泰勒科技 (TYL) 2011 Q2 法說會逐字稿

Hello, and welcome to today's Tyler Technologies second quarter 2011 conference call. Your host for today's call is Brian Miller, Chief Financial Officer of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded today, July 28, 2011. I would like to turn this call over to Mr. Miller. Mr. Miller, please begin your call.

Thank you, Amy, and welcome to our second quarter 2011 earnings call. John Marr could not be on the call with us today, as he has a travel conflict. However, as is always the case, please feel free to contact John next week regarding any follow-up questions that you might wish to ask him directly.

First, I would like to give the Safe Harbor statement prior to presenting the details of our results. During the course of this conference call, management may make statements that provide information other then historical information and may include projections concerning the Company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We would refer you to our form 10-K and other SEC filings for more information on those risks.

Yesterday, Tyler Technologies reported its results for the second quarter ended June 30, 2011. You've most likely read the press release, and our form 10-Q has been filed, so I'm going to comment on some of the key factors in the quarter and discuss our outlook for the remainder of 2011. This quarter was our 41st consecutive profitable quarter, and it was also the second consecutive quarter of year-over-year revenue growth, after reporting declines in revenue in each of the last two quarters in 2010. Given the continued challenging market environment and overall economic conditions, resulting in longer sales cycles and delays in the timing of new business, we are encouraged by our operating results. Although we continue to experience significant fluctuations in bookings from quarter to quarter, our sales pipeline remains healthy, and bookings were very strong in Q2. We signed of the largest software contract in the Company's history by a factor of roughly two times during the quarter and ended the quarter with an all-time high backlog.

Contracts announced during the second quarter included the new agreement with the state of Oregon for our Odyssey court case management system for statewide implementation, supporting all state trial courts. The contract is valued at approximately $31 million, which includes software, professional services and support and is expected to be recognized over approximately five years. We signed traditional perpetual license arrangements for our MUNIS and ERP solutions with several new clients in California, including the Alameda County Waste Management Authority and the city of Santee.

New customers for our INCODE local government solution included California's Mountain House Community Services District; Brown County, South Dakota; the city of Hartzell, Alabama; and the Hazelton City Authority in Pennsylvania. We signed a new contract to provide our appraisal services for 11 towns that are members of the Northeastern Connecticut Council of Governments. In addition, we signed a significant staff contract for our iasWorld appraisal and tax software with Loudoun County, Virginia, located in the Washington, DC, metropolitan area and the fourth-fastest growing county in the country over the past decade. We also announced a new agreement with the Third Circuit Court in Wayne County, Michigan, which includes Detroit, to provide our Odyssey file and serve software for electronic filing under a transaction-based revenue sharing model.

We also recently announced a small acquisition completed at the end of June. We acquired the assets of Yotta MVS, Inc. Yotta has annual revenues of approximately $1.5 million and 13 employees, providing services and products that complement our appraisal and tax business, including expertise in street-level imaging. It will not have a meaningful impact on our results this year.

Now I will provide more detail on the financial results for the quarter. Revenues for the second quarter were up 5.7% to $76.7 million, compared to $72.6 million for the second quarter of 2010. This quarter's total revenues represent a new high for Tyler. Revenue growth was completely organic again this quarter and was driven by strength in our recurring revenues from maintenance and subscriptions.

Software license revenues decreased 4.9% from last year's second quarter. Although the decrease in license revenues narrowed from the previous five quarters, it is mainly attributable to ongoing delays in new business signings and longer sales cycles in the current economic environment, as well as extended implementation timetables on some signed business, which is consistent with the conditions we've seen for the past several quarters. In addition, an increase in the number of our clients choosing our subscription-based offerings rather than purchasing software under traditional perpetual software license arrangements has contributed to lower software license revenues.

Correspondingly, subscriptions continues to be our fastest growing revenue line and was up 25.3% over last year's second quarter. In the second quarter, we signed 13 new subscription-based arrangements and 10 existing installed client conversions, compared to a total of three new arrangements and 15 conversions in the second quarter of 2010. Software services revenues decreased by 2.8%, primarily due to the slowness in software license bookings going back several quarters, as well as an increase in the mix of customers choosing our subscription-based offerings in recent quarters.

