泰勒科技 (TYL) 2010 Q3 法說會逐字稿

Hello, everyone, and welcome to today's Tyler Technologies third quarter 2010 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, Vicky, and welcome to our third quarter 2010 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, and then I'll have some preliminary comments; and Brian will review the details of our operating results. Then I'll have some final comments and we'll take your questions. Brian?

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

Thanks, Brian. This quarter was our 38th consecutive profitable quarter. Our operating results were somewhat mixed, but generally in line with our expectations. Total revenues were down less than 1% compared to last year's third quarter, and were impacted by extended sales cycles and lengthened implementations. However, we continue to see strong performance in our recurring revenues that for the quarter grew approximately 9%.

Our appraisal service business posted solid growth this quarter, as we have signed several significant reappraisal agreements this year. We expect the appraisal business to continue to show growth in the fourth quarter. Despite flat revenues and increased product development spending, we improved our gross margin percentages by 30 basis points over the third quarter of 2009 as well as sequentially from the second. New bookings for the quarter were essentially flat with last year's third quarter.

Among the more significant new contracts signed in the quarter were two contracts totaling $2.3 million for our MUNIS Solution with California's Clovis and Saddle Back Valley unified school districts. They collectively provide education services to over 63,000 students. We also signed contracts valued at $2.5 million for our MUNIS Solution with two of Oklahoma's ten largest school districts, Tulsa public schools and Norman public schools. We signed a $1.1 million MUNIS contract with the City of Annapolis, Maryland and a $4.5 million contract for appraisal services with Cobb County, Georgia, which is part of the five county Atlanta metropolitan area and an existing appraisal and tax software client.

We continue to maintain a healthy backlog and our sales pipeline remains very active. However, the current economic environment -- in the current economic environment, we continue to experience longer sales processes and less predictability regarding the timing of contract signings, and we expect that that will likely be the case for the next few quarters. Now I'd like for Brian to provide more detail on the results of the quarter.

Thanks, John. Revenues for the third quarter. Revenues for the third quarter. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2010. You have access to the press release and our Form 10-Q was filed this morning, so I'm going to limit my comments to some of the key factors in the quarter, and then move on to John's comments for the current quarter and our outlook for the rest of 2010.

Revenues for the quarter were $73.8 million compared to $74.3 million for the third quarter of 2009. Organic growth was negative 2.2% and acquisitions provided approximately $1.1 million of revenues for the quarter. Software license revenues decreased 8.9% from last year's third quarter. The decrease in license revenues is mainly attributable to longer sales cycles as well as extended implementation time tables on some sign business, which is consistent with the conditions we have seen for the past several quarters. Subscription revenues continue to be our fastest growing revenue line and we're up 32.1% over last year's third quarter. Over 0.5 of the increase is the result of our acquisition in January of Whiz Net, which provides electronic document filing solutions for courts and law offices.

The remainder of the growth reflects revenues from new customers as well as existing customers that have converted to our ASP model from in-house installations. During the quarter we signed two new ASP customers and converted 10 existing customers who previously had our software installed in-house. Software services revenues decreased by 18% primarily due to slowness in software license bookings in recent quarters. Maintenance revenue growth was 6.1%, a combination of new revenues associated with license sales in the past year, and annual rate increases for existing customers. Together recurring revenues from subscriptions and maintenance comprised 55.2% of our total revenues for the third quarter and grew 9.2% year-over-year.

Finally, appraisal services revenue increased 19.6% in the third quarter primarily due to the ramp-up of work on several new revaluation contracts we began in late 2009 and mid 2010, including a number of Indiana counties as well as the major revaluation project we signed in Allegheny County, Pennsylvania last quarter. For the third quarter of 2010, our blended gross margin increased 30 basis points to 45% compared to 44.7% in last year's third quarter, with gross margins for our software license and maintenance and subscriptions driving the increase. In light of delays and contract signings and implementations, we have worked to keep costs in line with revenues as much as possible, and have deferred some planned hiring until new business is in hand.

SG&A expense increased 1.3% and as a percentage of revenue was 23.5% compared to 23% in last year's third quarter. The primary driver of the increase is expense associated with the Company's stock option plan. Sequentially, SG&A expense declined in absolute dollars from the second quarter of this year; and as a percentage of revenue, SG&A declined 50 basis point from the second quarter. Non-cash stock compensation expense for the third quarter was $1.5 million compared to $1.3 million in last year's third quarter. $184,000 was included in the cost of revenues, and $1.3 million was included SG&A expense.

