泰勒科技 (TYL) 2009 Q2 法說會逐字稿

Hello, welcome to today's Tyler Technologies second 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, Jim.

And welcome to our second 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 will have some preliminary comments, and Brian will review the details of our operating results, then I will have some final comments, and we will take your questions.

Brian.

Thanks, John.

During the course of this conference call management may make statements that provide information other than historical information, that may include projections concerning the Company's future prospects, revenues, expenses, and profits.

Such statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections.

We refer you to our Form 10-K and other SEC filings, for more information on those risks.

John?

Okay.

This quarter marks our 33rd consecutively profitable quarter.

We are especially pleased to report these record results in difficult economic times.

Total revenues exceeded $70 million for the first time ever, despite less than strong license sales.

Maintenance revenues increased 17%, and subscription-based revenues grew by 12%.

Our recurring subscription and maintenance revenues now comprise approximately 48% of total revenues.

Together with services and licenses for existing customers, well over half of our revenues are generated from our existing customer base.

We expanded gross margins and earnings even, while investing more than ever in our products and organization, continuing to strengthen our competitive position, and extend our market-leading position.

Our ability to deliver these results is entirely predicated on the outstanding performance of Tyler's 2,000 employees.

Literally hundreds of these employees have 10, 15, even 20 years of experience in our divisions serving the public sector.

Their experience and deep subject matter expertise is reflected in the rich functionality and reliability of our products, and the unmatched quality of our services.

This team is what differentiates Tyler from others in the market, and represents our strongest strategic advantage.

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

Thanks, John.

Yesterday Tyler Technologies reported its results for the second quarter ended June 30th, 2009.

You all have access to the press release, and our Form 10-Q has now been filed, so I am going to limit my comments and focus just on providing an analysis of the key factors contributing to our results for this quarter, and then move on to John's comments on the current quarter, and our outlook for the rest of 2009.

In addition, as you know, our second quarter of 2008 results included the effect of a non-cash legal settlement, pertaining to stock warrants.

In the second quarter of last year, Tyler reported a charge of $9 million which was not tax deductible, and the results are reflected in operating income, net income, and net income per diluted share for the second quarter of 2008.

For comparability purposes, my comments regarding comparisons between periods reflect non-GAAP numbers for 2008, that exclude the impact of this settlement.

Our press release includes a reconciliation of our GAAP results to the non-GAAP results in 2008.

Revenues for the second quarter were $72.2 million, up 6.8% from the second quarter of 2008.

This was our highest quarterly revenue ever, exceeding our previous best quarter by more than $2.5 million.

Our organic growth for the quarter was approximately 5%, and about 2 percentage points of our growth was the result of acquisitions we have made over the past 12 months.

Our software-related revenues, consisting of software licenses, subscriptions, software services, and maintenance, increased 6.9% from the second quarter of 2008.

Software licenses decreased 16.7% from last year's second quarter.

The comparison to last year's Q2 is a difficult one, because last year's quarter included $1.7 million of license revenue from an existing hosted customer, who elected to terminate the hosted arrangement, and purchase a perpetual license.

License revenues from our financial management and education solutions were off 28%, as fewer new license deals closed during the quarter, and that also reflects the impact of the switch from the hosted customer last year.

License revenues for our Courts and Justice Solutions, virtually all of which are recognized on a percentage of completion basis increased 22%.

Subscription revenues grew 12.1% over last year's second 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 three existing customers, who had previously had our software installed in-house.

Maintenance revenue growth was 16.7%, and all together recurring revenues from subscriptions and maintenance comprised 47.6% of our total revenues for the quarter.

Software services revenues grew 7.5%, with increases driven by implementations of our financial management and education solutions, as well as our Courts and Justice Solutions, reflecting increased capacity to deliver backlog, following additions to our implementation and the support staff over the last several quarters.

Finally, Appraisal Services revenues increased 15.4% in the second quarter, primarily due to the ongoing revaluation project in New Orleans.

