泰勒科技 (TYL) 2009 Q1 法說會逐字稿

Hello and welcome to today's Tyler Technologies first quarter 2009 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, Jill. Welcome to our first quarter 2009 earnings call. With me on the call today 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 then Brian will give the details of our operating results. Then I'll have some final comments and we'll take your questions. Brian?

Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information 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 10K and other SEC filings for more information on the risks. John?

We're pleased to report very strong results for the first quarter of 2009. This quarter marks Tyler's 32nd consecutive profitable quarter. In fact, our first quarter results exceeded last year's fourth quarter for the first time since 2004. We posted 17% overall revenue growth in a 19% growth in our software-related revenues. Our recurring subscription and maintenance revenues now comprise approximately 48% of total revenues. And together with services for existing clients, over half of our revenues are generated from the existing customer base. We also saw a dramatic improvement in our blended gross margin up 680 basis points from the first quarter of last year, driven in part by certain software development costs becoming fully amortized during the fourth quarter of last year. In addition, we reported an approximate 114% growth in operating income and 100% growth in EPS for the quarter.

Now I would like for Brian to provide more detail on the results of the quarter.

Thanks, John. Yesterday, Tyler Technologies reported its results for the first quarter ended March 31, 2009. You all have access to the press release and our form 10Q has now been filed, so I'm going to limit my comments and focus on providing an analysis of the key factors contributing to our results this quarter, then move on to John's comments on the current quarter and our outlook for the rest of 2009.

This was, by a wide margin, our best first quarter in history in terms of both revenues and earnings. Revenues for the first quarter were $69.6 million, our highest quarterly revenues ever and up 17.2% from the first quarter of 2008. Our organic growth for the quarter was approximately 15% and about two percentage points of our growth was the result of acquisitions we made over the past 12 months.

Our software-related revenues consisting of software licenses, subscriptions, software services and maintenance increased 19% from the first quarter of 2008. Software licenses increased 28.5% and the majority of the increase was associated with our Courts and Justice Division, which has increased its delivery capacity over the past year and also achieved milestones on some arrangements for which the software license revenues had previously been deferred. Subscription revenues grew 21.8% over last year's first quarter, reflecting revenues from new customers as well as existing customers that have converted to our ASP model. During the quarter, we signed one new ASP customer and converted six existing customers who previously had our software installed in-house. Maintenance revenue growth was 17.3% and together recurring revenues from subscriptions and maintenance comprised 47.6% of our total revenues for the first quarter. Software services revenues grew 16.4% with increases driven by our financial management and education solutions as well as our courts and justice products.

Finally, appraisal services revenue increased 6.8% in the first quarter primarily due to the ongoing revaluation project in New Orleans and partially offset by the completed projects on the Ohio revaluation. For the first quarter of 2009, our blended gross margin increased 680 basis points to 43.5% compared to 36.7% in last year's first quarter. The improvement is attributable to certain of our capitalized software products becoming fully amortized in the fourth quarter of 2008 resulting in a decrease of quarterly software amortization of approximately $450,000, as well as a revenue mix that included slightly more software licenses. Sequentially, gross margins increased 190 base points from 41.6% in the fourth quarter of 2008 primarily due to the reduced amortization in the first quarter and a more favorable revenue mix.

SG&A expenses as a percentage of revenue of 25% were essentially unchanged from last year's first quarter of 24.9%. The change in total SG&A expense from the first quarter of 2008 was primarily due to increases in stock option expense and sales commissions. Net research and development expense was $2.2 million for the first quarter of 2009 compared to $1.8 million for the same period last year. Research and development expense for the first quarter of 2009 was offset by $857,000 of cost reimbursement recognized under the amended research and development agreement with Microsoft. R&D expense in the first quarter of 2008 was offset by reimbursement from Microsoft of approximately $130,000. Gross R&D expense before the effect of the Microsoft reimbursements increased approximately $1 million from the first quarter of 2008, and was primarily driven by increased headcount in related costs associated with the Microsoft development effort. We currently expect reimbursements for the balance of the project of approximately $850,000 each quarter through the end of 2010.