Net research and development expense increased 8.7% to $3.2 million for the third quarter of 2010 compared to $3 million for the same period last year. R&D expense was offset by cost reimbursement recognized under our agreement with Microsoft of $1.5 million in the third quarter of 2010 and $857,000 in the third quarter of 2009. Gross R&D expense before the effect of the Microsoft reimbursements, increased approximately $939,000 from the third quarter of 2009, and was primarily driven by increased head count and related costs associated with the Microsoft dynamics development effort, which was expanded in the fourth quarter of 2009 to include payroll, human resource, and budget functionality as well as the redeployment of existing development staff to other Tyler R&D projects.

We currently expect reimbursement of approximately $850,000 in the fourth quarter of 2010 under the terms of the agreement we signed with Microsoft in September of 2008. We are receiving additional offsets to research and development costs from August 2010 through March 2012 associated with the recent expansion of the agreement. The recognition of which will vary from quarter to quarter. However, for the fourth quarter of 2010, we expect the rate at which we recognize the reimbursement will decline somewhat from the third quarter due to changes in the timing of deployment of resources on this phase of the project.

As a result, we expect net R&D expense in the fourth quarter will be approximately $1.2 million higher than previously estimated. Operating income was $11.8 million versus $12.5 million last year; and net income for the quarter was $6.7 million, or $0.19 per diluted share compared to net income of $7.5 million, or $0.20 per diluted share in the third quarter of 2009. The fully diluted share count declined by approximately 1.1 million shares, primarily as the result of our stock repurchases. Free cash flow for the quarter was $26.9 million, which is a new high for quarterly free cash flow for Tyler; and $18.8 million for the same period in 2009. Excluding real estate capital expenditures, free cash flow was $22.4 million in the third quarter of 2009.

This year's cash flow includes a high level of cash receipts associated with our mid-year maintenance and support billings as well as an improvement in DSOs. Day sales outstanding and accounts receivable at September 30, 2010, was 94 days compared to 98 days at December 31, 2009, and 104 days at the end of September 2009. Our DSO at the end of the third quarter last year was higher than normal due to several large milestone billings that occurred during the quarter for which revenue would be recognized in future periods.

During the third quarter, we repurchased 2,481,271 shares of our common stock for approximately $46.7 million at an average cost of $18.81 per share. Year to date, we have purchased 3,349,760 shares for approximately $61.5 million at an average cost of $18.37 per share. We now have about 32.3 million common shares outstanding. This week our board of directors authorized the repurchase of an additional 2 million shares of our common stock; and with this increase, we currently have authorizations to repurchase up to a total of 2.9 million shares.

Our backlog at September 30, 2010, was $253.8 million compared to $231.5 million at September 30, 2009; and $258.0 million at June 30, 2010. Backlog related to our software business, which excludes backlog from appraisal services contracts was $216.2 million; compared to $209.2 million at September 30, 2009; and $223.9 million at June 30, 2010. Appraisal services backlog was $37.6 million at September 30, 2010; compared to $22.3 million at September 30, 2009; and $34.2 million at June 30, 2010. Backlog at September 30, 2010, included about $84 million of deferred maintenance compared to about $80 million a year ago.

On the balance sheet, we ended the third quarter with $8.6 million in cash and investments and $16.5 million in borrowings under our new $150 million revolving credit facility. The new agreement, which closed on August 11th is with a syndicate of seven banks, has a four year team, and contains an accordion feature under which it may be increased to $200 million. At September 30th, we had $125.2 million of availability under the agreement. Having this new long-term credit facility in place gives us a great deal of flexibility to take advantage of opportunities that may arise, including repurchase of our stock and potential acquisitions.

The cost of these funds is low, and we believe that some leverage in our capital structure is appropriate given the reliability of our cash flow. We finished the quarter with 2,069 employees, up from 2,032 at the end of June with the increase primarily in our appraisal services staff. Now, I'd like to turn the call back to John for his further comments.

Thank you, Brian. Our results for the quarter were helped by the stability and steady growth in our recurring revenues, which were approximately 55% of total revenues, as well as our ability to continue to improve our gross margins and to make what we believe are well timed investments in our existing and future products to maintain and enhance our competitive position in the marketplace. However, the new business market continues to be soft and unpredictable.

The result for us is that solid growth and recurring revenues are almost exactly offset by softness in new customer related license and professional service revenues. Both our backlog and pipeline remain healthy. However, the timing of new customer decisions and even the rate at which implementations are executed have been negatively affected by the unusual caution local governments are operating under. Considering all of this, we do feel over the long term, the market will be healthy.