For the second quarter of 2009, our blended gross margin increased 120 basis points to 44.3%, compared to 43.1% in last year's second quarter, with gross margins for each revenue category except hardware increasing over last year.

Sequentially gross margins increased 80 basis points, from 43.5% in the first quarter of 2009.

The improvement from last year is primarily 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 $870,000, as well as increased leverage in the utilization of our support and maintenance staff.

SG&A expense as a percentage of revenue was 23.7%, compared to 22.8% in last year's second quarter.

The change in total SG&A expense from the second quarter of 2008 was primarily due to increases in stock-option expense, commission costs, and marketing expenses.

SG&A expense declined, both in absolute dollars, and as a percentage of revenue, sequentially from Q1 of this year.

Net research and development expense was $2.8 million for the second quarter 2009, compared to $2.3 million for the same period last year.

Research and development expense for the second quarter of 2009 was offset by $857,000 of cost reimbursement, recognized under the amended research and development agreement with Microsoft.

There was no reimbursement from Microsoft in the second quarter of 2008.

Gross R&D expense before the effect of the Microsoft reimbursement, increased approximately $1.4 million from the second quarter of 2008, and was primarily driven by increased head count, and related costs associated with the Microsoft Dynamics development effort.

We currently expect that net R&D expense will at or slightly above the current quarter level for the balance of 2009, and we expect reimbursements of approximately $850,000 in each quarter through the end of 2010.

Operating income was $11.4 million, versus $10.8 million last year, and net income was $6.9 million, or $0.19 per diluted share, compared to net income of $6.7 million, or $0.17 per diluted share in the second quarter of 2008.

Free cash flow for the second quarter was negative $4.2 million, excluding real estate capital expenditures of $1.9 million, versus a negative cash flow of $1.6 million for the same period in 2008.

The lower cash flow is primarily due to timing of working capital changes, with an increase in Accounts Receivable, and more revenues recognized out of deferred revenues in this quarter.

Our Accounts Receivable performance continues to be normal with Days Sales Outstanding at June 30th, 2009 of 104 days, versus 103 days at the end of June 2008, so we have not experienced deterioration in receivables in this economic environment.

During the second quarter, we repurchased 7,500 shares of our stock, at an average cost of $15.28 per share.

In July we also repurchased 35,200 shares of our stock, at an average cost of $15.27 per share.

We now have about 35.4 million basic shares outstanding, down 3.2 million shares from a year ago.

We have approximately 2.7 million shares remaining under our existing repurchase authorization.

During the quarter, we also completed two small acquisitions.

We purchased Assessment Evaluation Services in San Diego, California, a company that develops integrated property critical solutions, and specializes in applications that deal with the unique provisions of the California revenue and tax code.

In addition, we also acquired from Causeway Data Communications of Northern Ireland, an exclusive North American and Caribbean license for spatialest, the only fully integrated geographic information system, computer assisted mass appraisal solution available in the marketplace today.

The combined purchase price for these two acquisitions was $1.5 million in cash.

In addition, in early July, we acquired Parker-Lowe & Associates, a provider of software for land records and Social Services offices in North Carolina for $700,000 in cash.

Our backlog at June 30th was 235.3 million, compared to 246.9 million at June 30th, 2008, and 234.2 million at March 31st, 2009.

Backlog related to our software business which excludes backlog from appraisal services contracts was 209.4 million, compared to 224.0 million at June 30th, 2008, and 209.4 million at March 31st, 2009.

Appraisal services backlog was 25.9 million at 6/30/2009, compared to $22.9 million at June 30th, 2008, and $24.8 million at March 31st, 2009.

Prior-period backlog numbers that have been adjusted with slight changes, to conform to our current presentation.

On the balance sheet we ended the second quarter of 2009 with $12.2 million in cash and investments, and outstanding borrowings of $15.4 million under our credit facility.

The second quarter is seasonally our lowest quarter for cash flow, and the third quarter is our strongest with significant maintenance collections from our July 1 renewals.