Maintenance revenue growth was 5.6%, a combination of new revenues associated with license sales in the past year and annual rate increases for existing customers. Our maintenance revenue growth rate has been reduced somewhat by the effect of existing installed customers converting to our hosted offering, which results in a loss of maintenance revenue offset by a larger increase in subscription revenue. Together, recurring revenues from subscription and maintenance comprised 55.2% of our total revenues for the second quarter and grew 8.5% year-over-year. Appraisal services revenue increased 21.6% in the second quarter, primarily due to revenues from several new revaluation contracts we began in late 2009 and 2010, including a number of Indiana counties and a major revaluation project in Allegheny County, Pennsylvania.

Finally, hardware and other revenues were $2.1 million and included approximately $1.1 million of revenues associated with our client conference, and the corresponding cost of revenues included approximately $1.4 million of related expenses for the event. As a result, we had a negative margin for hardware and other in the quarter. We did not hold a similar conference in 2010.

For the second quarter of 2011, our blended gross margin was 44.5%, compared to 44.7% in last year's second quarter. The slight decrease in gross margin is mainly due to the negative margin for hardware and other attributable to our user conference. Excluding that effect, our gross margin for the quarter would've been 45.5%. SG&A expense increased 5.9%, generally in line with our revenue growth for the quarter, and as a percentage of revenue was 24.1%, compared to 24.0% in last year's second quarter. We continue to closely manage our operating costs, staffing levels, and SG&A expenses. Non-cash stock compensation expense was $1.5 million in the second quarter of 2011, compared to $1.6 million in the second quarter of 2010. $214,000 was included in cost of revenues, and $1.3 million was included in the SG&A expense.

Net research and development expense increased 34.5% to $5.0 million for the second quarter of 2011, compared to $3.7 million for the same period last year. The increase is primarily due to the timing of recognition of research and development offsets related to our Microsoft Dynamics AX project. No cost reimbursement was recorded in the second quarter of 2011, while $1.1 million of offsets were recorded in the second quarter of 2010. We currently expect to recognize approximately $3.0 million in offsets in the second half of the year, with the majority of that expected to be recognized in the fourth quarter. Total offsets remaining for this year and next year are expected to be approximately $4.1 million. Gross R&D expense before the effect of the Microsoft reimbursements increased approximately $169,000 from the second quarter of last year.

Operating income was $9.8 million, versus $10.5 million last year, and net income was $5.6 million or $0.17 per diluted share, compared to net income of $6.2 million or $0.17 per diluted share in the second quarter of 2010. The declines in operating income and net income are primarily due to the timing of the recognition of offsets to R&D expense. Our effective tax rate for the second quarter was 39.6%, and the fully diluted share count declined by approximately 2.4 million shares, primarily as the result of our stock repurchases. During the second quarter, we repurchased 578,000 shares of our common stock for approximately $14 million, at an average cost of $24.28 per share. At the end of the second quarter of 2011, we had 31.7 million common shares outstanding, and authorizations to repurchase up to a total of 1.8 million additional shares.

As in the first quarter, our free cash flow in Q2 was well ahead of last year's level. Free cash flow excluding capital expenditures for the second quarters of 2011 and 2010 increased $9.5 million to $1.3 million, compared to a negative $8.2 million for the same period in 2010. The increase was primarily due to strong accounts receivable collections. Year-to-date, our free cash flow, excluding real estate CapEx, is $17.6 million, an increase of almost $20 million, compared to negative $2.2 million for the first half of last year. Including real estate CapEx, our year-to-date free cash flow is up $14.8 million over last year, to $9.8 million.

