泰勒科技 (TYL) 2012 Q4 法說會逐字稿

Hello, everyone, and welcome to today's Tyler Technologies fourth-quarter and year-end 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 a listen-only mode. Later, we will conduct a question-and-answer session; instructions will follow at that time. As a reminder, today's conference is being recorded today, February 7, 2013.

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

Thank you, and welcome to our fourth-quarter 2012 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I would like for Brian to give the safe harbor statement. Next, I will have some preliminary comments, and Brian will review the details of our operating results. Then I will have some final comments, and we will take your questions.

Brian?

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 10K and other SEC filings for more information on those risks.

Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise.

John?

Our fourth-quarter financial results were solid and in-line with our expectations. This was our eighth consecutive quarter of year-over-year revenue growth. We again had double-digit organic growth of nearly 11%, and total growth of over 16%.

We are very pleased with the performance of our recent acquisitions. The Infinite Visions product businesses, which include Windsor, UniFund, and CSA, performed well in 2012, and we have made substantial progress in consolidating those three organizations into Tyler.

Our most recent acquisition, EnerGov, was only included in our results for one month of 2012. But we are very excited about both the product and the people that have joined Tyler from EnerGov. At the end of November, we completed the acquisition of EnerGov Solutions. They are a leading provider of enterprise permitting, land management, licensing, and regulatory software solutions to government agencies. EnerGov was founded in 2002, and is based near Atlanta, Georgia.

This acquisition broadens our portfolio of citizen services software solutions, by complementing our Munis and Incode product suites with industry-leading land-use and community-development solutions. EnerGov was selected in 2009 as the Esri World Partner of the Year, and received the 2012 Esri Mobile App of the Year Award. EnerGov has clients in 31 states, and had approximately $9.5 million in revenue in 2012. The purchase price for EnerGov was approximately $10 million in cash and $2.8 million in Tyler stock.

Our recurring revenues from subscriptions and maintenance continue to be the primary driver of our growth, as together they grew 22%, and represented approximately 61% of total revenues for the quarter. The trend of gradual improvement in our marketplace that we have discussed in recent quarters appears to be continuing. However, we believe that our strong competitive position is the bigger factor in our growth, as we are seeing the results of the increased investments in product development we made during the very challenging new-business environment years of 2010 and 2011.

Some of our notable recent contract signings include the Texas Office of Court Administration selecting our Odyssey File & Serve eFiling offering for text file, a unified statewide electronic filing system for courts that will reduce the cost for filers, while providing a robust platform for the expansion of electronic filings in Texas.

In addition, the State of Oregon has begun implementing our electronic filing solution on a transaction-revenue-based model, as well. Oregon selected our Odyssey Court Case Management System in 2010 for statewide implementation, supporting all state trial courts. Odyssey has already been successfully implemented in Yamhill, Crook, Jefferson and Linn counties. The rollout of Odyssey to Oregon's remaining circuit courts will continue through 2016.

The Superior Court of California, County of San Luis Obispo, signed a contract for our Odyssey system as the single integrated software for managing court information and operations within the San Luis Obispo Superior Court. I will discuss both our e-filing business and the opportunity in California courts in more detail later in the call.

We signed two new clients for Microsoft Dynamics AX through our direct channel during the fourth quarter, including Walker County, Texas, and the Maricopa County Association of Governments in Arizona. I will also have more to say regarding this later in the call.

New clients for our Munis ERP solutions include the City of Naples, Florida; Ellsworth and Mount Desert, Maine. Ellsworth is a tradition, on-premise deployment, and Mount Desert signed a 10-year SaaS agreement. The cities of Santa Barbara and Beverly Hills were both significant contracts in California, where we continue to win a meaningful amount of new business. We also achieved a significant milestone where our Munis system is used by all of the school districts in the State of Kentucky. In the fourth quarter, we completed the conversion of 173 school districts to our hosted solution from an on-premise installation.

In Texas, we signed a contract worth almost $3 million with the City of Dallas, the nation's ninth-largest city, for our Incode Municipal Court Case Management solution. The City of Mesquite, which is also in the Dallas area and is the state's 18th largest city, will also implement our Municipal Court solution.

In Mississippi, Jackson, the state's capital city, selected our Incode local government solution, including criminal court case management and document management applications. And the City of Gulfport, a long-time client, added our public safety solution.

Significant signings for our CLT appraisal services include Cobb County, Georgia, with a five-year, $4.3 million contract for residential appraisal services, and Clermont County, Ohio. Finally, in December, we signed an agreement valued at more than $2 million with Harford County, Maryland for our recently acquired EnerGov planning, permitting, and licensing solution.

Now I would like for Brian to provide more detail on the results of the quarter.