Since June 30th, we have reduced our borrowings by over $9 million, to approximately $6 million outstanding as of today.

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

Thanks, Brian.

Our results for the quarter demonstrate the strength of our business model as we posted new highs for revenues sustained by solid growth and consistency in our recurring revenues.

We continued to improve our gross margins, achieving a new high this quarter, while investing aggressively in our products and organizations, to continue to improve our competitive position.

Last quarter, we talked about certain sales processes lengthening, and we were affected by that in the second quarter.

But overall our markets remain active, with the request for proposal activity at a similar level to last year, and the total new business pipelines, at levels that are historically high.

While there was relatively slow activity in the quarter, we did sign some important deals, including in financial systems, we signed contract with San Patricio County, Texas, we have signed two more Texas independent school districts, Katy and Canyon, for a total of 3.1 million.

We signed a contract with Tualatin Valley Fire & Rescue, Oregon's largest fire district, for a three year ASP contract value of $1.15 million.

In Courts and Justice, we signed Odyssey contracts with Forsyth County, Georgia, the City of Nashville and Davidson County, Tennessee, and an additional county, that is one of the 35 largest in the country.

These contracts totalled 9.2 million.

In the quarter, we also signed a contract for our municipal court software with the City of San Antonio, Texas.

The seventh largest city in the United States for $2.2 million.

This represents the largest municipal court contract in Tyler's history.

In Appraisal and Tax, we signed a contract with Bernalillo County, New Mexico, and the town of Brookhaven, New York, totaling $1.5 million.

Finally, we signed land records and recorder contracts with Henderson and Morris County, Texas.

These wins combined with our strong position and processes nearing decisions, are evidence that Tyler continues to improve its competitive position and gain market share.

Although we expect that in this environment, we will see weakness from time to time, we believe there is a healthy amount of opportunity in our market, and that we are extremely well-positioned competitively.

We are closely tracking active deals, and are confident that many of these processes are nearing completion, with a favorable outcome for Tyler.

As a result, we are confident that license bookings will pick up in the second half of the year.

Considering our performance in the first half of the year, and our current visibility into the second half, we remain comfortable with our original earnings guidance.

We have raised the lower end of our earnings range, while slightly reducing our revenue and free cash flow expectations.

We expect to see solid revenue growth, as well as year-over-year increases in license revenues, that is consistent with our top-line growth.

For the full year, 2009, we expect revenues to be in the range of 290 million to $294 million.

We forecast 2009 diluted earnings per share to be approximately $0.68 to $0.72.

Fully diluted shares for the year are expected to be approximately 36.5 million to $37 million.

For the year, estimated pre-tax expense related to stock options in the employee stock-purchase plan is expected to be $4.8 million, or approximately $0.10 per diluted share after taxes.

We estimate an effective tax rate for 2009 of approximately 39.5%.

We expect free cash flow for the year to be within a range of 26 million to $33 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 37 million and $44 million.

Now Jim, we will be happy to take questions.

We will now begin the question-and-answer session.

(Operator Instructions).

We will pause momentarily to assemble our roster.

Your first question comes from Brian Kinstlinger from Sidoti & Company.

Great.

Thanks very much.

Good afternoon.

Hey, Brian.

The first question I have is about Microsoft and the deal there.

And I guess I am interested to understand the timeline as we look to, first of all, does it still hold that you expect at the end of 2010 to release that product?

Are their pilot customers right now?

Where is that?

And then as that product is released, what will happen to R&D?

Will it be cut in half?

Will it be increased?

Will it come down just a little bit?

Give us a sense of if the earnings power of the Company will be much greater once that happens?

Okay.

A lot of that remains fluid and not highly certain, but in general the projects, the scope, and the schedule, doesn't change much.

It is a large software development project, and we would certainly allow for weeks or a couple of months of variability, as we near the release through the manufacturing of the product.

But there aren't any real significant changes in schedule or scope.

