泰勒科技 (TYL) 2014 Q3 法說會逐字稿

Hello and welcome to today's Tyler Technologies third quarter 2014 conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. (Operator Instructions). As a reminder, today's conference is being recorded, today, October 23, 2014. At this time I would like to turn the conference call over to Mr. Marr. Please go ahead.

Thank you, and welcome to our third quarter 2014 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 third quarter operating results and 2014 guidance. Then I will 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 that may include projections concerning the Company's future prospects, revenues, expenses and profit. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are is 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.

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 third quarter financial performance continued to trend of record results in virtually every meaningful matrix. From an historical perspective, this was our 15th consecutive quarter of year-over-year revenue growth and our 12th straight quarter of double digit revenue growth.

Our GAAP net income of $17 million made this our most profitable quarter ever. It was our second consecutive quarter with organic revenue growth greater than 20% and net income growth greater than 50%.

Our recurring revenues from subscriptions and maintenance continued to be major drivers as together they grew 20% and represented approximately 60% of total revenues for the quarter. Our subscription revenue growth of 49% reflects strong growth in our eFile revenues from courts, as well as a continuing gradual shift toward cloud-based software and service business.

Software license and royalty revenues achieved exceptional growth again this quarter, up 26% over last year. This was our first $13 million license quarter and our fourth consecutive quarter where license and royalty revenues grew year-over-year by 20% or more. Gross margin improved 170 basis points to 48%, reflecting our high level of software licenses as well as the earnings leverage from incremental recurring revenues.

During the third quarter we completed the acquisition of SoftCode, Inc. SoftCode which was founded in 1991, specializes in software for managing civil process. SoftCode primarily serves county sheriff's departments and offers a complete civil case management solution from court to service attempts to final execution of payments.

With this acquisition, we broadened our portfolio of court and justice solutions with a product that is very complementary with our Odyssey suite. SoftCode's founding partners, management and employees have joined Tyler's Courts & Justice Division, and over the coming months, their technology and service offerings will be integrated into our operations and branding. SoftCode's annual revenues last year were in the $3 million range and we expect to see them grow meaningfully as part of Tyler.

We had a tough bookings comparison for this quarter as the third quarter of last year included bookings of approximately $72 million from our Texas, eFiling contract as well as two statewide Odyssey court contracts. Accordingly, total bookings were down 32% for the quarter.

However, excluding bookings from eFile Texas from last year's third quarter, bookings grew almost 5% which we consider to be solid given the strong comp. On a trailing 12 month basis bookings are up 22% with Texas eFiling considered on a comparable basis to other eFiling arrangements.

Some of the notable contracts announced in the third quarter included an agreement with the city of Detroit, Michigan for our appraisal services valued at approximately $7 million. Tyler will provide the city with real property appraisal data verification, [sketch] conversions and valuation services for the city's first full reappraisal in 50 years in a project that is considered to be an important component of Detroit's financial restructuring.

The California courts market took a break from new contracts this quarter, but we continue to add new customers for our Odyssey case management solutions in other states. We signed an Odyssey contract with Kane County, Illinois, valued at approximately $4.1 million. Kane County is the state's fifth largest county and represents our second Odyssey client in Illinois.

We also signed a contract valued at approximately $3.5 million with Harris County, Texas to implement Odyssey in 16 justice of the peace courts. Harris County, which includes the city of Houston, is the third largest county in the United States. In addition, we signed an integrated justice system contract including Odyssey courts and jails with Webb County, Texas, which includes the city of Laredo. For our EnerGov planning, permitting and licensing software we announced contracts with the city of Charleston, South Carolina and Los Angeles County, California. In the [ERP] market we signed a $4.1 million contract for our MUNIS solution with Jefferson County, Alabama, the home of Birmingham and the state's largest county. We also signed MUNIS contracts totaling almost $3 million with the cities of Midland, Texas and North Miami Beach, Florida, each of which also included EnerGov solutions. Significant new SaaS contracts from MUNIS includedAltamonte Springs, Florida, a $4.3 million contract that also includes EnerGov; and Oklahoma County, the largest county in Oklahoma and the home of Oklahoma City. Our EnerGov solutions continue to gain market share.