Yesterday, Tyler Technologies reported its preliminary results for the fourth quarter ended December 31, 2012. These results are considered unaudited until our Form 10K is filed, which is expected to be on February 20. I am going to provide some additional data on the quarter's performance, then turn the call back to John for his additional comments on the current quarter and our outlook for 2013.

Beginning with this quarter, we have added additional non-GAAP measures that we believe will facilitate understanding of our results and comparisons with peers in the software industry. Our non-GAAP earnings exclude shared-based compensation expense and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

Revenues for the fourth quarter were $95.4 million, a new quarterly high, and up 16.2%. Organic revenue growth was 10.9%, 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, CSA, and EnerGov accounted for revenues of $4.3 million, or 5.3 percentage points of growth. Software license revenues declined 11.2%, excluding the impact of acquisition, software licenses declined to 18.9%. This is due in part to the mix of contracts, as the current quarter had several contracts with significant service components, which are recognized over a longer period, as well as a greater proportion of the new clients who chose a subscription-based arrangement versus the perpetual license.

Subscriptions continue to be our fastest-growing revenue line, and grew 42.9%. Organic growth was 40.5%, and the impact of acquisitions was 2.4%. We added 29 new subscription-based arrangements, and converted 15 existing installed clients, compared to a total of 9 new arrangements and 12 conversions in the fourth quarter of 2011. Approximately 45% of our new software customers opted for one of our cloud-based solutions, while 55% purchased the deployed solution with an associated perpetual software license.

The subscriptions line also includes a growing revenue stream from transaction-based revenues, such as e-filing for courts and online payments. These revenues rose approximately 50%, to $3 million from $2 million last year. We expect to continue to see solid growth in these revenues, as both current and new customers adopt our Odyssey File & Serve solution, and more of them move towards mandatory e-filing.

Software services revenues increased 22.2%, with 18.7% organic and 3.5% 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 courts contracts. Maintenance revenue growth was 16.9%, of which 10.1% was organic. Together, our recurring revenues from maintenance and subscriptions comprise 61.1% of our total revenues, and grew 21.7%. And finally, appraisal services revenue increased 4%.

Other revenues included $238,000 of royalties on sales of Microsoft Dynamics AX by other Microsoft partners in the third quarter. These royalties are recorded one quarter in arrears, as the royalty reports we receive in a given quarter pertain to activity from the previous quarter. In addition, we had approximately $256,000 of revenues related to Tyler's direct sale of Dynamics, which are included in licenses and services. For the full year, our total royalty revenues were $756,000, and direct revenues were $840,000, for a total of approximately $1.6 million.

Our blended gross margin for the quarter was 46.8%, compared to 47.5%. The blended software services, maintenance and subscriptions margin increased 50 basis points, reflecting our operating leverage and incremental recurring revenues. However, this was offset by declines in software license and appraisal margins.

SG&A expense increased 7.7% in the quarter, and represented 23.9% of total revenues, a decrease of 190 basis points from last year's fourth quarter. Non-cash share compensation expense was $1.9 million, compared to $1.7 million last year. $293,000 was included in the cost of revenues, and $1.6 million was included in SG&A expense.

Net research and development expense more than doubled, to $5.4 million. We did not receive any R&D expense reimbursement under our agreement with Microsoft in the fourth quarter of 2012, versus $2.2 million of reimbursement in the fourth quarter of 2011. We do not expect to receive any further reimbursements under the agreement.

Operating income was $15.4 million, compared to $14.3 million, or an increase of 7.7%. Non-GAAP operating income was $18.9 million, up 9.7% from $17.3 million, and our non-GAAP operating margin was 19.9%. Net income was $9.4 million, or $0.28 per diluted share, compared to $8.7 million, or $0.27 per diluted share. The fully-diluted share count increased by approximately 1.4 million shares. Our effective tax rate was 37.6%. Non-GAAP net income was $11.8 million, or $0.35 per diluted share, compared to $10.8 million, or $0.34 per diluted share in the fourth quarter of 2011.

Adjusted EBITDA, which is EBITDA plus non-cash share-based compensation expense, was $20.3 million, or $0.61 per diluted share, compared to $18.8 million, or $0.59 per diluted share in the fourth quarter of 2011. Free cash flow was $13.7 million, up 52.2%, compared to $9 million last year. Excluding real estate CapEx, our free cash flow was $14.9 million, versus $9 million last year.

For the full year of 2012, our total revenue was $363.3 million, an increase of 17.4%, compared to $309.4 million for 2011. Recurring revenues for the full year grew 21.8%, and comprised 59.6% of total revenue. Net income for the year was $33 million, or $1 per diluted share, compared to $27.6 million, or $0.83 per diluted share for 2011. Non-GAAP net income for the year was $42.4 million, or $1.29 per share, an increase of 20.5% compared to $35.2 million, or $1.06 per diluted share for 2011. Adjusted EBITDA for the year was $76.1 million, compared to $62.9 million in 2011.

