006. Operating income was $7.9 million, an increase of $1.3 million from the third quarter 2006 income of $6.6 million. Net income for the quarter was $5.2 million, or $0.12 cents per diluted share, compared to net income of $4.4 million, or $0.11 cents per diluted share in the third quarter of 2006. Results for the third quarter of 2007 include $632,000 of non-cash expenses associated with our share-based compensation plan, of which $59,000 is included in cost of revenues and $573,000 is included in SG&A expenses.
Cash flow from operations was $15.7 million for the third quarter, compared to $12.1 million a year ago. Free cash flow was $14.7 million, up 34% compared to free cash flow of $11 million for the third quarter of last year. For the nine months ended September 30th, 2007, free cash flow was $21.8 million, compared to $19.2 million for the same period in 2006. The third quarter is historically our best quarter for free cash flow because we collect a large portion of annual maintenance billings during the quarter. EBITDA for the third quarter of 2007 increased 15.9% to $10.6 million from EBITDA of $9.1 million in the third quarter of 2006. A reconciliation of GAAP income to EBITDA is included in our third quarter earnings press release. Our software related revenues which includes software licenses, software services and maintenance, increased in the aggregate 11% over the third quarter of 2006. Software license revenues decreased 21%, primarily as the result of larger new sales under our subscription based ASP option versus traditional perpetual license sales where a significant portion of the license would be recognized up front. In fact our two largest financial management system deals signed during the quarter were ASP deals, although we would have originally expected them to be traditional perpetual licenses.
On the $6.3 million Fort Worth independent school district contract and the $3.3 million Richmond, California deal signed during the third quarter, revenue will be recognized over the terms of the contract, three and five years, but we would have recognized approximately $1.1 million of additional license revenues in the quarter had they been traditional deals. Although we closed over 40 deals for financial management systems during the quarter, only two were ASP arrangements but those happened to be relatively large deals. In addition, we signed three new subscription type contracts for our Eagle recording and land records software. In addition, on some existing implementations for our Odyssey and tax software products, contract terms have required us to defer license revenue although we are recognizing services revenue.
Last year's third quarter which had our highest license revenues ever also included a larger proportion of third-party license sales associated with some of our financial management solutions. For the third quarter approximately 45% of our total revenues were annually recurring type revenues either for maintenance and support or for ASP and other subscription based services. Appraisal services revenue for the third quarter was flat compared to the third quarter of 2006, as we continued to wind down the Ohio revaluation projects that drove growth in appraisal services during the first two quarters of 2007. Although appraisal services backlog increased with the signing of the $12 million Orleans Parish reevaluation contract in the quarter, the level of appraisal services revenues for 2008 will ultimately depend on our ability to fully replace the appraisal services revenue associated with projects currently nearing completion.
The revenue mix for the third quarter of 2007 compared to the third quarter of 2006 was as follows: software licenses, 15% versus 21% last year; software services, 33% versus 29% last year; maintenance, 40% versus 37% last year; appraisal services, 9% versus 10% last year; and hardware and other, 3% both this year and last year. Overall 88% of our revenue mix was software related for the third quarter of 2007 and 87% for the third quarter of 2006. For the third quarter of 2007 our overall gross margin was 39.4% compared to 40.2% in last year's third quarter. The 0.8% decline is primarily due to a revenue mix that included less software licenses which have the highest gross margins in our revenue mix. Sequentially gross margins increased 180 basis points from 37.6% in the second quarter of 2007.
Software license margins for the quarter were 71.8% versus 72.6% last year. The decrease in software license gross margin is primarily driven by reduced license revenue with corresponding fixed software amortization costs included in cost of sales. The blended margin for software services and maintenance improved to 33.8% compared to 32.1% for the same quarter last year and increased from 31.4% in the second quarter of this year. The gross margin for appraisal services was 34.1% compared to 31.2% in last year's third quarter.
