Manatron F4Q07 (Qtr End 4/30/07) Earnings Call Transcript

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Manatron, Inc.
F4Q07 Earnings Call
June 28, 2007 4:15 pm ET

Executives

Paul R. Sylvester - Co-Chairman and CEO
Krista L. Inosencio - CFO
William McKinzie, President and COO

Operator:

Good afternoon, my name is Myrna and I will be you conference Operator today. At this time I would like to welcome everyone to the Manatron Inc. Fourth Quarter Fiscal 2007 Earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw you question, press the pound key. Thank you.

It is now my pleasure to turn the floor over to your host, Cameron Donahue of Hayden Communications. Sir, you may begin your conference.

Cameron Donahue:

Thank you and good afternoon. We’d like to thank everyone for joining us today for Manatron’s Fiscal 2007 Fourth Quarter Earnings Conference call. The call today will be hosted by Paul Sylvester, Chief Executive Officer and Krista Inosencio, Chief Financial Officer.

Following management’s discussion, there will be a Q&A session for participants on the call. Bill McKinzie, Manatron’s President and Chief Operating Officer will be available for this portion of the call.

Before we get started, I’m going to review the Safe Harbor Statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements include the development of new products, the commencement of production and the future financial performance of the Company. Actual results may differ from such projections that are subject to certain risks including without limitations, risks arising from changes and the rate of growth in the local government market, increased competition in the industry to delays in developing and commercializing new products, adequacy of financing and other factors described in the Company’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission which can be reviewed at www.sec.gov.

At this time, I would like to turn the call over to Paul Sylvester, CEO, for opening comments.

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Paul Sylvester:

Thank you Cameron and good afternoon everyone. I want to thank those of you who have taken the time to join us today.

We’ve produced our financial results for our fourth quarter in the year ended April 30, 2007 just a short time ago today. Hopefully you have had an opportunity to take a look at them.

On balance, it was another good quarter for us. Our acquisitions of ASIX and Plexis in the second half of the prior fiscal year combined with solid organic growth and the impact of our cost reduction efforts in the current year have resulted in significant improvements in our financial performance on many fronts for each of the first three quarters of fiscal 2007. We are pleased to report that the fourth quarter was a continuation of these positive trends.

Before I turn the call over to Krista, who will provide you with additional details on the numbers, I would like to briefly touch upon a number of our financial highlights for both the fourth quarter and the full fiscal year.

In summary, our gross margin for the fourth quarter improved by 217 basis points to 53.1%. Our operating income increased by $2.6 million and our earnings per share moved upward by $0.39. We recognize that the prior year fourth quarter results were soft and therefore, easy to compare against, but still feel very good about delivering on our promise to return this company to profitability, as well as our ability to do so on a consistent basis throughout the year. Our goal is to continue this trend during fiscal 2008 and we currently feel confident that we will do so.

We also have some fairly impressive comparisons for the full year. Our revenue growth was over 15%, which includes 100% improvement in our software license fees. Our gross profit increased by over $9 million reflecting a much improved margin of 48.9% versus 30.6% in the prior fiscal year. Our pretax income changed in the right direction by more than $8 million as we posted pretax income of $1.4 million in the current year.

Finally, our net income positively swung by more than $5 million to $946,000. This translates to $0.19 per diluted share for fiscal 2007 versus a loss of $0.97 per diluted share for fiscal 2006, which is also a significant improvement. In addition, our cash and short-term investment balance is about $3.4 million higher at April 30, 2007 as compared to the prior year-end.

Our total revenues increased 1.7% for the fourth quarter and have now exceeded $10 million for four consecutive quarters. Furthermore, if you exclude the impact of appraisal services revenue, which decreased by $918,000 for the fourth quarter, our revenues have increased by over 13%. We also believe that we have a cost structure in place that could support another $1 million to $2 million per revenue per quarter, without having to add significant expenses. This means that we have the opportunity to produce incrementally improving gross and operating margins as we grow our revenues.

Our balance sheet remains strong with working capital of $5.1 million, no bank debt and $24.5 million of shareholders equity. This is after we paid down acquisition related seller finance debt by nearly $3 million and repurchased almost $500,000 of our common stock during the year.

After Krista provides you with more detail on her numbers, I’ll talk briefly about the market and our GRM product and then we will take questions.

Go ahead, Krista.

Krista Inosencio:

Thanks, Paul. Our total net revenues were $10.1million for the three months ended April 30, 2007. This is an increase of 171,000 or 1.7% over the 9.9 million of net revenues that were reported for the fourth quarter in the prior fiscal year. For the year, our total net revenues were 41.8 million which represents an increase of 5.5 million or 15.1% over our revenues of 36.3 million for the prior fiscal year. These increases in net revenues were primarily due to increases in the Company’s application software license fees and recurring software maintenance fees, offset by a reduction of professional services revenue. Our application software license fees increased by 856,000 to 1.3 million for the three months ended April 30, 2007 versus the 455,000 of software license fees that were recognized for the fourth quarter in the prior fiscal year. For the year ended April 30, 2007 our application software license fees increased by 2.7 million or 100% to 5.3 million from 2.7 million for the prior year period. The increases in software license fees for both periods were primarily due to organic growth as they were driven by several property tax and CAMA implementation in our existing markets, as well as the continued execution of our GRM implementation in Idaho, Minnesota, Nevada, South Carolina, Tennessee, and Virginia, throughout fiscal 2007.

Our recurring software maintenance revenues increased by 511,000 or 11.9% to 4.8 million for the three months ended April 30, 2007 versus the prior year fourth quarter. For the full year, our software maintenance revenues increased by 3.5 million or 23.5% from 14.7 million to 18.1 million.

