泰勒科技 (TYL) 2012 Q2 法說會逐字稿

Hello, and welcome to today's Tyler Technologies Second Quarter 2012 Conference Call. Your host for today's call is John Marr, President and CEO of Tyler Technologies.

At this time, all participants are in listen-only mode. Later, we will conduct an question and answer session and instructions will follow at that time.

As a reminder, this conference is being recorded today, July 26, 2012. I would like to turn the call over to Mr. Marr. Please go ahead.

Thank you. Welcome to our second quarter 2012 earning call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I would like for Brian to give the Safe Harbor statement. Then I will have some preliminary comments. Then Brian will review the details of our operating results. Then I will have some final comments. Then we will 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 and 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. Also, please note that all growth comparisons we make on this call today will relate to the corresponding period of last year unless we specify otherwise. John?

Thank you. Our second quarter financial results build upon our solid performance over the last five quarters. As this was the sixth consecutive quarter of year-over-year revenue growth. We continue to see exceptionally strong growth in our recurring revenues from subscriptions and maintenance, which together grew over 24% and represent approximately 58% of our total revenues for the quarter.

Our return to growth levels more aligned with our historical experience. It was attributable to a modestly improved market. However, improvement across the board in our competitive position from continued investments in our products throughout the downturn is the primary cause.

We had another very good quarter for bookings. We signed a contract valued at more than $8 million with the city of Charlotte, North Carolina. Charlotte is the 17th largest city in the country by population and will be the largest city to implement the Tyler ERP system to date.

This was a win with a highly competitive process, including major tier one ERP vendors. And we believe it speaks to Tyler's strong market position. We also signed a contract with the city of [Tallep], Wyoming, which represents our first Munis client in that state. Other significant contracts in Munis ERP solutions announced during the quarter include St. Lawrence County, New York; the city of Alexandria, Virginia; and the Alexandria City Public Schools; the city of Des Moines, the capital of Iowa; and the city of Miramar, Florida.

We also announced the agreements for our in code municipal court case management solution with Oregon's second largest city, Eugene, and Plano, Texas, Texas's ninth largest city and their nation's fourth fastest growing city since 2010.

Jackson, Mississippi, the state's capital and largest city also signed a contract for our municipal court software during the quarter. We signed contracts with Scarsdale, New York, and Santa Fe, New Mexico to provide real property appraisals from municipal wide revaluations.

Finally, we are pleased to report that we have signed two. We assigned our first two direct sales of Microsoft Dynamics AX. The Truckee Meadows Water Authority, which provides water for Reno and Washoe, County Nevada has purchased Dynamics AX Financials along with Tyler deed, and payroll, and Human Resource applications, and other expenses.

In addition, the global alliance, the TB drug development, and non-profit organizations dedicated to discovering and developing improved TB treatment has selected Tyler to provide Dynamics AX financials in a cloud environment. The TB Alliance is based in New York and has international operations. While these are not large contracts, their signings represent an important milestone in a Microsoft Dynamics business.

Another important milestone we achieved during the second quarter was our first Odyssey court case management go live in Oregon. [Yamal] County successfully piloted our solution and went live in early June, less than one year after we signed a contract for the statewide implementation of Odyssey in Oregon's 36 counties. This successful effort is the result of the proven repeatable and highly reliable implementation process that Tyler has honed during six statewide Odyssey deployments in the installation of more than 400 counties nationwide.

As we discussed in our last call, we completed the acquisition of computer software associates at the beginning of the second quarter. CSA, founded in 1982 and based in Billings, Montana, is a retailer of Tyler's infinite visions school enterprise solutions in the Northwest.

In addition, CSA has a robust line of proprietary software for county governments, including solutions to land and vital records in indexing for county recorders. And taxations solutions for county treasurers. CSA had approximately $8 million in total revenue in 2011, and has more than 200 installations in ten states.

The CSA transaction complements two other recent Tyler acquisitions, Windsor Management Group, and UniFund. To date, we are extremely pleased with the performance of these acquisitions and have been impressed with the qualify of the infinite visions products and the strength of the employees that joined Tyler from these organizations' strengths.