Days sales outstanding in accounts receivable was 106 days at June 30, 2011, compared to 111 days at June 30, 2010. Our maintenance billing cycle typically peaks at its highest level in June and the second-highest level in December of each year, followed by higher cash collections in the subsequent quarter. Our backlog at June 30, 2011 was $296.0 million, a new record high, up 15% compared to $258 million at June 30, 2010. Backlog related to our software business, which excludes backlog from appraisal services contracts, was $272.2 million in the current quarter, a 22% increase, compared to $223.9 million at June 30, 2010. Appraisal services backlog was $23.8 million at June 30, 2011, compared to $34.2 million at June 30, 2010. Backlog at June 30, 2011 included approximately $104.2 million of maintenance, compared to about $86.2 million a year ago.

On the balance sheet, we ended the second quarter of 2011 with $3.5 million in cash and investments and $31.5 million in outstanding borrowings under our $150 million revolving credit facility. At June 30, we had $110.2 million of availability under the agreement. The average interest rate on our borrowings in the quarter was just over 3%. Since the end of the quarter, as of tomorrow, we will have reduced the amount outstanding under our revolver by another $12 million to $19.5 million. We finished the quarter with 2,010 employees, down from 2,019 at the end of March and 2,054 at the end of December.

Our results for the quarter reflected the stability and steady growth in our recurring revenues, as well as our ability to manage our staffing and operating costs in line with current revenues. In addition, our backlog grew year-over-year for the fourth straight quarter and is at the highest level in our history, giving us greater visibility into revenues for the remainder of the year. From an overall market perspective, while our Q2 results and bookings are encouraging and the overall market environment seems to be modestly more positive, we are still experiencing in many cases longer than normal sales cycles, more involved decision-making processes on the part of prospects, and funding issues in light of budget pressures. Until we see a more consistent trend develop, we expect that the new business development in 2011 will remain both challenging and unpredictable and that growth will come primarily from recurring revenues. The mix of SAPs versus traditional contracts and the number of large contracts requiring percentage of completion accounting are also variables that affect our software revenues in the short-term.

While the new business market is still challenging, the story is very positive with respect to our recurring revenues. We continue to add clients in our staffed and hosted offerings, including those that are new to Tyler and existing customers who convert to a hosted solution from an in-house Tyler system. The most significant of the recent conversion decisions is in the state of Kentucky, where Tyler's MUNIS ERP solution is currently used statewide by all 174 school districts in the state. The first of these districts went live with MUNIS in 1995, and they have moved through multiple technology upgrades with us without paying upgrade or re-licensing fees under our evergreen model.

The Kentucky Department of Education has endorsed and strongly recommended to all the districts in the state that they move to our hosted solution, with the software applications and data hosted at our Falmouth data center. Tyler anticipates that all of the districts will select this option, and to date, 173 have committed to moving. We are beginning to migrate the Kentucky school districts at a rate of 10 districts per month, and by the time the migration is completed in 2013, we expect to realize an increase in annual recurring revenues of more than $2 million under this arrangement.

We are also continuing to build revenues from our transaction-based revenue models, including e-filing with our Odyssey file and serve solution for courts, which came from our acquisition of Wiznet early last year. We are providing this solution to clients in many cases under a model in which we share in the filing fees collected by the courts. This model enables courts to implement e-filing and realize the efficiencies of eliminating paper from the system with little upfront cost, while funding the solution out of fees generated from the filings. As mentioned earlier, we recently signed a revenue sharing-based agreement with the courts in Wayne County, Michigan, and are providing our e-filing solution to courts in Clark County, Nevada, which includes Las Vegas, under a similar arrangement.

We believe that our competitive position is stronger than ever and that our continued significant investments in both existing products and new product offerings has positioned Tyler to take significant advantage of an eventual return to a stronger economic environment. Among the new products we have invested significant R&D dollars in is the Microsoft Dynamics AX solution for the public sector. As most of you know, we have developed this solution jointly with Microsoft over the last three-and-a-half-years, with Tyler providing public sector functionality for Microsoft's latest ERP offering. Microsoft Dynamics AX 2012 was released to manufacturing in late June and is scheduled for general availability on August 1. Tyler's first customer for this product under the Microsoft technology adoption program is the city of Redmond, Washington, a progressive city of 54,000, which went live earlier this month on Dynamics AX, along with Tyler's payroll and cashiering solutions.

