泰勒科技 (TYL) 2011 Q4 法說會逐字稿

Hello, and welcome to today's Tyler Technologies' Fourth Quarter and Fiscal Year 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, February 23, 2012.

I would like to turn the call over to Mr. Marr. Please go ahead, sir.

Thank you, Lori, and welcome to our Fourth 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 give a review of the details of our operating results. Then I'll have some final comments, and we'll take your questions. Brian?

Thanks, John.

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

John?

This quarter marks our 43rd consecutively profitable quarter. By many measures, it was our best quarter ever as we reached new quarterly highs in revenues, gross margins, and backlog.

Our fourth quarter financial performance builds upon a trend of improving financial results that began in the second quarter of this year as the marketplace began to show signs of modest improvement.

Total revenues for the quarter were a record high $82.1 million, driven by continued strong growth and recurring revenues from subscriptions and maintenance.

In addition, our software license revenue grew by 16% over the same period in 2010, which is the first quarter of growth for software license revenue since the fourth quarter of 2009.

Also, our gross margin percentage improved by 250 basis points compared to the same period last year to 47.5%, bolstered by continued strong growth in our recurring revenues of subscriptions and maintenance.

Tyler announced a number of significant contracts during the fourth quarter.

We signed a contract with the state of Maryland for our Odyssey Court management system as the single integrated environment for management and reporting court information statewide. The contract was the second statewide Odyssey deal of the year, following the contract with the state of Oregon in the second quarter.

The Maryland contract is valued at approximately $45 million, which includes software license fees, professional services, and a multi-year maintenance agreement, and it is the largest software contract in the Company's history. The implementation includes a broad range of Odyssey modules, including case manager, enterprise content management, financial management, and e-filing.

Other significant contracts from MUNIS ERP solution included the Pasco County School District in Florida, which totaled a value of almost $8 million, our largest ERP contract of the year; a $3.4 million contract with the Guam Department of Education; and other contracts with Ottawa County, Michigan, the fastest growing county in Michigan, and Culver City, California.

We also announced a three-year SaaS agreement with Meridian Behavioral Health Services in North Carolina for our MUNIS ERP solution.

We signed a SaaS agreement for our INCODE ERP solution with the City of Eugene, Oregon.

We announced agreement for our VersaTrans student transportation management solution with Ohio's Columbus City schools, Ohio's largest school district and a client that already uses our MUNIS ERP solution.

Five more Texas counties joined 28 existing counties using our Eagle Land and Vital Records management solution. These Texas counties included Brazoria, Clay, Jasper, Loving, and Randall.

In mid-October, we completed the acquisition of Windsor Management Group, which provides an integrative suite of financial and human capital management solutions with the K-12 educational market through its flagship product, Infinite Visions.

Windsor had annual revenues in 2010 of approximately $12 million, including approximately $8 million in recurring revenue.

Windsor has over 800 school district clients in 31 states, with a concentration in Western states, such as Arizona, New Mexico, and Colorado, where Tyler does not currently have a significant K-12 presence. This acquisition broadens our geographical reach in K-12 schools and adds meaningful recurring revenue from a single competitive product suite.

We're pleased with the early performance of Windsor, which contributed approximately $2.6 million in revenue in the fourth quarter.

Subsequent to year-end, we announced the acquisition of Akanda Innovation, Incorporated of Toronto, Canada. Akanda has been a partner of our appraisal and tax group since 1997, developing complementary modules to Tyler's iasWorld Appraisal and Tax software.

The Akanda team, which -- will continue to provide expertise from a wide variety of technical disciplines, including GIS, browser-based, and workflow technologies. Because virtually all of Akanda's revenues already pass through Tyler as a third-party software provider, the acquisition will not have a material effect on our revenues.

We entered 2012 with a record backlog and an active sales pipeline. Bookings were again very strong in the fourth quarter, and new RFPs continued to come in to the marketplace at a steady level. We are cautiously optimistic that we will continue to see a modest improvement in the market that will provide a favorable environment for Tyler to continue to expand its growth.

