泰勒科技 (TYL) 2013 Q2 法說會逐字稿

Hello, and welcome to today's Tyler Technologies second quarter 2013 conference call. (Operator Instructions) As a reminder, this conference is being recorded today, July 25, 2013. Your host for today's call is John Marr, President and CEO of Tyler Technologies. Mr. Marr, I would now like to turn the call over to you. Please go ahead.

Thank you and welcome to our second quarter 2013 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. Next, I'll have some preliminary comments. Brian will give 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 refer you to our Form 10-K 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 second quarter financial performance continued a trend of steady growth in virtually every meaningful nature, with results very much in line with our expectations. This was our tenth consecutive quarter of year-over-year revenue growth and our 49th consecutive profitable quarter. We also reached a new milestone with our first quarter of revenues of more than $100 million.

Our recurring revenues from subscriptions and maintenance continued to be the primary driver of our growth, as together they grew 15% and represented approximately 59% of total revenues for the quarter. The growth in subscription revenues reflect the continued shift toward the cloud and new business, as well as a growing transaction based revenue stream.

At the same time, we are pleased that our software license and royalty revenues were up almost 20% over last year, which is attributable to licenses from EnerGov, which we acquired last November and contributed $1.3 million of licenses this quarter, together with a significant increase in royalties from Microsoft Dynamics AX sales. The higher license and royalty revenues, together with the leverage in our recurring revenue growth led to an increase in gross margin of 110 basis points and our non-GAAP operating margin grew 200 basis points to 19.3%.

New contracts signings were relatively strong across Tyler and bookings in the second quarter grew 24% over last year. The broader local government marketplace continues to gradually strengthen and our strong competitive position, including our cloud based offerings is helping us increase our share.

The largest contract we signed during the second quarter was with New York City for our iasWorld Property Appraisal and Tax Administration software. The contract is valued at approximately $18.4 million, including a perpetual license. The revenues will be recognized over the implementation period of approximately 12 quarters.

Obviously, New York City is a large and complex jurisdiction in which our software will manage the property taxes associated with more than one million properties worth approximately $800 billion. This is the largest software contract in Tyler's history other than statewide court systems and our selection here is a great example of our credibility and competitive strength that Tyler has established in the local government marketplace.

In courts and justice, we signed an Odyssey contract with Kings County, California which we mentioned as an unsigned award on our last call. Kings County is a staff implementation under a five-year agreement which will also include transaction based e-filing. We also signed an agreement to provide e-filing for the Reno, Nevada Justice Court, as well as a five-year SaaS contract for Odyssey Online with Refugio County, Texas.

We had a number of significant new contracts for our newest ERP solution, including the cities of Longmont and Pueblo, Colorado. Pueblo also purchased our Municipal Court solution. Munis was also selected by the Ector County Independent School District in Odessa, Texas and by California's Santa Barbara Unified School District. The Shelby County schools in Memphis, Tennessee, the state's largest school system, and the 14th largest school district in the United States, selected our Versatrans Student Transportation Management system, as did Brownsville ISD, Texas.

Sales activity for our EnerGov solutions is also strong. We have a number of wins for that product, both on a standalone basis such as San Mateo, California and in conjunction with our ERP products. In Q2 for example, the town of Eerie, Colorado signed a contract for our Incode ERP solutions, together with EnerGov.

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

Thanks John. Yesterday, Tyler Technologies reported its results for the second quarter ended June 30, 2013. You've seen the press release and our 10-Q has been filed, so I'm going to comment on some of the key metrics for the quarter then move on to John's comments on the current quarter and our outlook for the remainder of 2013.

Beginning in the fourth quarter of 2012, we added additional non-GAAP measures that we believe 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. Also beginning in the first quarter of 2013, we've included the Dynamics royalty revenues in the software licenses and royalties line. These were previously included in hardware and other revenue and prior-year amounts have also been reclassified for comparability.

