Manatron: B. Riley Conference Presentation Transcript

TRANSCRIPT SPONSOR

Manatron (MANA)
B. Riley Conference
March 15, 2007 1:15 pm ET

Executives:

Paul R. Sylvester - Chief Executive Officer and Co-Chairman of the Board

Presentation:

Justin Cable

This year I’m happy to have Manatron here presenting at our conference and today we have Paul Sylvester to present, so I’ll leave it to Paul.

TRANSCRIPT SPONSOR

Hayden Communications ("HC") is a premier information resource to institutions, hedge funds, independent portfolio mangers, buy-side and sell-side analysts, small to large retail brokerage firms and accredited individual investors. With integrity and knowledge, the team of investment professionals at HC draw from “Wall Street” and media backgrounds and continuously strive to maximize the ongoing corporate visibility and market capitalization of clients though a multi tier proactive program. Confidence is essential for a client to attract key investors, customers, and employees. Through a proven track record of exceptional performance, Hayden Communications has established confidence in the marketplace one investor at a time. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

Paul R. Sylvester

Thanks Justin, looks like everybody’s bailing out and going to the basketball games here, but I appreciate the few of you who have taken the time to let me tell you a little bit about Manatron.

For purposes of our attorney this is a message from them. I'm not going to spend any time on that but, safe harbor for what it's worth.

Basically a little slide here on who we are. We are a niche provider of software to state and local governments. If you own a house and get a property tax bill, you probably know something about us. We basically provide software to tax collectors and auditors, to help the county officials maintain and update property values, bill and collect taxes, track taxes to delinquents, and ship all their stuff over the internet. We provide them with e-commerce as well.

We've been around for a long time, 36 years in business. We've got over a thousand clients. We're in thirty states and a couple of Canadian territories. We've got over $40 million in revenue and over $40 million in assets.

We've gone through a number of evolutions in our history. It started out as a service when I joined the company in '87, shortly after we went public. Essentially we were a hardware reseller and that bought up a number of companies in the late '80's, early '90's, which were doing the same thing that we were, but back then software was proprietary to hardware, so it was all about moving hardware.

Once we got by Y2K we needed to really take a close look and find a sustainable business model and an opportunity to grow the business. So we landed on the fact that our core competency was really in the property tax and assessments base. We reorganized the company at that time and sold off a couple of our non-core products, and in the last three years have put all the investment in becoming the leader in that space.

Currently today our property tax software touches about 25 million parcels across the US. There are about 150 million parcels nationwide. So it's a reasonable percentage. And then we are responsible for billing and collecting over $60 billion of taxes. If you look out the window, if any of you went up to the Ghost Bar and looked out over Las Vegas last night, you could see all the properties there. Clark County is one of our clients, so we're billing and collecting, helping the treasurer and the tax collector in this county to bill and collect the taxes here in Clark County.

We've got a lot of subject matter expertise, a lot of people that have been in this business a long time. Some of them are former county officials. We think we're second to none in terms of the competition and in terms of domain expertise. That plays well when you're selling to local government. Again, as I mentioned at the front end, in the last three years we've really put all of our investment dollars behind our new product which we've coined “GRM.” It stands for “Government Revenue Management,” and I'll talk a little bit more about that in a few seconds.

As I mentioned, now that we've reorganized and are looking at where we're going to go on a forward basis, our vision is to be the leading provider of property tax solutions across the US and we want to consistently deliver solid financial results and obtain the leverage from a lot of the costs that, historically moving from a service company to a software company, we weren't able to obtain.

A lot of times when people look at our company for the first time they look at a 5-year picture and see that the revenues haven't really grown. In this case you can see that the revenues have actually shrunk from 2006 to 2000, six years ago.

But if you look at the mix, back in 2000 we were selling a lot of hardware and doing a lot of appraisal services which is kind of feet on the street work where we actually go out and visit properties, take pictures, and collect information, help counties reassess properties in their locality, so a lot of our revenue back then was from that type of service.

