泰勒科技 (TYL) 2011 Q3 法說會逐字稿

Hello and welcome to today's Tyler Technologies' third quarter 2011 conference call. Your host for today's call is John Marr, President and CEO 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 October 27, 2011. I would like to turn the call over to Mr Marr. Mr Marr, please begin your call.

Okay. Thank you, Amy. And welcome to our third quarter 2011 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, 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 then historical information, that may include projections concerning the Company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause the actual results to differ materially from these projections. We refer you to our Form 10-K and other SEC filings for more information on those risks. John?

Thanks, Brian. This quarter was our 42nd consecutive profitable quarter. This was also the third consecutive quarter of year-over-year revenue growth, after reporting declines in revenue in each of the last two quarters of 2010. By many measures it was our best quarter ever. As we've reached new highs for revenues, gross margins and backlog. Given the continued challenging environment and overall economic conditions, we're encouraged by our operating results. Total revenues for the quarter were up due to continued strong growth in recurring revenues from subscriptions and maintenance. In addition, our software service business posted growth of 6% this quarter. We improved our gross margin percentages by 180 basis points compared to the same period last year which demonstrates the margin leverage in our recurring revenues. Tyler announced a number of significant contacts during the third quarter including contracts for our MUNIS solution with -- Culver City, California; Plant City, Florida; Alfreda, Georgia; Sussex County, Delaware which is the state's largest county; Prince George County, Virginia; the City of Florence, South Carolina; and Washington's South Correctional entity.

We also signed a 7-year SaaS and disaster recovery contract with the city of Sanibel, Florida for our MUNIS solution. We announced a multi-suite contract for our INCODE court case management system and our newest financial solutions with the city of Roswell, Georgia. Other new customers for our INCODE municipal court MERP solution include the Texas cities of Bullard, Longview, and Texarkana and the Hazelton City Authority of Pennsylvania. We announced that the state of Kansas has completed its statewide implementation of our Orion appraisal solutions with more than 85% of the state 105 counties accessing the solution via the states SaaS platform. In our courts and justice division, we signed a new statewide agreement with the courts in New Mexico for our Odyssey file and serve e-filing solution which is a revenue-sharing arrangement that will generate a significant recurring revenue stream.

In mid-October we announced the acquisition of Windsor Management Group, which provides an integrated suite of financial and human capital management solutions to the K-12 education market through its flagship product, Infinite Visions. Windsor had annual revenues in 2010 of approximally $12 million including approximately $8 million in recurring revenue. Windsor has over 800 school districts, clients in 31 states with a concentration of western states such as Arizona, New Mexico and Colorado where Tyler has historically had a lighter presence. This acquisition broadens our geographical reach in K-12 schools and has meaningful recurring revenues from a single competitive product suite. Now I'd like for Brian to provide more detail on the results for the quarter. Brian?

Thanks, John. Yesterday Tyler Technologies reported its results for the third quarter ended September 30, 2011. You have seen the press release and our Form 10-Q has been filed. So I'm going to comment on some of the key factors affecting the quarter and then move on to John's comment on the current quarter and our outlook for the remainder of the year. Revenues for the third quarter were $77.2 million, a new quarterly high, up 4.6% compared to $73.8 million for the third quarter of 2010. Revenue growth was completely organic again this quarter and was driven by strength in our recurring revenues from maintenance and subscriptions. Software license revenues remained weak with a 17.6% decline from last year's third 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 timetables on some signed business which is consistent with the conditions we've seen for the past several quarters.

In addition, the number of new clients choosing our subscription-based offerings rather than purchasing software under a traditional, perpetual software license arrangement continues to grow with the resulting dampening effect on license revenues. Subscription revenues continue to be our fastest growing revenue line, and were up 32.7% over last year's third quarter. In the third quarter, we signed 12 new subscription-based arrangements and converted 17 existing installed clients, compared to a total of two new arrangements and 11 conversions in the third quarter of 2010. Software services revenues increased by 5.5%, primarily due to increased service revenues related to a statewide contract implementation. This is the first time in seven quarters that software services revenues grew year-over-year. Maintenance revenue growth was 6.6%, a combination of new revenues associated with license sales in the past year, and annual rate increases for existing clients.