Revenues for the second quarter were $103.1 million, a new quarterly high, up 12.8%. Organic revenue growth was 9.5% and our acquisition of EnerGov accounted for revenues of $3.1 million or 3.3 percentage points of growth. Software license and royalty revenues increased 19.8%. Excluding the impact of acquisitions, software licenses and royalties grew 4.5%, most of which is attributable to the increase in Microsoft Dynamics royalties. In Q2 we received $687,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft partners compared to $129,000 last year.

In addition, we had approximately $216,000 of revenues related to Tyler's direct sales of Dynamics, which are included in software services and maintenance revenues. Organic license revenue growth continues to be pressured by the increasing percentage of new customers selecting subscription based arrangements. Subscriptions continue to be our fastest growing revenue line and grew 31.4%, of which all but 1.3% was organic.

We added 28 new subscription-based arrangements and converted 15 existing installed clients compared to a total of 24 new arrangements and 17 conversions in the second quarter of 2012. Approximately 42% of our new software clients opted for one of our cloud-based solutions compared to 33% of new clients in the second quarter of 2012.

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 33% to $3.1 million from $2.3 million last year. We expect to continue to see solid growth in these revenues as both current and new clients adopt our Odyssey File & Serve solution and more of them move towards mandatory e-filing.

Software services revenues increased 10.8% with 5.7% organic and 5.1% from acquisitions. Organic growth was primarily driven by the higher level of bookings in recent quarters. Maintenance revenue growth was 10.9%, of which 9.6% was organic. Our maintenance revenue growth rate continues to be reduced somewhat by the increasing percentage of new SaaS clients, as well as 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.

Our blended gross margin for the quarter was 45.6% compared to 44.5%. This increase was due to higher license and royalty revenue and leverage in our recurring revenues. The increase in our gross margin was offset somewhat by costs incurred related to our investment in TexFile, with no related revenues.

SG&A expense increased 15.1% in the quarter and represented 24.2% of total revenues, an increase of 50 basis points from last year's second quarter with stock compensation being the major reason for the increase. Non-cash share based compensation expense was $2.9 million, compared to $1.8 million. $343,000 of the cost was included in cost of revenues and $2.6 million was included in SG&A expense. Excluding stock compensation, SG&A expense improved to 21.7% of revenues from 22.1% last year.

Net research and development expense was $5.6 million compared to $5.4 million last year. We did not receive any R&D expense reimbursements under our agreement with Microsoft in the second quarter of either 2013 or 2012 and we do not expect to receive any further reimbursements under the agreement.

Operating income was $15.3 million compared to $12.5 million, or an increase of 23.2%. Non-GAAP operating income was $19.9 million, up 25.6%. The non-GAAP operating margin rose 200 basis points to 19.3%. Net income was $9.0 million or $0.26 per diluted share compared to $7.1 million or $0.22 per diluted share. The fully-diluted share count increased by approximately 1.5 million shares. Non-GAAP net income was $12.2 million or $0.36 per diluted share compared to $9.5 million or $0.29 per diluted share in the second quarter of 2012.

Adjusted EBITDA, which is EBITDA plus non-cash share-based compensation expense, was $21.5 million or $0.63 per diluted share, an increase of 23.4% compared to $17.4 million or $0.53 per diluted share in the second quarter of 2012. Free cash flow was negative $9.2 million compared to negative $12.9 million. Excluding real estate CapEx, our free cash flow was negative $2 million versus negative $11 million last year. This improvement is primarily attributable to an increase in cash associated with higher deferred revenue collections.

Days sales outstanding in accounts receivable was 106 days at June 30, 2013 compared to 99 days at June 30, 2012. DSOs normally increase sequentially from Q1 to Q2, as we bill a significant portion of our maintenance in Q2, resulting in an increase in receivables with the related revenue deferred over the next 12 months. The increase in maintenance billings this year drove the higher DSOs compared to last year's Q2.

