泰勒科技 (TYL) 2010 Q4 法說會逐字稿

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  • Operator

  • Hello and welcome to today's Tyler Technologies fourth 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.

  • - CEO, President

  • Thank you, Rebecca, and welcome to our fourth quarter 2010 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?

  • - CFO, SVP and Treasurer

  • 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 to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. John?

  • - CEO, President

  • Thank you. This quarter was our 39th consecutive profitable quarter. Given the challenging market environment in overall economic conditions, understandably our operating results were mixed, but reasonably solid overall.

  • Total revenues with for the quarter, again, were down slightly due to lower software licenses and service revenues as we continue to experience extended sales cycles and lengthened implementations. However, these declines were mostly offset by continued strong growth and recurring revenues from subscriptions and maintenance. In addition, our appraisal service business posted solid growth of 40% for this quarter.

  • Despite lower overall revenues compared to last year's fourth quarter, and a 25% decline in our high-margin software license revenues. We improved our gross margin percentage by 20 basis points compared to the same period last year, which demonstrates the margin leverage in our recurring revenues. Tyler signed a number of large contracts during the fourth quarter including contracts for our Odyssey court case management and jail system with Bolton County Georgia which includes Atlanta and Pinellas County, Florida, totaling $16.8 million.

  • We also signed our largest software-as-a-service contract to date, valued at more than $6 million over five years for our MUNIS enterprise resource management solution with Ohio's largest school district, the Columbus city schools. And we signed another large software-as-a-service deal for the MUNIS solution with Putnam County, New York valued at $4.1 million over 10 years. As a result of our strong bookings on the fourth quarter, we enter 2011 with record backlog of signed contracts. Although the composition of the backlog includes more subscription and percentage of completion contracts than last year, which will be recognized over a longer term.

  • Our sales pipelines remain very active, and RP activity for our major products in the fourth quarter was healthy. The dollar value for proposed licenses in total value were both up, as compared to the same period last year. However, in the current economic environment, we continue to experience longer sales processes and less predictability with regard to the timing of contract signing. As evidenced by the variation in bookings over the last few quarters, and we expect this will likely to be the case for the next few quarters.

  • In the longer run, analysts are forecasting growth in our market over the next four years. Gartner currently forecasts that spending by state and local governments in the US for applications and vertical specific software will increase 7.5% in 2011, and will grow at a compound annual rate of 5.9% from 2011 through 2014. For IT services, including professional services and support, Gartner forecasts growth in spending by state and local government by 4.1% in 2011, and at a compound annual rate of 5% from 2011 through 2014.

  • We believe that as we experience a return to a more normal growth level such as these forecasts indicate, combined with the release of pent-up demand from the recent deferrals of investments in these essential systems, Tyler will be well-positioned to take advantage of a more favorable market. Now I would like for Brian to provide more detail on the results for the quarter. Brian?

  • - CFO, SVP and Treasurer

  • Thanks John. Yesterday Tyler Technologies reported its results for the fourth quarter ended December 31, 2010. You most likely read the press release and our Form 10-K has been filed. So, I'm going to comment on some of the key factors in the quarter, then move on to John's comments on the current quarter and our outlook for 2011.

  • Revenues for the fourth quarter were $72.4 million compared to $74.2 million for the fourth quarter 2009. Organic growth was negative 3.5% and acquisitions provided approximately $832,000 of revenues for the quarter. Software license revenues decreased 25% from last year's fourth quarter. The decrease in license revenues is mainly attributable to delays in signing new business, due to longer sales cycles in the current economic environment. As well as extended implementation time tables on some signed business, which is consistent with the conditions we've seen for the past several quarters.

  • In addition, we've seen an increase in the number of our customers choosing our subscription-based offerings rather than purchasing software under traditional perpetual software license arrangements. With two of our largest ERP contracts in the quarter selecting the SaaS model.

  • Subscription revenues continue to be our fastest growing revenue line and we're up 38.6% over last year's fourth quarter. Over one third of the increase was the result of our acquisition last January of Wiznet, which provides electronic document filing solutions for courts and law offices. A growing part of that e-filing business is under arrangements where we provide the software at little or no up front cost to the client, and then drive revenues from sharing and filing fees. These transaction fee-based revenues are included in subscriptions on our income statement.