Our maintenance revenue growth rate has been reduced somewhat by the effect of existing installed client converting to our hosted offerings, which resulted in a loss of maintenance revenue offset by a larger increase in subscription revenue. Together, recurring revenues from our subscriptions and maintenance comprised 58.3% of our total revenues for the quarter, and grew 10.4% year over year. Appraisal services revenues increased 2.7% in the third quarter, primarily due to activity on several revaluation contracts that began in late 2009 and mid-2010, including a number of Indiana counties and a major revaluation project in Allegheny County, Pennsylvania. For the third quarter of 2011, our blended gross margin increased 180 basis points to 46.8%, which represents our highest quarterly gross margin ever. Last year's third quarter gross margin was 45%. Gross margin for our software services maintenance and subscriptions primarily drove the increase, our ability to increase gross margins despite a significant decline in high margin license revenues, illustrates the power of the leverage in incremental maintenance and subscription revenues.

SG&A expense increased to 8.2% and as a percentage of revenue, was 24.3% compared to 23.5% in last year's third quarter. For the year-to-date, SG&A expense as a percentage of revenue is slightly lower than last year at 24.0%. Non-cash stock compensation expense was $1.6 million in the third quarter of 2011, compared to $1.5 million in the third quarter of 2010. $239,000 was included in the cost of revenues and $1.4 million was included in the SG&A expense. Net research and development expense increased 29.8% to $4.2 million for the third quarter of 2011 compared to $3.2 million for the same period last year.

R&D expense was offset by cost reimbursement recognized under our agreement with Microsoft of $885,000 in the third quarter of 2011 and $1.5 million in the third quarter of 2010. We currently expect additional offsets to research and development costs totaling approximately $3.3 million through mid-2012, of which the majority is expected in the fourth quarter of 2011. The recognition of the reimbursements will vary from quarter to quarter, but we currently expect that for 2011, we'll recognize less reimbursement than we did in 2010, due to the timing of the deployment of resources on the second phase of the project. Gross R&D expense before the effect of the Microsoft reimbursements increased approximately $297,000 from the third quarter of 2010, and was primarily driven by development costs for Tyler proprietary software products other than the dynamics project.

Operating income increased 4.6% to $12.4 million, from $11.8 million last year, and net income for the quarter was $7.5 million, or $0.23 per diluted share, compared to net income of $6.7 million, or $0.19 per diluted share in the third quarter of 2010. Our effective tax rate for the third quarter was 36.5%. The tax rate was reduced from prior quarters as the result of a revision in the estimated state tax rate for the year, bringing our estimated effective tax rate for the full year down to 38.4%. The fully diluted share count declined by approximately 2.5 million shares compared to last year, primarily as the result of our stock repurchases.

During the third quarter, we repurchased 2 million shares of our common stock for approximately $49.6 million, at an average cost of $24.34 per share. At the end of the third quarter of 2011, we had 29.7 million common shares outstanding, and authorizations to repurchase up to a total of 1.8 million additional shares. Year-to-date through September 30, we've repurchased 3 million shares of our stock at average cost of $23.88 for total cost of $70.5 million dollars. This represents approximately 9.1% of the shares outstanding at the beginning of the year. As of today our actual shares outstanding are now below 30 million.

Free cash flow for the third quarter was $24.3 million, compared to $26.9 million for the same period in 2010. Year-to-date, our free cash flow excluding real estate CapEx is a $41.8 million, up 71.4% from $24.4 million for the first nine months of last year. The increase in free cash flow reflects improved receivable collections, higher deferred revenue collections from maintenance and other recurring revenues, and lower cash payments for taxes and bonuses compared to last year. Receivables continued to perform well. Days Sales Outstanding in accounts receivable was 88 days at September 30, 2011, an improvement of six days compared to 94 days at September 30, 2010. This is down from 106 days at June 30 as billings peak in June with a high level of maintenance billings followed by collections in the third quarter.