Our backlog at the end of the quarter reached a new high of $430.9 million, up 19.7%. Backlog related to our software business, which excludes backlog from appraisal services contracts, was $411.1 million, a 25.3% increase. Backlog included $139.8 million of maintenance, compared to $114.1 million a year ago. Subscription backlog was $101.2 million compared to $72.9 million last year.

Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were up 23.5% to $147 million. For the 12 months ended June 30th, bookings were up approximately 16% over the prior 12-month period. We signed 19 new contracts in the second quarter that included software licenses greater than $100,000. Those contracts had an average license of $687,000 compared to 19 new contracts with an average license value of $306,000 in the second quarter of 2012.

Our total headcount grew by 25, to 2,431 employees at the end of the second quarter compared to 2,406 at the end of the first quarter. We currently expect to add approximately 100 additional employees before the end of the year.

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

Thank you Brian. As you've seen, this was a solid quarter and results were generally in line with our expectations. The trend of gradual recovery in the broad local government market environment is continuing. Our new business pipeline is active and our competitive position and win rates are strong.

I'd like to provide updates on a couple of opportunities that we've discussed in recent quarters, then discuss our updated guidance for 2013. As we mentioned earlier in the call, our royalty revenues from Microsoft this quarter increased substantially over last year. Royalties totaled $687,000, up from $129,000 recorded in the second quarter of last year. These royalties were generated by sales of Dynamics AX to approximately 55 public sector entities in 18 different countries. While the royalty revenues were about $200,000 less than Q1, almost half of the royalties in Q1 were from one large sale to a federal agency in Indonesia. This was just our sixth quarter of royalty payments and we continue to be encouraged by the reception of the product in a very broad marketplace. As reflected by the number of new deals and the widespread geographical footprint.

With respect for our direct channel for Dynamics, late in the quarter we signed the two more significant deals that we had previously mentioned as unsigned awards. The City of Columbus, Ohio was one of our early Dynamics proposals and selected us after a thorough competitive process. Columbus is the nation's 15th largest city and we look forward to partnering with them to transform their core financial operations with the implementation of Dynamics, along with Tyler proprietary software products and services.

We also signed a contract to provide Dynamics for the Oklahoma Administrative Office of the Courts, a statewide agency that provides administrative services for the supreme court, appeals court and district courts in that state. Together, those two contracts have initial value of nearly $8 million.

Our pipeline of Dynamics opportunities through our direct channel also remains active and growing. In the courts and justice market, we continue to build our Odyssey leadership position in case management software. We have been awarded a contract with the State of Washington for statewide implementation of Odyssey and expect that to be signed soon. In California, we have signed contracts for Odyssey with two of the state's 58 counties, following the termination last year of a project to develop a custom statewide case management system. We previously discussed that we were one of three vendors selected earlier this year to enter into a master service agreement under which courts in California can purchase systems without going through the RFP process. The MSA was executed last week and we are actively engaged with several counties that we expect to purchase systems under the MSA.

Our electronic filing solutions for courts known as Odyssey File and Serve is another area in which we are making significant investments and expect to be a growth driver over the next few years. We are well underway with the work on the TexFile project, which is the contract we signed last year to provide a statewide e-filing system for Texas civil courts. E-filing will be mandatory in Texas for civil cases beginning with the largest counties in January of 2014 and then phase into other counties over a 2.5 year period. The first pilot court in Greg County went live on TexFile with optional e-filing in late June.

We are also pursuing a number of additional e-filing opportunities with current Odyssey clients as well as with courts that do not use Odyssey. With each new e-filing contract, we will incur costs ahead of revenues which may put short-term pressure on margins, as is the case this year. We believe that these recurring transaction based revenue streams will contribute significantly to revenue and margin expansion in coming years. This quarter we signed one new e-filing contract with Reno, Nevada Justice Court.

Our updated guidance for 2013 is as follows. We currently expect 2013 revenues to be between $411 million and $416 million. We expect 2013 diluted GAAP earnings per share to be approximately $1.08 to $1.14 and fully diluted shares for the year are expected to be approximately 34.5 million. We expect 2013 non-GAAP diluted earnings per share to be approximately $1.44 to $1.50.