And we also had two other product lines. One was our financial product line which is general ledger, receivable, payable, inventory management, that sort of thing. And we had judicial software also, which is for court accounting child support case management. We sold off those two product lines a couple of years ago to narrow our focus on property.

We're selling very little hardware anymore. We do still sell hardware to the smaller clients that want kind of a one stop shopping proposal, but for the most part there's very little margin in hardware and most of the counties and cities we deal with buy their hardware directly. So if you look at our core property business back in 2000 from software and services it was about $14 million, and then in 2006 it was almost $27 million.

So we actually have grown the property business and that's really what we're focused on, driving north the $50 million in the future, that (inaudible). So we are actually growing the business.

In terms of the market drivers or our value proposition, if you got in your car and you drove from here to California and you stopped at all the counties and the cities along the way, you'd find that for the most part counties and cities are using 20-25 year old software. It's green screen legacy based software. On an industry average or a nationwide average it's probably 75-80% of those counties and cities are using old stuff. The IT folks are having a harder and harder time maintaining the software, particularly as they've upgraded and purchased new software for other areas of the county.

This is becoming a mission critical product because the states and the fed have cut back what funding they've historically given the counties and cities, so counties and cities are relying more and more on property tax revenue as their fiscal lifeline. A lot of people are retiring that have been in the workforce for 20-30 years and so Bill and Jenn have supported the Legacy system are moving on and so they're panicking about who they're going to get to support their new system.

They're facing build versus buy decisions, do we want to rebuild a new system or do we want to find a package software from somebody that focuses on this on a daily basis. They're facing integration issues, they've made huge investments in GIS systems in the last four or five years so that they can look at things pictorially and visually. A lot of the assessors and tax collectors want to look at property information visually, so they want to leverage that GIS investment. And they're looking for new software that'll allow them to do that, and frankly they're looking for the next generation of software that they can use for the next 10-20 years.

We believe that we have the product that will allow them to address a lot of those issues. We can show them a pretty reasonable ROI where if they put the new software in, a lot of times they can identify new properties or they can identify features about existing properties where maybe they didn't pick up some new construction or they didn't characterize the property accurately, so they can end up generating more tax dollars which will ultimately pay for the system.

It gives them a huge amount of efficiency and a lot more functionality than they ever had before. They can tie in the internet now where historically lots of people had to go downtown, stand in line, deal with parking, deal with office hours, which as most of you know, in local government is about 9-4. Now they can get access to this information on a 24 by 7 basis.

Lots of realtor and title companies and lawyers typically want this information. And of course, constituents like you and I are putting pressure on local governments to be able to process transactions over the internet. With the new software we're now able to collect taxes and do tax fails and so forth over the internet. It's giving them that next generation.

In terms of the market, people want to know how big the market is. If you look at Gartner's statistics or NPUT, or the Center for Digital Government, that'll tell you that $80 billion is being spent on an annual basis in state and local, but that's for the whole gamut. That's for child support systems, health and human services, school systems. They don't drill down and see how much is being spent on payroll systems or how much is being spent on property tax systems.

We've tried to take an initiative to calculate the size of the market ourselves. If you look at the fact that there's 3,000 counties across the US and about 10-15,000 cities and towns and you look at the average number of parcels per county and city and use an average parcel price, you can quickly land on the fact that there's over $1 billion and maybe closer to $2 billion of market opportunity for a new software.

California alone, we estimate a couple hundred million dollars. California's using mostly internal systems for the most part. The market opportunity is not insignificant. The big question is when are they going to spend this $1-2 billion for new software?

We believe again, government is typically a little slower to move than private industry, so it's probably looking at about a 10 year period to spend this amount of money. You're looking at maybe $100-200 million of new business opportunity on an annual basis. We have not seen that in the last couple of years. We've seen closer to $75-100 million of business that's been let out in the last couple of years, but we've seen the market starting to loosen up a little bit for a number of reasons that I mentioned previously.