SG&A expenses were $12.7 million for the third quarter of 2007 and $12.4 million for the same period in 2006. Third quarter 2007 SG&A expenses were 23.1% of revenues, which represents our lowest level in five years, and 24.8% for the same period in 2006. We remain very focused on carefully managing overhead costs to keep the rate of SG&A growth below our overall revenue growth rate. Research and development expenses of $639,000 decreased 18% in the third quarter compared to the third quarter of last year and decreased 54% from the second quarter of 2007. In September of this year we amended our software development agreement with Microsoft, in which Microsoft has agreed to assist in funding our Microsoft Dynamics AX development cost in exchange for intellectual property rights for use outside of the public sector. Research and development expense for the third quarter of 2007 was reduced by $880,000 of cost reimbursement recognized under the amended agreement. We continue to expect that virtually all of our new product development costs in 2007 will be expensed rather than capitalized.
Our effective income tax rate was 38.3% for the third quarter versus 36.4% for the same quarter in 2006. The effective tax rate increased compared to the prior year mainly due to several state income tax audits last year, which resulted in our recording of credit to income tax expense during the 2006 to record a benefit of previously unclaimed tax credit. The effective income tax rates for the full year of 2007, including the credit, is expected to be 39.0% and the effective rate for the fourth quarter of 2007 is currently estimated to be 39%.
Our backlog increased again during the quarter and at September 30th, 2007, stood a new high of $225.8 million compared to $197.7 million at September 30th, 2006 and $203.9 million at June 30th, 2007. Backlog related to our software business, which excludes backlog from appraisal services contracts, was $198.2 million at September 30th, an increase of $12.1 million, or 6.5% from the second quarter of this year, and an increase of $27 million or 15.8% from September of last year. New contract signings for our financial management and tax on appraisal solutions were primarily responsible for the growth in backlog. Appraisal services backlog was $27.6 million at September 30th, 2007, compared to $17.9 million at June 30th, 2007. The increase in appraisal services backlog from last quarter is primarily due to the $12 million contract signed in the third quarter for data collection and reevaluation services for Orleans Parish, Louisiana.
During the quarter we repurchased just a few hundred shares of our common stock. However, for the first nine months of 2007 we repurchased a total of 889,120 shares of our stock at an average cost of $12.52 per share. Our remaining authorization of shares that may be purchased totals 2.1 million shares. Our capital expenditures during the third quarter were $1 million which includes $53,000 of capitalized software development. CapEx for the third quarter of last year was $1.1 million and included $90,000 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 third quarter, down from $1.2 million in last year's third quarter.
We also used approximately $3.9 million in cash during the third quarter to purchase all the capital stock of EDP enterprises which develops and sells financial and student information and management systems for public school districts in Texas. The purchase price represents just over one time EDP's annual revenue run rate for maintenance and support. Day sales outstanding and accounts receivable at September 30th, 2007, was 93 days, compared to 102 days at December 31st, 2006, and 80 days at September 30th, 2006. Excluding unbilled receivables day sales outstanding were 68 days at September 30th, 2007, and 61 days at September 30th, 2006. Our stockholders' equity at September 30th, 2007, was $133.6 million. We continue to have no debt outstanding and ended the third quarter with $48.7 million in cash and cash equivalents. We ended the quarter with approximately 1640 employees, an increase of approximately 40 over June 30th, and up about 110 from the beginning of the year.
Today we are filing our Form 10(Q) for the third quarter. In the Form 10(Q) we disclosed that we have excluded the effect of two warrants from potentially dilutive common shares in our earnings per share computation after September 10th, 2007. The exclusions of the effect of the warrants for the twenty-day period ended September 30th, 2007, was immaterial to fully diluted earnings per share for the third quarter. The warrants provided the holder the right to purchase approximately 1.6 million shares of our common stock at $2.50 per share. The Company is currently involved in litigation with the former warrant holder which is more particularly described in our Form 10(Q). As a matter of company policy we do not discuss ongoing litigation. Therefore, I would refer you to our public filings to answer any questions regarding this matter. Now I would like to turn the call back over to John for his comments on the quarter.
John Marr - President & CEO
Okay, thank you, Brian. We posted strong improvement in our operating results for Q3 over last year, setting record highs in several key measures including total revenues, operating income, free cash flow and backlog. We remain focused on margin improvement and on controlling SG&A expenses as we continue to grow revenues. Free cash flow for the quarter increased 34% from the same period last year and exceeded third quarter net income by over two and a half times. Year-to-date free cash flow was almost double GAAP net income. We experienced a substantial increase in the number of contract signings this quarter.