With general availability in August, both Tyler and other Microsoft partners will begin actively selling Microsoft Dynamics AX. Given the length of sales cycles, we do not currently expect to recognize significant revenues from Dynamics in the second half of this year. We will have a better idea of the expected impact on 2012 as we begin to gauge our direct sales pipeline as well as start to see sales generated through the Microsoft partner channel. We will need some revenues to offset the impact of R&D reimbursement from Microsoft going away next year, but at this point, we believe it may be 2013 before Dynamics AX is meaningful to our results.

Based on these factors, our 2011 annual guidance, which is largely unchanged from last quarter, is as follows. We currently expect 2011 revenues to be in the range of $305 million to $310 million. We forecast 2011 diluted EPS to be approximately $0.74 to $0.79. Fully diluted shares for the year are expected to be approximately $33.5 million to $34.0 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 39.6%. We expect our total capital expenditures, including the real estate purchase in the first quarter totaling $6.6 million, will be approximately $12.5 million to $13 million for the year, and total depreciation and amortization will be between approximately $10.5 million and $11 million.

That concludes my prepared remarks. And now I will take your questions.

(Operator Instructions). Our first question comes from Brian Kinstlinger at Sidoti & Company.

Hi, Brian. How are you?

Good, Brian, how are you?

Good. The first question I wanted to ask, of course, was related to Dynamics. I guess I'm interested if you guys have been able to put numbers together of how much you plan to bid in the second half of the year, the opportunities ahead of you maybe in 2012 as well, if you have put some pipeline numbers together.

No, we really haven't. And we certainly have an idea of some things that are in the pipeline right now, and we typically wouldn't disclose pipeline numbers and certainly not for a specific product. There are certain opportunities that we have already identified that we are preparing or have prepared responses to that we expect that we will bid Dynamics on, where we think that is a better fit for that opportunity. There are a number of those that we are aware of at this point but wouldn't be able to quantify it at this point. But there are a number of opportunities that we believe that we will be bidding it on in the next couple of quarters.

And then, as a follow-up, can we look at courts and justice versus financials, how those two divisions are doing? And then maybe address for Odyssey, maybe we won't see other Oregon-type contracts but something more like a Minnesota-type deal. Are there a handful of those? Are there not very many of those left in the pipeline? Can you talk to that at all?

Well, there are a couple of a statewide deals that are currently actively in the market that we are competing for, but I'm not certain of the timing of those decisions. There is one that we I think reasonably expect a decision to be made in the next couple of quarters, but the timing of the decisions is certainly unpredictable in that space, as it is in most of the market segments we address. But the pipeline for Odyssey, with respect to large counties as well as the lower end of the market that we are starting to penetrate with the Odyssey online offering, continues to be very active, and I'd say it's pretty consistent with how it was last quarter. It does continue to be an active marketplace.

Financials, which is the majority of our business with our ERP products, continues to have an active pipeline. RFPs were up again this quarter over the same quarter last year. It seems to be a little bit more active at the upper end of the market than it is at the lower end of the market, but generally, the pipelines are good and at close to historic high levels. And our win rates are very strong. Particularly compared to last year, they are up meaningfully.

Our next question come from Nathan Schneiderman at Roth Capital.

Hi, Brian. Thanks a lot for taking my questions. I have a few of them for you. Just starting off, you made some comments about an elongated sales cycle, but I was a little unclear. When comparing the sales cycle to recent quarters, would you say it is staying about the same, things are stretching out, or things are actually getting a little better there?

It varies a lot from deal to deal, but I would say, in general, the length of the cycles is pretty similar to what it's been for the last few quarters. Some of the decisions that we have had decisions or signed contracts on in the last couple of quarters were deals that have been in the pipeline for quite a while, so some of those have worked their way out. But new deals that are coming into the pipeline or deals that have come in the pipeline of the last few quarters continued to, on average, be taking similar amounts of time, or seeing longer cycles as we have for the last several quarters.