These increases are primarily due to three factors. The first is our acquisition activity. The acquisition of Plexis on November 1st, 2005 and ASIX on February 1st, 2006, contributed $2 million of new maintenance revenues for the year ended April 30, 2007 and 2.8 million on an annualized basis.

Second: Our software maintenance revenue has increased because we initiated maintenance on several new name accounts that have recently gone live, such as Kenai, Alaska; Gwinnett County, Georgia; Payette County, Idaho; Duval County, Florida; Davidson County, Tennessee, and the CAMA portion of the City of Virginia Beach contract.

Finally, our software maintenance revenue has grown because of the price increases.

In calendar 2005, we increased our software maintenance prices by approximately 3 to 5% as we have done every year. As noted in our previous calls, we increased our software maintenance prices in calendar 2006 by a much higher average percentage in order to bring them closer to what we believe were market rates. While these notices were sent out last spring and some started to take effect beginning October 1st, 2006, the majority of these price increases did not go into effect until after January 1st of 2007.

Our professional services revenues, which consist of data conversion, training, project management, hardware maintenance, printing, consulting and appraisal services, has decreased slightly by 182,000 or 1.1% to 16.7 million for the year ended April 30, 2007 versus 16.9 million for the prior fiscal year. For the fourth quarter, our professional services revenue decreased by 803,000 or 18% to 3.7 million from 4.5 million in the comparable prior year quarter. The decreases for both the fourth quarter and fiscal year were primarily due to a reduction in our appraisal services revenue. Our appraisal services revenue decreased by 918,000 and 1.9 million for the fourth quarter and year ended April 30, 2007 versus the respective period in the prior year because of the cyclicality of that work as well as an increase competition for the services.

Our cost of revenues for the fourth quarter has decreased by 2.1 million or 30.4% to 4.7 million from 6.8 million for the prior year quarter. For the year, cost of revenues has decreased by 15.2% or 3.8 million to 21.4 million versus 25.2 million for the year ended April 30, 2006.

It is worth noting that our cost for both periods decreased substantially while our revenues actually increased, which is an indicator that we are leveraging our expenses more effectively.

These decreases in cost of revenues were driven by the following factors: First, as noted in previous calls, we completed our restructuring at the beginning of the fiscal year, which has resulted in lower personnel expenses. In addition, there has also been a reduction in the Company’s payroll expense as a result of the reduced appraisal services activity. Our out-source labor had decreased by 656,000 and 1.4 million for the fourth quarter and year ended April 30, 2007 versus the respective prior year period. Primarily because the prior year amount included significant contracted labor expense related to the City of Baltimore implementation and the current year amount do not.

We have not incurred any internal or external labor expense on the Baltimore project since August 1st, 2006 but did incur $352,000 of out-sourced labor on the project with no associated revenues during the first quarter, which ended on July 31st, 2006.

Another reason for our decrease in cost of revenues is, effective May 1st, 2006, we extended the useful life of our capitalized GRM software development from three years to five years. Since GRM is a national product which has been implemented in many states and all of the clients will be using the same and single thread of code, we believe that’s its useful life is greater than less historic state-specific software that did not cross state boundaries. This change in the county (inaudible) has resulted in a reduction of software amortization expense during the current fiscal year of 502,000 and software amortization is one of the components for cost of revenue.

Finally, cost of sales for the three months and year ended April 30, 2006 included approximately 321,000 and 420,000 of expense related cost to complete accruals where as the current three months and year ended April 30, 2007 do not include any related expense. As a result of the increases in our revenues and decreases in cost of revenues, our gross margins have also significantly improved. For the three months ended April 30, 2007, our gross margin was 53.1% compared to 31.4% for the fourth quarter in the prior fiscal year. For the year ended April 30, 2007, our gross margin was 48.9% compared to 30.6% for the prior fiscal year. The increases in our revenues and the decreases in our cost of sales, as previously noted, have had a very positive impact upon our gross margin.

In addition, we have experienced a favorable change in the mix of our revenues, which also has impacted our gross margins. Typically our margins on licenses fees are much higher than they are on services.

Our selling general and administration expenses have increased by 3.9% to 5 million for the three months ended April 30, 2007 from 4.9 million for the fourth quarter in the prior fiscal year. For the full year, these expenses have increased by 9.9% to 19.2 million from 17.5 million for the prior fiscal year. The increases are for the prior year comparable periods are primarily due to four factors.

First, the amortization expense associated with the intangible assets acquired in connection with the acquisitions of Plexis and ASIX. Intangible asset amortization was flat for the three months but increased by 261,000 for the year ended April 30, 2007over the prior year comparable period.

Second, deferred compensation expense increased by 148,000 and 337,000 for the three-month and year ended April 30, 2007 over the prior year comparable period. This increase has resulted from the implementation SFAS 123R share-based payment effective May 1st, 2006 which requires the Company to book compensation expense associated with stock option issuances.

Third, commission expense has increased by 244,000 and 596,000 for the three months and year ended April 30, 2007 over the prior year comparable period, because of an increase in signed contracts as well as the implementation of a new commission structure for fiscal 2007.

Finally, the remaining increase in selling general and administrative expenses is due to the addition of key sales marketing and development personnel associated with the Plexis and ASIX acquisitions offset by the decline attributable our restructuring.

A substantial component of our selling general and administrative expenses is research and development costs. Our total R&D costs, included in expenses, have decreased from 2.4 million in the prior year fourth quarter to 1.4 million for the current quarter. For the full year, our R&D costs were 7.4 million versus 8.9 million for the prior fiscal year. These R&D costs include software amortization expense, which is included in cost of revenue versus SG&A software amortization expense of 304,000 for the fourth quarter versus 436,000 for the comparable prior year period. For the full year, software amortization expense was 1.2 million compared to 1.7 million for the prior fiscal year. These reductions are due to the change in the life of our GRM software from three to five years as noted previously, as well as the restuction activities for the latter part of fiscal 2006 which had an impact on the entire Company including the development staff.