Now, I'd like for Brian to provide more detail on the results for the quarter.

Thanks, John.

Yesterday, Tyler Technologies reported its results for the fourth quarter ended December 31, 2011. You've seen the press release, so I'm going to comment on some of the key factors in the quarter and then move on to John's comments on the current quarter and our outlook for 2012.

Revenues for the fourth quarter were $82.1 million, a new quarterly high, up 13.3% compared to $72.4 million for the fourth quarter of 2010.

Organic revenue growth was 9.7% this quarter, led by increases in our recurring revenues from maintenance and subscriptions, as well as growth in our software license revenue for the first time since the fourth quarter of 2009.

Our acquisition of Windsor Management Group in October accounted for revenues of $2.6 million in the fourth quarter, or 3.6 percentage points of growth.

Software license revenues grew 16.1% from last year's fourth quarter and were the highest since the fourth quarter of 2009. Organic growth in licenses was 9.9%, and Windsor added 6.2% of growth in licenses.

Subscriptions continues to be our fastest-growing revenue line and grew 43.6%, virtually all organic. In the fourth quarter, we added nine new subscription-based arrangements and converted 12 existing installed clients compared to a total of 11 new arrangements and 16 conversions in the fourth quarter of 2010.

The subscription lines also includes a growing revenue stream from transaction-based revenues, such as e-filing in the courts and online payments. In the fourth quarter, these revenues totaled $2 million, up from $1.3 million in the fourth quarter of last year.

Software services revenues increased by 7.2%, of which 4.5% was organic and 2.7% resulted from the Windsor acquisition. Organic growth was primarily driven by increased contract signings during the year.

Maintenance revenue growth was 13.5%, of which 8.6% was from organic growth due to 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 clients converting to our hosted offerings, which results in a loss of maintenance revenue, offset by a larger increase in subscription revenue.

The acquisition of Windsor contributed 4.9% to the maintenance growth in the fourth quarter. Together, recurring revenues from subscriptions and maintenance comprised 58.3% of our total revenues for the fourth quarter and grew 18.1% year over year.

Appraisal services revenue decreased 8.0% in the fourth quarter, primarily due to the wind-down of 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 fourth quarter of 2011, our blended gross margin increased 250 basis points to 47.5%, which represents our highest quarterly gross margin ever. Last year's fourth quarter margin was 45%.

Gross margin for our software licenses increased with the higher level of license revenues and the blended software services, maintenance, and subscriptions margin increased 240 basis points, reflecting the high degree of leverage and the incremental recurring revenues.

SG&A expense was 25.8% of total revenue compared to 23.7% in last year's fourth quarter. The increase in SG&A was mainly attributable to higher incentive compensation accruals in the fourth quarter of 2011 compared to the same quarter in 2010.

For the 2011 full year, SG&A expense as a percentage of revenue was 24.5% compared to 24.1% for 2010.

Non-cash stock compensation expense was $1.7 million in the fourth quarter of 2011 compared to $1.5 million in the fourth quarter of 2010. $222,000 was included in cost of revenues and $1.5 million was included in SG&A expense.

Net research and development expense decreased 24.3% in the quarter to $2.6 million compared to $3.5 million for the same period last year.

Total gross R&D expense before the effect of Microsoft reimbursements was $4.8 million in the fourth quarter of 2011 compared to $4.7 million in the fourth quarter of 2010.

R&D expense was offset by cost reimbursement recognized under our agreement with Microsoft of $2.2 million in the fourth quarter of 2011 and $1.3 million in the fourth quarter of 2010.

For the full year 2011, gross R&D expense related to the Microsoft Dynamics project was approximately $8.1 million, which was offset by total reimbursement of $3.5 million, for a net expense for the year of $4.6 million.