Now I would for Brian to provide more details on the results for the quarter.

Yesterday, Tyler Technologies reported its results for the second quarter ended June 30, 2012. You have seen the press release and the 10-Q has been filed. I am going to provide some additional data on a quarter's performance. Then turn the call back to John for his final comments on the current quarter and our outlook for the remainder of 2012.

Revenues were $91.4 million and the new quarterly high up 19.1%. Organic revenue growth was 11.9% led by increases in our recurring revenues from maintenance and subscriptions. As well as growth in our software services revenue. Our acquisitions of Windsor, UniFund, and CSA accounted for revenues of $5.5 million or 7.2 percentage points of growth.

Subscriptions continue to be our fastest growing revenue line. Grew 45%; organic growth was 41.1%. The impact of acquisitions was 3.9%. We added 24 new subscription based arrangements and converted 17 existing installed clients during the quarter compared to a total of 13 new arrangements and ten conversation in the second quarter of 2011.

Approximately 33% of our new software customers opted for one of cloud based solutions while 67% purchased the deployed solution with an associated perpetual software license. The subscriptions line also includes a growing revenue stream from a transaction based revenues such as e-filing for courts and online payments. These revenues total $2.3 million up from $1.5 million for the same period last year.

Software services revenues increased 20.8% with 13.3% organic and 7.5% from acquisitions. Organic growth was primarily driven by the ramp-up of work associated with the implementation of contracts signed in recent quarters, including the Oregon and Maryland court contract. Maintenance revenue growth was 20% of which 10.4% was organic.

Our maintenance revenue growth rate continues to be reduced somewhat by the effect of existing installed clients 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 subscriptions and maintenance comprised approximately 58% of our total revenues and grew 24.3%. Appraisal services revenues decreased 3.6% primarily due to the completion of a major revaluation project in Allegheny County, Pennsylvania. We are in the start up stages of several smaller new projects, including several in Ohio. Other revenues included a $129,000.00 of royalties on sales of Microsoft Dynamics AX 2012 by other Microsoft partners in the first quarter. Our blended gross margin for the quarter was flat at 44.5%.

Gross margin for our software licenses increased 320 basis points, mainly due to a revenue mix with less third party software. The blended software services, maintenance, and subscriptions margin increased 80 basis points, reflecting the leverage in the incremental recurring revenues. We also experienced pressure on services, maintenance, and subscription margins from increases in our implementation and development staff to accommodate current backlog in anticipated growth.

Excluding staff added through the CSA acquisition, we added 43 people in the second quarter with additional staffing increases planned for the second half of the year. These margin increases were offset by an expected decline in our appraisal services margin from 38.2% last year to 32.8% this year. Reflecting the lower level of appraisal services revenue combined with a shift towards projects that are generally at normal margins compared to the higher margins we achieved on certain larger projects in the last two years.

SG&A expense was 23.7% of total revenues representing a decrease of 40 basis point from the same period last year. For the second half of the year, we expect the SG&A expense will be approximately 24% of revenues. Non-cash stock compensation expense was $1.8 million compared to $1.5 million compared to $1.5 million; $257,000.00 was included in cost of revenues; and $1.5 million was included in SG&A expense.

Net research and development expense increased 7.4% to $5.4 million. We did not have any R&D expense reimbursement recognized at our agreement with Microsoft in the second quarters of either of 2012 or 2011. We currently expect to report the final R&D reimbursement offsets of approximately $1 million in the third quarter of 2012.

Net income was $7.1 million or $0.22 per diluted share compared to $5.6 million or $0.17 per diluted share. The fully diluted share count declined by approximately 1.1 million shares as a result of our stock repurchases in 2011. Our effective tax rate was 39.2%.

Free cash flow was negative $12.9 million compared to $1.2 million in last year's second quarter. Excluding real estate CapEx, our free cash flow was negative $11 million versus $1.2 million. The decline in free cash flow is primarily attributable to the timing of collections. And to a lesser extent, to the increase in the number of new subscription contracts, which generally have lower up front payments than comparable traditional license arrangements.