There are essential needs local governments need to address, and we remain well positioned across our offerings to be a market leader. But the shorter-term predictability will remain difficult. Based on our visibility into the fourth quarter, combined with a continued uncertainty in the market, we've revised our guidance for the full year. We currently expect 2010 revenues to be in a range of $289 million to $292 million. We forecast 2010 diluted EPS to be approximately $0.67 to $0.71. Fully diluted shares for the year are expected to be approximately 35.4 million to 35.6 million. For the year estimated pre-tax expense related to stock options and the employee stock purchase plan is expected to be $6.1 million or approximately $0.14 per diluted share after taxes.

We estimate an effective tax rate for 2010 of approximately 40%. We expect free cash flow for the year to be within a range of $33 million to $39 million, with total CapEx of approximately $5.5 million to $6 million for the year, and total depreciation and amortization of approximately $11 million. Excluding capital expenditures for real estate of approximately $1.5 million, we expect free cash flow to be between $34.5 million and $40.5 million. Now, we'll take questions.

(Operator Instructions) We'll take our first question from Brian Kinstlinger with Sidoti & Company.

Hi, good afternoon. The first question I wanted to ask was on software license versus subscriptions. As you look out, and doesn't seem the environment is changing too soon, would you expect over the course of the next year or so to continue to see subscriptions grow much quicker and software license maybe flatten out while customers are trying to save some money?

I don't know about much quicker, Brian, but there has -- what we refer to as flips, the clients that were traditionally deployed. There continues to be a pretty good flow of those moving from a deployed client to a SAS or hosted customer. And I think that is driven by the current environment to some extent and that they're working to keep head counts flat in their own IT departments as well as in cases of where they may need a capital investment in their own infrastructure to avoid that by leveraging our data center.

So do we continue to see that. That's a good thing because it really doesn't have opportunity cost in terms of licenses. We are expecting in the fourth quarter to see a higher mix of SAS type contracts that we're working on right now, a higher mix of those, and that will impact licenses that otherwise would have been recognized in the quarter and is part of our revision downward. Whether or not that's sustained in the next year is hard to tell, but currently there is more command for the SAS solution.

Okay. And when you talk about delays, is there any difference between criminal justice products versus your financials products? And then can you maybe talk about on the software license side, the difference in the growth -- deterioration of the two business, maybe what the growth rates are?

Yes, sure. Over, say, the last year, there really isn't any difference. The delays have occurred across the board. The timing of it has kind of been different as the quarters went through. So earlier in the year when we were referring to some deals that just seemed to not be getting done that we had expected, we would have contracted and had people deployed on; more of those were on the financial side of our business. And in the second half of the year, it seems that more of those are actually in the courts and justice business. But I think that's just a little random. But throughout the year, they've happened across the board.

In terms of growth, probably there's been a little more retraction or reduction in the financial side of the business. It's a bigger number, and we've probably seen a little more of a drop there than we have in the courts and justice business. The courts and justice business has a very good pipeline, has a nice backlog. And we continue to win really all the meaningful deals that we chase; but again, right now they're happening very slowly, and that's impacting our ability to hit utilization targets in the professional service side of our business that we're accustomed to historically.

Lastly, if I could. I missed a comment because I joined late. You said -- joined just during the sentence, something about the next couple of quarters. Did you expect stronger bookings or continued weaker bookings? I'm sorry. I just missed the sentence. I think it was Brian that may have been talking about it. Did you comment on what you expected for bookings the next couple of quarters?

No, we wouldn't. If anything, I don't think we're saying either stronger or weaker. What we're saying is that the current environment of things being less predictable and even deals that we may have been awarded, predicting exactly when they get contracted and we can deploy resources and recognize revenues in those deals, that that environment we expect to continue into next year; and we haven't seen any easing in that practice at this point.

Okay thank you.

Corey Tobin, William Blair and Company has our next question.

Hi, thanks. Good morning, guys. Just a couple of quick ones if I could. Brian, can you just walk us through what's going on with the Microsoft reimbursement once again? I didn't quite follow your explanation as to why it's going to affect the reported financials.

Sure. There's two phases to the project effectively. There's the original phase, which primarily was Core Financial that began back in 2007; and we currently have reimbursement under that of about $850,000 a quarter, and that's a fixed amount through the end of this year.