As you may remember we expressed some modest concern from our market experience after the first quarter of this year. That condition seems to have been temporary. Since that time we've seen all our markets recover to at least normal levels. And we are currently satisfied that the market is strong enough for to us continue to execute consistent with our objectives of delivering revenue growth and expanding margins over the long-term. We are all aware of the softness being reported in the real estate market and, as you know, real estate taxes are a primary source of revenue for local government. There is some concern that this weakness will eventually lead to lower values and ultimately lower local tax revenues. At this point all I can report is that we have no direct experience of this issue affecting our market or having any specific projects that we have that have been delayed or cancelled as a result of these concerns. We will however monitor this closely and make adjustments should conditions change.
We continue to sign new business across all our product lines. Some of the more significant recent contracts announced include: in financials and ERP, a contract with Indiana County, Pennsylvania, a $2.8 million contract with Newport News, Virginia, a $1 million contract with Hillsborough, Oregon, a $6.3 million ASP contract with Fort Worth, Texas, a $3.3 million ASP contract with Richmond, California. In courts and justice for our Odyssey product, we signed a $1.2 million with Ector County, Texas, a $2 million contract with Hidalgo County, Texas, and a $2.5 million contract with (inaudible), Texas, the last two being part of our contract with the C.U.C. In tax and appraisal solutions, we signed a software contract with Nassau County, New York, for $5.5 million, and for appraisal services we signed a $12 million contract with Orleans Parish. And finally we signed a land records contract with Orange County, Florida, for $1 million.
Overall Tyler signed more than 50 new name customers during the quarter in 24 different states, clearly reinforcing our position as the leader in local government software markets. Forty of these sales were from our financial divisions. We continue to enjoy a very strong competitive position with Odyssey, our courts and justice system and we are on track adding capacity to deliver on those contracts. We continue to see strength in our backlog. Backlog is now greater than estimated annual revenues for this year. This is an indication of our success in the market, but also a trend of slower revenue recognition for new contracts. Consequently with the acceleration of backlog and free cash flow now more than twice GAAP earnings, our reported revenues and earnings represent only a partial picture of our progress. Recently, Tyler was added to the S&P small cap 600. We were also named one of America's 200 best small companies by Forbes magazine in its annual list this week. Tyler ranked 64th on that list.
Now in the fourth quarter of the year our guidance remains generally consistent with what we have reported previously, with some narrowing of ranges and other minor adjustments. We currently expect total revenues for the year of $217 million to $220 million. We currently expect diluted earnings per share to be in the range of $0.38 to $0.41 cents, assuming fully diluted shares of approximately 41 million. For the year, estimated pretax expense related to stock options in the employee stock purchase plan is expected to be $2.3 million or approximately $0.04 cents after taxes. We also estimate an effective tax rate of approximately 39% for 2007. Free cash flow is now expected to be between $25 million and $28 million with a total CapEx of approximately $3.5 million to $4 million for the year. Now we will take questions.
Operator
(OPERATOR INSTRUCTIONS) Your first question comes from Brian Kinstlinger from Sidoti & Company.
Brian Kinstlinger - Analyst
Hi. Good morning and good afternoon, I guess. The first question I had is about the Microsoft agreement change. If they use IP and somehow are able to produce any revenue, maybe I misunderstand it, from that IP will you guys benefit in any way?
John Marr - President & CEO
Okay. The core agreement with Microsoft hasn't changed at all and that core agreement was for us to extend their products to address local government needs and then to market those products with them and directly as well. And that relationship really hasn't changed. What has transpired is, in the process of the gap analysis and launching the development of that, Microsoft has recognized that a lot of the functionality that is in that gap has value to other products they have that use those source streams. And they have agreed to pay us for some of that development in order to get that functionality into products unrelated to the public sector. So we will be paid during the development phase directly for that IP that we otherwise would already be developing but we will not share in future revenues related to those products, only the public sector products.