  • 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. In the fourth quarter, we signed 11 new subscription-based arrangements, compared to a total of eight for the first nine months of 2010. During the fourth quarter, we also converted 16 existing clients who previously had our software installed in-house to our hosted offering.

  • Software services revenues decreased by 17.5% primarily due to the slowness in software license bookings in recent quarters, as well as an increase in the mix of customers choosing our subscription-based offerings. Maintenance revenue growth was 5.8%, 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 55.9% of our total revenues for the fourth quarter, and grew 9.8% year-over-year. Finally, appraisal services revenue increased 40% in the fourth 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 and a major revaluation project in Allegheny County, Pennsylvania.

  • For the fourth quarter 2010, our blended gross margin increased 20 basis points to 45% compared to 44.8% in last year's fourth quarter. With gross margins for our software services, maintenance, and subscriptions primarily driving the increase. Our ability to increase gross margin, even slightly, despite lower revenues and a significant decline in high-margin license revenues, illustrates the power of the leverage in incremental maintenance in subscription revenues. In light of delays and contract signings and implementations, we have worked to manage headcount and keep costs in line with revenues as much as possible. And have deferred some planned hiring until new business is in hand. However, we continued in Q4 to experience lower-than-normal utilization of our professional services sect, which had a negative impact on margins.

  • SG&A expense decreased 7.4%, and as a percentage of revenue was 23.7% compared to 24.9% in last year's fourth quarter. The primary driver of the decrease is lower commission cost and marketing expenses, partially offset by higher share-based compensation expense. Marketing expenses in 2009 included the cost associated with the launch of a new corporate branding initiative. Sequentially SG&A expense declined in absolute dollars from the third quarter of this year, and as a percentage of revenue SG&A was up slightly from the third quarter.

  • Non-cash stock compensation expense for the fourth quarter was $1.5 million compared to $1.3 million in last year's fourth quarter. $210,000 was included in cost of revenues, and $1.3 million was included in SG&A expense. Net research and development expense increased 11.8% to $3.5 million for the fourth quarter of 2010 compared to $3.1 million for the same period last year. R&D expense was offset by cost reimbursement recognized under our agreement with Microsoft of $1.3 million in the fourth quarter of 2010, and $895,000 in the fourth quarter of 2009.

  • We currently expect additional offsets to R&D costs totaling approximately $5.1 million from 2011 through 2012, associated with the expansion of the agreement. The recognition of those reimbursements will vary from quarter to quarter, but we currently expect that for 2011, we will recognize less reimbursement than we did in 2010 due to changes in the timing of deployment of resources on this phase of the project.

  • Gross R&D expense before the effect of Microsoft reimbursements increased approximately $726,000 from the fourth quarter 2009, and was primarily driven by development costs for Tyler software products other than the Microsoft project. Operating income was $11.2 million versus $10.9 million last year, and net income for the quarter was $7.2 million, or $0.21 per diluted share, compared to net income of $6.7 million, or $0.18 per diluted share in the fourth quarter of 2009.

  • Our effective tax rate for the full year was 37.2%, and for the fourth quarter the effective tax rate was 29%. The tax rate was reduced from prior quarters as a result of a revision in the estimate of the amount of R&D tax credit for the year. The fully diluted share count declined by approximately 2.7 million shares, primarily as a result of our stock repurchases. During the fourth quarter, we repurchased 208,957 shares of our common stock for approximately $4.2 million, at an average cost of $20.30 per share. For the year, we purchased 3,558,717 shares, for approximately $65.8 million at an average cost of $18.49 per share. As of year-end, we had 32.3 million common shares outstanding, and authorizations to repurchase up to a total of 2.7 million additional shares.