We capitalized 687,000 of software development costs in accordance with FASB statement number 86 during the current quarter versus 354,000 for the fourth quarter in the prior fiscal year. For the full year, Texlite software costs were 2.3 million versus 1.6 million for the prior fiscal year. These increases in Texlite Software are due to the fact that more of our resources are dedicated to our GRM suite of software. As a result of our increase in revenues, lower costs structure and the fact that the prior year quarter and year-to-date results included a $532,000 restructuring charge, our operating income improved by 2.6 million to 311,000 for the three months ended April 30, 2007. For the full year, our operating income improved by 8.1 million to 1.2 million.

Net other income increased by 125,000 to 95,000 for the fourth quarter and by 8,000 to 185,000 for the year ended April 30, 2007 versus the respective period in the prior fiscal year. These amounts primarily consist of interest earned on our cash balances and rental income from a portion of our corporate office space that we’ve leased to an unrelated third party offset by interest expense. The increases in net other income for the current year and specifically, the fourth quarter, are due to reduced interest expense associated with the seller finance notes payable related to acquisitions as we came down $2.9 million during fiscal 2007. In addition, there was an increase in interest income as we had a higher average cash balance throughout fiscal 2007 than we did in fiscal 2006.

Our provision and credit for income taxes generally fluctuates with the level of our pre-tax income or loss. Our effective tax rate was approximately 23.8% for the fourth quarter and 32.3% for the year. These rates are lower than the statutory rate as the company’s prevision was reduced during the current year as a result of state net operating loss carry forward.

As Paul noted, our net income, or net income after taxes, was 328,000 or $0.06 per diluted share for the fourth quarter which compares quite favorably to the net loss of 1.6 million or $0.33 per diluted share that we recorded for the fourth quarter of our prior fiscal year. For the full year, our net income was 946,000 or $0.19 per diluted share which also is a positive comparison to our net loss of 4.3 million or $0.97 per diluted share for the prior fiscal year. Net income for the year ended April 30, 2007 was positively impacted by 340,000 or $0.07 per diluted share due to the change in the estimated useful life of our GRM software from three to five years.

Diluted weighted average outstanding common shares increased by approximately 353,000 shares for the fourth quarter and by 542,000 shares for the year ended April 30, 2007 versus the respective period in the prior fiscal year. These increases were primarily due to the inclusion of the dilutive impact of stock options or restricted stock outstanding. There was no dilutive impact of stock options and restricted stock in the prior year comparable period as these amounts were excluded from the weighted average outstanding share amounts due to the loss as reported for those periods.

Book value per share increased to $4.82 as of April 30, 2007 from $4.53 at April 30, 2006. Book value per share is calculated by dividing total shareholders equity by the total shares outstanding at the respective period end.

Net capital expenditures decreased by 6.5% or 31,000 to 443,000, for the year ended April 30, 2007. This slight decrease was primarily due to the restructuring activities that occurred a year ago, which resulted in the re-deployment of fixed assets throughout the organization and reduced the need for replacement equipment during fiscal 2007.

During the second quarter of fiscal 2007, we received approximately $2 million state and federal tax refunds generated from the losses we reported during fiscal 2006. We still owe a little over 1.6 million on the ASIX acquisition that will be paid in the next three years as well as a little over 500,000 on the VisiCraft acquisition that will be paid off over the next two years.

At this time, I would like to turn the call back over to Paul.

Paul Sylvester:

Thank you, Krista.

Simply speaking, local governments nation-wide are using old property tax systems, many of which are still green screen and character based. While many jurisdictions have upgraded their client service systems with relational databases, there is still a huge demand for more modern, integrated and cost effective property management platforms. Our new GRM suite of software is responsive to these needs and shows particularly well when we have the opportunity to demonstrate our capabilities and subject matter expertise to prospective clients. The market readiness for legacy systems upgrade seems to be on the increase as more local governments are starting to bow to pressures to replace their old technology, reduce costs and manage their critical life-line of property tax revenues more efficiently.

This is evident by the solid increases we have seen in our software license fees as well as the expansion in our pipeline and the number of opportunities we have had for sales this year versus the prior year. Our total sales, or new-signed contracts, increased 8.5% to $20.6 million for the year ended April 30, 2007 from 19 million in the prior fiscal year. While this may not seem like a large increase, the prior year amount included $4.4 million of appraisal services sales and the current year amount only includes $2.6 million of appraisal services sales. Excluding these appraisal services amounts from both years, our property software sales increased 23.2% from 14.6 million to $18 million. It is also worth noting that for the last three years, a substantial amount of our sales have been to new clients and new markets. Historically, the majority of our sales were to existing clients. Given the increased pipeline and continued investment in our GMR software, we expect that our sales for fiscal 2008 will reflect similar improvements.

Our backlog for license fees and services at April 30, 2007 is $21 million compared to $23 million at April 30, 2006. We should point out that the backlog amounts for both years include $2.8 million related primarily with the second phase of the Baltimore project, which most likely will not be delivered. The decrease in our backlog is primarily due to the reduction in our appraisal services backlog. The current year backlog amount includes over $5 million related to our recently announced GRM contracts with Beaufort County, South Carolina; Sedgwick County, Kansas and the unified government of Wyandotte County, Kansas.

As you know, our backlog amounts are exclusive of our recurring revenue from software maintenance, hardware maintenance, e-government subscriptions and printing and processing contracts. Our total recurring revenue stands at approximately 21.7 million on an annualized basis. This amount was 17.1 million at January 31st, 2006 just prior our ASIX acquisition.