Days sales outstanding in accounts receivable was 95 days at December 31, 2012, an improvement of four days, compared to 99 days at December 31, 2011. DSOs increased sequentially from 75 days at September 30, which is a normal seasonal pattern, as maintenance billings and associated receivables spike in June and December quarters.

Our backlog at the end of the quarter reached a new high at $380.6 million, up 12%. Backlog related to our software business, which excludes backlog from appraisal services contracts, was a record $350.6 million, a 9.6% increase. Backlog included $125.5 million of maintenance, compared to $110.3 million a year ago. Subscription backlog was $82.1 million, compared to $66.8 million last year. We currently expect to recognize approximately $42 million of the subscription backlog in 2013.

Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were down 4.1% to $118 million. Bookings for the fourth quarter of 2011 included approximately $29 million from the Odyssey court contract with the State of Maryland. For the 12 months ended December 31, bookings were up approximately 10% over the prior 12-month period. We signed 18 new contracts in the fourth quarter that included software licenses greater than $100,000, and those contracts had an average license of $493,000, compared to 14 new contracts with an average license value of $866,000 in the fourth quarter of 2011. Excluding the State of Maryland contract in last year's fourth quarter, the average license value for Q4 of 2011 was $474,000.

Our total headcount grew by 112 to 2,388 employees at the end of the fourth quarter, compared to 2,276 at the end of the third quarter. The acquisition of EnerGov added 70 new employees.

Now I would like to turn the call back over to John for his further comments.

Thank you, Brian. As you can see, we returned to solid growth in 2012, after two years of a weak new-business environment. And earnings for the year were generally in-line with our expectations. I will detail our guidance for 2013 shortly. But first, I would like to discuss in a little more detail some of our long-term opportunities, and our plans for this year as we prepare to build on those opportunities.

As you will see, we enter 2013 with expectations of another year of double-digit revenue growth. But our range of earnings growth and the implied margins associated with those earnings reflect some cost and margin pressure. On a GAAP basis, share-based compensation expense will increase significantly. While it is added back for non-GAAP income, share-based compensation expense is expected to increase from $7.4 million in 2012 to approximately $10.5 million in 2013. While we are reducing the number of options granted under our regular semi-annual grants, our very strong stock performance over the years has driven up the book expense.

Much of the additional cost in margin pressure is due to the investment we are making in 2013 in advance of opportunities we believe will accelerate revenue and margin growth in 2014 and beyond. While margins will be relatively flat in 2013, it remains reasonable to assume that they will generally expand over time, even if not in a straight line.

One of the most significant of these investments is related to our electronic filing business, known as Odyssey File & Serve. This product allows attorneys to file documents electronically with courts, providing significant efficiencies and cost savings for both the filers and the courts. Most of our new e-filing contracts generate transaction-based recurring revenues, where we provide the solution with little or no upfront cost to the courts, and earn revenues from filing fees. As a result, we generally incur implementation costs associated with the new contracts upfront, and then build the stream of recurring revenues as e-filing volumes build. Generally, we look for the courts to make e-filing mandatory, in order to increase adoption and achieve volumes to generate stronger margins.

As of the end of 2013, we have transaction-based e-filing agreements that are currently generating revenues with only a handful of clients -- three counties in Nevada and Michigan, and the states of Minnesota and New Mexico. As I mentioned earlier, we have recently signed statewide e-filing contracts with the states of Oregon and Texas. In Oregon, we do not currently e-filing revenue, but the courts expect to mandate e-filing in each county approximately six months after they go live on the Odyssey system.

In Texas, there is not a statewide court case management system, but we were awarded the statewide e-filing contract in November. The new text-file system operated by Tyler will replace an outdated existing system, which is expensive for users, and capacity constrained. And e-filing is not currently mandatory anywhere in the state. Very recently, the Texas Supreme Court issued an order mandating e-filing in civil cases, beginning January 1, 2014. Mandatory e-filing will be phased in over a 2.5-year period, beginning with the largest counties in January of 2014.

We will be paid on a per-filing basis. We expect to see very limited revenues from text-file during 2013. But during the coming year, we will invest significantly, in the range of $3 million, as we prepare to implement the system with courts across the state. However, with the recent order mandating e-filing in Texas, we expect that this contract will provide a long-term recurring annual revenue stream of $15 million to $20 million when it becomes fully mandatory.

We are actively pursuing a number of additional e-filing opportunities, both with courts that are currently using Odyssey, and those that are not. With each new e-filing contract, we incur costs ahead of revenues, which can contribute to lumpy margin expansion. We believe that these recurring revenue streams are extremely valuable, and that this part of our business will contribute significantly in the coming years.