In addition to contracts that included both EnerGov and one of our ERP solutions, we signed significant EnerGov contracts with Riverside County, California, the nation's 11th largest county and the city of Carlsbad, California. Also in the quarter we announced agreements with New Port Richey, Florida, and the cities of Allen and College Station, Texas which included both MUNIS and EnerGov solutions. Finally, we signed a contract for our Infinite Visions financial software with the Tucson Unified School District, the second largest school district in Arizona.

Now I would like for Brian to provide more details on the results for the quarter and our annual guidance for 2014.

Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2014. Since our press release and Form 10-Q are both available, I am going to add some color around some of the key factors in the quarter and review our guidance for 2014. Then we will move on to John's comments on the current quarter and our outlook for the remainder of 2014.

In our earnings release we've included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. Our non-GAAP earnings, exclude share-based compensation expense, the employer portion of payroll taxes, unemployed stock transactions and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

Revenues for the third quarter were $128.7 million, a new quarterly high up 20.2%, virtually all of which was organic. Software license and royalty revenues increased 26%.

In Q3 we received $906,000 of royalties on public sector sales of Microsoft Dynamics AX, by other Microsoft bars, down from $1 million a year ago. In addition, we had approximately $1.1 million of revenues related to Tyler's direct sales of Dynamics which are included across our various revenue lines. These direct Dynamics revenues increased 84% from $573,000 in Q3 of 2013.

Subscriptions continue to be our fastest growing revenue line and increased 49.2%. We added 38 new subcription-based arrangements and converted 11 existing on premise clients representing approximately $17 million in total contract value compared to 24 new arrangements and 14 conversions in the third quarter of 2013. Approximately 34% of our new software clients in the quarter selected our cloud-based solutions.

The subscriptions line also includes the fast growing revenue stream from the eFiling for courts and online payments. These revenues doubled to $8.2 million from $4.0 million last year. Total eFiling revenue of $6.2 million this quarter included approximately $4.4 million related to our Texas eFiling contract, up from approximately $590,000 last year.

Our blended gross margin for the quarter rose 170 basis points to 48%. The increase reflects the higher level of license revenues as well as margin leverage from the incremental recurring revenues primarily those from eFiling.

Gross margin expansion was somewhat suppressed in the first three quarters of 2013 as we incurred costs ahead of revenues related to the Texas eFiling contract. Our non-GAAP gross margin expanded by 160 basis points to 48.8%.

SG&A expense increased 11.2% in the quarter and was 21.3% of total revenues. A decrease of 170 basis points from last year's third quarter.

Excluding noncash share based compensation expense, SG&A expense increased 9.6%. Operating income was $26.7 million, an increase of 49.8%. Non-GAAP operating income was $32.4 million, up 40.3%. The non-GAAP operating margin improved 350 basis points to a new high of 25.1% as we leveraged both SG&A and R&D expenses to grow operating margin at a much greater rate than gross margin.

Net income rose 53.9% to $17 million, or $0.48 per diluted share. The fully diluted share count increased by approximately 520,000 shares as a result of stock option exercises offset somewhat by stock repurchases in the current year.

Our effective tax rate was 36.3%. Our tax rate declined from previous quarters primarily due to lower estimated state taxes based on currently anticipated revenue allocations.

Free cash flow was $64.7 million compared to $35.7 million in last year's third quarter. Excluding real estate CapEx, our free cash flow was $64.7 million versus $40.7 million. Free cash flow for the third quarter actually exceeded our free cash flow for the full year of 2013 and we ended the quarter with cash of $157.4 million.

Days sales outstanding and accounts receivable were 78 days at September 30, 2014 compared to 76 days at September 30, 2013. DSO's decreased sequentially from 104 days at June 30, 2014 which is our normal seasonal trend related to the timing of maintenance billings.

Our backlog at the end of the quarter was $674 million up 24.6% from last year's Q3. Software related backlog, which excludes backlog from our appraisal services contracts, was $634.3 million; a 22.6% increase. Backlog included $152.1 million of maintenance compared to $135.3 million a year ago.

Subscription backlog was $194.7 million compared to $189.3 million last year and included approximately $56 million related to the Texas eFiling contract. Our bookings for the quarter which are calculated from the change in backlog plus revenues were $148 million, down 31.8% from last year's third quarter. Q3 of last year included the Texas eFiling contract booking of approximately $72 million as well as two statewide courts contracts that totaled almost $26 million. Excluding the backlog from the Texas eFile contract, bookings grew 4.7% in the quarter.

