Interactive Q&A: Paul Sylvester, CEO of Manatron Inc. (MANA)

This is the latest in Seeking Alpha's series of interviews with leading companies of interest to our readers. Ours are interviews with a twist: the respondent has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.

This interactive Q&A is with Paul Sylvester, CEO of Manatron, Inc. (MANA). Manatron is the nation’s leading provider of property tax systems and services for state and local government. Founded in 1969, Manatron’s software boasts the latest in technology advancements and reflects the Company’s 35 plus year heritage and experience in developing and supporting property management software systems for this niche. Simply speaking, Manatron’s software and services enable state and local governments to maintain and update real and personal property values, create assessment and tax rolls, produce property tax bills, collect property tax payments, manage delinquent accounts, administer tax sales of property, provide Internet access to property information and conduct certain transactions such as the payment of property taxes over the Internet.

Manatron has client relationships with approximately 1,300 local government offices, such as the Assessor, Auditor, Recorder, Tax Collector or Treasurer, in 30 states and two Canadian territories. The Company’s software currently manages over 25 million parcels of property and bills and collects over $60 billion of property taxes annually. Manatron has invested over $15 million in a new suite of software called Government Revenue Management® (GRM®). GRM is a Microsoft.Net, web-based, service oriented architected, fully integrated, enterprise-level property tax and assessment solution that crosses state lines. Historically, the Company’s software was state specific. The GRM product suite provides the next generation of functionality and technology to local governments, many of whom are still using 20 plus year old systems. Given that property tax revenue is the fiscal lifeline for local governments, Manatron believes the market for new software in this niche is ripening. Preliminary estimates of the market size are between $1 and $2 billion with spending to occur ratably over the next five to ten years. In addition to capturing new market share and upgrading its current client base, GRM will allow Manatron to obtain better economies of scale and leverage of its costs as the Company will be supporting fewer systems.

The Company's revenues are primarily generated from software license fees, software maintenance fees, professional services and sales of hardware and supplies. Professional services consist of data conversions, installation, training, project management, hardware maintenance, forms processing and printing, consulting and appraisal services. Manatron has approximately 350 employees and is headquartered in Portage, Michigan. It has regional offices in Florida, Georgia, Illinois, Indiana, Minnesota, Ohio, Pennsylvania and Washington.

(See the latest MANA earnings call transcript, corporate fact sheet and corporate web site for more background on the company.)

Manatron has sponsored this interview (for sponsor information contact us here), which works like this:

• Paul briefly introduces himself and the issues he's focused on below.
• Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
• Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or hostile language.
• Paul will respond to the questions and remarks beginning Wednesday, July 18th. Readers can track his answers and respond to them during that period.

Yahoo Finance readers may join the Q&A by following this link.

Over to Paul:

• • •

My name is Paul Sylvester and I'm Chief Executive Officer of Manatron (Nasdaq: MANA) and I would like to thank Seeking Alpha for providing this opportunity to interact with investors.

I'm happy to discuss a range of topics with Seeking Alpha readers, including:

1. Our industry and market opportunity.

2. The development and rollout of our next generation tax and assessment platform, Government Revenue Management® (GRM®) for local and county governments.

3. The growth of our backlog and recurring revenue base as well as recent contract wins.

4. The competitive landscape.

Please leave your questions by using the comment box below.

Thank you!

-- Paul

This Q&A represents the opinion of Manatron, Inc. management and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. Except for the statements of historical fact, information presented herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions, the ability to fund operations, the ability to forge partnerships and other factors over which Manatron, Inc. has little or no control. Manatron, Inc. assumes no obligation to publicly update or revise any forward-looking statements provided in this Q&A, or to correct any erroneous information presented in any investor questions herein.

Comments

[John]

Paul,
Thanks for answering our questions.
Can you discuss what percentage of your revenue is recurring and how has that portion of the business been growing?
JJ

[paul.sylvester]

Our recurring revenue from software maintenance, hardware maintenance, forms printing and processing and e-government subscriptions currently stands at approximately $22 million annually. This is an increase of over $5 million from a little over 18 months ago. Our recurring revenue represents a little more than one half of our total revenue, which was $41.8 million for our most recent fiscal year ended April 30, 2007.