Another relatively new opportunity that we have discussed in the last couple of quarters is in the California courts market, which arose out of the termination early last year of a project to build a statewide custom case management system. We are now seeing more activity in that marketplace. As I stated in the opening remarks, we have been awarded the first decision to have signed a contract with the courts in San Luis Obispo County for our Odyssey court case management system. Tyler was also one of the three vendors recently selected in California to enter into a master service agreement, under which courts in the state can purchase systems without going through the RFP process. We are beginning to be engaged with a number of prospects that we expect to purchase the system under the master agreement.

While we continue to believe that the courts in California represent a great opportunity for which we are well-positioned, we view this as a long-term process that will likely play out over a number of years. These processes, especially the larger ones, can be lengthy and complicated, and we currently do not anticipate additional new contracts that will contribute meaningfully to revenues before 2014. We will, however, be investing in development efforts in 2013 related to the California market, as well as costs related to increased selling efforts in the state. Finally, California is not the only state we are competing for courts' business, and we have a very active pipeline for Odyssey across the country.

I also would like to add some color to our Microsoft Dynamics AX business. We started the year with very limited visibility on Dynamics business. Although we had no history on which to base our expectations for the year 2012, we did not expect the revenue contribution for the year to be meaningful. Given the typically long sales cycles in the public sector market, we are not particularly surprised by the slow ramp-up of Dynamics sales.

As you know, there are basically two channels from which we earn revenues related to Dynamics product. First, there is our direct sales channel. As we have previously discussed, our launch customer, the City of Redmond, Washington, went live with the product in July of 2011, and continues to be a strong reference. We announced two Tyler direct deals in the second quarter, and both of those clients are now live. In the fourth quarter, we signed two additional direct deals that I mentioned earlier -- Walker County, Texas and Maricopa County Association of Governments in Arizona. In addition, we had two additional awards that are not yet signed, including one more significant deal that was one of our early Dynamics proposals. We are encouraged by those awards, and have an active pipeline of prospects that we are targeting with Dynamics.

The second channel is from the Microsoft partners. We receive royalties on both licenses and maintenance from Dynamics sales in the public sector worldwide. We have very limited visibility into those partner channels, and record the royalty revenues a quarter in arrears. These revenues have grown slowly in the first four quarters, and royalties for quarter in Q4 from sales in Q3 were actually slightly lower than the prior quarter. The royalties reported in Q4, however, represent sales in 12 different countries, and we are pleased with the geographical diversity of the partner channel, as well as by the run rate of recurring revenues. In addition, a number of sales by Microsoft partners have been upgrades from other Microsoft products, which do not carry an initial license royalty, but will earn maintenance royalties for Tyler.

Since this year-end earnings report is a few weeks later than our normal quarterly earnings, we have already received the royalty report for Q4, which will be recorded in Q1. Those revenues are considerably higher than the last quarter, and represent sales in 22 different countries. While we are encouraged by the increase in activity reflected in the Q4 report, we expect that revenue through the channel may vary from quarter to quarter, until the base grows large enough for steady trends to develop.

We enter 2013 with a strong competitive position, a record backlog of business, and a business environment that appears to be continuing to trend in the right direction. With our growing backlog and positive outlook across the Company, we are adding staff to ensure that we are well-positioned to deliver on the new business levels. Excluding the EnerGov acquisition, we added 79 people in the second half of 2012, and our plans call for a net addition of approximately 200 people in 2013, primarily in development and professional services.

While we carefully manage staffing additions to ensure that they are appropriately timed and in-line with our business, the additions do put pressure on margins in the short term, until these people are fully productive and generating revenues. Our guidance for 2013 reflects those trends, as well as our continued investment in our products and business, that we believe will enhance long-term growth and margin expansion.

2013 guidance is as follows. We currently expect 2013 revenues to be between $409 million and $418 million. We expect 2013 diluted earnings per share to be approximately $1.06 to $1.14, and fully diluted shares for the year are expected to be approximately 34 million to 34.5 million. We expect 2013 non-GAAP diluted earnings per share to be approximately $1.42 to $1.50.

For the year, estimated non-cash, share-based compensation expense is expected to be approximately $10.5 million. We estimate an effective tax rate for 2013 of approximately 40%. We expect our total capital expenditures will be approximately $23 million to $24 million for the year. Capital expenditures for the year include approximately $14.8 million related to real estate and office facility construction. Total depreciation and amortization is expected to be approximately $14.2 million to $14.7 million, including approximately $6.5 million for the amortization of acquired intangibles.

Now we will take your questions.

At this time, we will begin the question-and-answer session.

(Operator instructions)

Nathan Scheiderman, Roth Capital.