Obviously bookings can be some what lumpy from quarter to quarter especially with respect to large contracts for which revenues are often recognized over several quarters or even years. We believe that looking at bookings on a trailing 12 month basis can be meaningful in some what smoothing out the quarterly lumpiness. For the 12 months ended September 30, bookings were up 4.3% over the prior 12 month period.

These bookings include the contract for the statewide eFiling in Texas. This is our only eFiling arrangement that was included in bookings and backlog at [fining] as it is our only [sisprice] eFiling arrangement. Excluding backlog, but including revenues from eFile Texas, which puts the contract on a comparable basis to other eFiling arrangements, bookings for the trailing 12 months rose 22%.

As a reminder, bookings do not fully reflect the true long-term value of new transaction-based contracts for eFiling or online payments. Revenue from these arrangements is recorded on a per filing or per transaction basis, and even though the volumes and future revenue streams may be very predictable, we do not include future revenues in bookings and backlogs because they are dependent on those transactions occur.

Only the current quarter revenues from these arrangements are included in bookings as they are recorded. Therefore, current bookings and backlog do not capture the future revenue stream from these arrangements.

We signed 30 new contracts in the third quarter that included software licenses greater than $100,000 and those contracts had an average license of $475,000compared to 29 new contracts with an average license value of $674,000 in the third quarter of 2014. Our total head count grew by 61 to 2,796 employees at the end of the third quarter compared to 2,735 at the end of the second quarter.

Based on our results for the first three quarters of the year and our current outlook for the balance of the year, we have revised upward our revenue and earnings guidance for the year. Our revised 2014 annual guidance is as follows -- we currently expect 2014 revenues will be between $489 million and $494 million. We expect 2014 diluted GAAP EPS will be approximately $1.63 to $1.69. We expect 2014 non-GAAP diluted EPS will be approximately $2.06 to $2.12.

For the year, estimated non cash share based compensation expense is expected to be approximately $15 million, fully diluted shares for the year expected to be between 35 million and 36 million shares. We estimate an effective tax rate for 2014 between 37% and 39%. The tax rate and share count depends somewhat on the timing and volume of stock option exercises.

We expect our total capital expenditures will be approximately $10.5 million to $11 million for the year.

Total depreciation and amortization is expected to be between $14.5 million and $15 million, including approximately $6.5 million of amortization of acquired intangibles. I would like to turn the call back to John for further comments on the quarter.

Thanks, Brian. As I indicated earlier, we are very pleased with Tyler's third quarter results which by most measures was the best quarter in our history. And as our revised guidance indicates we have a very positive outlook for the remainder of the year.

Most of the factors contributing to our success this quarter are similar themes to last quarter. Activity in the local government market is good and has returned to normal pre recession levels. Most importantly, our competitive position is very strong across all our major product suites and our win rates remain very high which is enabling us to gain market share and expand our leadership position.

As you know, our bookings and backlog in the first half of the year benefited from our success in California courts markets where we signed 13 contracts in the second quarter and have now been selected in 25 of the 28 decisions made by California courts. The timing of some of these contracts was accelerated into the second quarter because some counties had limits on the availability of funds.

While revenues from the contracts will be recognized over a number of quarters, or in some cases years, the growth and backlog provides us with increasing visibility over future revenues. There were no new California case management contracts awarded in the third quarter, but it is important to recognize that significant long-term opportunities remain in that market.

First, we expect that over time the other 30 counties in California will acquire new case management systems. Second, our existing contracts with several courts do not currently cover all case types, and we expect to expand those relationships to include additional case types.

Third, while we have signed 17 California counties to transaction-based eFiling contracts, we expect that most, if not all, of the courts using Odyssey software will ultimately be using our eFiling solutions as well. Those revenues will not start until our case management systems are implemented but in many cases we expect that the recurring eFiling revenues will be as much as two times the annual maintenance revenues.

Finally, we are pursuing opportunities to expand our relationship with California counties beyond case management systems to our Odyssey integrated justice solution, adding applications for jails, prosecutor, public defender and probation. These expansion opportunities are not unique to California and are part of our long-term growth strategy for the Courts & Justice business nation wide.

The eFile Texas system continues to perform exceptionally well and we believe that it conserves the model for future eFiling systems in other jurisdictions across the country. During the third quarter we added the courts in Clayton County, Georgia as a new eFile client.