For the year, estimated non-cash share-based compensation expense is expected to be approximately $11.5 million. We estimate an effective tax rate for 2013 of approximately 40%. We expect that total capital expenditures will be approximately $25.5 million to $26.5 million for the year. Capital expenditures for the year include approximately $17.8 million related to real estate and office facilities construction. Total depreciation and amortization is expected to be between $14.0 million and $14.5 million, including approximately $6.5 million of amortization of acquired intangibles.

Now we'll take your questions.

(Operator Instructions) Brian Kinstlinger, Sidoti & Company.

The first question I had, it's great to hear the MSA was executed in California; I'm wondering if any large counties out there have put out RFPs outside of the MSA and maybe in addition, how many counties you expect might award a contract this calendar year, given the MSAs now executed?

The larger counties are taking a little slower look at this, although we do expect them eventually to be in the marketplace. Most of the counties purchasing off the MSA will be small to midsize. It's hard to say how many will do it in this year. We certainly think there are several that will do it relatively soon. But some of the others that are earlier in the process, whether or not it gets done during this year it would be harder to say. So certainly several in the next couple of months and whether there's a couple or few more before the end of the year, will just be a timing thing to see.

My second question is, if you look at the two AX deal, Microsoft deal that you won in direct sales, I guess I'm interested in how long these guys are going to take to implement or a better way to ask, at what point do these two customers become referenceable clients and are there any more awards that are awarded but unsigned?

Referenceability is a process. So a reference as an installed online client is probably 18 months away for these clients but I think that the enthusiasm they had for their selection and their support of the best of both worlds approach of Tyler as the leading vertical player in this space and Microsoft is a tier-one software company, I think they're referenceable from that perspective right now.

So we have installed accounts that are online and are referenceable and then I think to take especially a top-15 city in the country, in Columbus that did a very thorough search and really can tell that story of having selected kind of a best of both worlds approach, will be beneficial even before they're online. Obviously, further down the road it will even be enhanced by that. But it will be helpful there.

We do not have other awards that we're negotiating in that size range. We do have other small awards, active pipeline, your typical smaller or average size deals. We do have some of those awards that we're working on, but there isn't a Columbus size deal awarded in the contract process at the moment.

Nathan Schneiderman, Roth Capital.

I was curious with the New York City tax billing and collections solution, if you could give us more details on the competitive dynamics of that deal? And then when you look at your pipeline of opportunities within this category of tax billing and collection, are you seeing other significant multimillion dollar deals out there or is this do you feel more of a one-off situation?

It's a good question and I think it goes a little broader than New York. We kind of have two segments in my view, of this vertical market. You've got core financials and human capital management and the kind of things that clearly are vertical applications but we also see crossover type vendors, obviously the Oracles or SAPs or Lawsons and maybe some other names that aren't as familiar to everybody. You're always going to have some competition in that space because it can be a crossover market.

You then have what I kind of refer to as a sub-vertical with tax and appraisal, this type of particular opportunity or even courts and justice, where you're not going to see crossover vendors. These are vertical only type applications and when you have large enterprise decisions like this, this is a space in the market place that traditionally didn't have these kinds of options and was a bit underserved. Now there is a company, Tyler, that is large enough, has the scale, has the resources and the stability that is really kind of uniquely qualified to do these large enterprise projects in very vertical types of spaces. And I think that's why you're seeing us very consistently win these large deals, whether it's in tax and appraisal or in courts and justice. So the competitive landscape there is very favorable toward us.

I wouldn't dismiss that there are others that participate in that space, but they tend to be smaller, weaker companies that represent considerable exposure for someone who's doing a 10, 20 or 30 million dollar deal. So this is a place where Tyler brand and stability has emerged as having a significant competitive advantage.

In this tax billing and collection area, do you see other significant multimillion dollar deals out there or is this really a one-off?

Yes, we do.