We expect our recurring revenue to continue to grow as we add new clients, finish the implementation of existing GRM contracts and realize the full effect the price increases we initiated about a year ago, as well as those we just announced in the current year.

We have been reaping the expected benefits and synergies from our acquisitions the last year, particularly with ASIX. We’ve made sold progress against our strategic goal of positioning our GRM suite of software to penetrate the California market, which we have long considered a key to Manatron’s future growth.

Our Company gained a great deal of experience and credibility in California, particularly as we provided subject matter expertise on a large property tax project with the County of San Diego, and as we continue our pursuit of other California counties that are in the process of evaluating new platforms.

Fiscal 2007 was also highlighted by continued progress on the GRM front. Our GRM solution is gaining traction nationally as we continue to increase the number of referencable accounts. We are currently live in three states and have implementations in process in six others, which will contribute to Manatron’s future growth. The GRM suite of software is a web-based dot net, fully integrated, service orientated architected, enterprise-level solution with an extendable data model that enables local governments to replace legacy systems and realize significant efficiencies in cost savings while providing more and modern services to their constituents and in most cases, collecting additional tax revenues, which cover the cost of the GRM system.

We have several important releases scheduled for fiscal 2008 and expect to take a number of clients live during this fiscal year. In fact, the City of Virginia Beach is scheduled to go live in July followed by our three pilot counties in Minnesota, several Counties in South Carolina and Washoe County in Nevada this fall. We expect to gain additional leverage in economies of scale as we continue to market and implement GRM.

While our optimism and progress is not fully yet apparent in our financial results, we are, we were able to report a fourth consecutive quarter profitability and actually came in slightly ahead of our plan for fiscal 2007.

We are working very hard to build our backlog during fiscal 2008, so that we continue this momentum. Our focus for fiscal 2008 and beyond continues to shift toward creating a business model, whereby we are now able to deliver a customizable solution based on a standard product offering across the United States. The past several years have been heavily focused on investment behind all of our products from GRM to MVP Tax and from ProVal to e-government. We have put key processes in place including a GRM practice, a solid sales plan, a new marketing strategy, a core implementation methodology and a streamlined product development process.

We are starting to turn the investment corner and are focusing on producing sustainable, predictable and dependable operating results. We intend to prove that we can consistently deliver and execute solid outcomes. We recognize that there is still a lot of hard work to do and to commit to you that we are up for the task.

Thank you for your continued support and interest in our Company. We look forward to reporting our progress to you in the quarters ahead.

At this time, we will take questions from those of you joining us on the call today.

Operator:

Thank you. At this time I would like to remind everyone if you would like to ask a question press star then the number one on your number one on your telephone keypad. We will pause for just a moment to comply a Q&A roster.

Your first question comes from Sam Bergman (sp?) from Barry Capital Management.

Sam Bergman:

Good afternoon Paul and Krista. How are you?

Paul Sylvester: Hi Sam.

Krista Inosencio: Well, thank you.

Sam Bergman: A couple of questions. One, regarding employee count for the quarter. How much of an increase in sales or in other areas were added to the employee count fourth quarter versus third quarter?

Bill McKinzie: I’m sorry Sam, this is Bill. What, would you say the question is again?

Sam Bergman: Oh, hi Bill. How are you?

Bill McKinzie: I’m good.

Sam Bergman: The question is, was there much of an increase in the employee count this quarter versus last quarter:

Bill McKinzie: Head count you mean? Head count you mean; no, there was not.

Sam Bergman: For the whole year, how much of an increase was there versus the prior year.

Bill McKinzie: We actually had, we did not have an increase; we actually had a decrease because we had gone through the restructuring, Sam. We did have a little bit of a shift of an out-source labor on a cost-of-goods where we were going to do some things with some contracted resources that we did find we could do more efficiently in-house, but that all was within the confines of plans. But from an overall head count standpoint, we are down versus last year.

Sam Bergman: We were right around 350 or so?

Krista Inosencio: Yes.

Bill McKinzie: Our total head count’s around 350.

Sam Bergman: Around 350.

The news on the Baltimore contract, I guess you had said there isn’t going to be any revenue from that contract going forward. Is that in litigation right now?

Bill McKinzie: It’s not in litigation at this point in time no, Sam.

Sam Bergman: What is the plan for Manatron against Unisys on this particular contract?

Bill McKinzie: Right now, at this point in time Sam, it’s not anything that can be discussed. We are definitely reviewing and looking at all of our options and studying them very closely.

Sam Bergman: Okay. This quarter, how many GRMs in the fourth quarter sites went live?

Bill McKinzie: In the fourth quarter, we didn’t have any GRM sites that went live in the fourth quarter; we’ve got implementations to go on line in July and then in the fall, based on kind of those tax cycles, if you will.

Paul Sylvester: Right. There’s continued work on those projects though, Sam, as we mentioned in previous call some of the initial GRM contracts, particularly in new states, the project’s spread out typically over a 12 to 18 month period, and so we’re reaching the point in several of those like we mentioned, Virginia Beach, and Washoe and Minnesota and South Carolina where we expect to have those states live here in the first two quarters of this fiscal year.

Krista Inosencio: And Sam, I would like to go back and just add a few comments regarding the head count question you had. Our current head count’s actually at 325 and I think your question might have been geared toward have we hired a bunch of folks or created new positions since we did the restructuring and the actual increase in head count since the restructuring has been extremely minor; just maybe a couple of positions. But we constantly have open requisitions because as we have turnover we do look backfill those positions.

Sam Bergman: Okay, thank you. In terms of the appraisal business, has that hit its low point for the Company?