Our backlog at September 30, 2011 was $298.7 million, a new high, up 18% compared to $253.8 million at September 30, 2010. Backlog related to our software business, which excludes backlog from appraisal services contracts, was $277.5 million in the current quarter, a 28% increase compared to $216.2 million a year ago. Appraisal services backlog was $21.2 million at September 30, 2011, compared to $37.6 million at September 30, 2010. Backlog at September 30, 2011 included approximately $100.1 million of maintenance compared to $84.4 million a year ago. This was our sixth consecutive quarter of year-over-year backlog growth. For the trailing 12 months at September 30, our bookings are up approximately 10% compared to the 12 months ended September 30, 2010.

On the balance sheet we ended the third quarter with $7.4 million in cash and investments, $58 million in outstanding borrowings under our $150 million revolving credit facility. At September 30 we had $83.7 million of availability under the facility. The average interest rate on our borrowings in the quarter was 3.39%. Subsequent to the end of the quarter, we completed the acquisition of Windsor Management Group, the purchase price was $23.5 million, after netting acquired cash of $7.2 million, we borrowed approximately $16.3 million on our revolver to fund the net cash purchase price. We have not completed the purchase price allocation analysis but we currently expect that the Windsor acquisition will not have a material impact on our fourth quarter GAAP earnings. Our headcount was essentially flat in the third quarter as we finished the quarter with 2,011 employees compared to 2,010 at the end of June. With that I'd like to turn the call back over to John for his further comments.

Thanks, Brian. Our results for the quarter reflected the stability and steady growth in our recurring revenues, which were approximately 58% 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 market place. While license revenues recognized remained under pressure, our view of the overall new business environment, at least for Tyler, is modestly improved. We believe that the new opportunities initiated remain flat since the weaker environment began about three years ago. However, the processes that have been slow to move forward seem to be moving at a more normal rate. We also believe that the investments we have made in virtually all of our products during the past several years is paying off with Tyler products enjoying improved competitive positions. This is supported by improved market share, really, across the board.

This progress illustrates the value of Tyler to our customers. Our sales and marketing people have worked closely with our product development teams to integrate new technology and extend functionality. Development has been successful and timely delivered on these shared objectives and our service channels have successfully delivered these products to the field. Tyler has 2,000 employees and together they have effectively and efficiently responded to these challenges extending our leadership position in this vertical. Our backlog grew year-over-year for the sixth straight quarter and is at the highest level in our history. The story is positive with respect to our recurring revenues. We continue to add clients to our SaaS and hosted offerings, including those that are new to Tyler and existing clients who convert to a hosting solution from an in-house Tyler solution.

We are also continuing to build revenues from our transaction-based revenue models including e-filing, with our Odyssey filing service solutions for courts. 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 systems with little upfront cost while funding the solution out of fees generated from the filings. We're now approaching $1 million in quarterly e-filing revenues, and have a very active sales effort for e-filing with both new and existing court clients. As you may know, our beta customer for Dynamics AX, the city of Redmond, Washington went live in July. And general availability release of the product was in August. Both Tyler and other Microsoft partners are now actively selling Microsoft Dynamics AX.

While we are starting to build a direct pipeline given the length of the sales process, we have not yet signed Dynamics contracts. We currently have very little visibility into the pipeline for Microsoft partner channels. We do not currently expect to recognize significant revenues for the Dynamics in the last quarter of this year. We feel we'll have a better idea of the expected impact on 2012 as we continue to gauge our direct sales pipeline as well as start to see sales generated from the Microsoft partner channel. We'll need some revenue to offset the impact of R&D reimbursement from Microsoft going away next year. So at this point we believe it may be 2013 before Dynamics AX is meaningful to our results. Our results from the third quarter were somewhat ahead of our expectations while the marketplace remains challenging and somewhat unpredictable, with respect to both timing of new business and the mix of traditional versus SaaS business, our strong results for the third quarter along with our current visibility into the fourth quarter allow us to revise upward our outlook for 2011.