Brian Kinstlinger - Analyst
That's helpful. In terms of the backlog to revenue, I guess I'm trying to figure out how to look at revenue compared to backlog. Backlog has been a very strong, has been growing very strong for awhile. Last year in the 30% range, this year we are at about 16%. I don't know if revenue growth lags that or hits that or what necessarily. I'm sure it's difficult to view, but certainly your overall software revenue services coupled with license is only growing 6% as of this quarter. Can you talk about the disconnect there and will is catch up. Is one a good indicator, in your opinion, for revenue growth or just revenue over the future, maybe giving me a sense of how you think about it?
John Marr - President & CEO
There a few things that cause that but in general, yes, I would encourage people -- I think not too long ago I said we didn't focus an awful lot on backlog, but I think times have changed somewhat and I think the backlog, especially in the software license area, is more important now. And we'd look at that and would also look at free cash flow and the significant gap between those and our growth in revenues and earnings and see that obviously the income statement is now almost more of a real trailing indicator of our performance. And backlog and cash flow are either leading or even current -- better leading or current indicators of what have we have going on.
There are a couple of causes for the backlog to grow ahead of the income statement. And one of them has to do simply with the types of projects that we do and we are doing larger projects that take longer and therefore contracts that are as signed, stay in backlog to some degree longer and sit in backlog, portions of them sit in backlog before we actually perform on those contracts or perform fully on those contracts. But another cause certainly is that the nature of the contracts and the percentage that go, percentage to completion and the deferral of license revenues until milestones are reached or services are delivered has certainly changed in the current accounting environment and so that has an effect as well. And so that is why I think you see that grow ahead of the revenue statement and certainly all of those revenues have to eventually run through the financial statement.
Brian Kinstlinger - Analyst
Okay. I will follow up on that question and then I'll jump in the queue. Is -- so if I can just try to rehash what you said, just because backlog grew 15% doesn't mean will you expect next year software license or even services total to necessarily grow 16%, it could be more, it could be less but it's not necessarily indicative of a year out, what we will see. And then with that, with the software license down so much, do you expect that trend to continue next year or do you expect to see traditional growth levels there? Thanks.
John Marr - President & CEO
I mean I don't want to give the impression we don't pay attention to revenues and earnings, we certainly do, but we don't control them internally as much as you might want to. And we can't allow our ability to compete in the marketplace, what would otherwise be good contracts for Tyler but don't have favorable revenue recognition and we certainly don't want to be aggressive on accounting issues. So as a result where the revenue actually falls is something that's hard for us to predict and it's something we really don't want to manage. We need to accept it as it is. So it's hard to give you a lot of guidance on that, Brian. I will say that our signings of licenses, which we track closely, has been very robust in the second half of this year, the quarter we are reporting and our current experience. And as a result, the volume of business and our competitive position for the second half of this year and going into next year is good, it's probably ahead of our expectations. But as you see, our earnings are only up marginally and only consistent with expectations.
So our experience in the marketplace is strong across products. The business is there. We will deliver on it but exactly when it runs through the financial statement is something we don't have a lot of control over. So I guess the answer to your question, over the long run, no, we certainly don't see that our license revenues will be down or flat. We see them continuing to grow. The market is strong enough to support that and our competitive position continues to improve, but exactly at what rate is something that's hard for to us project.
Operator
Next question, Charles Strauzer with CJS Securities.
Charles Strauzer - Analyst
Hi, how are you?
John Marr - President & CEO
Good, Charles.
Charles Strauzer - Analyst
Quick question for you, John. The big national court conference just wrapped up a couple of weeks ago. Any feedback in terms of new opportunities and any change to the competitive environment in terms of maybe new products that you've seen that you hadn't seen before?
John Marr - President & CEO
Well, we hope to not learn a lot in terms of new projects because we ought to be on top of that. So we didn't learn a lot in terms of opportunities. We wouldn't expect -- but certainly we are able reaffirm that there are a number of projects coming on line and the outlook is that that will continue to be a pretty robust market going forward. We do go there, certainly interested in seeing what kind of interest seems to exist around competitive solutions and we are pretty confident that the attendance and the interest and people, not just coming by the booth but sticking around for the presentations, et cetera, in our view was much higher at our booth than at any others at the show. So our view is that, from what we are seeing in the decisions and the decision processes out there and then from that show itself, is that we are in a pretty strong position in that marketplace and we think that market will have some important decisions coming up.