  • Free cash flow for the fourth quarter was $7.4 million compared to $8 million for the same period in 2009. Excluding real estate capital expenditures, free cash flow was $10.5 million in the fourth quarter of 2009. Day sales outstanding and accounts receivable at December 31st, 2010 increased slightly to 102 days compared to 98 days at the end of December 2009. Our backlog at December 31st, 2010 was $281.4 million compared to $233.1 million at 12/31/09, and $253.8 million at September 30, 2010. Backlog related to our software business, which excludes backlog from appraisal services contracts, was $248.2 million compared to $209.7 million as of December 31st, 2009, and $216.2 million at September 30th, 2010.

  • Appraisal services backlog was $33.3 million at December 31st, 2010 compared to $23.5 million at December 31st, 2009, and $37.6 million as of September 30th, 2010. Backlog at December 31st, 2010 included about $92.6 million of maintenance compared to $85.2 million a year ago. Approximately 70% of total backlog at year-end 2010, or approximately $197 million, is expected to be recognized in the next 12 months, compared to 73% of backlog, or $170 million, at the end of last year. The decrease in the percentage of backlog expected to be recognized over the next 12 months reflects a strong growth in subscriptions during 2010, as well as some of the recent large contract awards that will be recognized on a percent of completion basis over several quarters.

  • On the balance sheet, we ended the fourth quarter with of 2010 was $4.3 million in cash and investments, and $26.5 million in outstanding borrowings under our $150 million revolving credit facility. At December 31st, we had $115.2 million of availability under the agreement. The average interest rate on our borrowings on the fourth quarter was about 3%.

  • We finished the quarter were 2,054 employees, down from 2,069 at the end of September, with the decrease primarily in SG&A headcount. Now, I will turn the call back over to John for his further comments.

  • - CEO, President

  • Okay thanks, Brian. Our results for the quarter reflected the stability in steady growth in our recurring revenues, which were approximately 56% 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. Our observation of the current market conditions remains mixed. Clearly, we are encouraged by the historically high bookings we experienced in the fourth quarter. And our current visibility for awards in the first half of 2011 suggest they will remain at least respectable.

  • RFP activity, the weight of the pipeline, demo activity, and generally all leading indicators are healthy. However, the historically predictability of prospects becoming awards, then contracts, and ultimately converting to revenue, continues to be disrupted by the well documented pressures on local government. We believe that our competitive position is stronger than ever, and that our continued significant investment in existing products and new product offerings will allow us to take significant advantage of an eventual return to a stronger economic environment. However, until we see signs of the market behaving in a more predictable fashion, we will continue to expect our new business market will be both challenging and unpredictable, and the growth will come primarily from the recurring revenues, as was the case last year.

  • Based on these factors, our 2011 guidance is as follows. We currently expect 2011 revenues to be in the range of $306 million to $312 million. We forecast 2011 diluted earnings per share to be approximately $0.74 to $0.79. Fully diluted shares for the year are expected to be approximately $33.7 million to $34.3 million.

  • For the year, estimated pre-tax expense related to stock options and the employee stock purchase plan is expected to be $6.5 million, or approximately $0.15 per diluted share after taxes. We estimate an effective tax rate for 2011 of approximately 38.3%. We expect our total capital expenditures will be approximately $5 million to $5.5 million for the year, and total depreciation and amortization will be between approximately $10.5 million and $11 million. Now we will take your questions.

  • Operator

  • We will now begin the question and answer session. (Operator Instructions) Your first question comes from Torin Eastburn with CJS Securities.

  • - Analyst

  • Hello, good morning.

  • - CFO, SVP and Treasurer

  • Morning.

  • - Analyst

  • My first question is about the spike you saw in new contracts signed . Can you say anything more to characterize those contracts specifically? Did this feel like it was either pent-up demand or revenue drawn forward for any reason? Can you help us understand the sales process behind those contracts?

  • - CEO, President

  • Well, as we indicated, it's been very lumpy and if you look at the last several quarters, it remains pretty inconsistent, so we wouldn't draw too much in the way of conclusions from a single quarter. Obviously we would love to see become a trend. It was a very good quarter for bookings, however the number may look a little higher than it actually is, as we have indicated. There were a $17 million in just a couple of court contracts, it's not going to happen every quarter. So, we are fortunate to have those in the fourth quarter.