Based on these factors, our 2011 annual guidance is as follows. We currently expect 2011 revenues to be in the range of $308 million to $311 million. We forecast 2011 diluted earnings per share to be approximately $0.78 to $0.82 per share. Fully diluted shares for the year are expected to be approximately $33 million to $33.5 million. For the year, estimated pretax 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 38.4%. And we expect our total capital expenditures will be approximately $11.7 million to $12.2 million for the year, in total depreciation and amortization will be between $11 million and $11.5 million. Now we'll take your questions.

(Operator Instructions) Torin Eastburn, CJS Securities.

My first question is about the growth rate of your business right now. If I look at revenue, you grew about 5% this quarter but if I look at your software backlog, it was up 28% and your bookings are up 12% year-to-date. So how do you reconcile those? How do you think internally about your growth rate right now?

Yes, that's a good observation. It's certainly somewhere in between. I think that we, as I indicated, are seeing a little bit of a modest recovery. I don't think the market is roaring back, but some of the business that's been in the pipeline for a while. Those processes are behaving a little more normally, so I think the opportunity for growth is better. Our recurring revenues have been growing pretty nicely through this environment, but they been offset by declining new business revenues, predominantly licenses and professional services. You saw professional services turnaround this quarter, and we would expect that licenses would recover somewhat but again, the mix of revenues is hard to project.

So I think we're going back into a little better growth cycle. However, you'll continue to see backlog grow more rapidly and at a higher rate. Generally the reasons for that are a couple fold. These bigger deals, the Oregon deal and some of these very large deals, are obviously going to backlog and stay there and we work through those numbers more slowly. And then also, like we mentioned, the Sanibel seven-year deal, that's a contract that goes in backlog and takes a very long time to work through it. So because there's more SaaS, and because there are more large deals that are multi-year engagements, you'll continue to see backlog grow at a higher rate than our financial system shows.

Okay. And along those same lines, is it too early to discuss broad growth expectations for 2012?

Well, we'll give you better guidance on that probably in January or so. We haven't gone through the detailed planning process. That's all coming up in the weeks to come. I guess at a very high level, I would just say we kind of reinforce what I just said, which is that you can look and see what the annual run rates are for maintenance and subscriptions and obviously there's nice growth there as there has been the last couple of years. It would be our expectation however though next year that those wouldn't be offset by further declines in licenses and professional services. So we would expect those to be at least flat if not modestly recover from what's kind of a low level they're at now. So therefore, the growth in recurrings should remain at least at that level across all our revenues, and then hopefully we'll see some modest recovery in the new business type numbers. So yes, we expect to have better growth next year organically than we've had in the last few years, and then obviously we'll have the growth from the Windsor acquisition as well.

Tim Quillin, Stephens Inc.

Nice results. First question is around margins. The gross margin improvement, and is there anything in there that we should think about as unsustainable? You noticed that the cost of software licenses was down a little bit from where it has historically had been. And the 43% gross margin on the services maintenance and subscription was a nice bump up. Is that a run rate we should think about? Or growth off of that number? Or any color you could give around the margin would be great. Thanks.

Well, the margin improvement on licenses is mostly related to the effect of the mix of third-party licenses versus Tyler proprietary products and there's obviously a lower margin on the third-party products, and there was a lower proportion of those in this quarter compared to last year's third quarter, so that's primarily the reason for the decline in the cost of licenses. And that mix can bump around a little bit, and can vary quite a bit from quarter to quarter. But when you're talking about the services and the subscription side, we have held headcount reasonably flat over the last year. Services revenues are starting to grow back into that. We've talked in the past about us continuing to be somewhat underutilized in our professional services staffing organization over the last few quarters. And now that, that services business is starting to grow a bit again, we sort of growing back into our staffing level, and then the other is really, just the power of the -- that incremental revenues in the subscriptions and maintenance side, where the incremental margins on those revenues is very high. So there's nothing particularly unusual about this quarter, and we'd expect that, particularly on the services and subscriptions side that we should be able to build from the level we are at now.

Okay. Great. And then just on Windsor, you said in the initial press release it did $12 million in revenue in 2010. What are your forward revenue projections on that? Also what kind of margins do you expect and what buckets will the revenue go into, as you report them? In other words, the licenses, the subscriptions and maintenance et cetera? Thanks.