Got it. And then, just on this issue of deals of flipping from -- particularly new deals flipping from perpetual to SaaS, does it seem like the degree of this switching toward SaaS is increasing or staying a fairly consistent with recent quarters?

I would say the percentage of customers -- of new customers, although still the vast majority of our new customers are in the traditional perpetual license model -- I would say the percentage of those choosing a subscription model are up a little bit, at least in terms of the number. They do tend -- the majority of the new SaaS customers are on the smaller side in terms of the dollar value or the size of the customer. But I would say the adoption rate is increasing but increasing modestly.

Okay, and then, I was hoping you could clarify. You made a comment in your presentation that you felt like the environment is modestly more positive. What specifically are you -- is leading you to say that? What are the data points you're looking at?

Well, we are looking at, for example, RFP activity, which would be probably one of the most leading indicators that we at least could quantify. So the number of RFPs that we have responded to this quarter compared to the same quarter last year and the dollar value of those RFPs, both up significantly. And it's the same for the trailing four quarters taken as a whole, compared to the four quarters prior to that. So the activity in the marketplace, the number of new opportunities, and processes that are starting is increasing. And some of it is anecdotal. What we are hearing from customers with respect to projects they expected to fund out of new budgets that went into place July 1 is generally positive. So, the general sense in the marketplace seems to be a little bit more positive. The activity in the RFP pipeline seems to be more active.

The next question comes from Jonathan Ho at William Blair.

Good morning, Brian.

Hi, Jon.

Just a quick question on the revenue sharing arrangements that you guys have kind of talked about here. What is the typical time before that starts to kick off in terms of relative to when you sign the contract? Are you seeing more and more people moving in this direction, just giving the budget pressures that are out there?

We clearly are, and it is an offering that resonates with customers that really want to implement the electronic filing. It provides significant efficiencies and cost savings on the customer's part, from being able to eliminate personnel that accept and process paper filings, to eliminate the cost of moving that paper around, and generally provide a more efficient work environment in the courts. They really want to implement e-filing, but where budgets are tight, it is significantly attractive to them to be able to implement it without an up front cost and to share in the revenues of the filing fees.

Generally, there is a fairly lengthy phase-in period. At first, it is usually optional. And adoption rates tend to be fairly low in that case. There is a lot of slowness in the adoption by the legal community, generally. Once it is made mandatory, then obviously, the rates are very high. The courts typically will set some sort of a phase-in period, and they will say, we've got this system in place, the bar needs to go out and get set up on it, learn how to use it. And in six months or nine months or 12 months from now, it's going to become mandatory. It varies from court to court and state to state, but very often, that's at least a six- to nine-month window before it becomes mandatory. It is a fairly lengthy time. It is not a long time to set up the system, but it can be a fairly lengthy time before it becomes mandatory.

Got it. And just in terms of your pipeline, it seems like we've been staying at sort of these record levels. What do you think has to happen in the environment, or what are some of the indicators that you think will take place when that we see that pipeline maybe normalize? Are you guys are looking for an abnormal flush, or is this going to be a multi-year process where it just gets worked through over a longer period of time?

I think it will be a longer period of time. Whether it is multi-year, I'm not sure. At least multi-quarters. We don't think there will be one or two big quarters where it flushes through. Clearly, from our bookings that we've seen over the last several quarters, you can see they have been very lumpy, varying by close to 50% in some instances from quarter to quarter. I don't think there will be a big flush. I think as the market and the overall economic environment returns to a more stronger environment, and as some of these processes that have been delayed rise in priority and become more crucial that an aging or unreliable system needs to be replaced, that was able to be postponed for a year or two, that we will see this start to flush out. But until we see a few more consistent strong quarters in terms of new contract signing's, it is hard to tell what that timing will be. But I expect it will be at least over several quarters.

Just relative to some of the more recent quarters, are the delays more being influenced by budget or more by approval? I just want to get a general sense if there has been any kind of a shift where it's one reason versus the other in terms of the pipeline building up.