And whatever changes might be anticipated, probably aren't directly related to Tyler, so I think the scope and cost of our portion will be very much in-line, with what it has been expected to be for some time.

Once it goes to release, we will have future releases, and new development of other releases as we do with our existing products that are marketed, and so we would expect to retain a significant amount of staff, to maintain the code that we developed for the original release, as well as to contribute to future milestones, and releases down the road.

We don't yet have great visibility as to what size that staff will be in relation to what it is now, but it would be expected to fall reasonably significantly from the current level.

Whether some of those resources get deployed on other opportunities, and other places, or they represent a net reduction in cost to Tyler, again, it is a ways off, and it is hard to tell, but certainly our direct cost for this system itself, will come down somewhat after the original release.

I would not be comfortable projecting real meaningful revenues in late 2010 or even 2011.

That is not to say they can't occur, but with our experience with products we have built ourselves, the process of releasing those, and building the reference base, and the services around them, et cetera, takes some time, and I think it is prudent to allow for that in the forecasting here.

So again, there could be an early ramp up to revenues, but it is not something I would factor in to late 2010 or 2011.

I would look for it to be coming online more meaningful after that.

In terms of beta sites, there are a number of sites that have been selected and agree to be beta sites, both domestically and internationally, in local government, as well as in other governments and not-for-profits.

So we expect that to kick off some time shortly, and we do expect to have a number of referenceable sites installed, along with the original general release.

Okay.

Thank you.

And my second question is on the cash flow guidance coming down just a little bit.

I know you mentioned working capital.

It is DSOs?

It it cash-strapped clients?

Or what particularly among working capital, has caused that, because earnings guidance actually stayed the same at the high end, and at the low end it was increased, so I am wondering, what has happened there?

Right now it looks mostly like timing of working capital changes.

We have generated a little more revenues out of deferred revenues, and in the second quarter, our cash collections on receivables even though our DSOs are about the same, our receivables are up in terms of absolute dollars a little bit more than in prior years, so our receivables DSOs have not changed significantly.

It only changed by a day year-over-year.

Most of it appears to be timing, although we had a little bit quicker collection last year, so based on where we sit now, it seems to be just be timing within the year.

So no cash-strapped clients, or anything like that?

There don't seem to be.

We have been staying on top of receivables pretty carefully, but nothing that seems out of the ordinary, in terms of collection.

Have I got time for one more?

Jump back in the queue.

I expected to be pushed out.

Operator, can we take the next question?

Certainly sir.

That will come from David Yuschak from SMH Capital.

Good morning, guys.

Good quarter.

As far as your comments John about the RFPs, being basically about what you saw about a year ago, and the pipeline being kind of at the levels it is.

You said in the past, you thought that sales cycle was stretching out maybe six months or so, so with that in mind, it would kind of suggest that we could really see some really good announcements going forward on a lot of those RFPs that have been backlogged, because of time.

Is that what we should be thinking about here as you mentioned, that some of these things could be favorable to you?

So that could boost your software backlog as well?

Yes, I mean we don't control these decisions and the timelines, but that is the impression we would give to some degree.

RFPs are coming online, very much in-line with last year, and yet they haven't been coming out the other end in the way of decisions as regularly.

So that is why the weight of that forecast is heavier, and we are tracking these deals very, very closely, and obviously decisions don't just come out of blue air, there is a process, and you get to a point, where you have got a clear impression that you are a selected vendor, you are negotiating a contract, and what have you.

And we would be comfortable giving the impression that there are a number of deals that have been sitting out there for some time, that are at that stage of the decision process, and we would expect that the awards, in the current quarter and throughout the second half of the year, would be somewhat better than what they have done the last six months.

And then as a follow-up to that, where is most likely some of that success to come?

And the second part of that with the new business that you are developing on the ASP, just kind of curious as to, as firms make decisions is that ASP model becoming more realistic, as far as an alternative to maybe some of the software licensing business, and even from your conversions, internally what might be motivating those guys to do it that way, instead of the traditional ways?

Yes.

Well, I think where would it come from?