Final question for you, when you look at total backlog of 20% year-over-year, when you think about the current portion of that to be recognized over the next 12 months, I know you give us a specific number at the end of the year, but would you say it's roughly up that same percent or did you see any, for example, noticeable mix shift toward either current or toward long-term?

I think in general, there are more larger contracts in there, so for example New York is roughly a three-year implementation that the revenues will be recognized and as we've talked about, the subscription component of that backlog grew 39% year-over-year. So tenor of that backlog should be a little bit longer than it was say at the end of last year. So it is a little bit more falling in the long-term section.

Dan Cummins, B. Riley & Company.

I wonder if you could share with us what you can about your hiring plans for the second half of the year, particularly with respect to some of the more recent large contract wins and how that squares with getting to the high end of your earnings guidance?

I think we said in the remarks we expect to hire about another 100 heads before the end of the year. Many of those are in billable professional services. We have been doing that throughout the year and that's another area that as we go back into a little higher growth period is a current investment that puts a little pressure on margins. So the onboarding process, depending on the suite of applications and the division is three to six months that people are on board and we're investing in them and they're not productive in terms of revenues yet. That's the majority of the positions we're hiring during the year.

I guess with respect to that seasoning process, is it perhaps likely that you won't really have a strong indicator on getting toward the high end of the range until the fourth quarter?

I think all of that is baked into the plan, so current projects, if they stay on track, as you saw, we raised the lower end of the range which suggests that we are tracking toward the higher end of the range.

Scott Berg, Northland Capital Markets.

Congratulations on a nice quarter. I guess my first question Brian is how's the right way to think of the deferred revenue gain in the quarter? I'm trying to reconcile how much of that might have been from say the New York City deal versus other contracts that were signed in the quarter.

I don't think there were any billings on New York City in the quarter. Virtually all of that is driven by the higher level of maintenance, some of which comes from EnerGov and the other acquisitions and the majority is just the annual increases on our customers that have July 1 renewals. So most of it is organic from new customers brought on board in the last year as well as the rate increases on the existing base.

On the Dynamics revenues in the quarter, the royalty is at 687,000. How should we view those in terms of how much of that is a function of maintenance revenues that you're getting royalties on versus new license sales? I'm trying to understand how much of that is a run rate going forward into the third quarter, given obviously the differences there.

The run rate on the maintenance right now is a little over $200,000 a quarter and the difference is on license royalties. One thing to point out with respect to those new customers, we said there were 55 new entities that bought Dynamics in the public sector through the Microsoft channel; of those 55, the majority of those were upgrades from other Microsoft products; about 40 of them were upgrades and about 15 of them were new names. So those upgrades, in most cases we don't get a meaningful license royalty at the time of the signing; you start getting maintenance royalties as their maintenance renewals kick in they jump up. So on a large number of those there's not a significant license royalty up front.

Charlie Strauzer, CJS Securities.

This is actually Dan Moore filling in for Charlie. Just wanted to touch on obviously the housing market improving steadily. Are you seeing, maybe you can elaborate on increased activity or RFPs in the appraisal unit. You touched on it a little bit in your prepared remarks, but any additional commentary or color would be appreciated.

In terms of appraisal services for revaluation, no, not really. That's a pretty defined cycle. We have a pretty good long-term view on exactly how those things cycle out. We're kind of in a low point of those cycles. That business will be a little bit stronger in the coming couple of years, but we'd expect our appraisal service revenues would kind of stay in the $17 million to $21 million or $22 million range over several years going forward.

The tax and appraisal software market is stronger than it's been. I don't know if that's a result of what's going on in the housing market, but there is a fair amount of activity. New York is certainly an outsized deal, but there are a number of midsize and good size cities that are active in that process, so we do expect that our software or tech business in the tax and appraisal business will be strong over the next couple of years.

Maybe just talk a little bit about M&A, the trends in terms of opportunities that you're seeing out there?