To date, in July our cash collections have been more than $10 million ahead of collections for the same period last year. So, at this point the timing appears to be catching up. Day sales outstanding in accounts receivable is 99 days at June 30, 2012. An improvement of seven days compared to 106 days at June 30, 2011.

Our maintenance billing cycle typically peaks at its highest level in June and second highest level in December of each year. Followed by higher cash collections in the subsequent quarter. As a result, DSOs are seasonally higher at the end of second and fourth quarters. Our backlog at the end of quarter was $360 million, up 21.6%. Backlog related to our software business, which excludes backlog from appraisal services contracts with $328 million in the current quarter, a 20.5% increase.

Appraisal services backlog was $32 million compared to $24 million for this time last year. Backlog included approximately $114 million of maintenance compared to about $104 million a year ago. Subscription backlog was $73 million compared to $50 million a year ago. Our bookings for the quarter, which are calculated from the change in backlog plus revenues were up 7%.

Excluding acquired backlog, bookings were up 3%. For the 12 months ended June 30th, bookings were up approximately 19% over the prior 12 month period. Excluding acquired backlog, bookings rose 16% in the last 12 months. We signed 19 new contracts that included software licenses greater than $100,000.00.

Those contracts had an average license of $306,000.00 compared to ten new contracts with an average license value of $640,000.00 in the second quarter of 2011. It should be noted that [signings] in the second quarter of last year included the $31 million Oregon courts contract.

During the quarter, we completed the acquisition of Computer Software Associates for a cash purchase price of $9.4 million net of cash acquired of $437,000.00. Our total head count grew by 127 to 2,239 employees at the end of the second quarter compared to 2,112 at the end of the first quarter. The quarter end head counts includes 84 people added with the CSA acquisition. With that I would like to turn the call back over to John for his comments.

Thanks, Brian. Our results for the quarter reflect a continued gradual improvement in the marketplace and the stability and steady growth in our recurring revenues. After two years of limited growth, and strong expense management, we are making the necessary investments. Largely additions to professional services areas that do temporarily delay margin expansion. From our experience, we have characterized the market as having somewhat recovered from the weaknesses that we have seen prior to 2009 levels.

We are pleased with the improved market share we have achieved. This is a reflection of improved collaboration between our sales and marketing people working with developers to identify and address on timely basis, the changing needs of our customers and prospects. Our backlog grew - the backlog grew year-over-year for the ninth straight quarter. With the rollout of dynamics -- Microsoft Dynamics progresses -- both Tyler, and other Microsoft partners are now actively selling Microsoft Dynamics AX, and are starting to build a pipeline.

We have very little visibility into the pipeline from the Microsoft Partner Channel. In most of the early opportunities that Tyler is pursuing with, Dynamic Solutions has not yet reached the point of selection. Most of the sales by Microsoft Partners in the first two quarters have been upgrades from other Microsoft products, which do not carry a license royalty but do earn maintenance royalties for Tyler.

Given the length of the typical sales cycle, it is not surprising that we have not seen a lot of sales in the first half of the year. In Q2 we received royalties of about $129,000.00 related to sales of dynamics by other Microsoft Partners in Q1. This includes sales in five countries and a mixture of new and upgrade customers. As we have consistently said in the past, we do not expect the Dynamics will generate meaningful revenues before 2013. We will not likely be profitable before 2014.

Our 2012 annual guidance is generally unchanged from the last quarter. 2012 guidance is we currently expect revenues in the range of $360 to $366 million. We expect 2012 diluted earnings per share to be approximately $0.95 to $1.02 with fully diluted shares to the year are expected to be $32.5 to $33 million. For the year, estimated pre-tax expense related to stock options in the employee stock purchase plan is expected to be $7.4 million for approximately $0.18 per diluted share after taxes.

We estimate an effective tax rate for 2012 of approximately 39.2%. We expect our total capital expenditures will be approximately $16.5 to $17.5 million for the year. Total depreciation and the amortization will be between $13.2 and $13.7 million. Capital expenditures for the year include approximately $9 million related to the real estate and office facility under construction. Now we will take your questions.