Obviously, the areas that are most impactful on the Company are Courts and Financials, and I think the more important deals that we are tracking right now, are in those two areas, and again, we have got some expectations that there is some business, and we will get some bookings in the backlog in those areas in the coming months.

There is a little more traction for ASP, and other software or service types of arrangements, with these clients.

So we have the ability to do that, the sales channel is aware of that.

We always offer it has an alternative.

But there does seem to be some heightened interest.

I don't think we will see a dramatic shift in that.

But there does seem to be a little bit more attraction there, and in some cases, where it was not necessarily considered, the approach originally, it has shifted in that direction, so I would expect that the adoption rate would be marginally higher for ASP for new clients going forward.

We will take our next question from Raghavan Sarathy from Dougherty & Company.

Thank you for taking my questions.

Going back to John's comment, John, you indicated that you are seeing longer sales cycle in some situations and some weakness, but I guess the most, the recent comment that you just made seems like that is probably getting better.

Could you give us some color on when you are seeing longer sales cycles, meaning whether it is larger deals, or smaller deals, or maybe with what line of products, and if there is any kind of commonality, in terms of reasons besides possible budget constraints?

Yes, I think it is across the products and across the sizes.

I don't see that being too much different in one segment than another there, and I think as we would all expect, we have talked about everything Tyler does is non-discretionary.

It has to be done, and systems generally, even historically in good times, are only replaced when they need to be.

It is not generally done because there is a better system out there.

So if those things are true, then they are going to need to buy systems in these times as much as they do other times, and we believe that generally is the case.

However, people are going to be more prudent, and more disciplined, and people are going to be asked to justify their request for the resources to buy these systems, and that is what is happening.

So historically, something might be in the capital budget.

It was put in into the long-range plan, three, four, five years ago, it comes up, they go out they find the system, they buy it, it is approved at a higher level, and the contract occurs.

All we are seeing is we are not seeing a lot of those processes going off line, we are seeing understandably, more questions being asked, more detail being required to justify it, and just a few extra steps being added.

Once the cycle has been expanded by that, whether it is 60 days or 90 days, which is what I think has occurred in the first half of this year, then you should get back to as many decisions being made, coming out that end of the pipeline as new RFPs going in, and I think we are getting to that point, and again, we are not saying that lightly, we have names and watching processes closely that we are pretty comfortable are at a point that they are ready to move forward.

And then second question for Brian here.

You said the downward relation to revenue doesn't seem significant considering the first-half bookings.

So that being said, could you comment on some of the things that you factored in, or maybe tightened up in the revised revenue guidance, and how comfortable are you with the top line guidance now?

Thank you.

We are now halfway through the year, and another month into the third quarter.

We are increasingly comfortable with it.

Again, we just tightened it up a bit, based on what is coming out of backlog, the processes that John has described, that seem to be moving forward, so we are as comfortable as ever, increasingly comfortable in this new guidance range.

And again, the change was pretty modest.

Moving on, we will take our next question from Torin Eastburn, CJS Securities.

Hi, good afternoon.

Hey.

Your average size of the new contracts was a bit lower in the quarter than it has been historically.

You have had a few quarters like that recently.

Does that trend were you, are there maybe larger contracts in the pipeline that could change it?

It doesn't worry us.

Obviously we will welcome the lower-end clients, and if there are more of those, that is fine.

We do a lot of business with small town America, and we certainly hope to continue to do that.

So the real question in my view wouldn't be the average, again if that average comes down because we are doing more business with smaller clients, that is fine.

I think the question would be, and what would concern us would be, if we didn't believe we would be doing a healthy number of large contracts.

And we believe that the activity on the high end is actually pretty strong, and that the number of multi-million dollar engagements that we would be doing going forward, we expect to pickup over traditional levels.

Thank you.

We look forward to seeing you at our summer conference.

Sure.

Moving on, we will take our next question from Gary Lenhoff, Ironworks.

Thank you.

Trying to measure this push-out or delay.