Bill McKinzie: Is it at the low point for the Company?

Sam Bergman: Yes.

Bill McKinzie: Yes it is.

Sam Bergman: Do you expect it to bounce in ’08?

Bill McKinzie: I don’t expect a lot of bounce at this point in time, in ’08 Sam, we are definitely looking at other market opportunities, we are pursuing them aggressively but at this point in time, my expectations remain pretty conservative.

Sam Bergman: Okay. In the last question, Paul, it seems like you have pretty good confidence going in to 2008. Is it pending contracts that are on the table right now, or the pipeline that’s giving you that confidence?

Paul Sylvester: You know, I think the pipeline is quite a bit bigger than last year and I think the confidence is better as a result not only of an increased pipeline, but as a result of the continued investment in our product. Our product is getting better and better and it shows really well. I mean, it seems like whenever we have an opportunity to present our product in front of a perspective client, they are really impressed with all of the things we have considered and are looking at putting into the product and so, you know, we feel very good about the future.

Sam Bergman: Thank you.

Paul Sylvester: Thank you, Sam.

Operator: Once again, if you do have a question you may press star, one on your telephone keypad at this time.

Your next question is coming from Justin Borus from Lazarus Investments.

Justin Borus: Hey, Paul. My question is, I’m a little surprised we haven’t seen more significant GRM contracts, particularly with California. You know, the product has been out for quite some time now. Can you comment on that a little bit?

Paul Sylvester: I will turn that over to Bill as he’s closer to the marketing activities than I am, but…

Bill McKinzie: Yes, we’re actually very very focused on California; definitely there is a lot of activity going on there, not only from a Manatron standpoint as far as what we’re doing, but there is also a lot of market activity out there. There’s always that little bit right now, I mean, California’s kind of getting to that point where it’s ready to pop and it’s really who can kind of get that anchor first; who jumps first and who’s kind of got that anchor first. So, we’re really targeting several key areas to be able to get that anchor account going but it’s still, it’s turning right now, we are seeing the market, definitely there has been when you see RFPs like Los Angeles County coming out with a huge RFP, which they came out recently within the last couple of weeks, a very large kind of custom build for that location.

Those types of things do ripple the market a little bit and there’s a little bit wash in it and kind of wandering by the various jurisdictions, but we’ve got a couple-pronged approach there and we are seeing that market shifting and we do, you know, we’re all over and we’ve got an army of folks out there on a continual basis, the EVP of business development and CTLs, they are actively involved. We’re actually sitting on certain panels with assessors and tax collectors out there so we are, we are going at it hard. We are pressing at full demand, creation and are, you know, we remain very hopeful that we’re going to get that anchor in the near term here but, it’s a process right now.

The Manatron brand is definitely getting established in California. We’re working aggressively at that and we’re actually making good strides.

Justin Borus: No, I mean, are you just - because I know you have a great product and in your own words it shows very well, so you’re confident you have the right horses (sp?) in your sales force and that they’re getting the job done or, it just seems like a no-brainer for a lot of these counties.

Bill McKinzie: I wish it were that easy on being a no-brainer, okay, because that procurement process is just, is very very complicated. There’s no doubt that California’s kind of been on that back end of migrating toward commercial off-the-shelf solutions and away from their legacy, their big legacy systems. Which is why you really want to get that anchor, where you get that first deployment and you kind of build just like, for us at Gwinnett, Georgia and then building a you know rest of the nation, but also in Georgia itself; Virginia Beach in Virginia; you know, (inaudible) and Payette in Idaho and then we got the other Idaho’s coming on board and they’re already several of them live and several more going live. So, if you get that anchor and then you’ve got that template that works in that market, you’ve got the configuration that works in that market and you’ve got the confidence. So, we’re working aggressively to get that and then to get that deployed. We do have several reviews lined up for people to touch and feel and we have had several where people are touching and feeling GRM out there in that market.

Justin Borus: Thank you.

Operator: Your next question is coming from Dennis Stavros from Robert W. Baird.

Dennis Stavros: Thanks gentlemen and ladies; great report. A couple of questions. We used to talk about the objective of bringing, I think we said 10% to the bottom line. Where is that model in your thought process these days? Where are we at in our progress toward that?

And the second question is, Paul; in particular, there was this agreement that was entered into on June 16th. Will you explain why that’s good for the Company, and so on, so-forth?

Paul Sylvester: Yes, okay, I’ll handle that one first and then Bill and I might both tackle the next one.

The Rights agreement that was signed on June 16th was an essentially a renewal of our existing plan that we had had in place for the last 10 years. It was a 10-year plan that a lot of people referred to as “poison pills” and that it basically prevents hostile takeovers and encourages perspective acquirers to meet with the Board of Directors and discuss mutually agreeable plans. The only thing, the only real difference in that plan that we just renewed versus the one we’ve had in place, is that we shortened the term for 10 years to five years. Otherwise, it is exactly the same plan. So, I don’t know if you want me to get into the mechanics of how it works or as you know, these plans became quite popular probably 30 years ago and I don’t believe anyone’s ever has to put one in effect because they’re basically are so anti-dilutive that they just have mechanisms in place to encourage perspective acquirers to not go through a hostile takeover event, but to basically work with the Board of Directors. With us being a thinly traded Company and our stock could bounce up or down pretty quickly, it’s just we believe it was important to keep that in place.

Dennis Stavros: Thanks, Paul. I just wanted everyone to understand that; that this is in the best interest of the Company.