Charles Strauzer - Analyst
And you think the pipeline is a long-term pipeline or you think you are seeing more of a ramp-up sooner than you thought in terms of the opportunities maybe coming into --
John Marr - President & CEO
As you know, we do fewer deals than we do say in financials, but larger deals and they will happen on a sporadic basis. But we are satisfied that there are a number of statewide or large county decisions that are out there and that we are in a very good position to capitalize on those. As you know we have a very significant backlog in our courts division. So, so long as those deals happen over any reasonable period of time, they will certainly replace the business we are earning out of our backlog now. So that division does operate mostly out of backlog. There's very little revenue say in the two quarters you can see ahead of you that come through new contracts. So we've got ample backlog there for certainly the balance of this year and next year. And certainly interested in some of these new opportunities to extend that backlog to support years further out. At the same time, having said that, we've made a lot of progress bringing on new resources, making them productive and delivering quality service on those contracts. All of our national accounts are pretty much on target and on budget and operating within the scope of the originally contemplated contract and quite referenceable. So that's going really well.
Charles Strauzer - Analyst
Excellent. Just a tangent off of that, Orion or what used to be called Orion, any update in terms of the success pattern there?
John Marr - President & CEO
That is not being managed as a growth part of Tyler right now. We have a number of clients in the original market, the Texas market, that we are focused on delivering services to and executing on those contracts. We have a handful of national accounts as well. Those projects are going well. We did achieve a number of good milestones. We reached some important milestones in the state of Montana project this past quarter. So I think we have those issues identified. We are executing on them and making progress in those areas. At the same time, though, we are kind of catching up with the work we had on our plate for Orion and we are not aggressively bringing on new clients at this point in time. So that is not looked at as a growth part of the Company currently.
Operator
Our next question comes from David Yuschak from SMH Capital.
David Yuschak - Analyst
Let's just go back to the revenue recognition on the software, looking forward because of the percentage completion and not being able to identify when some of these milestones get reached because it's, like you said, in the hands of your customer. Does that suggest that as these milestones are met, that you may earned up experiencing more of a lumpy recognition of that software licenses going forward, so it's kind of an unpredictable element as far as even us is concerned to try and factor that in, other than to believe that it's there, it's just a matter of when it happens?
John Marr - President & CEO
I don't think it will be extremely lumpy because most of those, especially in courts, those larger deals are POC. So I think will you see trends of ramping up and down. here are a few contracts that have event driven large license recognition, C.O.C. has been one of them and I believe Indiana is one of them. But most of them, it is really a matter of utilization of resources, what resources are being built and how much license is that service hour or service day dragging and those projects will vary. So it will trend in different directions, but it shouldn't be overly lumpy.
David Yuschak - Analyst
Okay. And one other thing on the Microsoft arrangement, with you guys having the resources you have, you could have funded some of that stuff just internally. What was the some of the logic of saying the value of what Microsoft wants versus what they are going to help us fund this program with, what are the trade-offs, because you guys have more in a -- got cash flows that are redundant.
John Marr - President & CEO
Well, we never -- we weren't brought into this project to be part of the commercial systems development and I think these are functions that have some value to the commercial system, but I'm not certain that they've had so much value that we would have had an opportunity to share in royalties or ongoing revenues. So I think this was an opportunity to get some income now to help minimize our risk and our investment in that project and yet keep fully alive all of the revenues that were part of what was originally envisioned in this relationship. So it's a win win. To get some help in the cost of the current development project, that obviously manages our exposure, any risk that's in the project. And again we believe we have significant upside down the road with the public sector version of the product. And I'm not sure that we should believe that these features and functions, while they have some value to their commercial and other market systems, were so significant that they'd be willing to pay a royalty on them. They are not really of that nature.
David Yuschak - Analyst
You had to assume that, but I just wanted to hear it from you. Thanks. I will get back into queue.