Obviously we remain opportunistic there. We're very happy with what we have done in the last few years. We have certainly raised our standards as we feel we have the portfolio products and the geographical presence that we wanted to have at this point in our development so we are more selective. The E-File Wiznet deal, the EnerGov deal as strategic plays are playing out very nicely and the Infinite Vision deal, the three companies associated with that, which represents the majority of our M&A in the last few years, are going along very nicely as well. We're not overly aggressive at this point in time, but that's not to suggest that something even material wouldn't occur in the future, but currently there really isn't anything to report on.

Congrats on a very nice quarter.

Mark Schappel, Benchmark.

Again, nice job on the quarter here. John, in the New York City property tax deal, you beat out two competitors that historically have been pretty strong in that area, [Mentone], CCI and I was wondering if you could address in a little bit more detail why you think the competitive tides seem to be shifting so dramatically there in the property tax arena?

I guess I don't want to comment too specifically on an individual competitor, other than to say generally that most of our direct competitors are not as strong today as they were three or five years ago as businesses or as competitive products and we're benefiting from that. We've discussed before that 2010 and 2011 this market place was pretty tight. Many of these companies went through some type of a business combination. In a lot of cases cost was taken out or certainly investments weren't increased and we've improved our offering in these areas and we're satisfied that we've gotten good results in terms of the competitive position.

Raghavan Sarathy, Dougherty.

First question is a clarification question. With regard to this New York City deal, was there any kind of appraisal services included in that deal or is there potential for appraisal services as a follow-on?

That deal is entirely software professional services and maintenance, perpetual license, on-premise installation and there's not an appraisal services component and I don't believe at this time there's any appraisal services contemplated in that jurisdiction.

In terms of the Microsoft deal that you talked about, that's in Oklahoma, how does the revenue recognition work on this situation; is it going to be a percentage of completion or how should we think about that?

Currently we expect that the Columbus deal will be a percentage of the completion accounting and that the Oklahoma deal will be more traditional license recognition as the license is delivered and the services on a time and materials basis.

Jonathan Ho, William Blair.

I just wanted to understand with regards to winning the Columbus deal what the potential impact could be for maybe not other tier-one cities but just in terms of the larger tier-two cities; does this increase your prestige or give you more of a marquis win that you can reference in terms of a large deal? I just want to get a sense of maybe what this means for the company in terms of that market.

I think we have had a number of clients with Dynamics that are referenceable, but having a tier-one type client that's pretty enthusiastic about their selection, that was an important part of getting this deal done. So obviously we've known; we've been working this deal since the early days of Dynamics release and we've considered it very important to get them on board. I consider them a sophisticated city. I've been there myself and met their team and I think they'll be a real resource to us leveraging this in the market place.

In terms of the EnerGov deal, I want to understand how much of a cross-sell opportunity you guys see and sort of the timing that you would expect that to really pick up at this point?

That's a good pick up on your part. There are a lot of revenue synergies there. They're a small company and just because it becomes part of Tyler they don't all the sudden somehow have all kinds of capacity they didn't have previously. So we mentioned quickly in the remarks that they've done their own direct deals or when a city goes out for that suite of applications on its own, that's what they've done traditionally and they continue to do that on a direct basis with their own resources and are doing well with that. We mentioned one Incode type deal where we sold EnerGov as well. But I think there were five in the quarter that Incode or Munis where we participated in a broader suite of applications and we were able to sell the EnerGov systems along with Munis or Incode.

And that's a benefit for two reasons really. Obviously it enhances the revenue that EnerGov will do and its incremental revenue over what say they would have done as an independent company, which is the revenue synergy we're looking for, but secondly, their suite of applications is very very strong, it shows very well in the demonstrations. It's very responsive to the RFPs.

So we would hope and expect, although it's very hard to track, that it will help us win deals that we otherwise might not have won. It certainly enhances our overall competitive position in the enterprise wide types of solutions. So we're encouraged that they continue to win business on a direct basis, kind of point solution type decisions and also that I think five deals that we won with our ERP solutions included EnerGov and we believe that along with selling those applications, it made our core offerings more competitive.