Operating income was $10.0 million versus $4.7 million for the first quarter of 2008, an increase of 113.7%. Net income for the quarter increased 92.1% to $6 million or $0.16 per diluted share, compared to net income of $3.1 million or $0.08 per diluted share in the first quarter of 2008. Free cash flow for the first quarter was $11.4 million, excluding real estate capital expenditures of $1.5 million related to construction of our office facility in Lubbock, Texas, versus $16.9 million for the same period in 2008. The primary reason for the decrease compared to last year was due to cash receipts in the first quarter of last year associated with one large contract that contained unusually favorable billing terms. Our accounts receivable performance remains very good as our day sales outstanding at March 31, 2009, was 85 days versus 90 days at the end of March 2008, so we're not seeing general economic conditions having a negative effect on our receivables aging.

As we've discussed in the past, we have a long-term outlook when considering the valuation of our stock and our stock repurchase plan, and with the market conditions over the last few months, we've been particularly aggressive with our repurchases. During the first quarter, we repurchased 707,100 shares of our common stock at a cost of $8.8 million or an average price of $12.49 per share. We now have about 35.3 million basic shares outstanding down 2.7 million shares from a year ago. We have approximately 791,000 shares remaining under our existing repurchase authorization. Our backlog at March 31, 2009, was $231.3 million compared to $242.4 million at March 31, 2008, and $243.4 million at December 31, 2008.

Backlog related to our software business which excludes backlog from appraisal services contracts was $206.4 million compared to $217.8 million as of March 31, 2008, and $217.8 million at December 31, 2008. The sequential decline in backlog from December 31st is a result of two factors. One, maintenance backlog seasonally declines in the first and third quarters because of higher levels of maintenance renewals at December 31st and June 30th. The remainder of the decrease in backlog was related to our courts and justice products where we have increased our delivery capacity to work down the high level of backlog we had built up and where contracts tend to be larger but less frequent. Appraisal services backlog was $24.8 million at March 31, 2009, compared to $24.5 million at March 31, 2008, and $25.6 million at December 31, 2008.

On the balance sheet, we ended the first quarter of 2008 with $11.1 million in cash and investments and outstanding borrowings of $7.5 million under our credit facility. We established the line of credit to provide additional working capital availability to ensure that we have the flexibility to take advantage of our opportunities with respect to potential M&A activity as well as stock repurchases and capital expenditures. We also continue to evaluate leveraging our real estate assets once we complete construction of our Lubbock building. Now, I would like to turn the call back over to John for his comments on the quarter.

Okay. Thanks, Brian. Our 2009 first quarter results continued to build on what has been relatively steady and sustained performance from year to year and quarter to quarter. We continue to sign new business at a relatively normal rate even during the current economic environment. And proposal activity in the first quarter was generally in line with our expectations as well as historical levels.

During the quarter, we added new name customers across the country as well as across all of our product groups. Among them, we announced contracts with new customers and financial systems with: Ashville, North Carolina, Binghamton, New York, for a total of $2 million, with Mahoney County, Ohio, for $1.8 million, with the Riverside County Transportation Commission in California, with the San Bernardino Association of Governments in California, with the village of Palmetto Bay, Florida. And we signed a contract with Bridgeport, Connecticut, for $2.1 million. In our Educational Management Division, we added five Georgia school districts with approximately 12,800 students. And in courts and justice, we signed a contract with Cameron County, Texas for $3.7 million. Intention management, we announced deals with Providence, Rhode Island and Winston, Salem, North Carolina for $1.1 million, as well as contracts with Lawrence, Franklin and Somerset counties, Pennsylvania. We enter the second quarter of 2009 with a set of factors that we believe will continue to sustain Tyler's financial performance.

We currently have a strong pipeline of sales prospects and a healthy backlog. Almost half our total revenues are now generated through recurring sources such as maintenance and subscriptions and we consistently experience an extremely high renewal rate. Also, we continue to improve our gross margins and operating margins demonstrating the leverage we have built into our business model. This leverage provides Tyler flexibility in its cost structure to respond to the changes in market conditions. Even with all of this, we remain aware of broader economic conditions and the related affect it has on local government budgets. And while we have not seen a significant effect on our results to date, the leading indicators that we follow are somewhat mixed. The total number of active RFPs, the volume of new RFPs and the total value of deals represented in our pipeline are reasonably strong by historical levels. While we have not seen an unusual number of deals taken off the table, we have -- we are seeing a lengthening of the process in many cases. Therefore, our current annual guidance for 2009 is unchanged from that provided earlier in the year.