For 2010, gross Dynamics R&D expense was $8.4 million, offset by reimbursement of $5.1 million for a net expense of $3.3 million.

We currently expect additional R&D reimbursement offsets of approximately $1 million in 2012. Although the timing of the reimbursement is subject to change, we currently expect it all to be recorded in the third quarter of 2012.

Operating income for Q4 increased 28% to $14.3 million from $11.2 million last year, and our operating margin of 17.4% equaled our highest quarterly level.

Net income for the quarter was $8.7 million, or $0.27 per diluted share, compared to net income of $7.2 million, or $0.21 per diluted share, in the fourth quarter of 2010. The fully diluted share count declined in the fourth quarter by approximately 1.9 million shares compared to last year as a result of our stock repurchases.

Our effective tax rate for the fourth quarter was 35.6% and for the year was 37.5%.

During the fourth quarter, we repurchased 53,000 shares of our common stock for approximately $1.3 million at an average cost of $24.77 per share.

As of December 31, 2011, we had 30 million common shares outstanding and authorizations to repurchase up to a total of 1.7 million additional shares.

For the full year 2011, we repurchased 3 million shares of our stock at an average cost of $23.90 for a total cost of $71.8 million. This represents approximately 9.3% of the shares outstanding at the beginning of 2011.

Free cash flow for the fourth quarter was $9.0 million compared to $7.4 million for the same period in 2010. For the full year, our free cash flow was $44.2 million in 2011, up 45% from 30.4 million in 2010.

Excluding real estate CapEx, our free cash flow was $50.8 million, up 60.1% from $31.7 million for 2010. The increase in free cash flow reflects improved receivable collections, higher deferred revenue collections from maintenance and the other recurring revenues, and lower cash payments for taxes and incentive compensation compared to 2010.

Receivables continued to perform well. Day sales outstandings in accounts receivable was 99 days at December 31, 2011, an improvement of 3 days compared to 102 days at December 31, 2010. This is up from 88 days at September 30 as billings seasonally peak in June and December with a high level of maintenance billings, followed by collections in the subsequent quarter.

Our backlog at December 31, 2011 reached our highest level ever at $339.8 million, up 20.7% compared to $281.4 million at December 31, 2010.

Backlog related to our software business, which excludes backlog from appraisal services contracts, was $319.9 million in the current quarter, a 28.9% increase compared to $248.2 million a year ago.

Appraisal services backlog was $19.9 million at December 31, 2011 compared to $33.2 million at December 31, 2010.

Backlog at December 31, 2011 included approximately $110.3 million of maintenance compared to about $92.6 million a year ago.

Our Q4 bookings were up 24% over Q4 of 2010, and for the full year of 2011, bookings rose 9.2%.

With more of our backlog comprised of multi-year subscription agreements, as well as certain software contracts that will be multi-year implementations, the timing of the recognition of backlog has lengthened. Approximately 67% of our December 2011 backlog is expected to be recognized during the next 12 months compared to 70% of our December 2010 backlog.

On the balance sheet, we ended the fourth quarter with $3.3 million in cash and investments and $60.7 million in outstanding borrowings under our $150 million revolving credit facility. At December 31, we had $81 million of availability under the credit agreement. The average interest rate on our borrowings in the quarter was 3.3%.

During the fourth quarter, we completed the acquisition of Windsor Management Group. The purchase price was $23.8 million. After netting acquired cash of $7.4 million, we borrowed approximately $16.4 million on a revolver to fund the net cash purchase price. Windsor Management Group contributed $2.6 million in revenues during the fourth quarter.

In the first quarter of 2012, we completed the acquisition of Akanda. The purchase price was $2.9 million, and we do not expect this acquisition to have a material impact on revenues or earnings.

Our headcount grew by 80 to 2,091 employees at year-end compared to 2011 at the end of the third quarter, of which 64 were added as a result of the Windsor acquisition.

Now, I'd like to turn the call back over to John for his comments.

Thank you, Brian.