No, I don't think so. I think at the core, it is all budget related. In general, our prospects, start a process when they think they have a significant need. It is not because our system is a little bit better than the system they have. It is because they have a system that is worn-out that is becoming unreliable and may not be supported any longer. It may be an in-house system that is very difficult to manage. And when it gets to that situation, they start a process. The primary reason that those have been delayed is because of budget issues and pressures in trying to get these funded, they come back and say, can you get by another year, or can you get by two more years with what you have?

So at the core -- now, as part of that whole environment then, it very often -- they have more decision-makers involved in scrutinizing the expenditures. There is more ROI-type analysis. There is more justification than there would be in a more normal environment. But at the core, it is all driven by the budget pressures at the local level. And again, because these are all mission-critical applications running functions in local government that are not discretionary, at some point, the systems need to be replaced. And when that priority gets to the point where it's really not discretionary anymore, then they are getting funded.

The next question comes from Torin Eastburn at CJS Securities.

Brian, good morning. I just have one quick one. The last couple quarters you have been at times borrowing to buy back shares. Do you have a target debt limit that you are comfortable holding, specifically to use over time to buy back shares?

Not specifically. When we put the credit facility in place last August, we said that if the credit facility were fully borrowed at $150 million, that we would be comfortable with that level of leverage in our capital structure. That would represent something less than three times EBITDA, and with the reliability of our cash flow and our recurring revenues, we would be comfortable fully borrowing it. As a practical matter, there will be some announcement that we'll -- we would always keep as a liquidity reserve. A portion of it -- I think it's about $8 million -- is used to secure letters of credit for our bonding facility. So, we are a long way away from being close to any kind of a limit on it, but in general, if we had compelling opportunities to use those funds, we would be comfortable fully borrowing the credit facility.

All right. That's all I had. Thank you.

Yes.

The next question comes from Rag Sarathy at Dougherty & Company.

Good morning. Thanks for taking my questions. Brian, you kind of talked about it, but I wanted to drill down a little more. Obviously, bookings have been bouncing around. But when I looked at the last six quarters, like you said, there is more pronounced seasonality in the second and fourth quarter. Bookings were almost twice the amount that you book in the first quarter. I was wondering if you -- if there is any pattern that is emerging since the recession or anything that you can share?

The biggest factor that is seasonally related is in our maintenance bookings. So, our biggest maintenance renewal period is June 30, and so at that point, for those customers that renew then, we bill them for a year's worth of maintenance. It goes into bookings and backlog and into deferred revenue. And then the second biggest period for those maintenance renewals is in December. For example, this quarter, our maintenance bookings were about $58 million. And that is up from last year's second quarter about $47 million, but in the first quarter, our maintenance bookings were only $24 million. In the fourth quarter, they were $43 million. So, maintenance is the biggest seasonal factor there.

I would say the other thing that is affecting -- that's leading bookings to be bigger then revenue growth, the bookings growth has been bigger than our recent revenue growth, is that -- and we talked about this on our last quarter call -- the backlog is generally -- and the bookings in recent quarters have generally been a little bit longer-term in nature. So there's more subscription deals in there that are recognized over three to six years rather than in the next 12 months with an average traditional implementation. And there are more larger contracts like the Oregon contract that will be recognized over five, 5.5 years, as opposed to a quicker implementation.

Speaking of this Oregon contract, you said you expect to recognize revenues over the next five years. When do expect to start recognizing revenue?

We have started already. As I said, it runs really all the way through -- the implementation runs through 2016. It is a bit of a bell curve, and we are not exactly sure how that will play out, but right now it looks like close to half of the revenues will be recognized in 2012 and 2013. This year, it's probably close to $3 million of revenues, and those are built into our guidance. And they were built into our guidance going into the year, as we had a pretty firm idea of how this contract was going to play out when we set our guidance for the year. But roughly half the revenues in 2012 and '13, and then the balance out into '14, '15, and '16.