We continue to expect 2009 revenues to be in the range of $292 million to $298 million. We forecast 2009 diluted earnings per share to be approximately $0.66 to $0.72. Fully diluted shares for the year are expected to be approximately 36.5 million to 37 million. For the year, estimated pretax expense related to stock options in the employee stock purchase plan is expected to be about $4.8 million or approximately $0.10 per share after taxes. We estimate an effective tax rate for 2009 of approximately 39.7%. We expect free cash flow for the year to be within a range of $28 million to $36 million, with total CapEx of approximately $14 million to $16 million for the year and total depreciation and amortization of approximately $10 million. Excluding capital expenditures for real estate of approximately $11 million, we expect free cash flow to be between $39 million and $47 million. Now, we'll take your questions.

We will now begin the question and answer session. (Operator Instructions) We will pause momentarily to assemble our roster. And your first question comes from Charles Strauzer with CJS Securities.

Hey, John, hey, Brian.

Charlie.

Hey, just filling in for Torin here. If you could help us on gross margins, they were obviously much better. How much of that was due to the falling off of the amortization and how should we think about gross margins going forward?

Well, the reduction in the amortization is about $450,000 a quarter that is not there after the fourth quarter. So, that would be a permanent change. And the cost of licenses should stay at about that level. We also saw some improvement in gross margins on other levels but that's the primary driver and you can factor that into your calculation going forward.

Sounds good. And then when you look at the backlog, help us break out, if you can, as roughly as you can, the breakout of -- between various segments of your business, financial versus courts, maintenance, etc. Can you give us a sense of what the backlog looks like right now?

Well we don't ordinarily break it out by product area, but the court backlog, as we mentioned, declined by about $6 million during the quarter, and as we've said the business there is a little lumpier so they tend to be larger contracts but not signed with the same frequency. We do have an active pipeline there and are comfortable with the business going forward over the next few quarters. But that was the primarily -- the primary area that declined. And maintenance also went down about $5 million which is a normal seasonal change. That accounts for most of the $11million to $12 million change in total backlog. In the financials area, other than maintenance, backlog was fairly consistent with where it was at the end of December. And on the appraisal and tax side, backlog was also in the same range just up slightly.

And our second question today comes from Brian Kinstlinger with Sidoti & Co.

Great, good afternoon. The last call, Brian, one of the questions I had asked was how much in your backlog of software license was related to courts that might be recognized this year, and I think your answer was $10 million to $11 million [and I'd like to transfer up to date]. Does that still hold about true?

Yes, I don't think in the courtside, yes, there hasn't been a significant change there. Most of the business in courts this year on the license side is coming out of backlog. We're fairly fully utilized in terms of our delivery capacity. And that's not expected to change much from what we talked about before.

I guess my follow-up to that is when I look at the K, if appraisal is flat like it was last year and you do $11 million, which is the top of the $10 million to $11 million, that would suggest that financials would be up about 15% to continue to grow faster for the year than the rest of the business slightly. I guess last year, it hardly grew is how the K reads without acquisitions. Why -- what has caused such a dramatic acceleration maybe in financial software license this year that you are expecting?

Well, the increase, part of it is coming out of backlog we had going into the year. And we've got I think the average size of the deal is a little bit bigger. But it is just an analysis of where we expect to be with regard to what we have coming into the year in backlog and our look at the pipeline, our competitive position in the financial is solid and generally it has been improving, we think. And it has been a reasonably active market.

A broader breadth of what we call financials, a broader breadth of products over the years, the products we have built and acquired. It is a broader group of products sold through both the existing channel and the new customer channel. So, it is just a bigger footprint and it is somewhat more productive.

Financials does include, as John mentioned, the breadth of the product, the educational products, and as you know, through acquisitions and internal builds, we considerably expanded our presence there, and expect this year to start to recognize a more significant amount of license revenues in particular from some of the education products which have been more in a development stage up to this point.