  • You take a deal like the Putnam County deal, it's $4 million that goes in backlog, that's great, great business, but it's also going to be earned over 10 years. Even the Columbus School District, $6 million, but it's over five years. So, the composition of the backlog is a little different; if Putnam and Columbus were traditional accounts, what would have gone into backlog would have been significantly less than the multi-year contract that went in there.

  • So, I don't want to be negative, we are encouraged by it, as I indicated, the market behaved better in the fourth quarter. And as I indicated as well, activity in the current quarter and visibility in the first half of the year is that those leading indicators are a little stronger than they been historically. But we are still experiencing delays in processes, and expecting to go to the next step in the process and weeks and weeks later, that hasn't occurred. So, not trying to be ambiguous, but it's still a little mixed.

  • - Analyst

  • Sure. And then my other question, your cost of goods for subscription services and maintenance, the absolute cost of goods were actually down year-over-year. Is that something that sustainable if revenues stay subdued? And, I guess, tied into that, Brian you mentioned deferring hiring. Could you quantify that as an expense at all? Or lack of an expense?

  • - CFO, SVP and Treasurer

  • Most of the majority of our costs are people costs. As you can see our headcount has been down slightly, but in the same ballpark. To the extent that we are able to, we have deferred new hiring until new business is in hand to manage that through attrition and more tightly control that. We do have a fair degree of control over that. What we tried to balance is managing underutilization and holding onto skilled people that we'll need as business comes back, and living through lower utilization to be prepared for a return to a more normal market.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Next will hear from Brian Kinstlinger with Sidoti & Company.

  • - Analyst

  • Yes, follow-up on that question that was just asked. One of the things that's most interesting is, could you talk about the leverage going forward? If maintenance -- if subscriptions are going to continue to grow and be the big piece of your business, 15% to 20% a year. At what point do you need to increase your support staff, and do you have a couple of years? Do you have -- maybe give us a revenue side that you need to start adding more resources.

  • - CEO, President

  • We add them, as we go, and we went we talk about flat heads it doesn't mean that every area of the businesses flat. We have been pretty disciplined about traditional, or all the parts of the business that aren't as robust, having reductions there and redeploying people in other areas. No question in our subscription-based business there have been heads added, but they are not significant head counts. We've got a good investment on the facilities, we do leverage some partner facilities. That is -- you notice the CapEx spend is a little higher for our non-real estate CapEx, some of that is in the data centers.

  • So, there's some of that, which brings some additional amortization. But really, you really are literally talking about a few heads here and there. And our discipline has been to try to offset that in other parts of the business that aren't as robust. So, I don't see any reorganization spike in heads at any point in the next two or three years there. I think we will add modestly and incrementally as we go, it's not a real people intensive business. And there are capital investments, but they're pretty modest as well.

  • - Analyst

  • Great and in terms of -- go on, Brian, I apologize

  • - CFO, SVP and Treasurer

  • I was going to say, there is an up front aspect of new names subscription customers because we do have to provide those professional services in terms of training, data conversion, consulting that goes with getting those customers live. So, that's not really different than a traditional customer other than you don't get all that revenue up front, and that the costs are still incurred early in the process.

  • - Analyst

  • Okay, and then second question, regarding dynamics. Maybe any update on the launch date, where we are, the sales pipeline, if you are starting to build one. Development and resources that you need now versus maybe when the launch goes on that maybe could -- maybe you won't need as many -- just give us a sense on all that, please.

  • - CFO, SVP and Treasurer

  • There really is a much of a change in launch, which is good news. We are targeting next summer, we don't control that, Microsoft does. There are certainly a lot of moving parts in a project that we are not even involved in. It could be things get affected.

  • But generally, they are still holding for the middle of next year at some point time. They are very disciplined --.

  • - Analyst

  • Next year 2012, or 2011?

  • - CFO, SVP and Treasurer

  • I'm sorry, this year. No, this year, sorry. Middle of this year. They are very disciplined, obviously the big company and having sold a lot of packaged software. They're very disciplined about not getting out in front of it and not bidding systems that aren't yet completely defined and productized, and what have you.