Paul Sylvester: Right. Now at first the 10% question, and again I’ll let Bill jump in here too, but we believe we can get higher than 10% and for some of the quarters that we’ve presented this fiscal year, we actually were pretty dog-gone close to a 10% on a pre-tax basis. You know, it’s all about leverage and as we gain more economies of scale, and I think that we had a one or two line comment in the script here earlier about how we believe we can grow revenues while $1 million to $2 million a quarter without having to add a lot of significant expense. Now that, of course, depends on what kind of revenues we had. If we went and sold $2 million worth of hardware, for example, you’re going to have a fair amount of additional cost but if we sell an additional $2 million of software in one of our existing markets, like Florida, Indiana or Ohio, we’re going to be able to deliver that with our existing resources. So, that’s where you’re going to start to see some nice improvements in the margins and you’ve seen improvements in the margins this year, just by going from basically $9 million to $10 million a quarter in revenue. We jumped from 30 to 35% margins to 45 to 50% margins and I think we finished the year right around 50%. So, as we get those margins north of 50% and grow our revenues, you’re going to see, you know, the operating income line getting north of 10% and hopefully closer to 15 and 20.

Bill, is there anything else you want to throw in on this?

Bill McKinzie: No, I mean I think that’s all right, our focus is definitely to grow that top line because as Paul said we’ve got the infrastructure such that the bottom-line will automatically expand. Our investment there, our cost structure did not need to increase greatly to deliver every additional million dollars at this point in time. The GRM, we’ve got that as we said is a three stage before implement. Right now an additional six (inaudible) with the Minnesota deployment that is definitely, we’ve had to do, we’ve worked through some things on a couple of modules for Minnesota. But at this point in time, as we get through this next set of releases here on these, on these installs coming up, we’re very confident and comfortable with how that implementation, how these implantations go, in new markets and even more importantly, how they go on that second, third and fourth, fifth site in the current, in those states we’re in.

So, that is where we really start to see the leverage. There is no doubt when we went through things, you know, last year we had significant GRM investment going on and at the same time we were kind of hit with, we had still some investments to make in some of our core markets and appraisal services were soft and those three combined to be kind of a bit of a tough year. But where we are right now, we’re actually seeing the momentum. The pipeline has expanded, our sales are expanding, the quality of our sales is expanding and improving so we’re – you know, right now we’ve got a lot of good internal, if you will, excitement going into this fiscal ‘08 as a Company.

Dennis Stavros: Could I just follow up one - are you able to calculate approximately, given a 50% gross margin and given that extra, lets say, million to two million in revenue per quarter and given your normal tax rate, well what would be the pre-tax target that’s doable?

Paul Sylvester: Again that depends on what kind of revenue you have, but if you put an additional two million of revenue on the books, your margin is going increase from 50% to something north of 50% and I really don’t want to take a stab at giving you a number right now to hold me to that. But your margin will go up a little bit and you will not have a lot of additional costs; you’ll have some third party costs potentially in there but, for purposes of discussion, lets just say you got 20% of additional costs related to that, which would be 400,000. And so, then you know you’ve got a million six that’s going to float down to the operating income line and then of course, you’ve got a tax affect that at roughly 40%. So you know, its going to start to add incrementally to your numbers but maybe for our next call, we can give you a more precise example because…

Bill McKinzie: Yeah, because what is, again it’s like Paul was kind of saying, there still is that, there’s always that capacity a bit. For example, if there’s another install in say Florida or say Virginia or say Indiana or Ohio, that’s a different - if there’s a different margin if it were like a brand new state, so for example, when we say California, if we enter California and if we get that one, it could be, depending on the size because it’s a very large jurisdiction, I may need to add a little bit of capacity in that. So that first one, that anchor one, might not quite generate - I might not have to do with the product per se, which need my license fees, but might need to get that first one at market pricing to get in there, but yet I got to add some resource capacity that to deploy it, if you will.

So again, it does depend on the mix significantly. But we are very comfortable, at this point in time, for anything over that, you know, in the range that we’ve been speaking about this past year; it’s going to expand our operating margin.

Dennis Stavros: Yeah, I understand those variables and maybe next call we could have some hypothetical numbers or whatever, what’s doable perhaps. Within the realm of what you’re allowed to say, of course.

Bill McKinzie: Okay.

Paul Sylvester: Okay.

Dennis Stavros: But, thank you very much, gentlemen.

Bill McKinzie: You’re welcome.

Dennis Stavros: And ladies.

Operator: Your next question is coming from Will Lauber from Sterling Capital Management.

Paul Sylvester: Hey, Will. Hey, Will, how you doing, man? Did we lose you? I can’t hear anything from Will. I don’t know if you can, Myrna.

Operator: Will, if you would like to ask a question you may press star, one on your telephone keypad.

Paul Sylvester: Okay Myrna, maybe we’d better open it back up and then Will, if you want to ask a question, just kind of get back in that queue.

Operator: Once again, if you do have a question you may press star, one on your telephone keypad at this time.

There’s a follow up question from Sam Bergman from Barry Capital Management.

Sam Bergman: Just a follow up question. Regarding the San Diego work that you are currently are doing. How much revenue it that going to the top line a yearly basis and when is that project due to be finished?

Bill McKinzie: Yes, that one gets a little bit interesting, Sam, that we are not the prime contract on San Diego, we are a sub-contractor. Basically, we are bringing forth subject matter expertise. At this point in time, we are operating under a time and material basis, so basically, our SMEs, as there needed, we then deploy them into that San Diego project. So it kind of adds some variableness to it for sure. This past year, it was probably about a 1.2 million during fiscal ’07 was related to the San Diego time and material subject matter expertise we applied to it.

Paul Sylvester: The nice thing about that, Sam, is were not making lot of money on that but we’re really learning the California issues and regulations, you know, gaining subject matter expertise in getting our costs covered basically, for doing so.

Sam Bergman: Have you had any of the counties from California visit any of your GRM live sites?