And our next question today comes from Raghhavan Sarathy with Dougherty & Company.

Good afternoon. Thanks for taking my questions. I have got a question for John. You talked about some of the leading indicators being somewhat mixed. Could you briefly talk about how these indicators have trended relative to your expectations back in February when you gave the annual guidance? and how should we think about reconciling sort of the mix leading indicators that you're seeing that unchange outlook for the year?

That's a good question. I think we even indicated in February that we were hopeful to have a little better visibility at this point than we had in February, and we do have better visibility, but it is not entirely clear as indicated a bit mixed. If you look at the total number of deals we're tracking, active RFP decision processes, very normal, at least in the average area. And if you look at the total number of new RFPs that we responded to in the first quarter, which we would expect, our RFPs being initiated where funds would be extended in the next fiscal year, that was pretty normal in terms of expectation as well as traditional numbers. So, that's pretty encouraging, actually, in this environment.

And if you look at the dollars related to those ongoing and new projects, they're relatively significant as well. So, all of that, I think was reassuring to see occur and continue during the first quarter. Given that a lot of those deals will be out in the second half of our year or in the next fiscal year. We're not seeing -- on the other side of it, we're not seeing a lot of deals pulled right off the table. Certainly, all we see a little of that. But the volume of those we see, I think, are pretty typical and therefore anecdotal or more related to a local issue than anything systemic here. What we are seeing, I think it is a lengthening of the process. And I think that's again as we've said, these are mission critical projects, that have been in a capital plan for some time.

They're committed to these projects, but they're definitely being a little bit more cautious and those processes are taking a little bit more time, and we could see some timing effect of that as we go out from here. So, again, the total volume of business is very healthy and that's reassuring. The timing may be a little less reliable than what we've seen in the past, so we'll watch that more closely. I think the stimulus package, the local and state tax issues and expense issues, again, are not erasing deals but they're creating new issues that local officials have to consider, and it affects their decision process and in some cases, as I indicated,may lengthen the sales process a little bit.

Okay. Thank you.

Sure.

And our next question comes from David Yuschak with SMH Capital.

John, you've been in this business long enough to get a sense as to the lengthening process. Given the kind of environment that we have been in, as you had indicated, it has been pleasantly surprising to see the RFPs mostly doing well, but nothing being taken off the table. But your years in that lengthening process, how could you look at the stuff that's being deferred as to any experience from your own history of how long that process of lengthening could be, if I make any sense at all?

Yes, no. And certainly, the reasons for the lengthening are a little different now, but we're following it very closely. And generally, I think you're talking about decisions generally carrying out into the next quarter from when we might have projected them originally. It is not -- I mean if they were being put on the back burner, we would consider that more of something coming off the table. And these are simply cases where people say, we need to check this. We need to affirm this. We need to understand what this means to us. And therefore, even in situations where we're pretty comfortable it's our business, entering the contract process and getting that done is taking 30, 60 days longer in some cases, not all cases.

So, I could see the volume of business that I think is pretty normal, that ordinarily might happen over the next six months or so, potentially taking eight or nine months. That's what we're seeing here, and as we have on this call, we reaffirmed our guidance for the year. We had a very good first quarter. We have got good backlog. We have recurring revenues and the pipeline is relatively heavy as I said. So I think we'll perform generally as expected for the balance of the year. But again, the timing of some of those deals is a little harder to predict than it has been traditionally.

So, you're saying that the lengthening process is not way out there. It is enough out there that it is because some of the stuff is mission critical, that could push it out three months, but it won't be pushed out a year.

That's right. Four or five deals that we win that slip into the following quarter or slip out of this year into next year has a little bit of an effect, a few cents on our earnings. I think that's what keeps us a little bit cautious on the year even though we had a very good start.

Okay.

But again, I am pleased to see that there are new RFPs coming out. Again, really almost exactly the same number in the first quarter as last year, actually a couple more. And that the deals that are in process remain ongoing and we're obviously in this for the very long term. And if a few deals slip into next year because people are being cautious, obviously, we'll be there to execute on that.