(Operator Instructions). Your first question comes from Tim Quillin at Stevens, Inc.

Hey, good morning. I don't think anybody really expected their royalty revenue to be meaningful at this point. You had said earlier in the year that you had hoped that it would be equal to the drop off in R&D reimbursements or offset that. I just wanted to kind of verify what that means exactly. Does it mean that the, I think reimbursements last year with $3.5 million and this year will be something like a million? Does that mean that $2.5 million difference is the revenue that you hope to have? Or is it a little more complex than that?

(Inaudible), that is generally --

That is pretty much -

- What we had in our plan. But again, as we have said, we really don't have much visibility on what comes through their channel. I know it's active, but as we know in this business it takes a long time to actually occur. What we recognize in one quarter actually reflects what they did in the previous quarter. What we booked in Q2 with their Q1 result.

But that is what we put in the plan and we have previously communicated. We're probably going to need more activity in the second half than we would have expected. I would say the first half is a little lighter than what we had expected. But again, it is a bit of plug. Because there really is not a lot of visibility there.

Right.

Similar, we were talking about that. We were talking about revenue both from the royalty stream and from our direct sales. This quarter, the $129,000.00 reflected the royalty. There was about another, a little less than $400,000.00 of revenues from our direct sales of Dynamics.

Right, Okay. Then on cash flows, Brian. Generally about cash from operations is one and a half to two times net income on an annual basis. Is that still the goal this year? Or is there something changing about the cash flow dynamic?

No, I think that is still the same for year. I think for the last five years, we have averaged about one and a half times. I think our expectation is still the same. There has been a -- I think this quarter there was a little -- the timing just seems to have been a little bit less received in Q2.

Q3 is as we said, is off to a strong start that basically offsets the shortfall in Q2. I think there was a little bit of an effect from the ongoing shift towards a little bit more subscriptions. That was a little bit more pronounced this quarter. But for the full year I think our expectation is for that relationship to be similar.

Okay. Just lastly on; you've won a couple of large ERP deals this year in Charlotte and the [Pascoe] County schools. I am just wondering what? If you feel, I guess, a, what your win rates are on larger deals on the ERP? If you feel like your win rate is starting to increase on larger size opportunities (inaudible).

Well, the sampling on view of both sizes are probably small enough that it's hard to get meaningful market intelligence out of it. We do know on broader samples that our competitive position in those products has improved pretty significantly over the last two years. We are pleased with that. Our people have worked very closely. We know there is a smaller marketplace out there. It is very competitive. That we need to respond to everything we see in the marketplace and our customer base to improve our competitive position.

Our people have done a very good job of doing that. We have seen those results. But again, percentages on deals besides the Charlotte, [Pascoe], could be misleading because there just isn't enough. Just as you observed winning those two deals is significant. Charlotte would be the largest city that has purchased this. It is an arms length deal, no pre - no (inaudible) existing relationships. An arms length deal against the primary tier one players.

We, I think won a pretty solid victory there. We feel good about that and we certainly hope that will position us even better in those size opportunities going forward. There are other active opportunities in that size range. We are, I think we are playing well in those situations.

Thank you.

Our next question comes from Charlie Strauzer at CJS Securities.

John and Brian, good morning. My two questions; one, can you give us a quick update if you could on California and kind of what is going on with the court systems there? Then also, a sense of the backlog, both timing and mix. If you can give us a little more color on that, too. Thanks.

Yes, sure, Charlie. As we have said before, and many of you are aware of, the California courts marketplace has changed pretty significantly this year. There was a statewide field going on. The intention was to build a system for California that the counties would adopt. That project has been shelved. So many other counties have pretty old systems. Certainly in need of new systems and had been anticipating this new system that no longer will be built. It is active.

I don't know exactly how many I would want to say. But certainly there are a handful that are moving relatively quickly to try to buy a new system. There is at least one [RRP] in the few months that have passed. It has already hit the street and is due relatively soon. Again, there are several other counties that are in that process. We would expect to receive [RRPs] from them in the coming month or two really.