Is it fair, if we take out the $1.7 million in Q2 '08 from the customer conversion, and we take out acquired revenue that wasn't in the quarter a year ago, that is there this year relating to your education acquisition, a rough measure, if you will, of organic growth in the software license business is down about 9% year-over-year, is that a fair assessment, and is that a meaningful measure in your mind?

I would have to do those numbers.

As you know, if you take the $1.7 million out, it is virtually flat.

Right.

And I would guess that the acquired revenues for licenses would be less than that.

I would think that is the high, I would say maybe 5 to 8%.

Yes, the acquisitions we have done in the last year have been companies that have been more heavy on the recurring maintenance and support side, than the license side, compared to our existing business.

So I think it would be, as John said, down less than what you are used to seeing.

Okay.

Great.

Thanks very much.

Sure.

We will take our next question from Maureen Drew from Gagnon Securities.

Hi, gentlemen.

Neil Gagnon with Maureen.

I think this is a question for John.

We all read the same type of newspapers, and we are seeing the stress supposedly in all kinds of governments.

I am wondering if the acquisition pipeline is building up, because smaller companies really need to sell in this environment, or is that just a poor impression?

Yes, that is not really the case.

The small companies, most of them have been around quite a while.

They are on a much lower scale have the same characteristics we do, they have got clients, they have got maintenance, and they may be doing a little less in new business, but they are generally stable, and what really is going on, and this is not just our experience, but if you talk to a number of different people that are active in the marketplace, there is a broad spread between the bid and the ask.

These people have been in business a long time, they have some level of stability, and they got used to what they might have thought their company was worth, and it might have been worth two years ago, and they have a hard time adjusting to the current valuation of the marketplace.

It is not just us.

In a lot of places there are assets you interested in, but obviously we are going to have the discipline of valuing those according to current realities.

There aren't a lot of people selling at those prices.

So the activity, actually has been relatively slow or low, and again, as we talk to people around the industry, that seems to be a normal thing right now.

Good.

Thank you very much.

Our next question will come from Del Warmington, Delwar Capital Management.

Yes, I have a balance sheet question.

You mentioned that you have seen an increase in Receivables.

Of the 83 mil you have on the balance sheet as receivable, what portion is billed vis-a-vis unbilled?

What portion is unbilled?

Unbilled is about $19 million of that.

Okay.

Thanks a million.

Sure.

We will take a follow-up from Brian from Sidoti & Company.

Hey, couple of follow-ups, the first one, we talked a lot about state and local markets and conditions.

We hit the new budget cycle, and one of the things a while back you said to look for, is you generally don't see too many RFPs canceled.

I am curious, when the new budgets came in, what would you say the trends have been for the RFPs?

Are they still there?

Are there a few less maybe, compared to historically, how the new budgets have played out?

RFPs are remarkably close to last year, almost identical, and given the environment we are pleased with that.

They were last year off somewhat from the previous year, so not a terribly different comp, but we are pleased to see that.

As we discussed earlier, Brian, we didn't say it would happen, but there was the possibility and we were looking for an indication as to whether they would fall off, and they haven't.

They have been coming out pretty much at the same rate that they did last year, and that is what built the bigger pipeline.

When you say there are delays in the sales cycle.

Let's take an example here.

Suppose the project or a government says, we are pushing this back.

Is there an actual push back, and they give you a timeline, when they expect now to award it, or is it sort of open ended now?

That is not really what I am talking about.

That does occur.

There are some deals.

We are talking about a few or a handful of deals where they literally say, let's push that back consciously to next year, or out six months, so that we know better where we are, or what have you.

There is some of that.

But that is not really what I am talking about.

It is not a conscious decision to lengthen the cycle, it is just these added steps that I have discussed.

Rather than just going to the next council meeting and getting approval, they may say we need to have a workshop, and we want some answers to these questions, and so they miss that meeting, and it is the next month, or what have you.