  • So, I would continue to be conservative in terms of my expectations of business that will actually occur in the second half of this year. You know our sales cycles, it's not like they are shrink-wrapped software that they can announce and launch and ship. So, I think it will be light volume in the second half of the year, but it is expected to still ship, and I think we will be ramping up proposals, both ourselves and them. And certainly next year we would hope to start to see more meaningful revenues from it.

  • In terms of heads, our gross spend is offset, as you know, by reimbursement significantly. So, our total headcount will decline, and our total gross spend will decline as we approach launch. But our reimbursement will also start to run off. So, our net spend will actually go up a little bit , and we will need some of the early licenses just to offset the decline in reimbursement.

  • - Analyst

  • Great, thank you.

  • Operator

  • We'll take our next question from Jonathan Ho with William Blair.

  • - Analyst

  • Good morning guys, just wanted to ask a question on the licensing versus SaaS revenue pattern. How do we think about that, I guess, progressing throughout the year? Just given the puts and takes that are taking place in the transition? And the second part of the question would be, how do you see, I guess, the license to SaaS conversion trend taking place? Is that accelerating here, just given the number of deals that you have seen?

  • - CFO, SVP and Treasurer

  • Yes, our experience, I mean, for an awful long time, it really didn't accelerate. It stayed in the mid teens percentage of our license business for a number of years. When the broader environment was seeing it become more popular, and we didn't see a lot of that. Definitely in the last couple of quarters, we have seen more of that. In the fourth quarter as we announced, we had a number of SaaS deals and clearly there is opportunity cost to the licenses there, although those long-term value of the client we think is greater.

  • So, we have started to see higher adoptions, I think it is associated with them wanting to lower the initial cost and defer it out into further years as much as a technical element of the deal. So, we are seeing more of that. We are also seeing a lot of what we are referring to as flips; traditional clients that had the product deployed at their site, had originally bought it traditionally, that as a result of turnover, or retirements that are approaching from people that have the skills to support the system, or looking at large expenditures for new infrastructure. And having been with us for some period of time and gained confidence in us, that they are flipping from a traditional client to an ASP client. That is a big part of the increase as well.

  • - Analyst

  • Great, and can you maybe discuss from a geographic perspective, whether you're seeing any additional traction in some of the newer territories you been targeting? Or whether there's been any differentiation in territories based on fiscal environments?

  • - CFO, SVP and Treasurer

  • Well, the comment would be it's pretty random. No question that we're definitely getting some pretty good business from what are newer markets for us. There's no question our investment in broadening the geographic footprint has paid off, probably as well as any of our marketing initiatives. I think I said the last call that 11 of the deals and the large ERP shop were from California, which is both relatively new geography for us, but as well, as we all know, one of the most challenging local government environments in the country right now.

  • So, historically, we are a productivity enhancer, and we are a partner that helps these governments do more with less. Sometimes that timing doesn't line up exactly with their needs. Sometimes it's deferred because the capital expense is challenging for them. But yes, to answer the question, we're definitely seeing good volume from our new geographies, and we also are seeing pretty good, healthy business from some of the states that we see in the press regularly as having more challenging environments.

  • - Analyst

  • Great, and just one final question on the environment that's out there. Just on a relative basis, are you guys starting to see a light at the end of the tunnel? Or are we still, kind of, in the midst of things? Are things incrementally getting better or worse? How do we think about where we are in all of this?

  • - CFO, SVP and Treasurer

  • I don't think we have a long enough experience to really change are out -- what we've been saying. Which is that, there's no question -- I mean, today, since I'm back in the office from board meetings. Number deals that continue to take a step backward before they go forward. And that's clearly just heightened scrutiny from these boards and management teams in the cities and counties who are managing these processes, that make it more difficult, as I said to, convert prospects to awards and contracts and revenue.

  • And that continues to be challenging, but as I also said, the volume of our fees, the demo schedules, these types of things are definitely up a little bit, say, in the fourth quarter and the first quarter. And yet, whether that's anecdotal or continues for another quarter or two, we'll have to see. So, the very recent trend it was a positive, but again, it's probably not long enough to draw our conclusions from.

  • - Analyst

  • Great, thank you.

  • Operator

  • Next we'll go to Nathan Schneiderman with Roth Capital.