So there is opportunity to grow the business, a lot of barriers to entry. It's a relationship business. You might have some great software that you've developed for county government. But if you don't know the people, if you don't know your way around the ropes and routines, and the IRP processes, then you're not going to make it.

We've been in this business and we've dealt with local government for over 35 years, so we know the drill. We know how to propose, we know who to talk to, who the decision makers are, and we know the sales cycles are long. And frankly, we're one of the few companies that have both technological expertise as well as the relationships.

One of the dilemmas of working in this market is long sales cycles. It's not unusual for a sales opportunity in a new market to extend out over 24 months. So you have to plan for that, and you have to be aware of that.

We're seeing some consolidation in the market. We ourselves have done about five acquisitions in the last five years. You're seeing some of the other competitors of ours – Tyler Technologies, for example being our largest competitor – they bought up a few companies. And Gardiner's actually predicted that in the next five years, you'll probably see one-third fewer businesses, particularly the little guys. They just are not going to be able to make the jump to the next generation for a couple of reasons: A, they don't have the money to invest in the next-generation product, or B, they're reaching retirement age and looking for liquidity event.

So, very fragmented in terms of competition. There are a couple of competitors, and I'll share with you a list of who they are in a minute. Most of the competition is state-by-state. So in Illinois, for example, we'll have a small company that might be doing $2-3 million in revenue, that will only compete with us in Illinois, and the same thing in Florida.

So there are very few companies like us that actually cross state lines. And again, that was part of our vision and strategy a few years ago. We wanted to develop a new strategy that would cross state lines because historically our software was state-specific. So we're one of the few companies that have done that.

A lot of people get confused when they look at the company. They hear us talking about GRM, and of course, that's what we've been bragging about recently because that's our new product, and we just launched it a little over a year ago, but we're only running GRM in three states right now. We're in the process of trying to get it implemented in six others. All the lion's share of our revenue is coming from our Legacy products here, which, I'll share with you some of the numbers in some of the states.

It's kind of a good news bad news thing, but we have a lot of products that we're still supporting in our core markets of Indiana, Ohio, Florida, Illinois, and Michigan, that's throwing off the revenue that's allowing us to invest in the new software. At some point we will circle back to these markets with our new GRM product. But right now our focus is to get each one of these states on a common client-server version of software.

Whereas right now, they're running on two or three different versions of software as a result of acquisitions we've done. So we're trying to get our core markets on one product, and then we're actually using our new product to capture market share. And I'll share with you in a minute some of the new minutes we've opened in the last couple of years.

In terms of our core markets, and this is really what we're trying to do in many states, we're trying to get this kind of penetration. Indiana is our biggest state in terms of penetration. There are 92 counties in that state; we have 87 counties that are using some form of our software. Most of those counties in Indiana are using both our tax and assessment software. They're not using GRM software yet. So remember that.

Ohio is our biggest state in terms of revenue. There are 88 counties in that state; we have 51 counties. And that's starting to throw off a fair amount of revenue for us, because we've only sold about 15 counties in the last year our latest version of tax software. So we've got an opportunity to sell 35 additional counties our next-generation client-server product. At some point down the road we'll take GRM into Ohio. But right now we're focusing on just getting all the counties in Ohio on one product.

Illinois, we have 41 of 100 counties there. In Florida, we've got 38. A lot of our larger counties are in Florida. Las Vegas is our largest customer. Fort Lauderdale is very close. And frankly, with the growth they've had last year, they may now be a little higher in terms of parcels. But right now, Fort Lauderdale and Las Vegas are our two largest clients.

We've got 35 counties in Georgia, 33 in Idaho, and 17 in Virginia. I mentioned at the beginning that we're in 30 states, and in a lot of these other states we have two to three to four counties. And so we're trying to get this kind of penetration, which is when you can start seeing some leverage on your costs.