Can anyone match you in terms of having that integrated solution with both EnerGov and your core Incode and Munis products?

Arrogant or presumptuous, but we hope not. That's the idea of this. Now again, immediately upon doing, we only did this less than a year ago, so their capacity, the point of integration, the seamlessness of the integration, those things don't occur overnight, so they're in process. So currently now, if somebody wants to take what they feel is another competitive ERP solution and an industry point type solution for that area, they probably can. But I think right now people can appreciate that Tyler's going in a direction where over time those products will grow together. The user experience and the integration will be better than what they can get by choosing partners in that type of situation.

Brian Kinstlinger, Sidoti & Company.

I just had a few questions on E-File. That first is, the Reno deal that you mentioned you won, is that a county where you have a mandate for Reno for filing or is it they can do manual or e-file?

I'm not certain if Reno is mandated at this point or not. It is a county that uses Odyssey as their court solution but I'm not certain if that's mandatory at this point.

The other question I have, similar to Texas, I'm curious if there's any other areas where you're not established with E-File where there is a mandate that is much closer - I think I ask this in most quarters, if there's a mandate close on any state or large county where you have a major focus on winning new business right now?

It usually goes in the other order, as Texas did. They went out, they selected a solution, selected Tyler and they intended to make it mandatory at some point in time. In the case of Texas, it was made mandatory before the system was actually implemented. Which is a good process for us. There are other states that are out for systems that generally do not commit to mandatory when they're out and generally in the contract process as they become educated in terms of what adoption rates are, when it's not mandatory they generally become convinced that it's in their interest to go mandatory. If it's not mandatory, it really is just a filing system, so it's a more efficient way to file than manually.

But if it becomes mandatory, even though there may be some exceptions, virtually all of these documents become electronic. So it's not just a filing system, it's a document retrieval system and they can have confidence that all of the information is online and it will be utilized that way in the court room, by law firms, by the clerks themselves and so it has considerable incremental value to them, not just to get a higher percentage filed electronically but the way the court actually works.

And today, many of these courts want to be paperless. They want to retire the file cabinets and storage that they have and this is a way that they become considerably more efficient and most of them become convinced it's in their interest during the process.

So to answer your question, no, there aren't a lot that have said hey, we're going mandatory and now we're looking for a system. It usually goes, we're looking for a system and as they do the due diligence they learn that it's in their interest to go mandatory.

Are there any states where you're not installed statewide for E-File? I think Texas might be one of the only ones you are, where there is active procurement going on, where you're actively bidding?

Yes.

Can you quantify a number of how many states there are?

Maybe three.

(Operator Instructions) Dan Cummins, B. Riley.

I noticed the boilerplate language about Tyler also mentions other international areas rather than formally concluding the United Kingdom. Can you give us some sense of how soon it might approach a material level, meaning your non-US revenue base and how you're getting there gradually and maybe even in what regions? Thanks.

International is not at this point a big part of our focus. We do believe that reinforcing the leadership position we've achieved domestically in the local government is important and that there would remain some opportunity cost to redirecting the sales channel, the development group, service group in those areas.

Having said that, Canada we consider really more North America than domestic, I should say. Canada is an extension of this market and there actually is a fair amount of Canadian activity across our different applications. But beyond that, there is some activity. I think there will be some international business on a direct basis, but your question specifically said significant and I don't think it will be significant in the next few years and I think that's a discipline we feel is important to really extending the leadership position that we're proud to attain.

The exception to that obviously is Dynamics. As we mentioned, I think 55 names this past quarter and I don't remember, 17 or 18 countries, so that by design was a relationship that we created that in addition to distributing that product domestically, we'll get a lot of international exposure that we wouldn't have gotten on a direct basis.

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

Thank you and appreciate you joining us on the call today. If there are any further questions, feel free to contact Brian or myself. Have a great day.

The conference is now completed. You may now disconnect.