  • - Analyst

  • Hello, John and Brian thanks for taking my questions. I want to start off with a couple on the Microsoft product. I was curious, when you planning to start proposing that solution in RFPs. What month do think that would actually start?

  • - CEO, President

  • Well, I kind of just mentioned this. Microsoft does not generally bid or authorize to bid products that aren't released. So, right now, it is kind of on an exception basis.

  • There are some very good fits out in the marketplace, and they will be there on an exception basis. Some proposals that we will get out of the first half of the year ahead of, what they refer to, as release for manufacturing. Higher quantities of bids from us will only happen after release to manufacturing. They clearly are working with their partner channel, definitely have a lot of excitement in their partner channel. But again, how much authorization they provide for those people to actually be in decision processes that would end up with a decision or a result in revenue in the second half of the year, I think it will be limited.

  • Again, there will be some out in the first half of the year on an exception basis. But any significant volume of proposals will really only happen in the second half.

  • - Analyst

  • Can you share with us -- any details on the Microsoft partner training? To what extent is Tyler going to be involved in that and what's the general timing? When is happening?

  • - CEO, President

  • Well, they've had training, they have early adopter sites with, not just us, but I think around 11 partners around the world. They clearly are working with partner channels, and have early adopter sites and have been doing these sorts of things. We pay -- play only a supportive role, we are really a developer in this partnership, and don't have a real direct role in training their partners, or certainly their partner clients. We will obviously train and provide a full turnkey solution for our own channel domestically in local government, but we play a small role through their channel.

  • - Analyst

  • Great. I know you don't want to get into the business of guiding too specifically to 2012, but when you look out to that year and the Microsoft contribution, how do you think about it at a high level? Should we be thinking at least $10 million of contribution? $25 million? Something higher than that? Anyway you can kind of ballpark it for us?

  • - CEO, President

  • Not really -- I think the $10 million would be more reasonable. And, also as I indicated, there will be declining reimbursements and we need some revenues to offset the decline in reimbursement. So, I really think it will be somewhat neutral this year and next. If there is going to be a catalyst for greater growth and greater earnings, I'd be surprised if it showed up in a meaningful way before 2013.

  • - Analyst

  • Okay, got it. And a question for you on debt levels. The debt has increased to nearly $27 million and you've use that debt to fund repurchases which, I guess relative to my other companies is quite aggressive. So, I applaud you all on that. I'm just curious the $115 million available, how comfortable are you into tapping significantly into that? Particularly the idea of tapping into that to fund more share repurchases? Just how do you think about that credit line and your willingness to tap into it in general?

  • - CEO, President

  • Well, obviously there are multiple elements to the repurchase decisions. Price being one, and just a number of different things. In terms of our tolerance to debt, we are very willing to tap into. So, if the opportunity to be aggressive in the stock were there, we would be very willing to be aggressive. And obviously, we wouldn't want to get to the end of our and, you always want to be conservative and have plenty of capital available. But we would be, we have tolerance whether it would be compelling acquisitions or repurchases to definitely tap into it. That's why we put it in place.

  • - Analyst

  • Got it, thanks very much.

  • - CEO, President

  • Sure.

  • Operator

  • Next we'll go to Raghaven Sarathy with Dougherty & Company.

  • - Analyst

  • Good morning, thanks for taking my questions. First on the backlog conversion, if I recall correctly Brian, at the beginning of last year, you said you are expecting roughly $170 million of the backlog to become converted to revenues. I guess in your prepared comments, you seem to indicate that you can convert the same amount of backlog into revenues. So, I was kind of wondering, was there any impact at all from lengthening the implementation, or anything like that? It sounds like that was not the case. And then, second, do have similar level of confidence in terms of backlog conversion to revenues this year?

  • - CFO, SVP and Treasurer

  • Yes, the confidence level is probably similar . You're correct, the number is 170 last year, and 197 this year. Going into the year.