And then just give us an update on the Microsoft arrangement, where you stand, what our resources, give a time line of things you need to accomplish between now and the launch date. Some things you have seen that have seen happening maybe have been pleasant surprises for you in that time line.

The core project. There is nothing to report which is very good in the middle of a development project. Things are generally very much on schedule, on budget. The two teams, Microsoft and Tyler, are working very well together. There aren't any major changes in scope, and so I think all of that is very good. We start to transition, gearing up marketing, and looking at some partners through their channel and some of our customers. And there clearly is interest in the product and through the partner channel. That's encouraging in terms of when we ultimately launch the product, having a receptive market for it. So, nothing to report which is very good in the middle of the development project of this scope.

I think there is potential that this will grow beyond this and we look at other products. And based on that, should we initiate additional or extensions to this product. It could be something we commit additional resources to and a number of quarters from now or into next year. So, that's something we'll watch closely and make you aware of if it happens. There could be some incremental opportunities as we go forward.

Our next question comes from Jeff Osher with Harvest Capital.

Yes. Hey, guys. Thanks for taking my question. And nice job. Can you maybe just a little more color around the changing deferred revenues and on a sequential basis, the $8 million that rolled off, were the margins on those deferred revenues as they flowed from the balance sheet to the income statement, were they commensurate with your blended gross margins?

Generally. Most of the declining gross revenues, deferred revenues from December to March is related to maintenance runoff. So, we have -- our biggest peak period of renewals in June and the second biggest in December. So we have a lot of money that goes into deferred revenue at December and then works those way out as they are amortized into revenue over the next 12 months. Most of it would be maintenance. I guess your blended revenue on the maintenance revenues would be -- the margin on the maintenance revenues would be higher than our blended revenue.

Yes.

But that maintenance number is generally a pretty stable number and it is consistent to increasing from quarter to quarter.

Sure. That's helpful.

It could really be a driver of an increase in margins.

You said that $217.8 million on software backlog. Was that for 12-31-08 or was that for March of 2008?

Actually I think it was both.

It was both. On a year over year basis, if we ignore the maintenance renewal season sequentially, if the court business was $6 millionish of that, what would you say the other $5 million of decline was? And I guess the final question, should we expect that software piece to begin to grow again as we look into the second quarter?

Year over year, the courts declined. When I talked about $5 million, that was really sequentially from the December quarter. From a year ago, the decline in the court's backlog is right at $10 million.

Okay. So, that accounts for the entire decline.

Pretty much.

Okay. And then should we expect that to grow looking out into the current quarter?

Hard to know exactly in the quarter. Over time, yes. But as Brian indicated earlier, a lot of the growth comes from large court deals that don't happen regularly. And whether one signs this quarter or next quarter, hard to know but that's what would spike it up. The financial part of our business, things don't remain in backlog that long. Those deals are generally signed and executed on a relatively short period of time. So, I would not have an expectation that unless you saw our major court announcement within this quarter, that it would be significantly different.

And our next question is from Gary Lenhoff with Ironworks Capital.

Thank you. I tried to withdraw. You just answered my question. Thanks.

And we'll take a follow-up question from Brian Kinstlinger with Sidoti & Co.

Thanks. Are you able to quantify the court pipeline? Maybe not dollars but maybe are you tracking five deals, 10 deals? Maybe give a sense of what we can --

Did you say core or court?

Court. Sorry. Court deals.

Brian, we don't get too specific mostly for competitive reasons. Who knows who's aware of what deals and so forth. But it would be more in the 10 range. 8, 10, 12, meaningful deals that we may be working. It's not two or three and it is not 20 or 30. It would be more in that range.

The other question was a follow-up tot he one I asked originally, how big is education of financials or the whole business and given that seems to be one of the differences of why you'll grow faster this year. How fast -- is that small enough it will be doubling or tripling because it was so small? Give us a sense of what could happen with that.

It is probably somewhere around 5% of total revenues and therefore, more in the 10%ish range of the financial acquisition. It wouldn't be doubling but it could be growing in the 30% to 50% range. Part of what we see there is because it is still a newer business for us both through acquisition and internal builds. There are more milestones to each recognition levels in projects. So, there's more deferred revenue there to earn. We'll see more of that as we go through it. Again, it will grow. It should grow considerably above the overall company growth rate. But no, it shouldn't be growing at a doubling rate.