Operator
(OPERATOR INSTRUCTIONS) Our next question comes from Ruchit Sutaria with Thomas Weisel Partners.
Ruchit Sutaria - Analyst
Hi, good morning, guys. I just had a question on your margin. As you said in the press release, most of the license revenue had shifted to -- on your service line. So how do you see your margins going forward? Do you see a little bit compression or pressure in the markets, especially on your gross margins?
John Marr - President & CEO
Well, it's not really most of our revenue. As we said, there were two large contracts out of 40 plus contracts in the financial system and more than 50 overall contracts that really were in the ASP model this quarter, but they were larger deals. We still expect that over time that we should continue -- that the majority of our business will still be in traditional perpetual licenses and that, again, as this business works out of backlog and works through revenue recognition, that we should still continue to see on a blended basis, consistent and long-term improvement in our overall gross margins. We've talked in the past about a general target over the next several years of 100 to 200 basis points a year. And we would expect that to continue to be the case. We also expect that as more of the subscription type revenues work through the services line, because they have higher margins that are -- than just straight professional services, that over time that we'll probably see a little bit faster growth in the margins in the services side of the business.
Ruchit Sutaria - Analyst
I see. So, all right. Then the question is, it seems that even if you take FY '06 and compare with this current year, it seems you have license revenue will come lower than last year. So how should we look at it? I mean, should we kind of take that your services is picking up, that's why your licenses are lower or the order recognition hasn't been as you would have expected on the licenses services side?
John Marr - President & CEO
I think it's more the second. Our signings, number of accounts and the volume for this year will certainly be up over last year. And so we believe we are addressing a broader market and have a good competitive position and that over time our licenses from a revenue standpoint will grow. But again, the nature of the contracts has been such that maybe that hasn't shown up. And this particular quarter is a very difficult year-over-year comparison as well. So.
Ruchit Sutaria - Analyst
-hum. And just one last question and I will get back in the queue. Your margins have improved sequentially for the last two quarters on your services and maintenance. So is it because your ASP model has some leverage built in or what are the dynamics over there?
John Marr - President & CEO
I think there is some impact from the ASP and other subscription type services that they are leading to some of the growth in the services line. And there's also a fair amount of leverage in the maintenance line. So you can see that sequentially, for example, our maintenance revenues grew this quarter from $20.5 million last quarter to $22.1 million this quarter, as new customers come on board and as we have annual increases across most of our customer base, as those revenues grow, there's a much smaller increase in the cost of providing those maintenance and support services. So we expect margins to grow at -- from the leverage in the maintenance and services line.
Ruchit Sutaria - Analyst
Okay. Thanks.
Operator
Our next question is from David Yuschak with SMH Capital.
David Yuschak - Analyst
Just a couple quick ones. As far as staffing is concerned, what's the outlook there as far as additional resources to grow your business, particularly for the rest of this year and into next?
John Marr - President & CEO
We ended the quarter with about 1,640 employees. And we are up about 110 from the beginning of the year and probably about 50 of those came through acquisitions. So we are only up about 50 or 60 people organically. I don't see the pace of that changing with any significance. Throughout really the business we should be growing headcount and cost below the growth of revenue and therefore it's pretty modest growth. We will continue to go a little more aggressively in the courts and justice division, where their overall growth is more significant and their backlog is pretty substantial as well. But we don't have an exact number for you, David. We are in the middle right now of '08 planning and certainly in the next call we'll have more specific numbers for you, if you're interested. But I don't see the pace changing much.
David Yuschak - Analyst
So you expect a lot of productivity out of -- there's still substantial productivity to get out of your existing workforce.
John Marr - President & CEO
Yes.
David Yuschak - Analyst
Okay. And then one last thing. We've heard a lot about the potential in the city kind of government for outsourcing because of the shortage potentially could surface because of retirements in that segment of the market for technology. Are you guys sensing any of that or seeing any of that or is it being discussed at all at this point in time or is it just something out there in the future that when it happens government, like it usually does, will react then?