Our results for the quarter reflect the continued modest improvement in the marketplace and the stability and steady growth of 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 marketplace.

The market conditions in the second half of the year generally improved, at least modestly, as we started to see opportunities that have been in the pipeline for some time start to make decisions. It's our view that these needs, they're all essential, are beginning to reach a point that need to be addressed.

During the weaker period of the last two or three years, we've made significant investments in our products, and in our view and as a result of our market share, indicate that we've made significant improvements competitively.

Our backlog grew year over year for the seventh straight quarter and is at the highest level in our history. With the new business market slowly improving, the story is very positive with respect to our recurring revenue. We continue to add clients in our SaaS and hosted offerings, including those that are new to Tyler and existing clients who convert to a hosted 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 File and Serve solution for courts. We are providing the 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 very 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.

Both Tyler and other Microsoft partners are now actively selling Microsoft Dynamics AX and are starting to build a direct pipeline. We currently have very little visibility into the pipeline from the Microsoft partner channel, and most of the early opportunities that Tyler is pursuing with the Dynamics solution have not yet reached the decision point.

Given the current lack of visibility, our current expectation for 2012 is that we will have sufficient revenue to offset the reduction in R&D reimbursement compared to 2011 and that the net expense related to Dynamics for us will be similar to 2011. We do not expect that Dynamics will generate meaningful revenues before 2013.

Our 2012 annual guidance is as follows.

We currently expect 2012 revenues to be in the range of $350 million to $356 million.

We forecast 2012 diluted EPS to be approximately $0.94 to $1.01. Fully diluted shares for the year are expected to be approximately 32.5 million to 33 million.

Over the year, estimated pretax expense related to stock options and the employee stock purchase plan is expected to be $7.4 million, or approximately $0.18 per diluted share after taxes.

We estimate an effective tax rate for 2012 of approximately 38.5%. We expect our total capital expenditures will be approximately $15 million to $16 million for the year and total depreciation and amortization will be between approximately $11.2 million and $11.7 million.

Our board of directors has approved our plans to build a new office facility for our Courts and Justice division and corporate staff on the land we purchased in Plano, Texas early last year. We expect that the total cost of the construction will be $16.7 million, of which approximately $9 million will be spent in 2012.

Now, we'll take your questions.

We'll now begin the question-and-answer session. (Operator Instructions)

Nathan Schneiderman, Roth Capital.

Thanks in advance for taking my questions. I was just hoping to get some clarification. On the backlog and bookings, what would growth rates have looked like without the Maryland courts contribution there?

The Maryland contract in backlog added a little -- there's a little less than $30 million related to that contract in the backlog number at year-end, so it's about a little less than 10% of the total backlog.

The contract amount is about $45 million. It includes a multi-year maintenance agreement, which is technically renewable after each year so -- even though the full maintenance agreement is in the contract. So we've not included all the maintenance in the backlog number, so it's about 10% of the backlog.

I would say it's something less than -- probably something less than 2% of revenues in the year.

Right. I guess maybe if you could just comment, it looks like without the Maryland courts deal, the bookings would have been down year over year. Is that the right way to look at it? Or just how do you think the way the business transpired during the quarter, apart from this particular large deal?

Well, the deal did happen.

Right, I mean it's great, but I was just curious about the rest of your business and --

Yes, but I appreciate -- it obviously is a very substantial deal, but obviously at any point in time if you take the biggest deal of a quarter or a year out, it changes things. So it's a significant deal, but it did happen.

I guess my observation would be this. We did have two very big deals in the year, Maryland and Oregon, and we actually had pretty good-sized deals in our other areas. $8 million deal in ERP is a significant deal.

So we're happy that we're getting some traction in kind of the tier-one decisions, which has been an objective of ours for some time, and we're starting to see that more regularly.

And in the case of courts, I think we're a leader in that particular tier, so that's encouraging.