Hi John and Brian; thanks for taking my questions. It does sound like the e-filing initiative for courts is becoming pretty exciting. You referenced in your discussion opportunity on the Oregon side with e-filing, but I just want to clarify -- your initial $30 million-plus deal with Oregon, did that anticipate e-filing revenues as part of that $30 million, or would this be an incremental opportunity? And if it is incremental, could you scope it, just in general or relative to the Texas deal?

No, it is not part of the $30 million, and that really raises a point that should be clarified. Since these contracts are not for a license fee or professional services -- it is a click-type thing -- there really are never any base contracts; they do not necessarily guarantee us this, and therefore they are also not in backlog. So as text file, for example, ramps up, even though as the mandatory counties come online, we see that ramping up to whatever, $15 million, $18 million, it will never be in backlog or a part of the base agreement. So no, it was not part of the $30 million. That is a hard one to read, because it is county-by-county, after the counties go live, and I really do not have any parentheses for you on what that volume will be. We will try to get that as that comes forward.

I see --

The volume on that is, I think, about 0.5 million filings a year, and, as John said, that will ramp up over time, so it is more in the $2 million to $3 million annual run rate. It is not nearly the volume that Texas has.

And then can you clarify as well -- did the $45 million Maryland deal include or anticipate e-filing -- or I guess e-filing was not part of that -- do you expect to get e-filing business there? And what would the size of that opportunity be, relative to the Texas deal?

We do expect to have e-filing in Maryland. It is not contracted yet; we are still in discussions. Maryland is still a fair ways away from being live and ready for e-filing. We do expect it will be on a transaction-base, but it is not finalized, so we do not really have terms there. It is, obviously, a much smaller state than Texas, and so the volumes would be significantly smaller.

And then, final question area for me -- just on the courts license revenue, at $1.5 million a year ago, it was $1.9 million, and you have these $75 million of wins with Oregon and Maryland combined. When does that really start to flow into the license fee on the income statement in a meaningful way? Just why is the ramp so slow there? Thank you.

It is really not -- we do not expect that number to explode. Even though the contracts are significant and the growth in the business is significant, sometimes what is in the contract does not run through that revenue line. Anything that is carved out for professional services or any other place -- maintenance -- all comes out of the license fee. And that line does stay, as you have seen, kind of stubbornly flat as the other things grow. Certainly, the strategy we have for the courts division is that, as we benefit from these large contracts -- and certainly they have a significant market opportunity there -- we are much more focused on what the business looks like after we execute those contracts than during it. So the licenses will not be -- will not grow as dramatically as one might think, and, again, as we have to make choices in the structure of contracts and arrangements and negotiations, we will always be more focused on what the customer will look like after that initial limitation. So we will see growth in that line, but it will not be anywhere near the growth you will see in maintenance in the e-filing, and, to a lesser degree, the professional services.

Got it, thank you.

Brian Kinstlinger, Sidoti & Company.

Great. To follow up on that last question, thanks. On the software license -- where are your expectations built into that line item for 2013, based on your guidance, and if it assumes any real growth double-digit, I guess, what is the basis for that, if we do not expect to see that on the courts line?

Yes, and obviously that is the hardest line to predict for a number of reasons. Obviously, much of the other businesses is recurring, has very high visibility -- as you know, we have hardly any turnover. In those lines, they are generally predicted in a very narrow range. And, historically, we have been very accurate with those. Licensing is difficult for two reasons. One is, it's just hard to predict the timing of new business and the volume of new business, and then obviously it has been complicated further for a good reason in recent years, which is that it is hard to predict how much of it is going to be SaaS, or hosted recurring models, which we prefer to new license and traditional licensing arrangements. All that said, we do have a fair amount of license growth in this year's budget. And we will not do the break down dramatically, but certainly double-digit and probably more than the 20% to 30% range.

Some of that is acquisition, obviously. EnerGov is a new business, and still does a fair amount of traditional licensing, and their model is a newer company, a younger company. It is more new-business-oriented than existing-customer- and recurring-revenue-oriented. So they bring some of that, and there is still a tail on some of the acquisitions that were not in all year last year. So probably about half of that growth is from acquired divisions, which really is not growth, and then we do see growth across the different product lines, as well. So we do have in our plan more on the range of 20% to 30% license growth.

Okay, and then -- thanks -- on the e-filing, are there any of your existing customers that you can share with us that are deep into the Supreme Court process of mandating e-filing? I mean that is really the driver of this volume, not just actually signing up clients, obviously, so maybe update us on the legislative landscape.

Yes, now we have shared with you the ones that we thought have made that decision or are far enough for us to do that. I want to be as transparent as I can with you folks, but I also do not want to obviously get overly involved in ongoing decision processes and put things out ahead of what our clients are doing. We thought that the Texas deal was significant enough that we should provide a lot of details on that, and we have Oregon, and I think, certainly, as we have said, there are other states, other counties, that we are actively engaged in. We do think that this is an exciting part of our business, but I am going to have to take hesitate to get too granular with people that are still in the process.