Our GRM suite software – again, Government Revenue Management, it's all about managing the revenue, if you will – is an integrated tax or assessment product that also has a recording function, an e-government function, and is married in with the GIS software.

And of course, we have the services when we sell that software. There's usually a one-to-one relationship in terms of licensing fees to services. And then, the real key is the annual maintenance, which I'll share with you in a few minutes as to what kind of dollars that can throw off.

In terms of the advantages, again, for GRM we spent about $15 million in the last three years, if you will, most of which has been expense in this new product. And, again, it's a single, one-thread-of-code system that will cross state lines, which will allow us ultimately, as we get this system implemented, to leverage our costs more effectively. And when you look at the numbers here in a few minutes, you'll see a few examples of some of the leverage that we are able to achieve.

It allows us to leverage our product development efforts, our sales efforts, our product-management efforts, our deployment efforts. Whereas historically, when I first became CEO, we had some separate pockets around the country: Indiana was like a separate company, Ohio was a separate company, Florida was a separate company. They all had their own development shops, they had their own support shops, their own sales team, and so forth. So you can imagine that those people weren't able to help other states. So, as we have this new national product, we'll start to see a lot more capability and a lot more leverage.

It's built on the latest Microsoft standards. We've developed our own framework, or what we refer to as our tool set, which again, allows our developers to be much more efficient. We even have visions of selling that tool set to some of the larger counties, perhaps in California, that they are going to want to have access to the source code, and so forth. So a lot of effort has been put into the product. We've still got a fair amount of work to do, but it's slowly and surely becoming a product that is crossing state lines and is leaping ahead of the competition.

In terms of why the clients should be buying this, well, as I mentioned at the front end of the presentation, it allows them to go to that next generation. It gives them kind-of a safe bet because they're dealing with Microsoft, and as you might imagine, governments want to be protected, and make sure they're not getting too crazy with their technology. But it gives them seamless integration to their other systems. They can tie into their accounting systems, they can tie into their GIS systems, and they can tie into their permit systems. It gives them internet access and e-commerce availability.

It gives them continuous synchronization of data, so when people want to start paying their taxes over the internet, if a husband is paying at home and the wife decides she wants to pay her taxes at the office, if one pays five minutes before the other, it won't allow for duplicate payments because the data is being constantly updated. And again, more importantly, it's allowing them to do more with less.

Because as you might imagine, with them facing budget restraints, governments don't like to lay off people. It's mostly leaders and elected officials, and that doesn't resonate well when they're running for re-election if they laid off 15 people in their last term. But if they can say, “Hey, we had six people retiring, and because we put this new software in we didn't need to replace them”, that's one of the selling points. So you put in this new software and do more with less.

So a quick case study. Gwinnett County, which is a collar county to Atlanta, was the first county that kind-of bought into this vision of the GRM product, and their key was that they wanted an integrated solution. We got a quote there from Steve Pruitt that I'm not going to bother reading to you, but Gwinnett is one of the larger, more progressive, faster-growing counties in the country, and they've put the product in a little over than a year ago.

So the product has been launched, it's been through a couple of cycles now. It's live and running in Gwinnett County. It's also live and running in three or four counties in Idaho, and it's live and running in one county in Alaska. So our growth strategy, obviously, is to take this new product across the country in new markets. Our growth strategy is also to upgrade our current client base of 1,000 clients, as well as pick off new customers in current markets. We've done a few acquisitions, which if you've done any research on us, you'll see that's part of our growth strategy as well.

In terms of recent momentum, our contracts that we've signed: Gwinnett County, as I talked about a few minutes ago, MCCC is a consortium of counties in Minnesota.

Historically we find one county at a time, and we're pretty proud of this award last year. This involves 28 counties currently that signed up for the product and there are another 20 counties in the consortium that that are standing by to see how this goes, and that’s tax only to start with and so, once again, we’re assuming that once we get tax going, they’re going to want to buy our assessment product as well. That was kind of a mini acquisition in itself.