Well, their business is roughly in 2010, was $12 million of revenues, of which about $8 million was maintenance revenues. And the other $4 million was divided reasonably evenly between licenses and professional services. We -- that business has grown a bit this year. It's -- I don't think we're quite ready to the guidance for next year. With respect to the purchase price allocation as you may know, we have to take a haircut on part of the maintenance revenues in terms of what we can recognize from their deferred revenues on the balance sheet at the acquisition date. So those will go backwards a little bit in the first year, and then we'll catch up from that going forward. But we do expect to see that business, particularly the referring revenues grow, and again, because the purchase price allocation isn't finished, we're not sure exactly how much amortization we'll have, and over what life from the intangibles, the customer base, the software products, that -- when we allocate their purchase price. But our best guess for now is at least in the fourth quarter it's on a P&L basis not particularly significant in either direction. But we'll add some meaningful revenues.

Brian Kinstlinger, Sidoti & Company.

The question I had first was really speaking to the leverage in the model of maybe talk to your recruiting plans or maybe the need not to recruit, either way related to your self increasing demand for the SaaS model as well as Microsoft demand starts to pick up, which may be a year off, but any real needs from a recruiting standpoint over the next year to 1.5 year for you? Or are you pretty good where you are at that level of employees that you have?

Couple of areas. There is a little CapEx spending in SaaS. Not a lot of headcount. Really a few heads there can be leveraged over a lot of clients, so it's very productive from that standpoint, but there is some redundancy that we're building out and some investments we need to make there. Not overly significant, but there is some spending going on there. I really think headcount, and we've been saying this for some time, I think we've gone ahead and funded development at a high level through this environment, and may be modestly disproportionate to where we were as a Company, so we really felt we were making a modestly outsized investment as we went through a more challenging environment.

So I think for the most part, R&D has development in general -- will be able to stay relatively flat over the coming couple of years. As we absorb some of this growth. So that should give us some leverage. I think support and customer service heads will grow below the overall growth rate. We will see some growth in professional services, and yet I think as Brian already indicated, this backlog does help us be better at projecting what we need for resources there in keeping the utilization where it needs to be. So we've had some of the lumpiness that you guys have observed in the gross margins and it really has had to do with utilization, and these contracts that are in backlog, they give us good visibility on that -- do allow us to staff and hopefully we believe we'll have better utilization or more consistent utilization going forward, so we will add professional service head, but we should be able to do it in a disciplined manner that doesn't affect gross margins.

Great. And my follow-up relates to Microsoft in the demand environment. You mentioned your one client. That did the beta testing. I think that client was quoted as saying in the paper that, that could've been a $9 million deal. Is that the size deals we're thinking about from this standpoint, from this software? And then maybe speak to -- I know you can't speak to the indirect sales channel, what does the direct sales channel look like? And can you maybe quantify maybe with the opportunity, what it looks like over the next year or two in at least in terms of proposals, not in terms of revenue?

I think $9 million would definitely be a higher end deal in that space. I think the average sales price will be higher than what it's been in our traditional proprietary products in that space, because I think their brand helps us there, the product has that kind of functionality, and I think it will be appealing to the large environments that want a Tier 1 partner involved in the implementation, but I don't know. I couldn't pick at an average sales price, but if I had to pick one, it might be 1/3 to 50% of that number. There will be deals that size, I certainly would hope, but that would be a large deal. The -- initially what we're doing directly is we obviously have a sales channel. We don't want to create redundancy there. That sales channel will have access, has access to this product. In order to make sure -- because those people obviously are comfortable and have made a living selling our other proprietary products, so they're incentivized to sell this product. Then there are -- there is kind of another layer of experienced salespeople we've had that are exclusively focused on Dynamics in order to leverage that product over our existing sales channel and make sure it's very well understood and that we know how to identify those opportunities where it has an equal or better chance of winning the business than our own proprietary products.