But I think if the question is what does the broader market look like, it's improved. We've been cautious about that. It started probably in the summer, late in the second quarter, and continued through the second half of the year.

So bookings and awards in the second half of the year were strong. I would not attribute that to an awful lot of new business entering the marketplace. We do track this pretty closely, and the new business rate, so people initiating decision processes, is somewhat consistent with where it's been the last three years in the environment we've been operating in.

What we have seen is as that pipe has become heavier and heavier, and we've talked about this on each call and talked about processes becoming longer. They've added due diligence steps, they've added ROI steps and just been very cautious in this environment that some of those processes have finally reached the end, albeit along the process, and are making decisions.

Also, I think there is some pent-up demand, that there was some reluctancy to replace older systems that they knew were near end of life when at the same time they may have been eliminating heads and doing things that are politically less popular. And now we're at a point where these are really deferred investments that have to be addressed.

So we're seeing a modest recovery is our view. We're seeing the market behave a little more normally, certainly at lower levels than previous to this environment, but we're encouraged by that. We're also encouraged that during this time -- and in a way, this has worked in our favor, a number of competitors, I think, have reduced their investment in R&D and have weakened their position competitively, and Tyler has continued to invest at high levels across the board in our products.

And really across the board, I think our products -- I think we know from the results we follow -- that our products have improved competitively and our market share really virtually in all of our more significant products have improved.

So we're encouraged by that. We hope the market behaves, and we believe it's going to behave a little more normally, not a real robust market, but enough of a market that behaves normally enough that with this improved competitive position, we feel good about our new business recovering and feel that the licenses that have declined the last two years have hit a bottom. And you saw recovery in the fourth quarter and our outlook for 2012 includes higher levels of new customer-type revenues reflected in licensing and professional services.

Thank very much for that answer. Could I -- just one real quick one on Microsoft, and then I'll drop off.

It seems like your expectations are very, very modest for revenue contribution for 2012. I was just curious about just why do you think it's going to be at such a low level given the product's already been out for a while? And is it happening at a slower pace than you originally thought? And if so, what are the dynamics that are causing that? Thanks so much.

It really isn't. I think people have felt we've been conservative or cautious on our guidance on this, and I need to reinforce that we've been telling the marketplace all along what we really believe will happen, and I do believe it's playing out consistently with that.

Obviously, Microsoft has a huge presence around the world in software and is a powerful player, and a lot of those things are what attracted us to this relationship, but the reality of this market remains, and that is that there are long decision processes that really can't be avoided.

So with the release of a product in August or September and at least six month sales cycles, very often nine, 12, 15-month sales cycles, it's going to take some time before you see significant business happening on a regular basis. So that has always been our expectation. It's always been our message, and that is, in fact, what's happening.

Now, I'm sure there were some people that maybe think things would happen more quickly, and certainly we'd be happy to see deals come in through a different decision process, and I'm sure there will be some of that, but I don't think it will be that significant.

So, consequently, certainly in the early quarters of this year, we've put light revenues in there, and we really believe that's what's appropriate. Maybe we get surprised on the up side, and maybe even it's a little bit below that. It's not that significant in the overall plan, so I think overall it doesn't have a major effect on the current year.

I will say we're not going to get into naming all their clients and numbers. That's their business, their channel, and other than what they comment on publicly, we probably shouldn't do that, but I know people are anxious to know what the reception is, and the presentations, the demonstrations go well. The product shows well. It's deep. It has the functionality. It's passing the test, and we expect it to do well competitively.

And there is business. There certainly are a number of new names that are signing up through their channel, and again, I don't think I should get more specific other than when they do, but certainly, this is not a zero. There are a number of new accounts signing up that are entering the implementation process, and they're across a number of different countries.

So that is consistent with our expectation. It's not a lot of dollars, but it's certainly encouraging that it's being well received by the marketplace. We're starting to see new business and would expect that to build as we get toward the later part of the year.

Tim Quillin, Stephens.