Virginia Beach was a very high profile win for us. We beat IBM out in that deal. We beat our major competitor there. That’s in the process of being implemented right now.

Reno, Nevada, which is on the other side of the state, we signed that a little over a year ago and that’s in the process of being implemented.

We just announced a couple days ago our fourth win in South Carolina, which is Beauford County. We now have four counties in South Carolina that have signed up for the product. That’s a new market for us.

A couple counties in Kansas which we just announced. That is another new market for us. And then Alaska and Tennessee.

Again, the map here of some of the markets we’ve touched. The significance of the map here is that historically all of our sales ten years ago were upgrades to clients. Every once in a while we would tick off a new client. If you look here, the red are new states that we’ve opened up in the last couple years.

We’ve opened up 11 new states, most of which are GRM markets in the last couple of years. And that, as you can imagine, includes a fair amount of expense to make that happen, so we’re still in what I call the planting of the seed process and we’re going to start to bear some fruit here in the near future, but 11 new markets in the last couple years is something that we’re pretty excited about.

Last year was a tough year for us in terms of numbers. We’ve since turned that corner and got the numbers going back in the right direction, but the significance of last year even though the numbers were not good was that we launched our new product and that secondly we had a major acquisition which I’ll talk about in a minute. And thirdly, we signed the MCCC contract.

But we made huge investments in our core markets and we’ve rolled out a complete new identity. We’re starting to brand ourselves nationally. Three or four years ago we were a regional company, so we’re now being branded and looked at as one of the experts in this space, so when counties are looking at doing something with their tax or their assessment, they know that they need to at least talk to us. So we’re popping up on a lot of people’s radars. We’re working closer with Microsoft. We’re a gold certified partner with them. We’re working with Oracle.

As I mentioned, we got rid of a couple of our non-core products lines so we can focus. There are some people who would argue that we shouldn’t have done that. But we believe that in order to be the leader, we needed to narrow that focus to property.

We’ve instilled a whole lot of new disciplines in the company, invested in new people and processes, again, all of which we’ve expensed to make us a more professional company. We’re migrating from being a services company to a software company and that takes some time to make that happen.

We did do three strategic acquisitions in the last year and a half. The major one being a company which we acquired February 1st of ’06, and it was about an $11 million purchase for us. They were our major competitor in the property tax space. The main reason we went after that company is because they made a huge investment in California and we were looking at California as the holy grail for the future for our industry because that’s where there’s going to be a lot of money spent.

We figured it would cost us $5-$10 million alone to get in to California. So the fact that we were able to add to the team, add their subject matter expertise, it gives us a presence up in Bellevue, Washington. So we now a have a West coast presence.

They had just completed a major client implementation in Minnesota. As I mentioned, we signed 28 counties, so they’re helping u in Minnesota. I mentioned that they had Clark County as one of their clients. We just signed Reno, so they’re providing subject matter expertise in Nevada. It’s been a great acquisition for us.

We also had more regional acquisitions. Those were much smaller deals. That was primarily eliminating a competitor, picking up subject matter expertise, picking up some recurring revenue to help us on our growth strategy.

This is a list of the competition. Due to the time constraints I don’t have a lot of time to talk about this, but if you guys want to drill down a little deeper later on, I’m available afterwards.

In terms of some of the highlights for the current year, we’re on an April 30 year end, so we’re three quarters of the way done. You just need to keep that in mind because a lot of times people automatically assume our calendar year.

So we’ve got three quarters under our belt and we’ve had about a $5.5 million positive swing in our operating income through Q3 which is significant. Our gross margins have improved over 17 points from 30% to 40%.

We’ve had 20% revenue growth this year and a lot of people are saying that revenue growth is due to your acquisitions. Well, a lot of the revenue growth is due to an 82% increase in our license fees and all those license fees have been to new accounts, so there has been a fair amount of organic growth.