The second phase, which is for HR, payroll, and budgeting began this year, and that project also has reimbursement, but it's variable based on different milestones and effectively the amount of resources that are devoted to that project in any given quarter drives what we recognize. And we've -- so in this quarter, we had a fair amount of reimbursement under that second phase as well as $850,000 under the first phase for a total reimbursement of about $1.5 million. In the fourth quarter, we had originally planned to have a higher level of work devoted to the second phase, which would have driven a higher level of reimbursement.

The timing of that has changed and pushed out into next year. So over the course of the project, we'll still see the same amount of reimbursement, but we'll see less of it in Q4 than we had originally expected by an amount of about $1.2 million.

So let me just get this straight, the $850,000 coming with your next quarter doesn't change?

That's right.

And then there was another $650,000 you recognized this quarter from the second piece, that is going to change? It's going to go to zero in Q4?

Effectively, yes.

Okay. And what was the $1.2 million?

Well, at one point, the way the project was scheduled, we actually would have -- the $600,000 would have gone to one-two in the fourth quarter, and it's really going to zero. So it's really just the result of how resources are deployed in the quarter, which we don't control. The total reimbursement for the second phase of the project and the total scope of that project really have not changed materially. It's just a matter of timing on how the resources are deployed. That catch-up, interestingly, will actually occur probably in the third quarter of next year, so there's been a shifting of how resources are deployed, and it's affecting the timing of that reimbursement.

Got it. And then last one on this front, are you going to expect the same gross amount, and this is just a delay on the reimbursement?

Yes. The gross amount of reimbursement for the second phase, payroll, HR, and budget has not changed.

No, I'm sorry. The gross amount of R&D that you'll expense?

It should be similar in Q4 as it was in Q3.

So the net showing of -- or the R&D that's going to be on the P&L, which is the net is going to look a lot higher in Q4 than Q3?

Right. That's correct.

Okay. All right. Great. Thanks. And then, John, back to your comments on the end market environment, I want to clarify. Can you give us a true-up as to what you're seeing today and what you're conveying here to us today versus the June conference call? I mean, I'm hearing similar type language; but I'm just curious, do you think it's becoming worse or better or stable versus what you saw in June?

Not an awful lot different. I do think we've seen in some parts of our business, a modest further decline in new business activity, things entering the pipe if you want to look at it that way. Again, relatively modest, but we haven't seen a pickup there, which obviously we're looking for at some point. And again, business coming out the other end of the pipe, becoming contracts for us or even anyone else continues to be slow. So the pipeline remains really -- by historical numbers, pretty heavy; but again, things are coming out at a slow rate. But overall, Corey, the market has not changed materially throughout the year, really.

So this last quarter, I think you said the RFP activity was roughly flat year on year in the June quarter. From your comment here, can we take it as down a little bit year-over-year at this point?

The higher-end ERP business -- the new RFP activity is off a little bit. Everything else is flat.

Got you. Okay. Great. Thank you.

Moving on, we'll hear from Nathan Schneiderman with ROTH Capital.

Hi, John and Brian. Thanks for taking my questions. Can you -- can you clarify what caused the professional services shortfall during the quarter? I'm surprised, because you gave guidance in July, and you would expect this to be an extremely visible line of revenue; and yet it was, at least by my estimate, that was almost all the miss here.

A lot of it's in courts; and what I referred to earlier that we're literally tracking deals that we're in contract processes for that three months ago, we had every expectation would have been signed and done; and we would have had considerable resources deployed on those projects in the second half of this year. All of those deals remain our business. As I said earlier, we haven't lost a deal we were expecting to win.

There haven't been any deals that we thought would get done that now look like they won't, but there are a number of names that still aren't to a point where we can send people to their site and reach the utilization targets we expected to be at in the second half of this year. So it's impacting professional services, and in the case of court deals where there are POC contracts, it's affecting the licenses that utilization drives as well.

So the revision in total revenues is a combination of both licenses and professional services.

Okay. So in late July when you were looking at this, what, you thought you would sign some of these deals in August, and you didn't, so pro services were light, and license were light?

Correct.

Okay. Can you clarify what -- on the Microsoft product, what's the expected GA date now?

On the original project, which is the core financial system, it is right in the middle of next year, the June/July of next year kind of timeline.

June/July?

Right. The other -- the newer project doesn't have a specific deadline, but maybe somewhere around 18 months later.

Okay. That June/July sounds about maybe three or so months delayed from our discussion last quarter. So it sounds like it slipped, could you clarify why it slipped?