While Courts & Justice has been our fastest growing product line in 2014, all of our business units are performing at a high level. For example, all of our major product groups had double digit revenue growth business in the third quarter and each business unit exceeded its plan for revenues and operating profits.

With our Microsoft Dynamics AX relationship, results this quarter were again somewhat mixed. Our royalty revenues from this quarter from sales from other [bars] were down about 13% from last year.

Royalties this quarter represented sales in 21 countries. We expect that royalty revenues will continue to vary from quarter to quarter and represent both a risk and an opportunity in our short-term results.

In our direct channel for Dynamics, revenues totaled $1.1 million, a substantial increase over last year. Tyler signed three new Dynamics clients through our direct channel this quarter. The city of West Hartford, Connecticut, the Buffalo and Fort Erie Peace Bridge Authority in New York and the Ohio police and fire pension fund.

Brian detailed our revised guidance for 2014 earlier in the call. The upward revision reflects our third quarter results as well as our outlook for the remainder of the year including opportunities and risk.

Tyler's results in 2014 have exceeded our internal plans by a wide margin. It is a testament to the skills and dedication of the Tyler team of nearly 2,800 professionals that we have been able to grow revenues at a rate substantially greater then the broader market is growing and expand margins while building our SaaS client base, investing in product development at a high level and absorbing onboarding costs associated with a net increase of more than 220 employees through the first nine months of the year.

Thank you for joining us on the call, and now we will take your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Charlie Strauzer from CJS Securities. Please go ahead with your question.

Hi, good morning. John, could you speak a little bit more on the Microsoft product and your thoughts there now that you have been in the marketplace for awhile and the feedback you are getting post some of the RFPs out there that you might not have won versus the pipeline when you look at some of the opportunities coming out?

Are there bigger opportunities that you think that might benefit sales there? And also are you seeing any push back that is giving you any [odds] in the near-term?

Well, it is a little mixed as we said, Charlie. We are pleased this we signed three contracts on a direct basis in the last quarter.

We do have an active pipeline that is growing. We are identifying and establishing a presence in what I would call sub niches in the marketplace.

We certainly are little bit constrained by the success of MUNIS and our other proprietary financial products. We are working hard to find the right places to grow our presence and gain momentum on a direct basis.

That is going pretty well, and we are encouraged by that. I think it is gaining some momentum.

When I say it is a little mixed, we just really have very little visibility into what is going to come through their channel. We literally learn after the quarter, and I don't think they have an awful lot of visibility.

I don't think it is a lack of transparency. It is through a channel, their partners and it is hard to know exactly when they are going to land the deals.

The thing we are encouraged by, as I said, more than 20 countries this quarter, consistently a very worldwide geographic footprint for the product that not just represents the countries and the partners that secure those deals but I think that is representative of them building a very broad partner alliance group and presence in the marketplace. But certainly, it is taking probably a little longer than we expected and they expected to accelerate the numbers.

In the meantime, you are obviously showing some very good core growth in your other products. Thank you very much.

Our next question comes from John [Widemeier] from William Blair & Company. Please go with your question.

This is Jonathan Ho. If we were to take a look at your California case types that you could potentially add on to your existing contracts, how much larger of an opportunity do you think you could get just from the counties that you have won so far? And when would be the approximate timing for that type of add on activity?

I don't know that we have that quantified but it might be fair to say that the volume of those deals is maybe in the 0.5 to 0.75 range, so there is still another doubling, or 50% growth opportunity by adding other case types in the deals we have already done. It is important to pursue that because while we have done fewer than half of the counties so far in terms of awards, the deals we have won represent more than 70% of the population base.

So we have won many of the larger counties and our focus will be, as we said, to expand the case types, hopefully pursue integrated justice systems including other applications entirely. Post implementation, the real benefit will be achieved as the eFiling comes online.

Got it. And then can you just talk a little bit about win rates?

I know you guys have seen some improvements in prior quarters, but are you seeing that trend accelerate or are you seeing it stay stable in terms of higher win rates? Just relative to the expectations how the win rate has been progressing?

Of course there is a lot of different product suites involved. I don't think we can accelerate in Courts & Justice.

We've won virtually all of the meaningful deals over the last few years. If you look there we will be happy with stable because its -- (inaudible -- laughter)

In some of the broader applications, it accelerated. Really we saw the meaningful acceleration in the second half of last year, and I would say it stayed within a pretty tight range since then.