Nice quarter. In terms of your expectations for a relatively back-end-loaded year, at least in terms of EPS, can you talk about the rationale for that?

Part of it --

Go ahead, Brian.

Well, part of it has to do on the EPS side with the R&D expenditure and the timing of the reimbursement from Microsoft, so this year, we have about $1 million left in reimbursement, and we expect all that to come in the third quarter, so that's part of the reason.

We do expect the revenues to grow throughout the year, and to the extent that we do have Microsoft Dynamics revenues built into the plan, we'd expect those to be back-end loaded, as well.

Some of it has to do with the timing of the ramp-up of some of the new contracts, like the large Courts and Justice contracts, the timing of things that are in our backlog, expected continued improvement of the market, and some of the expense items, like the R&D.

And, Brian, is it more on the EPS side? Or is the revenue going to have this same type of back-end loading?

The revenues aren't as dramatically back-end loaded as the earnings side, but we do expect the revenues to be more heavily loaded towards the second half of the year.

Okay. And is the gross R&D expense of about $4.8 million that you saw in 4Q, is that a good run rate to think about throughout 2012, or will it trend a little bit higher than that?

No, I think the resources we have devoted to R&D are going to be -- are pretty much at the level we expect them to be this year. So I'd say in that high $4 million to around $5 million a quarter is an appropriate range for our gross R&D this year.

Okay. And then on the SaaS business, are there any -- you've been able to leverage your investments real well over the course of 2011. Is there any additional headcount or resources you need to develop there in 2012?

There's a couple heads, but it's not a big number. I mean it does grow steadily as that business expands, but certainly there's a lot of leverage in that model. So there are maybe two or three heads in the year in the facility.

Okay, great. And then, finally -- and, Brian, you alluded to this -- but how should we think about the timing of the Oregon and Maryland deals and type -- and sort of the buckets of revenue that we should see, especially in 2012? Thank you.

Well, those deals, as we've said when we announced the contracts, they're multi-year implementations. They run five to six years. They're percentage-of-completion accounting, so the licenses are recognized as the professional services are provided.

Oregon started activity in the second half of 2011 and will be ramping up through 2012. Maryland is really now just getting started.

And they're not all incremental revenues, so they're replacing -- to some extent, they're replacing other projects that are finishing up, other Odyssey implementations in large counties and other states that we've had going.

So while we expect Courts and Justice revenues to grow this year, it's somewhat in line with our overall growth. So we think it will be a steady ramp-up but not a dramatic increase in the level that we're at now.

Got it. Thank you.

Jonathan Ho, William Blair.

The first question for me is on sort of your thoughts around software license revenue growth for 2012. I know that it picked up in the fourth quarter and signs seem to be improving, but what is your outlook at this point just given the change in mix?

I think what we saw in the first quarter is sustainable, that that level is probably a better baseline now than the lower level we've experienced the last couple of years, and marginal growth from that level would be pretty consistent with the plan.

Got it. And then can you talk a little bit about the competitive environment and potentially your win rate? You've talked a little bit about the investments that you guys have made and potentially some improvements there, but just want to get a sense of what you're seeing on a relative win rate position.

Yes, we're careful about how granular we get publicly on that because we do invest a lot in sales ops and understanding that marketplace and don't need to do that work for our competitors.

But there isn't any question that our experience in the marketplace, certainly the last six months of 2011 and into this year, is measurably better than what it was the previous 18 months, and that would be really across the board.

Courts has had a couple of losses from the period, say, year to two, two-and-a-half years ago. They certainly were a leader but lost a few deals that we would like to have won, and I don't feel we've lost a meaningful deal in the last year or so, and that's reflective of investments we've made in the product and the referenceability of our clients.

The same is true for both of our leading financial systems, the version 10 INCODE system and the MUNIS system, that we've made good investments directed at competitive situations in the marketplace where we thought we could improve and the results support that we've made that move.