To date we’ve signed about $19 million of new business compared to $16.5 million last year. Again, the significance of our signed contracts now versus a few years ago is that over 50% of the contracts that we’re signing now are with new-name accounts, where historically all of our sales were upgrades to current clients, so every time we add a new customer, we’re adding to that layer of recurring revenue.

Our back-log for license fees and services grew a couple million dollars. More importantly, our recurring revenue which is kind of our bread and butter is $22 million on an annual basis.

So out of $40 million in revenue, 50% of our revenue is coming from our maintenance contracts. That number has grown by $5 million in the last 12 months and should continue to grow through price increases and as we add these additional clients.

Some of you who have been following us may have noted that Consolation Software has sent us two unsolicited proposals in the last 90 days. One for $9 per share in December and one for $10 just a week and a half ago, suggesting that they acquire us and we have politely rejected both of those offers indicating that we’ve just put a new three year operating and growth plan together and we just came off of restructuring and the market hasn’t yet realized the value of what we’re trying to do.

So we’ve taken our third state live this year. Another important indicator is just on a cash stand point. In the last 12 months which includes the fourth quarter of last year which was not a good quarter for us, we’ve generated a little over $7 million of positive cash flow. We’ve used $6.5 million of that for acquisitions and another $400,000 and something to buy some of our stock back. That’s a positive indicator as well.

Again, due to time constraints here, we can spend a lot of time on the numbers, but just look at the leverage that you’re seeing and the revenue growth and on the margin improvements of $1-2 million.

We believe that we have an infrastructure in place that we can take revenue up to $11-12 million per quarter without seeing a lot of additional incremental costs so you should see continued improvements on the gross profit margin as well as the operating margin with sales growth.

That’s the Q3 results and then this is the nine months results, again, $5.5 million improvement on sales and $5.5 million improvement on operating income and some nice turn-arounds.

Our balance sheet is reasonably stable. We have a little bit of debt. It’s acquisition debt. It’s seller-financed debt. Some of it is interest free and some of it is at 5%. We’ve had no bank debt for five or six years. We have $4.5 million in cash. And so we believe we’re positioned well enough to continue to grow on our cash.

In terms of wrapping it up really quickly, again in the interest of time, we believe it’s not a matter of if, it’s a matter of when these county and city governments are going to purchase the software. They’ve essentially got old stuff that’s nearing technological obsolescence. There are all sorts of business reasons for them to make this investment as I explained earlier.

The amount of money that we’ve spent and the investment we’ve spent in the last two to three years, we believe has positioned us to be able to take advantage of this new business that’s going to start to come to fruition.

We have a new business model. We’ve been around in business for a long time but we’re really at the front end of our journey, and we believe that journey is going to continue to evolve and we believe there’s going to be a grab for market share and we believe we’re well positioned as we take our GRM contracts live in this next fiscal year, we’re on track to becoming the leader in this space.

Once again I want to thank you for your attendance and I will take a few questions although I know they’re trying to get a few more presentations in here so if any of you want to drill down a little deeper, I’m happy to meet with you. I’ve got a few more hours here this afternoon. There is a copy of the presentation that I think has been handed out.

Any quick questions?

OK, well thanks for joining me here today.

TRANSCRIPT SPONSOR Hayden Communications ("HC") is a premier information resource to institutions, hedge funds, independent portfolio mangers, buy-side and sell-side analysts, small to large retail brokerage firms and accredited individual investors. With integrity and knowledge, the team of investment professionals at HC draw from “Wall Street” and media backgrounds and continuously strive to maximize the ongoing corporate visibility and market capitalization of clients though a multi tier proactive program. Confidence is essential for a client to attract key investors, customers, and employees. Through a proven track record of exceptional performance, Hayden Communications has established confidence in the marketplace one investor at a time. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

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