  • They will come out of backlog, the timing, as we said in our comments earlier, the predictability about some of the implementation cycle is not as good as it would be in a more normal environment. So, that number includes estimates of a number of deals that are recognized in the percent of completion basis. And those numbers we have reasonable -- probably similar amount confidence as we did a year ago, but not absolute confidence in them. And on average, the term of that backlog is a bit longer, because of a greater mix of percentage of completion contracts as well as a greater mix of longer term, subscription-based arrangements. But I would say the confidence level is probably similar to what it was last year as to the timing of the realization of that.

  • - Analyst

  • All right, and then one follow-up. The software backlog grew for the last three quarters. I know you sound a bit cautious because of the mix of contracts, and also percentage of completion. But can you help us understand how to think about software license revenue growth, and the overall software revenue growth for this year?

  • - CEO, President

  • Well, we said, we don't give guidance on the full breakdown by revenue line, but we would expect in that range that licenses -- wouldn't see as large a decline as we saw this year. And that we'd expect we would probably be in a range of single digit declines to single digit growth in licenses. And we would expect, based on current analysis, that professional services would probably be off single digits from last year.

  • - Analyst

  • Okay, thank you.

  • Operator

  • And next we'll hear from Jeff Osher with Harvest Capital.

  • - Analyst

  • Hello, John and Brian, thanks for taking my questions. A follow-up to Nate's -- I know in the past, Brian, you had said that R&D would start to come in once the Microsoft general accounting product is generally available. How should we be thinking about the gross versus net R&D as we progress through '11? Or maybe if you don't want to bracket it by quarter, how do we think about that net versus gross once Microsoft does go live?

  • - CFO, SVP and Treasurer

  • As you know, it comes in two phases. One part around the middle of this year, second release with payroll budgeting and HR, probably 12 to 18 months after that. This year, we would expect that gross R&D would be higher, and that the reimbursement will be lower. And the amount of the reimbursement depends on the timing of work as we progress through the year. So, we don't really know what that will be from quarter to quarter with certainty, but we expect it will be at a lower level than last year.

  • Gross R&D higher, reimbursement lower, and as a result, net R&D should be higher. Probably in the range of $0.5 million to $1 million a quarter , although it certainly may vary from quarter to quarter.

  • - Analyst

  • Okay great, that's very helpful. Per quarter, okay. And then I guess to -- I think it was -- Rag's question. On the backlog conversion, if I look at what you did in 2010, about 41% of your revenue was, call it book and ship, or book and recognize type of revenue within the year. And your guidance, if I just look at the midpoint, only assumes more like 37% -- it's a much --41% last year came from that book and ship, whereas this year your guiding to a much, much higher percentage coming from backlog.

  • Maybe a little more color on how you encourage us to think about that lower expectation around book and recognize revenue? Said another way, is that still just a function of difficulty on sales cycles, or is there some other dynamic we should be thinking about?

  • - CFO, SVP and Treasurer

  • I think it would be that, it would be the sales cycle uncertainty and the uncertainty of the mix of the revenue. Very often, the decision the client makes whether to acquire the software under a traditional perpetual license, where we have an upfront license and professional services or to implement on a software-as-a-service basis, is made very late in the process, sometimes after they have selected us. So, that obviously has a significant impact on how much is recognized in the current year, and that is one of the variables that is difficult to predict. That goes into the wide range of our guidance.

  • - Analyst

  • Last one, maybe for John. Philosophically, as you think about buybacks versus M&A, I know you guys historically have been roughly split between the two, and I think more recently you been spending a higher percentage of that allocating capital on buybacks. Should we -- the 50-50 mix you have demonstrated historically, is that still a good way to think about your allocated capital? Versus the heavier mix towards buybacks you've exercised over the last year or so?

  • - CEO, President

  • It's hard to say, to answer it that way, because, obviously a very compelling acquisition could come in front of us that could be significant in size, and we will pursue that. Again, if it was very compelling and we felt strongly about it, even if it were significant in size, and that could obviously swing the ratio. So, it could be in favor of either of those -- I'll say it this way. If we have bias in our preference one way or the other, it swung towards the repurchase. The reason for that is, in our view kind of a transition of the Company. That there was a need to be, not necessarily aggressive, but certainly more acquisitive in the early years of this strategy. To get the foundation in place to be a leader in this space, and to have and build products that are industry-leading, and have a broad breadth of utilities with clients and lots of customers, and recurring revenue and subject matter experts.