It was a meaningful move in the market and these are a lot of sub market areas that we had focused on and really I tried to identify what we had to do to improve our presence in some areas where we hadn't performed as well as others. We are focused on sustaining that.

It is probably not possible to achieve the level of market share in those markets that are still vertical, but you see horizontal players in them. There just are price points and sizes and different decision criteria that no one solution can address all the time.

So I think the level we are at is a pretty strong one. Probably improvement would only be modest from there.

Great results in the quarter. Thank you.

Thank you.

Our next question comes from Brian Kinstlinger from Maxim. Please go ahead with your question.

Hi. Good morning. As it relates to eFile, I am curious what percentage of your CMS install base has your eFile solution?

And then did Clayton County, Georgia have your CMS?

I am not certain if Clayton, County is a CMS client, or not. We have a significant presence in Georgia.

There is several counties there that have our CMS that don't currently do eFile and some that have eFiling from us that don't have CMS. I'm not positive which one Clayton falls in.

In terms of what percent, it is not all of them. Probably more than half. Obviously, as you know, we had a lot of case management contracts and customers before we even acquired Wiznet and built our eFiling solution.

But I think the way we look at it and the way we would look at the future, which I'm sure is what you are trying to quantify, is we really feel regardless of whether or not it was part of the original engagement or not, it is a high probability that as these systems are implemented and maybe they rest a little bit post implementation, but that virtually everybody is going to have a paperless court which is really what eFile supports. It is not just a filing instrument, and that we should have near complete saturation in our own customer base. That is the way we look at it.

Great. I wanted -- (inaudible -- multiple speakers)Sorry. -- (inaudible -- multiple speakers)

One more to note as well. Even the number of our existing clients that have eFile aren't at full run rates.

For example, in Minnesota we have statewide CMS system, eFile is being rolled out across the state currently. In Oregon, we are in an implementation for our case management solution and counties are coming online with eFiling as they come on to the court system, but it is not at full run rate yet.

The same thing in Maryland. We are in the middle of an implementation. We've signed the state to statewide eFiling, but aren't recognizing any revenues there yet.

One more difficult question on eFile. If I exclude Texas eFile revenues down year-over-year $0.5 million, and you are talking about rolling more statewide work out; for example, Minnesota, other counties have been won, so I'm surprised that with those wins that you are seeing year-over-year, ex again, Texas, you are down. Maybe you could provide insight into that.

I'm going to have to take a look -- some places where volumes are down slightly, so I know that one of the counties in Nevada there is just a little bit less eFiling, less court activity this year over last year.

We don't necessarily view that as a trend. But I will have to take a look at those numbers.

Great. We'll catch you back offline. Thank you.

Our next question comes from Scott Berg from Northland Capital Markets. Please go ahead with your question.

John and Brian, congrats on a solid quarter here. Quick question on the revenue beat in the quarter.

If you look at the revenue beat and then your guidance for the fourth quarter, can you give us an understanding of how much of that is based on deals that are just going off the balance sheet in backlog versus incremental deals that are signed and won during the quarter? Trying to find the right way to view those two.

Goes by division. Courts & Justice, which obviously is a fast grower and clearly redid their second half plan with the California stuff coming online.

That is earning things out of backlog, and as we said, that is really just exceptional execution. Their billable hours are up about 50% over last year, which is an incredibly challenging thing to do with a lot of new people which we have had some great hires and aggressive onboarding and still delivering high quality service. So that beat is really burning through some backlog and executing well.

I think the MUNIS division which would be where the other big piece of that came from where they do sell, contract, deliver and recognize in a quarter at times. It's not a big number and the beat is only a few million dollars, but they are beating they are projected license number and that is just sales and delivery. Those would be the two biggest drivers.

And then the other thing that contributes is when you have a number of quarters like we've had in a row that are even a little bit ahead of plan, everything else just runs together. So you generally beat your maintenance by a little bit, you beat your SaaS number by a little bit, you beat your PS number by a little bit and that is momentum obviously that we enjoy right now that should continue for a number of quarters. When you are bringing in the new names and the new projects and all of those other numbers generally tend to outperform by a little bit and adds up to something meaningful.

Certainly impressive quarter, that is for sure.

Thank you.