Bill McKinzie: We’ve not had any of the California counties out right now that have left California to visit any sites. California is a little bit interesting in that, California does see itself as kind of a separate entity unto the rest of the nation, okay? And I don’t say that to be pointed at California one way or another, it’s a very very large state; it’s very populous, these counties are humongous, I mean you’ve got, it’s a very very big state. So, really they are a little bit more focused county-to-county amongst themselves, they talk a lot, they interact with one another, they are all talking right now and again, it varies as well. But very large speak (sp?), the mid-tier kind of speak and then the smaller kind of speak. They don’t even necessarily see that outside of other groups as peers, if you will. So, it’s pretty kind of separated that way. So, at this point in time, we’ve got kind of an act plan on a couple of those groups; we’ve been going at it pretty aggressively and we’ve got that we’ve actually shown GRM and we actually have plans that are even, during this coming month, to more plans lined up to get their eyes on GRM. So they very much, Sam, taken an approach of, how does that fit California? But at this point in time have a big interest in traveling to Virginia Beach.

Paul Sylvester: But the one thing nice about our GRM product is we have developed it in such a manner that it looks on the surface as a customizable product for California.

Bill McKenzie: It’s built and architect in a way that it is configurable so you can actually configure it to do the business rules necessary for whatever given market. And that is the beauty, and that’s what really what we’ve been able, if you will, kind of uncork a lot of these things across all these state lines, which is where we of course, leverage our cost significantly as we move into the next and the next, et cetera.

Sam Bergman: And the cost of the software maintenance contracts that were increased in the last year; what would you say were the percentage of the increases, I guess you mentioned January ’07 is when some of them became effective. When should we see the majority of the benefit on the bottom line? Is up coming quarters, was it this quarter?

Krista Inosencio: We started to see it during the fourth quarter; it actually, the largest portion of that kicked in January 1st, so you actually saw an impact of about $360,000 of increased maintenance revenue during just this fourth quarter, as a result of that. So, the average on an annualized basis for this period in time was about 8%.

Sam Bergman: Moving forward, are the increases going to be similar to what they were in prior, several years back 3 to 5% or are you working on another formula for increases?

Krista Inoseneio: I think in general, they will probably be closer to a 5 to 7% versus a 3 to 5%.

Sam Bergman: Okay.

Bill McKinzie: Yes, and what (inaudible) and what you also will see, Sam, of course and what’s so significant about, when we gain a new client, that’s actually incremental recurring revenue. So, as we bring a lot of these new GRMs on site, these are new market shares, these are not upgrades and so that new market share actually brings forth then a new recurring stream so you’ve got that expansion, as well.

Paul Sylvester: You know Sam, just as a reminder, on an annualized basis, if you go back just a little over 12 months ago, our total maintenance contracts including software, hardware, printing and so forth, e-government subscriptions was about 17 million and now it’s pushing 22 million. So you know, and granted, some of that’s from the ASIX acquisition but a lot of that’s from price increases as well as the new accounts we’ve added too, so that number has been growing nicely for the last couple years.

Krista Inosencio: Yes, on an annualized basis, ASIX was around 2.2 million and Plexis was around 600,000 so two eighths of that annualized increase…

Paul Sylvester: Yes, I was actually speaking though…

Krista Inosencio: From January.

Paul Sylvester: From January, so Plexis would have already been in there, so.

Bill McKinzie: Yes.

Krista Inosencio: Yes, so two, two of that would have ASIX, the rest would have been new accounts and price increases.

Sam Bergman: Does anybody currently have any competing technology against your GRM product line?

Bill McKinzie: Well, not when you think of (inaudible) technology, no, nobody comes close as it relates to what we’ve done in the investment we’ve made which we think will bode, you know, will continue to bode very well. We definitely have competition out there; we’ve always got the Tyler that we’re up against. We’ve got a new kind of group that’s leading the Texas space called True Automation, it’s definitely out there and they’re a bright bunch of folks and they’re working hard to gain market share in very targeted areas.

Another kind of what we’re seeing on a national, from a national viewpoint, otherwise Sam, we’re always up against various regional players and for the most part, what they play on is, they might kind of market on local experience but more so, it’s just a (inaudible) point. They will be a very low price because they will have some outdated technology with limited investment, limited investment to be made in the future (inaudible). We’ve always got that price pressure that way but from a national standpoint, there’s nobody at this point in time, out there with a full-service orientated architecture as we have completed.

Sam Bergman: Just going back to California one last time. How many cities there have put out RFPs?

Bill McKinzie: The property tax and assessment stuff, it is county out there, so it’s not a lot of cities. Of course, San Diego had – Los Angeles is out right now.

Paul Sylvester: This is there second time around, they went on…

Bill McKinizie: And this is Los Angeles’ second time around. They went out about five years ago and they basically, they didn’t like the price tags that came back from everybody so they’re going at it a second time and they refined some of their requirements and what-not. We have had San Bernardino was out there, Riverside was out there. Now, all of those are having some- right now they’re kind of in their process still - still sorting themselves out. They are looking at, do they go a little bit more integrated with tax and assessment and so there’s a lot of that still uncertainty there but there is activity that’s been going on There have been some groups of counties in that mid-tier that have come together to talk amongst themselves about how to approach procurement processes and we’ve been involved with them a bit, and so it’s all getting some - there’s a lot of activity, it’s just not fully popping at this point in time. So, even on the RFP side, it’s still pretty limited right now.

Sam Bergman: Okay. Thank you very much.

Paul Sylvester: You’re welcome.

Operator: Your next question is coming from Will Lauber from Sterling Capital Management.

Will Lauber: Hi, yes, sorry I got cut off the phone before when I got on off last time. On the 20.6 million of new contracts assigned in fiscal ’07, how much revenue was recognized from those contracts in fiscal ’07?