And in some cases, once we missed the May meeting, it was going to fall to August or September, and get through vacations, so most of it isn't a conscious decision to defer the project, it is just people being more deliberate in these times that this project is necessary, and a few steps being added that lengthened the process by 60 days, or something like that.

Moving on we will take our next question from David Yuschak.

Yes, as far as your ability to upsell.

You have done a great job geographically, and product expansion, and everything else.

What kind of things do you think as you look forward, particularly in kind of a quiet period, like now it gives you time to assess this, what things do you think that you need, and how close do you think you are, to be able to upsell yourself more aggressively into some of those bigger contracts, given as you said earlier, your expertise has been in the small stuff, and you have no problem living there, but because of your systems capabilities, and robustness of the products these days, shouldn't we ultimately look at upselling, and what things do you think you need, or maybe have now, and have some more success in upselling?

Well, that is a long-term process, but the good news is, we have been working at that now for a number of years, so there are a number of things.

One thing is Tyler itself.

Growing as a company, having a stronger brand, having a bigger presence in local government.

The Company itself being an asset to the way we present the products and services to the marketplace, and certainly we have made a lot of progress there, to be more relevant as a company.

Some of it certainly has had to do with products growing up into that space, and getting, some of those early sites to be successful and referenceable.

And a lot of that is in place.

The Company is better recognized, is certainly very credible in a large environment now, and again, our products have been extended to be able to be responsive to those deals, and the deals that we have done are successful and referenceable, and site visits to those places go well.

So a lot of progress has been made.

Something that I think in the current environment that is helpful, and one of the reasons we think we will have more deals to share with you in the second a half of the year, is that cost becomes a more important decision criteria, and in some of these deals, where we have a cost advantage when we are going up against the Tier 1 software provider, we are the systems integrator, combining for a bid to a city or a county or a school district, and we are the single vendor, with a comprehensive solution generally at a considerably lower price point.

So having established some credibility in that space, and now having a cost advantage that in these times is valued more than in others, is improving our competitive position there, so we expect to see some more activity in that space.

Thanks.

So I am kind of thinking that professional services, the robustness of what you have done in Professional Services, is a key part of that as well?

Yes, there are additional services that get layered over the general offering in these larger offerings, that is right.

Okay.

One last thing on the education side of it, when do you think you may be, you have had some good success there, when do you think your product suite is strong enough that we can see some things happening there, that are a little more positive as well.

Well, rarely in our business do things just kind of explode or turn the corner, it is always a process, and we think that will continue to be the place.

We kind of know what our business is for this summer and this fall in the school's business.

It is very cyclical, people don't generally buy systems in the middle of the year.

So we know what that is.

It is a reasonable book of business.

We are executing on it right now.

We need to achieve certain milestones to release those revenues and recognize them, and we think that it is a reasonable amount of that in the second half of the year.

So we think that they will contribute more in the second half of the year, based on projects that are ongoing right now, not awards, than what has happened historically.

And then obviously the reference ability of those clients, and going to market with stronger positions is what we will look forward to next year.

Moving on, we will take our next question from Robert Moses, RGM Capital.

Hi, John.

Hi, Brian.

Hi, Rob.

Hi, Rob.

Couple of things, first I was just curious on maintenance renewals.

It sounds like receivables are fine, and your maintenance grew 17%, which is consistent with what you hoped it would be, if not better.

Same things like in Philadelphia talking about stopping paying vendors, and certainly statewide in California, talking about IOUs, and some of this may just be political posturing, but just wondering if you are seeing any pushback out of the ordinary, in terms of playing maybe a little bit more chicken with you guys, on maintenance renewals, and payments, and things of that nature?

You always get challenged by a few customers, but it is literally a few, in relation to how many we have.

You added out of the ordinary, I don't see anything out of the ordinary there, in terms of being challenged by clients or the renewal rates themselves, which remain very, very high.

I would say the one thing that we get affected a little bit by, is it is not just single maintenance agreement.

There is a list of products that they pay maintenance on, and the one thing we do see in more challenging times, is they will pull that list out and go through it, and say, are we really using and do really need all of these apps.