So we'll put sales specialists in those spaces, they're exclusively incentivize and focused on making sure that product is well represented in our existing channel, we've identified incremental markets outside of just kind of plain city/county/school districts. There are higher ed, national not-for-profits, a lot of other niches there where our products that weren't multi-company, weren't multi-currency didn't have some of the functionality that Dynamics has that we'll identify those spaces more aggressively, so we have resources dedicated to that, primarily to leverage it again over the existing channel. We have product specialists both technically and functionally that are fully up to speed to demonstrate the product and represent it well in the marketplace. So we think we've made the appropriate commitment from a sales and marketing standpoint, and we're prepared obviously to expand that. Which would be maybe partly a reallocation of resources and some incremental resources as it gets more traction in the market place.

Nathan Schneiderman at Roth Capital.

You guys are showing a nice acceleration in the backlog, the total and the current. Though clearly we understand that you're selling longer-term multi-year deals. So just to help us frame that a little bit better, if you were to look at that current portion of total backlog and the current portion of software backlog, how much are those actually increasing?

Yes. We don't actually have the complete split between current and non-current at the end of the quarter. We do that at year end. But just for point of reference, the subscription backlog, at September 30 of our $298.6 million total backlog, a little over $62 million of that was related to subscriptions and a year ago, it was about $38 million. So that piece has grown about 63% year over year. And you can assume that most of that subscription-based backlog is multi-year types of deals and probably we do subscription deals that range from three years to seven years. But maybe an average of five years on that piece of the backlog. But that kind of illustrates the growth in the long-term nature. And then as John mentioned, more of the software and services backlog right now is related to larger deals, which are recognized over multi-quarters. And I don't -- they can't quantify that at this point. But it clearly is significantly more in the longer term portion of that.

Do you have kind of a ballpark sense though -- do you think the current portion is up high single digit or more than that?

I would guess kind of 10%-ish. Last year, I think at year end I believe it was around 70% of our total backlog was recognizable in the next 12 months. And obviously, virtually all of the maintenance was recognized in the next 12 months and that makes up about 1/3 of our backlog. So last year was about 70%. I guess at this point I don't know for sure, but I wouldn't think it would probably be much more than 75%. I'm sorry, the --

Okay. That's great. I'll focused on that 10% number. That's helpful. I was curious, John, if you look at some of the nice flow you're getting from the e-filing business on the revenue share. Are you exploring other opportunities for similar kinds of revenue sharing across your portfolio? Or is this a -- maybe in some of the ticketing areas or like the parking, ticketing areas? Or anything like that? Or is just revenue share a broader opportunity that you're exploring? Or is it just limited to this e-filing?

I think we're exploring it. We have some areas that are contributing to a lesser extent, so we don't get into them in as much detail. We are sharing in some transaction fees where we clear things online, and some of those things have more potential. But I don't think any of them will be as significant in the short-term but yes, there are other areas that we're definitely exploring, and some small areas where we're generating some revenues that potentially down the road could be significant. But I wouldn't focus on anything say, for the next 12 months or so.

Jonathan Ho, William Blair.

Great quarter, guys. Just to start out a little bit in terms of your competitive positioning, you alluded to improvements, and I just wanted to see if you could give us some additional color on maybe where you're seeing those win rates pick up, and maybe potentially who you're taking share away from?

I would probably stay away from who we're taking it away from, and unfortunately won't get too specific as obviously we're protective of that competitively. But it really is across the board, certainly in both of our ERP suites and certainly in courts and justice. We're very pleased with the feedback we got from the marketplace on those investments we've been making over the last three years. Obviously, it was significant to continue to invest at those levels in a more difficult environment, and we just know internally that those market shares and those win rates are up, kind of meaningfully. Over the last 18 months. And we feel good about that leadership position.

There is some pricing pressure in the marketplace and so it's important to not barely win but to win strong enough to be able to get traditional terms and conditions from contracts. Certainly want to deliver great value to our clients. But it's also important that we protect the principles of the way we price our solutions, particularly the post implementation costs that we need to protect to continue to deliver at this level. So again, I really think across those products, the results are up kind of meaningfully. And we are pleased with that and as I indicated, in my comments, our people really dug in, they identified areas we could improve, they appreciated we needed a better market share in a weaker environment, and it's gratifying to achieve that.