It is an active marketplace. Obviously we know it is a very big state. When you add that to the country it changes the landscape significantly. I think we are pleased that we are seen as a leader in the state. We did [not] have a presence there because our going national with the [court's] offering has been really coincidental with that build.

There have not been any decisions there during our roll out of Odyssey. But I think they recognize what was done in these other statewide implementations that have been successful. Obviously, going live with the site in Oregon that quickly demonstrates our ability to execute; which is going to be an important part of the decision process.

It is active. There's opportunities. We're excited about it. But we will see how it goes from here. It's certainly a good opportunity.

Range of site that you can give us a little more color on the backlog and in terms of timing.

Yes, I am pleased with backlog's growth this quarter. That reaches at an all time high. There isn't an Oregon or a Maryland in there. It is really made up of a lot of wins across the divisions for not outside deals. Backlog has grown nicely. I used to say we didn't pay a lot of attention to it. Didn't encourage people to overanalyze it.

I think as we have the shift that we're seeing from traditional licenses to SaaS arrangements as things get carved out of licenses. Or, for [DSOE] and accounting purposes. It probably is a pretty good indicator of market activity. Our sales and booking certainly appear somewhat stronger than what would be indicated by looking at the financial statement. I think backlog is encouraging at this point.

On the timing of the backlog, it is marginally lengthening. I think a year ago 70% of our backlog was expected to be recognized in the next 12 months. At the end of last year it was more like 65%. I think as subscription backlog, which is multiyear in some of the larger contracts that are multiyear continue to be a bigger piece of the growth there at length than modestly. A little bit longer term visibility there.

Roughly what percentage of the backlog would you say is SaaS right now?

The SaaS backlog or the subscription backlog at the end of the quarter was $73 million out of $360 million. That grew 45% over last year's second quarter.

Great, thank you very much.

The next question comes from Nathan Schneiderman at Roth Capital.

Hi, John and Brian. Thanks in advance for taking my questions. John I wanted to start with the question for you. You spoke a modest improvement in the environment. I was just curious if you could detail what particular data you are seeing that makes you say that?

Yes, we track the number of RFPs and the value of them. Everything you would expect us to track. We do have to normalize it because over time, we were not in certain markets or geographies where we are now. An increase doesn't necessarily mean the market is stronger. We try to normalize it for our teams in terms of footprint over that period of time.

Based on what we track, we feel that the market probably contracted around 30% from where it was in 2007 or '08, which would have been the peak. That it probably has recovered somewhere right around the middle of that in the last year or so. I don't think that means local governments are necessarily spending more freely. But as we indicated, as things grew older and older in the pipeline, those decision processes are happening.

The RFPs are coming back a little bit and decisions are happening a little bit more normally, but certainly not recovered all the way back. And so I think the [increase] -- are back to better growth levels is probably more attributable to the improvement in the competitive position.

Is the - when you - to followup there. When you look at RFPs, what percent would you say they are up year-over-year? If the sales cycle has improved, by what magnitude?

I think they are probably up 10% or 15% year-over-year. I think the sales process has improved because I think people -- Deals that were in the pipeline and RFPs coming out now reflect opportunities where there really is an essential need that has to be addressed. There is a little more pressure on them to execute on the process more normally.

The question on the Microsoft relationship and Outlook. I gather from your comments that you're not expecting the Microsoft business to generate operating profit in 2013. My sense is maybe that's a change in view. Can you just clarify that? If there has been a change in view, what's driving that? What in general are you thinking about revenue expectations for that product line, maybe third party and direct in 2013 just broadbrush?

That is pretty hard to nail down, Nathan. I don't know that there is a change in view. I think our view is probably pretty broad. It falls somewhere in it. We have sold software for a long time and rolled out products. It takes a long time. I think that is why you see us do one or two of these kind of investments that are catalyst of growth in earnings down the road. Only one or two at a time because we know the process is very long.