Last question I have overall is if you were growing your head count say 5% or 10% in courts, is there a relationship to similar services that -- to look at in software license? For example, if you grow your head count 5%. Services can't grow much more than 5% obviously. Is there any kind of relationship or can software license grow much faster?

Depends on the structure of the deal. A lot of it deals historically have been percentage of completion. And therefore, the answer is yes, that the licenses are going to be earned as we deliver the work and that's only done by putting out the hours and the days. But then some deals are not. And there could be more [quote] recognition on delivery or certain milestones. So, it is a little mixed. Generally that, division, more than any other division, it would be true that the utilization of our resources, the quantity and the utilization of our resources would have more of an alignment with license revenues, but it is not always true. A couple or a few of our large contracts have instruction the way there would have been a license other than through delivery of services.

And our next question comes from Raghhavan Sarathy with Dougherty & Company.

Thank you. A question for John on the stimulus package, you talked about the stimulus package perhaps creating some issues. On the flip side, do you see perhaps getting some tailwind as these funds reach the local agencies, if not direct, maybe in direct, and are you seeing any indication in RFPs as it relates to this?

I'm not sure we see it specifically as tying an individual RFP to that. It is more indirect which I think we mentioned in February. There is some in the education area that you might say is directly related, but generally what I think you see is stimulus package will end up funding critical projects that would have been a burden on the local budget, and therefore, freeing up other funds that would have been used for that for our types of projects. So, we do think indirectly, that it has to. They're putting more money in the pot. They talk about funding education at no less than 2008 levels and a number of these different things has to at least indirectly support our type of projects.

And it isn't just the federal stimulus package. You're seeing some states and local governments taking action as well, where there are some additional revenues, in some cases those additional revenues, increases in sales taxes or things, are specifically being identified as being used to not cut local aid, which is the aid the state provides to local governments. So I think all of that balance is good. However, as I said, the uncertainty of it sometimes causes local officials to say, hey, wait, I need to better understand this or see what's going to happen with this in order to know what we're going to do with our capital budget. So, the uncertainty can cause a little pause, but on balance, I think it is good for the total volume of business.

All right. And one final question for Brian. So, if I annualize the first quarter EPS, I'm look at $0.64 for the full year EPS which would be only a couple of pennies below the low end of your guidance. I understand license revenue's a wild card that can swing EPS one way or the other. That said, it seems like your low end of EPS guidance, you're not anticipating much leverage to the rest of the year, although you're expecting revenues to increase. So, could you help me understand what assumptions are driving your low end of your EPS guidance? And I would also appreciate if you could talk about the assumptions driving high end of your outlook. Thank you.

Excuse me, clearly, licenses are, as you said, the wild card. They're the highest margin revenues and those are that are the least predictable in terms of timing, as John discussed, and in some cases, what the revenue recognition would look like in terms of different contract provisions that could cause us to have to defer it versus being able to recognize more license sooner. And in addition, some questions from time to time, the mix, whether a particular deal ends up being a perpetual license deal where we recognize licenses up-front, or whether it is a subscription type hosted deal where the revenues are recognized over the term of the arrangement. So, the licenses clearly are the major factor in determining whether we're at the bottom end or the high end. As you go down the list, subscriptions and maintenance are both relatively predictable, very low attrition and there's not much variance from the high end to the low end of what we would expect out of those. Services to some extent move along with licenses.

So, licenses would drive some of the change in services, but again, the other factor that we're seeing this year is that -- and we said for a period of time as we get larger, we expect to see less seasonality, so a little bit less of a hockey stick effect from the first quarter to the fourth quarter. And I think our expectations now are that we would see less dramatic variance from quarter to quarter throughout this year. So that would be generally kind of what our assumptions are at the very low end of the guidance, would assume more deferrals of licenses, maybe more restrictive revenue recognition and a different mix versus the high end of the guidance, which would assume more acceleration of signings, more advantageous revenue recognition and better timing on some of the deals.