So I really look at the last few years as an environment where you simply weren't able to have the level of growth that you might like or that would have been consistent with our historical performance, but we did okay. But the real benefit has been, if our long-term objective is to be a clear leader in this space, that I think we've made more progress toward that recently than maybe is reflected financially.

Excellent. Thank you.

(Operator Instructions)

Raghavan Sarathy, Dougherty and Company

Thanks for taking my questions.

My first question is about the guidance. So you are guiding for strong revenue growth for the year, but it appears that there isn't going to be much in the way of margin expansion this year. I understand that Microsoft is going to have some impact on your margin, maybe 60, 70 basis point, but I was wondering if you could help us understand some of the puts and takes impacting the margin expansion this year.

Well, we have a couple of headwinds, and Microsoft, as you mentioned, is one of those. So with the reimbursement going away, roughly $2.5 million less reimbursement in 2012 than we had in 2011, effectively we have the Microsoft revenues in the plan or some amount of those in the plan with effectively no margin because we're starting with the increased costs on them.

So it's probably maybe a little bit north of what you said, so maybe close to somewhere between 75 and 100 basis points, maybe closer to 100 basis points of margin that we sort of start out with the headwind on.

There's also a fairly significant expected decline in our appraisal services margin. We expect the revenues to be relatively flattish on our appraisal services business, but the mix of the projects is changing a bit. We've enjoyed rather high margins in the last couple of years on the appraisal services, kind of above our historic levels. I think our margin in 2011 on appraisal services was over 37%. We expect that the 2012 revenues will be at our more normal levels for that business of the low 30s, more in that 31%-ish, 32% range. So that might be a 40, 50-basis-point on the blended margin hit for us.

And then with the revenues from the Windsor acquisition, a little bit of pressure there because of the -- at least on the operating side, it's generating nice cash flow, but we do have on a GAAP basis the depreciation and amortization or the amortization related to the acquisition intangibles, and so that puts a little bit of pressure on margins, as well.

So those are a bit of the headwinds, and again, depending on if you look at where we fall -- if we fall at the low end of the revenue range but the high end of the EPS range, then you obviously get a better margin, but if we're at the other sides of those, there's a little bit more difficulty in getting the kind of normal growth there.

Okay. And then I noticed that services revenue declined sequentially. Is there a particular reason for it or simply lag in license revenue and it should pick up when you'll be working on the two larger deals this year?

Well, it lagged a little bit behind license revenues, and certainly, we saw the decline come a little bit after that.

The other thing on the services side in the fourth quarter, I think last year we saw a decline from Q3 to Q4, as well. It's relatively modest. It went down about $400,000 this year. Last year, the services decline was around $700,000. And most of that from Q3 to Q4 is seasonal related to the holidays between Thanksgiving and Christmas to the end of the year. There's a little less billable time because of our people, as well as clients taking time off for the holidays.

Okay, just two final questions. How does the pipeline look for the Court and Justice? You did close two large statewide deals last year, though it wasn't surprise.

Can you talk about the pipeline for Courts and Justice?

And then one for Brian. How much license revenue do you expect to recognize on backlog? Thank you.

The pipeline is healthy. It's fine. There aren't going to be -- we don't set an expectation that there will be a lot of Maryland, but there certainly are some statewide deals out there.

It will be hard to predict the timing of those, but there are other processes for states to look at statewide implementations, and there certainly are a number of new business opportunities with significant counties.

There's also an opportunity with our broader base of products, including e-filing. We continue to sell add-on products into our growing base.

So we're comfortable that they'll continue to bring in new business as they work through the backlog.

And in terms of the timing of the backlog, we don't break out the licenses and services, but combined of the year-end backlog, we expect about $81 million of licenses and services that are currently at year-end backlog to be recognized in 2012 revenues, but we don't split that out between licenses and service component.

Okay, thank you.

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, Lori, and thank all of you for joining us on our earnings call today. If there are any further question, please feel free to call Brian or me. Have a great day.