I think it's kind of interesting right now that probably the most exciting opportunity. The most significant place of growth in Tyler is around our Odyssey product. As many of you know, we have been in the Odyssey world for ten years. It is a good contributor. We're certainly very pleased with the investment we made there. But it takes a long time as that indicates; even when successful to build a successful business around it.

I think as we've been saying for some time, yes, the product got released in the second half of last year. That is exciting, but it still takes some time to build a profitable and successful company around it. I think that will take two or three years as we were indicating here to become profitable.

Obviously, once you become profitable incremental revenue and beyond that will be very high margin. As in this case, it's royalty based and the costs are relatively fixed. I don't think it's changed an awful lot. There isn't a lot of visibility around it. But it's indicative of the time it takes to establish a good presence in the market and build a business around it.

Okay, thank you.

Sure.

The next question comes from Jonathan Ho at William Blair. One moment please.

Can you hear me?

Yes.

Yes, just a quick question around sort of the SaaS's option trends. It looks like a pretty big pick up again this quarter. Has your view changed is all relative to sort of that overall trend? Perhaps, maybe what the end will look like in terms of SaaS versus license.

I think that's a fair observation. I think our forecast suggests that it will continue. We were in the 30% range. That is up a bit meaningfully from where we've been in the last few years. Again, the forecast is somewhat consistent with that for the next couple of quarters. It could be a lasting trend.

We'll have to see. It is also a little bit reflective though of -- our SaaS offering is much broader now. Initially it was just newness and it continued to spread to some other applications. But it's virtually all of our enterprise applications now. That obviously makes a difference as well.

When you look at it in terms of adoption, will you look at both the number of new customers, which is what we said this quarter. About a third of the number of new deals were SaaS based. But the dollar value. They tend to be on the smaller side. The dollar value of the new deals in the SaaS model was more in the 20% range, which is fairly consistent with prior quarters; maybe a little bit higher.

Got it, that's helpful. Not to beat the Microsoft topic too much. But I just wanted to understand from your perspective. What are some of the signs that the product is getting traction? Or what are some of the milestones that you look for? Is it third parties that are - that are validating it? What has to kind of take place for the adoption to really pick up here?

Well, obviously, we've got their channels and ours. Their channel as we've said, we don't have a lot of visibility in individual deals. What we can see is that partners start to build businesses around it. Start to move away from products they have marketed before. We look for resellers of their's that have customer bases. That this -- that selected this really to be the follow-on product [until] we'll load into their installed base and so forth.

They have a lot of activity along those lines. But again, so seeing actual revenue which is what we're all anxious for will take some time. But they certainly have partners around the world that aren't new companies to this space. People that have either had a proprietary product or previously resold to Microsoft or another product. That are moving toward dynamics of their product for their customer base and their marketplace. Obviously, as they roll that out and get traction in the customer base, those can be significant opportunities.

We see that kind of activity which certainly continue to make us comfortable. But this will be significant down the road. But we continue to be cautious about the timing of that. In our own channel, obviously we can see the forecast. We are certainly active in a number of different deals. A few of them relatively significant. Obviously, we're looking for those decision processes to progress. But these are at the earliest, RFPs that were written last fall, last winter. Our typical sales process is a year or so, it can be longer.

We -- while we've won a couple of deals that as you can see a little different than a typical city or county. Not for profits or (inaudible) that might have a little different process; the typical deals that we pursue are still in process. And haven't yet reached a decision. But we are tracking a number of those that we would expect to make decisions in the second half of the year.

Got it, and just one final follow-up around sort of the maintenance revenue. Are you guys kind of looking at maintenance price increases similar to what you've shown in the past? Or is it the stone environment where maybe you had to seek maintenance increases a little bit lighter than normal?

It might be a little bit lighter. But, literally instead of a four or five, it's a three or four. It's not a situation where we have to not have an increase. Or have it be significantly lower. But they could be modestly lower. It's not across the board. If you look at individual clients. In some cases, cities have grown. Their use of the system is different. It's significantly greater value in what they're getting from us and the increase is totally justified. And the value proposition can reinforce with the customer.