Got it. And just in terms of the number of customers selecting SaaS at this point, are you seeing a shift more towards this model than in prior quarters? Or has there been some sort of change in the environment that would cause maybe your prior expectations around SaaS take rates to change?

Yes, we don't overly focus on an individual quarter, although this quarter was pretty strong. I think there were 12 new names and 17 converts, so that's about a 10% increase in the names that are accessing our solution through SaaS, obviously that's a nice rate. But generally, yes, I think in the new business model, the economic environment has helped there. A lot of people have needs and would like to avoid a significant capital investment and can have a lower entry point by adopting the SaaS model. So I think we feel our adoption rate, is probably about twice what it was prior to this environment over a longer period of time and in an individual quarter that can be different. But it's probably gone from the 12%, 15% rate to the 25%, 30% of names rate. We have it available in more offerings now, it's getting good traction in courts and justice where it had been more of a Munis thing in the past, so we got more -- we can address more of our marketplace with it.

It works better with their current financial situations and no question, the adoption rate there is up over the last couple of years. And as we indicated as well, the existing clients, when they're facing -- having to replace their infrastructure, when they're facing turnover in their IT staff, the people that really know inside and out, their solutions, those have become catalysts for them to move from a traditionally deployed solution to a SaaS customer and relying on our resources, where we have obviously the ability to have more depth than an individual customer can, and where we can leverage the capital investment over many clients versus them duplicating it just for themselves. So the traction there has been very consistent and strong and we have a good outlook on that as well.

Raghavan Sarathy, Dougherty & Company.

Two questions. Brian, you touched on this topic. I noticed that maintenance revenue increased 7% sequentially. Nice job. You mentioned it was run by new revenues and rate increases. When I looked at the license revenue, it actually declined sequentially from second quarter to third quarter. So can you help us understand some of the factors driving that and whether we should think about building up the space?

Well, it's really a reflection of all of the new license revenues over the last 12 months that are now on maintenance agreements. So even though that number of license -- that dollar value of licenses is declined, it's still a significant amount of new licenses that are generating new maintenance revenues. So each quarter, the licenses really that we've signed over the last 12 months are contributing to the increase in maintenance revenues and then, the pricing increases and a good portion of our customer base is on renewals effective July 1. Which coincides with a lot of our customers fiscal years, so a significant portion of our customers had rate increases on their maintenance that went into place July 1. Probably averaging in the 3% to 4% range on the rate increases, they vary from customer to customer, but -- so we thought a good bit of those go into place this quarter as well. So it's a mix of the two but really, you have to look at all the license revenues over the last 12 months that generate new licenses or new maintenance compared to last year.

And I would add to that -- we're careful not to alibi for a weaker license number, if it's weak, but I would say that I think our license number recognized on our financial statement is probably a kind of a low barometer for what's really going on in the new business market. It certainly has been weak the last couple of years, the market continues to be challenging, as I indicated, we are enjoying a better competitive position, but still a difficult environment. But having said that, that number is probably a pretty low indication of the activity we're seeing. Obviously, we have a higher adoption rate in SaaS. That wouldn't affect the leverage you're talking about in terms of increases in maintenance, but it is an impact on that. There are more carve outs. So accounting continues to I guess be clearer on anything that has value in the contract. It isn't priced, at VSOE or full price is going to be carved out a licenses, so there's more that gets carved out. If the first year maintenance is included and it often is, that's carved out of there, so that understates licenses.

If there's any service or any functionality, that we're going to deliver as part of the agreement, those things get carved out. So collectively, they take a cut out of that license. The license number you see in the financial statement is less than what it really may have been the value or even what was contracted for originally. And also, licenses are recognized just more slowly. There could be any number of things that trigger deferring the recognition of licenses. So anyways, the point on this would be that probably the value of the licenses sold, which you have pricing pressure as well, so there's sometimes discounting in there, so generally, the value of the licenses sold I really think could be maybe as much as 30% or 50% greater than what you actually see run through that revenue line. And the relevance of that is that the maintenance generally is based on the value of that licenses. Even if it's discounted or even if there are carve outs for maintenance or professional services or quote, programmatic commitments and that we've made along the way. So the pull through on maintenance is generally a percentage of a much bigger number than what actually runs through that line item on the financial statement.