Great, I will get back in the queue. Thank you.

Tim Quillin, Stephens Incorporated.

Hi, good morning. In terms of the implied margin guidance of roughly flat in 2013, can you talk about any specific cost drivers on that? You mentioned the e-filing -- are there specific costs with the build-out of Texas that you could highlight? And then, how much -- in terms of pursuing the California opportunities -- how much of an increase in sales expenses would you expect?

Sure. There are probably three specific things -- and one of the reasons we have included non-GAAP guidance for the first time -- stock compensation is up about $3 million year-over-year. We are committed to keeping the number of options we grant proportionately in-line with the outstanding shares, so those will be coming down since we repurchased a lot of shares in the last three years -- not last year, but over a period of time. But the value and volatility of the stock have driven the cost per unit up significantly. So that is significant. New acquisition intangibles is significant as well, as we did four somewhat meaningful acquisitions in the last 18 months. And then the text-file thing itself, but also that is an example of the way our business does work.

I think we indicated in the comments that, that is about $3 million ahead of revenues. That is a significant deal by itself. We can appreciate that number, put some pressure on earnings -- but whether it is Oregon or other states, where we are hiring people and creating teams and infrastructure to deliver on traditional deals or deliver on these e-filing and other hosted-type deals, there is a range of investments we are making. California is kind of anecdotal, that is not a $3 million to $4 million number by itself, but it is another example of that there is a great opportunity, there are some investments that we should become the product to have California-specific extensions ready for our presentations and these implementations ahead of the deals. And there obviously is a sales and marketing effort there, as well. But the three big ones are the stock comp, the acquisition intangibles, and the Texas file deal, and then the fourth, more general bucket, as Brian said, we intend to add about 200 new heads in the year. Those people are all on board for many months before they are very productive in terms of generating revenues.

Right. And then in terms of the master service agreement in California, how does that -- how do you think about that in terms of accelerating time to revenue? Are you starting to see some opportunities you might have that thought would go through a lengthy RFP process start to move quickly using the MSA? Or is it not quite so -- maybe not moving quite so fast? Thanks.

Yes. No, we do believe that a number of counties that we are in discussions with have been looking to that to get finalized and they do intend to leverage that agreement rather than go through an independent process. The courts are very organized with each other. So San Luis Obispo deal, I think really was somewhat of a template for this master agreement and for other deals. They do watch each other very closely. So we feel good about our position. We are engaged with a number of counties that picture themselves utilizing that agreement, probably making decisions, and we would expect to have other arrangements in place this year, but, as we said in the remarks, they probably will not contribute anything meaningful to 2013 results. But I think they will build up our book of business going into 2014.

Thank you.

Jonathan Ho, William Blair.

Hey, guys, you talked a little bit about the environment, again, incrementally improving. Can you maybe characterize where we stand relative to a normalized environment? Is it now better, or is it sort of in-line with a normalized environment at this point?

Yes. No, it is not better. It is better than it was in 2010 and 2011, probably more because things that had been postponed become more urgent than the general environment being that much better. So it is better. People are -- the decision has gotten old enough that they are urgent enough that they have to make these decisions. And some of the processes are moving forward more normally, but it is certainly not where it was prior to that marketplace. And I think -- not just the activity we track, but something we are pleased with is -- we are back to our regular low double-digit organic growth, with nice acquisitions and tuck-ins, and the company really performing the way it was prior to that environment.

If you look at the other companies in this space, that is the exception. Most companies are not back on a growth plane. Most of them are generally flat, or, in a lot of cases, off somewhat still at this point. So I do not think everybody is enjoying a return to growth and what we have, and that is why, as we have said, we attribute our recovery more to our improvement competitively than the modest recovery in the marketplace.

Got it. And just as a follow-up, with regards to Microsoft, why do you think things have kind of picked up in the fourth quarter on the license side? Is this time in channel, is this just the sales force having more experience with the product, or credibility? I'm just trying to understand a little bit better what your thoughts are around that opportunity, and how you maybe see that shaping up for 2013.

Yes. You can look at this positively or not. The significant increase in the report that we just received, that will be recorded in Q1, is largely driven by one deal. They had one very large deal in Indonesia. So, as I said, you could look at that as you will, and, as we said, this will probably continue to be a little lumpy until they really build out the channel enough to be more reliable. Looking at it either way, as I said, it could mean a lot may not re-occur, and it will continue to be choppy.