John Marr - President & CEO
I don't see a lot of it from a business process outsourcing standpoint. I just thinking culturally, having a tax office and having a financial and budget office and city clerk's office and operating the courts and the things we do, are just culturally something that local governments have been doing a long time and I really haven't seen any significant shift away from that. Again, over the long run, while it's being slow to change, we would continue to see that the technical services, like disaster recovery and ASP, not just the hosting of the application but that then lays off database management and managing the web and security and those sorts of specialized services that aren't citizen facing, that those are the opportunity and that's where most of our resources are going in terms of expanding our service and developing those recurring revenues with the governments. But the business process outsourcing, I have not directly seen or had reported to me from people on the street within Tyler much of a shift there so.
David Yuschak - Analyst
So the ASP looks like it --
John Marr - President & CEO
These are resources they haven't had traditionally, that don't interact with the public and therefore don't have more of a political and cultural change. New systems have become very different and in some ways much more powerful than what existed historically, but much more complicated as well. The old days of having a couple of people managing a mainframe and supporting the clients is gone. Today, in a relatively small organization, we need experts on the web and the services they have there and on security and on data bases and operating systems and many applications and hosting those applications for them and managing those technical issues. In an organization like ours we have multiple people that are expert at each of those tasks, versus an organization like theirs, where they have only two or three or four FTEs that need such a broad range of skills, that makes a lot of sense and I see that being embraced slowly. And government is slow to change, but we saw a lot of it this quarter in a place like Fort Worth ultimately going in that direction when their RFP hadn't specifically specified that. They were up for a more traditional procurement but saw the benefits of that. So we see that slowly getting embraced and we think over the long run will become a bigger and bigger mix of our relationships with our clients. I don't see so much people outsourcing the collection of tax bills or the management of a court or that sort of thing and therefore we don't really have any initiatives in those areas.
David Yuschak - Analyst
So your thought is that any technical support internally, the city kind of government, that has problems with retirements would likely think of an ASP model in some of those areas that you just outlined.
John Marr - President & CEO
There would be some -- that's right, some adoption, some will choose that area. We had one site, I think I might have talked about it on a call that had actually an illness with a person that had a lot of concentrated skills that would have been difficult to replace, and they changed to ASP in a matter of a month and we shifted them over. That's an anecdotal example, but some of that will happen over the long run and we expect -- we have 85 I believe ASP clients at this point, so it's been slow to be embraced over the five years or so that we've offered it, but it continues to build and over the long run will be very valuable set of customers to Tyler. So we are focused more on those types of services and we do not have any initiatives on the BTO type services.
Operator
Our next question come from Brian Kinstlinger with Sidoti & Company.
Brian Kinstlinger - Analyst
I asked this question a little bit differently earlier, but because your business really, and I agree with you, is more about what's going to happen in the future and not sort of looking back numbers, over the course of the year -- I know you've said that your software licenses are down -- over the course of the year you discussed the ASP and the softwares and service as something that increasingly has been looked at by your customers. And so traditionally, even without acquisitions, you've thought about 10% growth is for software license growth and I'm just wondering on a sustainable basis, not even next year, but do you think because that's happening that that 10% to 12% number might not be something to think about right now? We may be thinking of something lower in software. The servicing line may grow a little bit faster or should I not thinking about it that way?
John Marr - President & CEO
Well, I appreciate that it's not a straight line. We have quarters like this and maybe it's going to be a year like this where we don't show that growth but, no, I really don't. I think at the current adoption rate of ASP or softwares or service, that we will still grow license revenues year-over-year and it may not be consistent because of the dynamics of the recognition and the types of projects, but we believe our products are continuing to improve competitively. We believe our sales channels have broader reach than what they've had and we believe that the market's strong enough for us to continue to capture new customers and grow those revenues. But I appreciate that sometimes that's not clear by just simply looking at year-over-year software or license numbers.
Brian Kinstlinger - Analyst
Okay. Thank you.
Operator
At this time, there appear to be no more questions. Mr. Marr, I'll turn the call back over to you for any closing remarks.
John Marr - President & CEO
Thank you, Patrick. We appreciate everybody's interest today and the time they've taken to join us on the call. If there are any further questions please feel free to call Brian or myself. Have a good day.
Operator
This completes today's program. We thank everyone for their participation. You may now disconnect your lines.