So, just so that I understood this correctly, so, you are anticipating some level of sequential influence in license as opposed to what we saw last year, where it seemed like the back half declined sequentially.

That would be correct. I mean, at this point, we wouldn't expect the first quarter would have been our highest quarter. So, we would expect some sequential increase. Now, how that falls from quarter to quarter is difficult to predict. But we would expect that we would see, at this point, higher licenses and the latter quarters than we did in the first quarter.

Great. That was helpful. Thank you.

(Operator Instructions) And our next question comes from David Yuschak with SMH Capital.

Yes. With the product breadth you guys have today compared to the slowdown at the turn of this decade, John, how much would you say your prospects -- because you said earlier, it sounds like from a macro point of view, things are normal plus or minus or whatever. Is just having the strength of the product line here just given you a lot more things to see that gives you some reason to believe that because the macro underlining hasn't been as good that the potential to win more business because of the breadth, both from a product point of view and a geographic point of view. Both seems to be working well for you right now in this environment. Can you give us some idea as to how much of what you see out there is because of the product line and geographic expansion? That you may be inherently seeing more because of the macro environment may not be as robust.

Yes. No, that's fair. We continue to do a lot, broadening the breadth of product and increasing our presence and geographies, where we had no presence or less presence going back. I think it is fair, if we're saying that levels are relatively similar to a year ago and historically, I do think that in a more robust market place, we would be seeing higher growth and more activity than what we've seen historically. So, some of what we've done in a way, has only allowed us to maintain the level of business we've had or marginally grow it. I think that we would be seeing a more robust market and higher growth in normal times.

Now, what does that mean over the long run? We will be satisfied to have the broader breadth of products and the bigger geographical presence provide only modest levels of growth for this hopefully shorter period of time this year and next year, what have you. But even in a weaker period, eventually these demands will get such that they need to be executed on upon by the governments and I think we'll see higher growth rates. So, I think that's a fair observation, David, that you make and we're probably not getting the full benefit of the investment we've made in our more national sales channel and the broader breadth of products, it is simply giving us a bigger footprint from which to get some reasonable level of growth in a more difficult time.

Do you think you'll need to add more resources in anticipation of that getting and where would they be?

Sales channel?

Yes.

Marginally, but no, I think we have more capacity there in that channel than we're producing now. I think we've largely built it out and that I think our sales channel with only modest increases can be more productive in a more productive environment.

Okay. You still have the SG&A component. I would suggest maybe that's the case.

Right. There are a lot of moving parts there.

Yes, but still one of those things where I've always thought, what could be the potential leverage in the SG&A once you do get the kind of capacity and productivity off of that effort that you potentially could imagine you get out of it. Now one of the last questions, as you look ahead, what things do you think you need or -- because as you get more of a reputation in the business and execution software, everything else, what things do you think could potentially give you the ability to upsell yourself to even bigger projects that are out there, maybe that you prefer, maybe not even approach at this point in time, just because you've been comfortable with the space and being successful in the space you're at right now?

There are a few different categories but first, certainly would point out I think we're doing the large deals in courts and in tax and appraisal. I think we are the leader there even on the largest deal. up 20, 30 counties and state level deals in the country. So, in segments of our business, I think we're there. But I think in financial deals, which is a significant portion of our business, we're still much stronger in the midrange even though we do have some success on the high end, and when we have that success, winning that business, we have a very good record, executing on it. So, I think we're doing a lot with our brand and continuing to grow the company and its presence in the local government market. We're clearly pushing and I think are seen as Tyler versus our divisions, and starting to get more visibility there and be more seriously considered there. That takes time. We've made a lot of progress on that.

I think again, the products and services are more ready than the market has realized and that's been proven by the execution on the deals we had one. And I also think that with the release of the Microsoft project, which is still awhile out, we don't talk about it a lot, but I think when you combine the largest vertical player with the largest software company, that that's going to have an impact on the higher end of the market as well.

Okay. Well we just look forward to it then.

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

Okay. Well thank you, Jill. And we appreciate all of you joining us on the call today. If there are any additional questions after the call, please feel free to reach Brian or myself. Thanks again. Have a good day.