Brian, I wanted to ask on ASPs in the quarter, maybe it is a question for John, I'm not sure. Your ASPs for your $100,000 deals has been up every quarter year-to-date and actually higher on a year-over-year basis for six straight quarters.

Usually we see companies have ASPs and large deals bounce around a little bit from quarter to quarter but that is a pretty consistent trend. Is that a reflection of pricing increases on products or is this more customers buying more on the upfront sale or is there maybe a third dynamic going on?

You mean in terms of the long-term trend of those increasing, or this quarter where the average license was smaller?

No, I can take it. I think it is when we talk about improvement competitively, the greatest gain in terms of improvement competitively is I think what [Greg Garten] would call the tier two space which is generally the higher end of our market space, excluding courts where they are certainly a tier one player.

That is where we have seen a lot of improvement and there are a lot more of these $3 million, $4 million, $5 million deals. When if you look back two or three years, there were fewer of those and a lot more of the $400,000 to $800,000 deals.

Great, and then last thing --

There hasn't been any significant change in pricing.

Okay. That is great. I guess the last question I have then is I know that you guys have invested heavily in trying to staff professional services obviously to meet the large Courts & Justice deals that are out there.

John, you mentioned billable hours up 50% year-over-year. How should he would think about them flowing over the next two or three quarters?

Do those investments begin to moderate and you get better leverage in those lines, or do you still see a fair amount of investment into that implementation area for another two to four quarter stretch?

The head count should flatten dramatically from here forward.

That is all I have. I will jump in the queue. Thank you.

Our next question comes from Alex Zukin from Stevens. Please go ahead with your question.

Congratulations on another great quarter. I want to ask about the subscription deals and cloud deals.

What in your mind has led to that meaningful uptick in the quarter, and do you guys internally have a ratio in mind, and how was the performance in the quarter? And maybe over the last, four quarters versus that ratio, and how should we think about it for next year. I know a lot of questions in one there.

We do not try to influence it too much. Interestingly, we like the mix.

We are getting up in the third of the new name area which is great. As you can see on the financials we are still growing licenses, we are still growing earnings while we are building a nice SaaS business. A lot of the SaaS companies are sacrificing earnings in order to do that.

So it is really the market share, or the traction there, is developing exactly where would like it to even though we are not over influencing it. By this I mean there isn't any pricing bias or margin bias. The incentives for reps and management are similar.

Really our feeling is we should capture the customer whichever way works best for the customer. And once they are a customer, as you know, they are a customer with us almost forever. And so we are not over biasing that.

I also think, personally, that our types of maintenance agreements that are 98%, 99% retention, high dollar maintenance agreements, high margin; that while the marketplace clearly distinguishes significantly between traditional on premise maintenance revenues and SaaS revenues, I think our type of maintenance revenues are very valuable and the customers are very valuable if they happen to choose on an on premise basis.

That is very helpful. Thanks a lot, John.

Sure.

Also just a question about the competitive environment and the win rates and what is your take on the potential for pricing power given the [emcats] of the world getting taken out?You seem to be in a position with the market-leading product with not a lot of competition. Just want to get your thoughts on that.

Well, I would not factor in a lot of price increases. Obviously we are very active in the new business market. We want to have great relationships and be able to defend a very strong value proposition with our clients.

We want them to talk that language when talking to prospective clients, and I think that our current pricing as we achieve more and more scale and take advantage of that leverage is giving us plenty of margin opportunity. So I wouldn't factor in significant price increases.

What I would say is maybe a year ago, 18 months ago we were pleased with the improvement in our products and competitive position to win more deals. The next objective was to maybe win those deals by a wide enough margin that we could eliminate or marginalized the discounting that does go on in the marketplace. We do know that our discounting has been less aggressive, we haven't had to discount as much.

That is a benefit that we will be pleased if there isn't discounting. We can go forward with our model and just let the model work, and we will see margins expand through that.

Perfect. Thank you guys, again.

Our next question comes from Kevin Liu from B. Riley & Co. Please go ahead with your question.

Hi. Good morning. Looking at the guidance for the full year looks like you would expect Q4 revenues to be flattish to slightly down given that your software backlog is actually up on a sequential basis.

Wondering if you could talk us through some of the factors driving that? Is it just conservatism, is it reflective of the mix of deals you expect to be able to take up front versus putting in a backlog? Any color would be helpful.