But, on the other hand, I am encouraged because I know what is involved in winning a significant site. So that would've been retail, obviously, our share is not that, but retail of a multi-million dollar license deal in part of the country, part of the world, where we certainly have no exposure directly. And that is exactly what we are trying to do with Dynamics, is to get exposure to markets that we would not be in directly, as well as to improve our presence in our own traditional markets. And it is encouraging to see them go out and win a major enterprise deal, competing with the tier 1 type vendors. But they did have a very significant deal which represented more than half of what that report will be.

Excellent, thank you.

Raghavan Sarathy, Dougherty and Co.

Good morning, thanks for taking my questions. My first question is on the Texas e-filing opportunity. The court order from the Texas judiciary mandates the use of e-filing in civil cases in certain courts, but not in justice and municipal courts, where the case volume is heavy. I know, John, you said you are expecting between $15 million to $20 million in annual return revenue. I am kind of wondering what kind of case load or volume is contemplated in that.

That is strictly, as you said, the civil volume in those courts. That does not include anything from municipal courts or other courts that are not part of that mandate.

And the current run rate right now, or the current volume of filings in civil courts in Texas, is about 6 million annually. And under the current system, only about 500,000 of those are currently filed electronically, with the existing system, which not all counties use, is not mandatory, and is both expensive and capacity-constrained. So that run rate for us of moving up to $15 million to $20 million in annual revenues, is as you build up to that 6 million transactions that are currently -- that are the total for the state of the current level.

And then, can the product handle e-filings from justice and municipal courts? Is there potential for that sort of revenue opportunity, in case if it gets adopted our mandated?

It could, but it is not contemplated under the any of the arrangements we have now. The municipal courts are separate and entirely different, so -- just like this, we would have to go build interfaces and bring a system up and it would be -- it could do it, but it would be a pretty different project than the one we had in place.

Okay, and then just one follow-up, and I will jump back in the queue. You talked about e-filing being a material option for you, and you do not want to get into the details, but if you can step back from some of the details, how should we think about the total market opportunity for this, for the e-filing business?

Well, I do not think we are prepared to give too much. We do not have visibility to know what that necessarily looks like, but we have, as we discussed, a number of counties in two states in place, we have Texas and Oregon coming on, we have a lot of our existing clients looking at that. Probably the accounts we're talking about -- obviously, Texas is a big part of that, is a $30 million, $35 million a year recurring revenue rate. And certainly it is a small percentage of where Odyssey exists. And we certainly can put this in places where Odyssey does not exist.

So we look at this is a very significant opportunity that could be a multiple of the business we currently can identify. Cost do grow as we expand it, but certainly not proportionately to the revenue. So the next $10 million and $20 million increments will be much higher margin than this initial investment that we make. But they are projects that require resources, at the same time. So it is a significant growth opportunity. We are very focused on it. It is very important to make the right investments now and deliver very high-quality service, so that we can continue to benefit from that in the marketplace.

Thank you.

Mark Schappel, Benchmark.

Hi, good morning. John, with respect to the California courts opportunity, I believe last quarter on the call you thought that there could be another three to six court decisions in the next six to eight months. And I was just wondering if you think that is the case, or if that has shifted a little bit higher or lower.

Probably still a relevant number. Certainly not lower. I would think that the three might be out of play, and maybe the brackets move up a little bit. We are certainly engaged with the higher end of that range, or, say, six or eight good names that we think potentially might make decisions this year, but, as we know, timing is always hard to predict. But it is an active pipeline.

Thank you, and as a follow-up, any big counties in the mix that you can comment on?

You know, they are really not the biggest counties, so that is a good question. These are not -- so far, these are not mega-deals. These are the $3 million to $8 million kind of deals.

Okay, and then one question for you, Brian. Last year, I believe the appraisal services group faced some margin headwind's, and I was wondering what your outlook for margins in that group are this year.

The business -- we expect the appraisal services business to grow, probably, a high single digits this year. So they are seeing a little bit of growth with some cyclical projects coming back online in some of the states that have legislative cycles. But they are at more traditional margins, so I would expect them to be relatively consistent with this year's margins.

Thank you.

(Operator instructions)

Brian Kinstlinger, Sidoti & Company.

Thanks. With the discussion on software licensing increasing roughly 20%-ish, maybe more, subscriptions growing so quickly, I still get the sense that you think gross margins will be flattish, and I am wondering, given the much better mix, which one of those factors drive that down and fully offsets that better mix of revenue?

As we have said, a lot of the expenses that are holding the margin flat are not necessarily related to revenues earned in the year. It is stock option expense, amortization of new acquisition intangibles, specifically the tex-file investment, $3 million by itself, and then a lot of smaller projects like tex-file, that -- we will not go to every name, but create another bucket of expenses. So, there -- none of those are associated specifically with revenue mix or a particular revenue in 2013. Especially in the case of text-file, we do see those revenues, the good news would be developing rapidly as we move toward 2014, and I see this as a flat year, but the typical guidance we have given you guys in terms of the margin opportunity over the long run, you should not look at any differently. This just happens to be a flat year, and there will be another year that is a real strong year, and over your three- and five-year outlooks, this is not a change or any long-term trend. It's just a year where there is an opportunity to make some important investments, and we will do that.