The next question comes from Brian Kinstlinger at Sidoti & Company.

Brian, sometimes you mention that there are awards that have not been signed yet, so to give you better visibility, kind of like the Oregon contract where you hadn't signed, but I don't think it was awarded, actually. I'm sorry, you had it awarded, but it wasn't signed. Give us a sense for where those numbers are for awarded but not signed yet. Is it much higher than years past? Can you give us a number to give us a sense of where that is going?

I couldn't give you a number, and I wouldn't, because that would be more akin to a segment of the pipeline, and until they are assigned, we are never totally sure what the amount is or if they are going to be signed. But I would say, obviously, this was a very large contract that had been in the pipeline for quite a while, and as it progresses, we had pretty good certainty. But I would say the awarded and unsigned level of that stuff right now is pretty consistent with where we have been over the last few quarters.

Okay, that's it. Thanks.

The next question comes from Tim Quillin at Stephens Inc.

Hi, Brian.

Good morning, Tim.

You alluded to this, Brian, but I don't know if you can give the dollar value of bids submitted and compare that to where you were a year ago?

We don't really give a dollar value on the pipeline. But for example, for the last 12 months, the dollar value of the RFPs we have submitted for the trailing 12 months at the end of this last quarter is up about 30% over the trailing 12 months that ended last year in June. So, that's probably the best indicator of the level of new opportunities coming into the market that we are proposing on. The number of RFPs is actually lower than that, so that the average proposal that we are submitting is bigger this year than it was a year ago. But, as I said, about a 30% increase over the year-ago level.

That's good color. Thank you. And then, you had talked, and I think you said this before, that in 2012 you will have the reduction in R&D reimbursements from Microsoft. I think, and correct me if I'm wrong, but I think this year the reimbursement will be around $3.5 million and next year $1 million, so about a $2.5 million drop off in reimbursements. And when you discuss the AX public sector opportunity, you have kind of said that maybe revenue just offsets that drop off in reimbursement in 2012, and then 2013, you start to see more significant contribution. Does that imply, or are you thinking of that the 2012 opportunity is in a very low millions of dollars, and then it grows? Or any color around that would be great, including if you have a sense of the addressable market that Microsoft is going after in the public sector.

Yes, given the limited visibility we have now, where we are just starting to write proposals, we don't really have a clear -- any clear visibility into the level of business that other Microsoft partners are pursuing or the timing of that. We really are not able to quantify with any kind of reliability what the revenue opportunity for next year is. So at this point, we say it is reasonable to think that we will have at least enough revenue to offset the reduction in Microsoft reimbursement and to help offset some of the fixed costs that we have that right now are reimbursement costs that will be costs of maintaining the product and working on the next release of the product. As far as the size of the market, the worldwide ERP market in the public sector is in the couple billion dollar market in terms of licenses, and Microsoft is working to capture a significant part of that. It is a relatively new market for them in the ERP space, as their previous offerings haven't really addressed the public sector space very well. So, again, at this point, we know that they are committed to it, that they are enthusiastic about capturing over time a significant piece of that market and will benefit from that. But we just don't have enough visibility to start talking about how much of the market we think we will capture with the product.

(Operator Instructions). Our next question comes from Rag Sarathy at Dougherty & Company.

Thanks for taking my question. Just one final question. The recent macro events raise concerns about federal spending cuts that might eventually trickle down to the state and local level. Brian, I was wondering if you have -- there's any read on what you are seeing early in the third quarter, talking to customers?

I haven't heard of any -- I haven't heard that discussed as affecting any third quarter events. Obviously it is kind of a fluid situation, and I'm not sure how that trickles down to the states and then trickles down to lower -- to local levels is very clear at this point. But at least on the deals that we have -- that are working towards signing or that have already signed in Q3, we have not heard that as an issue with respect to the Q3 business.

Thank you.

Yes.

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

Okay. I would like to thank everyone for joining us today. If you have further questions, as always, please feel free to contact me. Thank you.

The conference has now concluded. Thank you for attending. You may now disconnect.