Historically the third quarter is a strong quarter. Generally, fourth quarter the target to be somewhat flat is not unusual. Certainly, we could have awards and performance that drives beyond that, but there are some things in there.

I mean we get our increase in maintenance because it is our highest renewal, so that the existing customer base there wouldn't be much movement in that. That is 60% of our revenues. That is an event that takes place in July, and doesn't change to much of a degree the rest of the year.

There actually are some third-party maintenance renewals that are recognized at once in the third quarter. That is a one-time event that has to be replaced with other revenue growth in the fourth quarter.

Holiday schedules and a number of things play into professional service where typically professional services are a little lighter in the fourth quarter. So you are right, they look flat sequentially, but you actually have to make up for a few things just to get to flat and certainly there is an opportunity to have some growth.

The timing of the special services would be the biggest factor there probably with respect to just fewer billable days as people take off the last part of December and it is hard to get a lot of implementation work done.

Thanks. That is helpful. And then just one question with respect to your SaaS business.

The number of conversions that you are doing has been fairly constant year-over-year. Curious as to whether you are hearing more from your existing customers about interest on switching over, or whether you expect this pace to continue on as we move forward?

We haven't seen an acceleration, you are right. I think a lot of those that had an interest early on we have addressed those.

We are very active going into those customer bases and trying to find those opportunities. We've talked about it before, the catalyst typically would be people retiring, a change in skills or a need for new infrastructure and a capital investment they would like to avoid. Our inside sales channel is in tune with those opportunities, and I think that will allow them to pace the -- kind of chug along as it is. At some point, we may do something that makes it more attractive to that base to try to accelerate that.

Great. Appreciate you taking the questions, and congrats on a strong quarter.

Sure.

And our final question today comes from Matt Williams from Evercore. Please go ahead with your question.

Good morning, guys. Thanks for fitting me in. Just two questions for me.

Number one, Brian, maybe if you could talk a little bit about some of the margin levers that you guys are looking at both at the gross margin and the operating margin leverage going forward. I know gross margins you mentioned in the nine months, year ago period were suppressed a little bit.

As we lock out to 2015, thinking about 100 bips of margin expansion. What are some of the drivers at the gross and operating level?

Clearly, there are two areas that have the most leverage. One is just the volume of the software licenses.

And with the very strong growth we have had we have seen a nice push from that. Obviously, very high margin on the incremental revenues on licenses, close to 100% on those.

And the second is the incremental leverage or incremental margin in the recurring revenues; both maintenance, and particularly, the transaction-based revenues. As we mentioned and as you just noted, last year we saw really an outsize effect there where we had more significant costs associated with the startup of eFile Texas, ahead of those revenues. Now we have those revenues and the costs are mostly behind us.

We have some more eFile projects. For example, the one in Massachusetts is ramping up but they aren't of the same scale as the Texas one.

Actually, the Texas revenues will continue to grow as well as other eFiling revenues. Just the incremental margins and the recurring revenues are the biggest lever there.

In addition, I think we are doing a good job of continuing to bring the service to license ratio down, particularly on some of the larger projects, particularly in the court space where the service component, although still significant in most of the courts projects, is a smaller piece of the project, and so that mix is helping us in growing the margins as well. So just a lower service mix.

Great. That is helpful. I appreciate it.

And then, John, maybe one for you. Given the cash balance that continues to build, maybe just any comments on opportunities from an M&A standpoint?

Nothing specific, but just what you are seeing in the market? How is the pricing environment and are there any opportunities that you guys might target over others? Thanks.

Funny, when he said it was the last question I couldn't believe we were going to get through the call without that question. Obviously, cash was incredibly strong in the third quarter. Got the highest cash position we have ever had.

With the visibility we have on our business it is going to continue to accumulate, and create a stronger and stronger balance sheet, so we are certainly aware of that. We certainly consider it a very important strategic opportunity to deploy that. Historically, I think we have with our capital, especially with our repurchase well and created a lot of share holder value.

You guys I'm sure know, the market is pretty robust right now. It is active, but it is expensive as well. We certainly are looking at the right opportunities very carefully. We have some things that we would love to achieve strategically and financially, and we will look to be opportunistic and find the right opportunities.

Great. Thanks for the color and congrats on the quarter.

Sure. Thank you for joining us on the call today, and if you do have further questions feel free to contact myself or Brian Miller.

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