  • Now really, 10 or 12 years into the strategy, we have 2,000 employees and many, many of them long-term experts in this space. We have 9,000 clients and as you know, pushing $200 million now in recurring revenue. So, we built the foundation and feel very good about that, and in the next generation of the Company. The priority will shift more inwardly to have the Company be much more seamlessly integrated, more consistent product strategies, and sales channels, and service channels, and leverage those things operationally G&A wise. There are a lot of internal projects of those types, that this Company should not always look like it was put together through acquisitions. That's not appropriate when you start to get 12 and 15 and 20 years into the strategy.

  • So, that is a higher priority and a bias in our strategy going forward. And therefore, the repurchase is what we measure acquisitions against. So, that's the way we look at it, that's the strategy. You would think it would result in, as you've seen in the last couple of years, much more of our capital being deployed for repurchase rather than acquisitions. But we certainly would not hesitate to step up to a compelling opportunity that could swing that the other way.

  • - Analyst

  • Okay, thank you guys.

  • Operator

  • (Operator Instructions) And we'll go to Brian Kinstlinger with Sidoti and Company.

  • - Analyst

  • Great, thanks. The first follow-up I had was on proposals outstanding. Maybe given all the delays, and you've obviously proposed a lot, it sounds like. Maybe can you quantify proposals outstanding today versus six months ago versus maybe a year ago?

  • - CFO, SVP and Treasurer

  • Yes, it's a little bit stronger, in terms of both six months and 12 months ago. And numbers of proposals generated in the current quarter are encouraging as well. I have alluded to that. But again, we are still cautious in terms of the rate at which they will convert, to awards and contracts, and we can actually deploy people and recognize revenue.

  • It's not across the board, there are some parts of the business where they are not up, and they are a little more shallow. But generally, we are writing more proposals right now than we were a year ago at this time.

  • - Analyst

  • Just because, when I look at it, you've mentioned that your bookings have been choppy quarter to quarter, but I guess I don't look at it that way. They are up 23% year-over-year. I don't think that the environment was all that great this past year, any different than it is this year.

  • And so, I guess I'm wondering why you expect bookings, it sounds like, will slow when you have more in your proposals outstanding. And we are still about the same place of difficulties for the local market. Is it that more and more is being pushed out the last year?

  • - CFO, SVP and Treasurer

  • Well, I don't know the bookings will slow. I think I said that our visibility in the first six months of this year tell us that, we think, they will be at least reasonable or respectable, whatever I said, and it's still only February. So, that could convert to something that is more encouraging.

  • There is a difference between -- our difference between bookings and revenues has broadened. That is a factor of a number of things. The challenging environment, and in some cases, creates more difficult contracts that require us to have more conservative revenue recognition, and slower to deploy things. The higher adoption of SaaS that goes in the backlog, and some of these larger, especially court deals, that are multi-year types of deals.

  • I would expect, and I think it would be encouraging, that bookings would be better and more encouraging here in the next six months, as they were in the fourth quarter than actually what runs through the P&L.

  • - Analyst

  • Right, so basically more services, software-as-a-services contract, because -- I guess that's what is helping governments balance budgets with cheaper dollars up front?

  • - CFO, SVP and Treasurer

  • Yes, and also getting creative with some of these challenging clients, again, forces up to adopt more conservative POC accounting, versus shipping and recognizing software. And a lot of those things are contributing to things going and staying in backlog longer than they did historically, when we were able to more quickly convert backlog into revenues.

  • - Analyst

  • Great, thank you.

  • - CFO, SVP and Treasurer

  • And, overall, that is a good thing. We have a very strong history of making sure everything that is in backlog does eventually flow through. I would just be cautious on how quickly it will convert.

  • - Analyst

  • Thanks again.

  • Operator

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

  • - CEO, President

  • All right, well thank you Rebecca, and thank all of you for joining us on the call today. If there are any further questions, please feel free to contact Brian Miller or myself. Have a great day.

  • Operator

  • Ladies and Gentlemen that does conclude today's presentation. We thank everyone for your participation.