I think you'd have to go back further for it to be a full quarter slip. I think it's probably slipped six months since the original project. I think most of that is the result of conscious choices and scope and making decisions to include things in the project that we thought were important to having a real high quality initial release. So in my view, the size of this project, the head count, and the investment being made in the product by Microsoft and by Tyler, six month-ish kind of change in scope in schedule is certainly reasonable in a development project this size. That's about what it's been throughout the project.

Is the $1.2 million hit on the Microsoft reimbursables effectively because you're diverting people away from that second phase onto the first phase to try to get it out by this June/July deadline?

Actually it is because they've been diverted or redeployed on the core project, but it's really not for that reason to get it out early. Our work is done to the product when they -- all the technological updates and some of the core changes or things Microsoft does to their core product, we take that product and extend it and reengineer it to some degree to better fit local government's needs.

Some of the core development, technological development, and foundational -- there were some things there that they wanted to do that really delays them getting us the platform that we build on. So, sure, wee moved forward some work on the core product, obviously keep people busy; and we'll have those resources available next year as we get that platform and the balance will shift the other way.

When the product becomes generally available middle of next year, will the Microsoft partner community have an option to sell this or maybe a likelihood or an option of selling this on a subscription basis as opposed to an up-front license basis?

Yes.

Okay. Final question area for you. Last quarter, you gave us kind of a broad brush view for revenue growth rates for 2011. Obviously you've taken down numbers a little bit here for the balance of the year, but can you give us any broad brush view on the 2011 growth rates?

Well, we have not. We're in that process -- the process we go through is underway, and division is doing their work and roll-up is being brought together, Brian and I on our trips out to the divisions and all of that. So we do not have the packages we need to give you better information. Normally the schedule is that we get that throughout the end of this year, and we'll give a better indication of what that looks like usually very early, January-ish of next year. Generally, as we've said, we don't see anything that should cause us to tell you anything different about our new business environment.

So I would look at our new business numbers as continuing generally at the level they're at until we get an indication that the market has changed, hopefully, in the right direction. The recurring business, you can see has grown pretty nicely. So we would think that that recurring business growth will show up a little bit in some growth next year. So where this year was flat because new business was down and completely offset the recurring revenues, we would hope that if those hold at least flat next year, that we'll see the recurring revenue growth show up on the top line, and exactly how much that is, we'll give you a better indication in a few months.

Okay. Thank you.

Next Ravan Serafi with RBC Capital Markets.

Good morning. Thanks for taking my questions. John, you briefly touched on this. You're expecting catch-up in this R&D reimbursement from Microsoft sometime third quarter of next year. Can you give us some sense for what is your expectation in terms of the R&D reimbursement from Microsoft for next year? And then, it seems to me that based on the discussion here that the second phase is getting delayed. Is that just a function of Microsoft not ready, or is there something happening on your end? And I have a follow-up.

I really don't think it's getting delayed. This is a big development project, and the way -- the way it works, as I said, is they have certain things that they need to do before we kind of get the platform to do the things we do. And so there's been some shifting in the way resources are deployed. So we'll have more resources on the core project in the fourth quarter than we anticipated, and then that'll shift back and compensate next year, but the overall investment and the overall time lines are not changing materially. Brian do you have the numbers?

There's about $5 million of reimbursement for Phase II that is left to come after Q3. And as we said, we currently don't really expect anything in Q4 on Phase II? So the balance of the reimbursement will take place over the course of 2011, and some of it on into 2012; again, depending on the ultimate time lines. But somewhere over the next 18 months will be the balance of about $5 million.

Okay. This question is asked a lot of different ways. You -- last quarter, you had pretty strong bookings. When you had a minor haircut to revenue; and then this quarter,we're so far down for the year, the haircut seems to be much bigger. I know, John, you kind of talked about some new business you are going to book, that didn't happen. I would imagine that you have more revenues already after last quarter, looking at the whole year.

Well, I guess we do have more visibility, and it was a negative adjustment; and again, it's mostly attributable to deals that we still see happening, and they happened later. And if a deal gets signed 90 days later than it was anticipated being signed, and the way business normally occurs, we go 90 days with a number of heads that were not utilized the way they would have been had that business gotten signed and been in backlog.

So we had to bring those professional service numbers and the licenses that they drag down. As we've also said the fourth quarter, which is -- that's the bigger adjustment is the outlook on Q4. Q3 really was pretty close to in line. We do anticipate, at this point a fair amount of business on the SAS side, which is a good thing for the long run, but it has a corresponding opportunity cost in the quarter for licenses that would have been recognized had they gone traditionally, and that's new visibility for us as well.