In other cases, that may not have been the case. If they've been getting an increase for many years from an initial purchase, then it may not be as warranted. So, in some cases it's the side by side situation. But again, there is a strong value proposition. We have our -- an (Evergreen) strategy where the systems are improved significantly. These investments we're talking about for the new business market obviously are rolled out to the installed customer base within their maintenance agreement.

We have a very strong argument in terms of the value proposition. Customers have had a very long lived returns on these investments. I think increases will be supportable going forward. But we certainly wanted to add the value to the client. In the case where, if it were to get ahead of itself, then we'd certainly provide that release to the client.

Great, thank you.

Our next question comes from Mark Schappel at Benchmark.

Hi, good morning. John, I was wondering if you would just give us an idea of your plans for additional head count additions for the balance of the year?

We are -- as we've provided and [adding] some [heads]. A lot of it right now is in professional services. It's communicated at -- put the low pressure on margins depending on the division and the complexity of the products. It could be 90 days or it could be six or eight months depending on those positions in terms of the on boarding and getting them to a point where they're productive in terms of revenue.

But we'll continue to add heads. Mostly in the professional services area at this point and time. I don't have exactly what the number would be. But I would guess that it's probably similar to the first half; 40 or 50 organic heads for the second half of the year.

Okay, thanks, and then with respect to the large deal with the city of Charlotte. Is it fair to assume that that's a subscription deal?

No, that is not a subscription deal.

It's not. Okay, thank you. That is all for me, thanks.

Sure.

Your next question comes from Raghhavan Sarathy at Dougherty & Company.

Hi, good morning, and thanks for taking my question. Two questions from my end. First in terms of licensed revenue growth. It was down slightly after increasing last couple of quarters. [They only] get only a basis. I was wondering whether you recognize any revenue from the Charlotte deal that you talked about? Then how we should think about a licensed revenue growth. Potentially rebounding the back half of the year.

Charlotte is a percentage of completion accounting deal. There was virtually no revenue recognition in Q2. That will ramp up and be a multi quarter implementation. No, there wasn't anything recognized meaningful in Q2. The expectation is -- again, there is a -- depending on how the mix falls out between subscription and perpetual. But we still believe that we'll finish the year with licensed growth probably above 10% for the year.

There are a lot of variables in determining what the new business level is. You would think that licenses recognized would be high among those. The reality is it's really not. It just bounces all over the place. The timing of it and the volume of it isn't necessarily that reflective of your current business; the mix of business; SaaS versus traditional; the accounting of the deals; POC versus recognizing on deliveries. A number of different variables basically make it such that the license number in the quarter isn't that reflective.

I can tell you because of that what we do is we look at every deal. Whether it's traditional or whether it's SaaS. Whether, POC and all these different things, we try to normalize what that would represent in terms of new license revenue. If it were a straight deal of that type. Based on that, which is the way we track our -- what we're doing in the marketplace.

The first half of this year was very strong here. It was up significantly from the first half of last year. How it falls through and when it falls through the financial statement is a different issue. But we're pleased with the modest recovery in the marketplace. Again, our performance within that market in the first half.

So I guess, if I could follow-up. But is it safe to say that your possibility assumptions is based about 10% license, (inaudible)?

Yes.

Okay, then in terms of -- I think. I think, John, probably you made that comment about software services margin being pressured by increased headcount. At the second quarter margin reflect the full overhead expenses and the increased hiring. How should we think about that margin in the back half?

Well, it's kind of a rolling. Everybody is not hired on the same day. It all -- don't all become productive on the same day. I would say it doesn't necessarily reflect the full volume. Because we'll continue to hire people that won't be productive for some period of time. But obviously the people we hired three months ago and four months ago will begin to become productive. I think the impact will probably remain somewhat the same through the second half of the year.

Okay, so thank you.

Sure.

(Operator Instructions). Mr. Marr, I'll turn the call back over to you for closing remarks.

Sure, Okay. Well, thank you for joining us on the call today. If there are any further questions, feel free to contact Brian or myself. Have a good day.