So occasionally someone will drop an app, that they are actually not utilizing to much of a degree.

Not a big deal, but there is a little bit of that in these times.

Got it.

Maybe secondly just about the Stimulus plan.

I think the last, at least call or maybe two, you talked a little bit about maybe, near-term, longer-term, maybe good things relative to that, but maybe some hesitancy as it relates to, could they get incremental capital.

Have you seen just based on the conversations with your sales force any changes in that, kind of waiting for that?

Or is that material at all in terms of near-term business?

No, I don't think so.

We don't see a lot of changes, and again, it is not material certainly directly, to the extent Stimulus funds are used for other things they would have had to do, certainly that could help support some of our projects, but it is not something where we are doing a lot with it right now.

And it is not necessarily something that is necessarily delaying, where they are saying we may be able to get funding in 12 months, so we are holding off, there is not much of that going on?

No, I don't think so.

Okay.

Lastly then, as we think about margins, obviously gross margins expanding, even with license revenue down.

Could you talk a bit, maybe Brian, just about how you guys are thinking about margins in the second half, and go forward?

I mean, it looks like if you just annualize both the second quarter and the first half, you will see greater than 70 million a quarter the next couple quarters.

Yet earnings don't see much improvement, is that largely due to incentive accruals, and things that you normally have year end stuff, or is it mix, as we think about margins, maybe not seeing more leverage if you will?

It would be more the latter.

I mean I think we have seen some pretty good improvements, some of which was driven by the amortization going away, and that is a number that is fixed at this point.

So I think at this general revenue level, that we probably would not see a lot more margin improvement.

If we are in this kind of 9 to 11% growth range, that the kind of margins from what we have seen in the first half of the year, would be about what we would expect, so I think that generally margins would be in the range that we are at now

Moving on, we will take our next question from Raghavan Sarathy.

Thank you.

A clarification question, John, you mentioned that you expecting are license revenue growth generally in-line with total revenue growth, was that comment related to the second half of the year, or the full year?

For the full year.

It was up just very marginally for the first six months, but we do believe by the end of the year, license will grow in-line with overall revenue growth.

All right.

Great.

Thank you.

(Operator instructions).

We will take another question from Brian from Sidoti & Company.

Two last questions.

The first one this year has been a CapEx heavy year for you, given your real estate developments.

Can you give us a sense of when those programs end, and will 2010 be a more normalized CapEx, or do you still have some extra costs going from developments?

Pretty much all of that stuff ends in the second half of this year.

The building we have under construction in Lubbock right now should be finished in the fourth quarter.

So the remaining total CapEx is around $11 million for real estate this year, will all be completed this year, and really shouldn't carry over into next year, so we should be back to our normal maintenance CapEx, which has traditionally been in the 3.5 million to $4.5 million range.

And then my other question, did you say core software was up 22%?

And if so what was financials at?

On the last call, you said that you thought financials would grow faster than the Company?

Yes, I was just talking about licenses in the quarter.

Right.

So Courts and Justices licenses were up 22%.

And I think it was a 17% decline in the Financials and Education licenses.

And what was the difference, why do you think Financials had such dramatic weakness?

Is that where the delays are, because that was a business 2.5 months ago you thought would outperform Courts, and some of the others.

So what has changed there do you think?

The biggest thing is the comp with last year has the one large license, 1.7 million in licenses from one customer, that was an existing customer, that was a hosted customer that elected to go ahead and buy the software.

So that was a very unusual occurrence in that quarter.

And if you factor that out, we are basically close to flat in terms of licenses in the financial business, and to the extent that otherwise we are off, that would really be a reflection of the longer sales cycles.

Okay.

Thank you.

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

Mr.

Marr, I will turn the call back over to you for closing remarks.

All right.

Thank you for joining us on the call.

If there are further questions, please feel free to contact Brian or myself.

Have a great day.

Thank you.

That will conclude today's conference.

Thank you for your participation.