Paul Sylvester: I’ll take care of that. It’s hard to get specific on the, not a lot because just for an example, we mentioned that the $5-plus million of contracts from Beaufort, Wyandotte and Sedgwick are still in the backlog. So as, and Will, you’re a fairly new investor to Manatron but, well what we talked about at the beginning of this year was when we put our financial plans together, not rely on a lot of what we call “sign and bill.” Most of our plan for this year was based on our backlog that we had going into the year, but we did recognize some revenue that would sign this year.

Bill McKinzie: Yes, we get a little bit of a mix Will, and it is kind of interesting in how that works. So Will, when we look at some, when we get to the large GRM contracts, right now GRM especially in the new state, as Paul had mentioned, it’s a little bit of longer timeframe. You tend to look at that 12-month to the 16-months, so it’s all percentage completion when we’re in there and we’re kind of working to get the project milestones, if you will. So, conversion processes, fit-gap analysis, installation and then customization in place and what needed to be customized. Things like this and so that one there; those there are the ones that are rolling across you.

When we look at where we got our kind of our core base or a core market, say a Florida or an Ohio or an Indiana, it’s very normal for that client base and for our activities there to be a much closer process to where they’re ready to sign up and we’re working that process because we’ve got the upgrade pass for them. They sign up, we begin the deployment right away and they could be closed within 90 to 120 days.

Paul Sylvester: Right.

Bill McKinzie: And so those there are the ones that when you look at the backlog at any point in time, they are on and then they are off, then they were on and then they were off. But the relational percentage completion projects those do expand and roll in and we probably, on a percentage completion project only, we’re probably somewhere in a range of a third of that backlog for the percentage completion project…

Paul Sylvester: Right. Well, you know we’ve had…

Bill McKinzie: …we’re worked off.

Paul Sylvester: Our backlog right now stands at about a little over 20.
We’ve got at least five of that is from the last quarter and you still, you know, you’ve still got some backlog in there from like Washoe and Virginia Beach.

Bill McKinzie: South Carolina.

Paul Sylvester: Most of our backlog is GRM. And then there’s a little bit from some of the core markets and then you’ve got some appraisal services in there.

Bill McKinzie: Yes, the mix that is a metric though Will, I will have to admit to you, I do not look at the metrics specifically that you asked about. I don’t. I look at the backlog; I look at the projects as they are moving forward against where they should be on their time lines. I look at the core market activity and make sure that is continuing to progress the way it needs to and that is the way I do look at it. So, it’s a little bit tricky but I would probably say, you know, it could be in the range of half of the backlog is our national deployment; they have a longer timeframe to and probably a third of that was worked off in the fiscal year.

Will Lauber: Okay, I guess kind of a round about way without asking how much you’re under, you know, myself is to what the ’08 revenue would be and your backlog is the 21 million and you got the recurring of 21.7 and then I guess, you had mentioned that 2.8 of that is Baltimore’s (inaudible) recognized so you’re kind of a little under 40 million there, and as you announce new contracts and stuff over the year, I just wanted to try to figure out some kind of way to…

Bill McKinzie: Yes, I know where you’re going, Will, and that’s a little bit, you know, of course we don’t give any of the financial guidance but I would just caution you can’t really necessarily do that because in any given quarter, I could have in Indiana, Florida and Ohio for example, I could take down two or three or four deals and deploy them all within that quarter within the next quarter and you won’t, that backlog number - the moving number - I’m always working it down and adding to it, working it down, adding to it. So, that’s a tough one to kind of make that jump a little bit; there’s no doubt that I like your thought process that we would love to go into any year with 30 million in backlog and then you can usually make your math work. Our model is such that in our core market, it’s a lot closer to time line to sign in the business than going ahead and execute and that is how those markets work. And those are significant markets for us.

Krista Inosencio: Yes and the other flaw with that is some of the items that are currently in our backlog as of April 30, 2007, still be in the backlog on April 30, 2008 due to the longer deployment period for the GRM products because they’re using percent completion accounting.

Will Lauber: Okay. All right, and my last question was on the LA County, it mentioned that it was somewhat of a custom build and I was wondering how that’s kind of fits in with, your whole kind of strategy it seems like you’re, with the GRM, you’re kind of you’re trying to get away from the custom build and you know, how custom built is that LA?

Bill McKinzie: Right. There is no doubt we are, you know, we got (inaudible) commercial off the shelf that’s configurable for a jurisdiction. The LA one, it is a very very complex proposal we’re evaluation right now, Will, kind of our options on responding to that and what does it mean and what would we need to you know, what models do we need to work against to do such if we choose to do such. So, that one there they, I did share that because Sam asked the question about what our fees are out there in the California market but LA is unto itself. I mean it is the biggest county in the nation. I think it’s somewhere in the range 2.5 to 3 million parcels; it is humungous. And so it is a very unique (inaudible) and we’re evaluating well what we, you know, how we might go at that. So, I don’t have an answer for you on that for sure tonight. If I had one right now I’m afraid I couldn’t share it.

Will Lauber: Okay. All right, well thank you very much.

Bill McKinzie: Very welcome.

Operator: There are no further questions at this time. I will turn the floor over back to Paul for any closing remarks.

Paul Sylvester: Thank you. Lots of great question today and appreciate your continued support throughout fiscal 2007. As we indicated in our call earlier, we have a lot of confidence going into 2008 and hope we’re able to continue to show improved sales and revenue and operating income as we, you know, get together in the quarters ahead.

So, have a great Fourth of July holiday coming up and we’ll be touch. Bye now.

Operator: Thank you. This does conclude todays Manatron Inc.’s conference call. You may now disconnect.

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