And even though bookings were extremely strong in Q2, the timing of the implementations on those is not something necessarily we can begin work on immediately on all those projects. Some of the customers' time lines don't allow us to begin work immediately and substitute that -- begin to execute that backlog.

So if you had to kind of maybe take a cut at this downward revision among all the various factors, delays and implementation, maybe some of the license deals converted into subscription for pro services; can you give us some indication on what was the predominant factor here?

Probably half of the adjustments have to do with delays and much lower utilization of professional services. So that's probably two-thirds pro serve and a third licenses, but all related to timing. The other half is a combination of things. The two biggest of which would be the higher -- the higher mix of SAS business especially in the fourth quarter, but in the second half, and the Microsoft adjustment.

Okay. Great. Thank you.

Torin Eastburn with CJ Securities.

Good afternoon. My first question is for Brian. Can you give us the composition of the new software license revenue in the quarter, please?

Sure. You mean by product category?

Yes.

For the quarter financials were about $6.1 million. Courts and justice, about $2.5 million. The balance, about $600,000, appraisal and tax.

Okay. Thank you. And my other question is for John. You've taken a different strategy this year than some of your competitors, specifically increasing head count and increasing spending on development; and I think it's probably hurt you on the earnings side a little bit. Can you talk about specifically what you think you've gained or how the competitive landscape has changed?

Yes. No, and that's true. We have -- we've invested pretty much on a long-term investment schedule across our product line despite the fact that obviously revenues have been disappointing and haven't supported that the way we would have liked them to. And it is a conscious decision that will take a little bit of a hit on current earnings, and feel that those investments are well timed and important to our long-term strategy. I believe that, as I said, the marketplace is soft. It's generally off from last year, which was off from the year before, which was probably a peak; and I don't want to get into a real detailed competitive analysis on this call, but we're certain that our competitive position and our win rates are higher than they have been traditionally. And obviously we intend to continue that, and to even improve those positions. And when we apply those market shares to a better marketplace, we feel that they will have been good well-timed investments and in the shareholders' long-term interest.

Okay. Thank you.

Gregg Speicher with 451 Group.

Hey, guys. That kind of leads into my very first question here. Your win rate in larger deals, how would you say that's changing?

For any particular product set, or for -- ?

Overall. Let's just talk overall.

I would say it can't get any better in courts and justice. We've won, really, virtually every important large deal. We've lost a few in recent years to build, which generally aren't successful. So we feel we have a good story to tell on that, but really not lost large tier one deals to competitors in courts. So that's flat at a very good level. I think it's improved in our tax and appraisal side. They've done a number of larger deals and are competitive right now in the pipeline on a number of larger deals. And it's improved as well on the financial side of the business.

Has the Microsoft relationship helped any there yet, or will that not be until the products are released probably?

Yes, that's right. It has not helped yet. That's the future. And when it's out, there may be certain sites that would like to have a tier one player like Microsoft involved, and that that would have value; or that the product maybe a better fit. But concurrent with developing the dynamics product and anticipating that, helping us in those environments, we have made significant investments, particularly in the MUNIS product for the high end. We've been successful in the larger deals we've won in terms of delivering those on time and on budget; and have more and better references on that side, and the MUNIS product's competitive position on larger deals.

Really not your ultra tier one deals. I mean, not the biggest cities in the country, but kind of -- once you take the top 30 or 40 cities in the country out, it's really that next 200 where we've improved our position pretty significantly.

Okay. And my other question on the subscription conversions, what is the situation there? Are most of those conversions people who have fallen off of maintenance years ago, or are some current, or is it a mix?

Oh, no. They are all on maintenance. So if you're trying to model this, it's hard to -- you would see a maintenance contract drop off for maintenance; but obviously it's picked up on the SAS side of the business. So this typical deal might be somebody that has a $40,000 maintenance agreement and becomes a $100,000 a year SAS client. So there's a significant pickup in terms of percentages on those recurring revenues. There's pretty good margins on those for us, but the client probably avoided a capital investment, may even have avoided a change in head count and it's -- they get a good return on it as well. So in this environment it's become attractive.

Okay. Thank you very much.

(Operator Instructions) And at this time, it appears there are no more questions. Mr. Marr, I'll turn things back over to you for any additional or closing remarks.

Thank you, Vicky, and thank you for joining us on today's call. If you have further questions, please feel free to contact Brian or myself. Have a good day.

And that does conclude today's teleconference. Thank you all for joining.