Okay. And then -- the market seems to be regarding you more like a SaaS company, and in the many years I have been looking at you -- obviously you have not received the evaluations, and this is the first year in quite a long time that you have not really bought any -- or any significant amount of -- stock, in probably the 10 years I have looked at you guys. So I guess I am wondering, do you expect that you will be more active in the market, despite the revaluation of how the Street has looked at your stock, or do you think there is a better use of your cash flow over the next year or two?

Well, you are right, this is the first -- we have been almost 15 months without buying the stock, and this is the first time that has happened since we started buying our stock a little more than 10 years ago now. We're fortunate; we bought a lot of our stock in the two years previous to that, which now looks like a good investment. We used some debt to do that. We are net cash of 0, roughly, today. So we have earned our way out of that.

We are more disciplined in acquisitions these days than in the early years of building the company, where there was more urgency to get to that leadership position. But even with that stronger discipline, I am very pleased that we've been able to find the types of companies to join us and the people and the products that have come with them. So, at this level of valuation, buyers probably shifts to that direction. We appreciate the reasons why our stock is trading higher, but it does make it less compelling for us to be as aggressive there as we have been historically, and so that is probably the way we will remain.

Great. Thanks so much.

Dan Cummins, B. Riley.

Thank you. I wanted to ask about follow-on sales, and how well you think the sales force is performing, with respect to the tier 1 business that you have done over the last two years, and the expansion of your product footprint would seem to position you pretty well to grow pipeline pretty aggressively, based on follow-on opportunities. Can you just give us a comment on that, and how that might be informing your plans to grow direct sales in the near-term? Thank you.

Well, I think we have got the coverage we need. Obviously, a higher volume could require more resources, but I think we were probably -- had probably a marginally bigger channel that we needed in 2010 and 2011. But these are very specific skills; we have a lot of long-term people in that channel, and we felt it was worth maintaining that level. So I really think our channel, with a few new positions here and there, has the capacity to deliver on the higher opportunity that we have in front of us at this point.

The market, as I said earlier, is better than it was in those years, but it is not like it is real robust. The nice thing about improving your market share is you are not dealing with a higher level of our RFPs and demonstrations and these things. You are simply being more productive, and that is a bigger part of what our growth is right now than just addressing more deals.

And then -- if I could, just a follow-up, sort of related, for Brian. In terms of just thinking about the seasonality of the first half here, are there any roll-offs related to some of the big contracts, leaving us any kind of little pothole's on revenue in the next couple of quarters we should be aware of? Thanks.

Not specifically. We have seen that in the past a little bit in the appraisal business. But in the larger courts contracts, the two biggest ones are still less than half complete, so there is a lot of work left to be done. Those don't finish up this year. We always have contracts rolling off and other ones rolling on, but there are not any real significant ones. The first quarter generally is our lightest in terms of revenues. The holidays, and some of the processes that our clients have going on in the first quarter, in January at the beginning of the year, tend to make it a little more difficult for us to execute as much as we are in the other quarters, so we do expect that the first quarter is the lightest in terms of revenues, and earnings as well. But, as we have grown, the other quarters have become less seasonal and are more consistent with each other. But no specific large contracts that roll off.

Alright, terrific, thank you.

Raghavan Sarathy, Dougherty and Company.

Thanks for taking my questions, two quick follow-ups. Brian, how much revenue do you expect to recognize from backlog this year? And then -- I think you mentioned that expecting flat margins, when you talk about in a GAAP, this is non-GAAP operating margin we should expect.

About -- of our year-end backlog, we expect about 70% of that to be recognized in the next 12 months, and the balance goes out, in some cases, as long as 10 years with some of our longer subscription agreements. And that is fairly consistent with last year. And as John mentioned earlier, the transaction-based revenue, e-filing, and online payments -- none of that is in backlog, it never touches backlog. So we also have higher visibility with respect to those payments that are not in backlog. So the non-GAAP operating margin -- obviously, because of the increase in the stock compensation and to a lesser extent our amortization of intangibles from the recent acquisitions, there is a larger delta there, so our non-GAAP operating margin would be meaningfully ahead of the GAAP operating margin, and those numbers you can kind of back into from the guidance.

Okay, thank you.

At this time, and showing no additional questions, I would like to turn the conference back over to Mr. Marr for any closing remarks.

Okay. Well, thank you. And we appreciate all of you joining us on the call today. If you have any further questions, feel free to contact Brian or me. Have a good day.

Ladies and gentlemen, that concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.