Great. Thank you. Appreciate that.

One other point on the maintenance revenues too, as we mentioned on the call, the number of conversions of existing customers to a hosted or subscription-based arrangement. Year-to-date, we have 17 of them this quarter. Year-to-date, we have had 28 of those. And those all come out of maintenance revenue and go into subscriptions at a higher rate. But that does depress the growth rate in the maintenance revenues offset by subscriptions.

And then in terms of the Windsor acquisition, just a clarification, do you anticipate any revenue from that acquisition in the fourth quarter? And then in terms of -- I apologize if you already answered -- in terms of the profitability of that business, how does it compare to your corporate average? And then I think, Brian, you talked about there could be some haircuts next year on the maintenance line. And could this be -- could this be a drag on your margins?

Yes, there's definitely -- fourth quarter, the revenues will be, we said they did $12 million last year, they'll be in for most of this quarter, so it's somewhere around 20% or 25% of that run rate. So $2.5 million-ish will probably be in there. The effect on earnings though, as Brian said, we probably wouldn't put anything in there for that. We don't yet know about the purchase accounting, which will provide a haircut. We don't know about the acquisition amortizations yet. And obviously if you want to attribute some interest expense to this as well, appropriately, it really will probably -- pretty close to neutral, so I wouldn't consider that a lot.

As we go into next year, we would expect that revenue run rate to be modestly above the numbers we provided for 2010. And on a normalized basis, it's a pretty profitable Company. They have 800 clients paying a lot of maintenance, and it's a mature relatively lightweight product that is well maintained and feature-rich. And they're in a position where the margins can be reasonable there. So there again, normalized margins are probably a little above Tyler's Company-wide margins. However again, we will have some purchase accounting for the first three quarters of next year, and then we will have amortization of acquisition intangibles on an ongoing basis. But generally if you consider normalized numbers, it should be nicely accretive.

On an EBITDA margin basis, it would be above Tyler's numbers.

(Operator Instructions) Tim Quillin, Stephens Inc.

First question is just, if you have any feel for how bookings might progress in the fourth quarter in terms of the timing of awards -- I know that's always difficult.

Well, we're comfortable changing guidance and not looking at the third quarter as a random event in terms of performing a little better. So yes, we think that bookings in the fourth quarter should continue to be consistent with what we experienced in the third quarter and to be reasonably strong.

Does that mean a little bit better than last year?

I don't remember. I'd have to look. But certainly, sequentially, the rates we've been running at, there was a nice uptick in the third quarter and we do expect that to continue in the fourth quarter.

Got it. Then just lastly, do you have any valuation parameters around the buybacks? Or is there some level that you would quit buying back stock?

Sure. It's always evolving. We're always making adjustments. Based on a number of different factors. But -- and we're not always looking at the current year, so to speak, but we look at what I think you guys do which are ranges of growth rates and margin expansion and what we look like three years and five years down the road. But certainly, if you look back historically, generally we're very aggressive when we're in ranges that we think are a good opportunity for us. And then we certainly back off and sit on the sidelines when the stock is more fully valued.

Nathan Schneiderman, Roth Capital.

Just a real quick one for you. I was just curious, you mentioned that you are already bidding on some of the Microsoft Dynamics projects, suggesting that solution. I was just curious if you could tell us about how many projects you're bidding that solution for at this point? Thanks very much.

It would be in the 10 to 15 names kind of thing. It's not dozens and dozens but it will continue to ramp up. But it's at that level on a direct basis. Again, we have -- we certainly are aware of some processes that are involved in, but we don't have real specific insight into the volume of business they're chasing at this point.

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

Okay. Well, thank you, Amy and we appreciate everybody participating in the call today. If you have any further questions, feel free to contact Brian or myself. Have a great day.

The conference is now concluded. Thank you for attending today's event. You may now disconnect.