This portion of our business has been growing for the following reasons:

1. Our acquistions of VisiCraft, Plexis and ASIX during the last three years have resulted in additional clients for Manatron and along with them, additional recurring revenue.
2. Our sales to new name accounts during the last three years have resulted in additional recurring revenue.
3. We have increased our prices on an annual basis in the range of 3% to 5%; however last year, we initiated a much larger increase in connection with our restructuring of the business as we felt that our rates were well below market. These increases are typically announced well in advance so that our clients have time to plan for them in their next budget cycle.

[Ralph F]

Thanks for doing this, Paul.

1. What kind of return on investment do the municipal and local authorities get from purchasing your software?

2. I assume your product is traditional software. What are your thoughts on software as a service in the government sector?

3. Outside your direct competitors, are there any publicly traded software companies that you think have great new products that investors haven't appreciated yet?

Thank you!

[paul.sylvester]

We do not have exact metrics which track the return on a jurisdiction's investment in our software; however, we believe that the purchase generally results in a jurisdiction's ability to identify properties that aren't being taxed or are being taxed incorrectly, which will result in additonal taxes for the jurisdiction, thereby helping to pay for their software. Secondly, our software generally allows a jurisdiction to be more efficient and the internet componet in particular, will result in less foot traffic in their office. While most of our clients are not into eliminating positions as many of them are elected officials and this may not bod well for them in their next election, this efficiency will allow them to not have to replace their employees who retire or it may enable them to reallocate their resources.

Our software is traditional in that it primarily helps our clients in the back office maintain and update their property values and bill and collect the related property taxes. We do however have an internet and e-commerce component of our software that enables third parties to have access to various property information 24 hours a day, seven days a week, as opposed to traditionally having to go downtown and stand in line for this information. Many jurisdictions are also collecting tax revenues and conducting other business over the internet. Our GRM software is a Microsoft.Net web-based, enterprise level and service oriented architected product that we could sell as a service. In fact, we do sell some of our e-government products a service. However, for the most part, this has not been widely accepted in our market as most of our clients and potential clients want to have control of their software in their office.

As for our direct competitors, we of course have a lot of respect for a number of them, most of which are not publicly traded companies, but rather smaller, regional players. A lot of our competition is also internally built and maintained systems, particularly in larger counties and cities. This of course is creating an opportunity for us as these systems are generally 20 to 25 years old and in need of replacement and fortunatley, for us, many of these jurisdictions are looking for a package product like GRM as they believe that is a far less expensive route than building another system. Tyler and ACS are our only realp public company comepetitors. I suppose Maximus, Microsoft, SAP, Oracle and some of the large system integrators could be also be considered competitors. Some of these companies have come out with new software, but I don't think it's fair for me to comment on whether it is great or not as we are doing our best to beat them. :)

[Lisa]

Paul, thank you for taking our questions.

Do you have any exposure to a further downturn in the housing market? Are property tax collections ever related to new home purchases?

[paul.sylvester]

While a downturn in the housing market could result in lower property tax revenues for local governments, which would certainly impact their budgets, we believe that this could actually work in our favor because property tax revenue is the fiscal lifeline for local governments as it is their main source of revenue. Given that and a downturn, these jurisdictions should be more inclined to make sure they are collecting all of the taxes that they are entitled to, which could compel them to look for more modern software and tools like GRM to help them in doing so.

As for new home purchases, property taxes would generally increase if a) it was a new house and therefore would result in additional tax revenue or b) if the house was purchased for more than what it was currently on the books for, which would trigger additional taxes from the new owner. If the house was sold for less than what it was on the books for, property tax revenues could of course go down. This response is at a very high level as each state has different tax rules and policies, which govern the specifics of how properties are taxed.

[Ian]

Paul,
You're in 30 states and two Canadian territories. Do you see your growth prospects greatest in the US or in international markets?
I think TYL is your publicly-traded competitor. They're much bigger than you. How can you compete with them over the long haul? I guess my question is what is your competitive advantage?
Cheers,
Sam

[paul.sylvester]

We believe there is a lot more growth yet to be realized in the U.S., particularly in the state of California where we have estimated the market opportunity to be as much as $200 million over the next five to ten years. We have estimated the market size in the U.S. for the counties and cities we are targeting to be in the range of $1 to $2 billion over this same period. We have bid on a couple of international opportunities and believe that certain markets in Europe, Asia, Africa and Canada will be good candidates for our GRM suite of software and services in the hopefully not too distant future, but for now, we are primarily focused on being the leading provider of property tax solutions in the U.S.

As for Tyler, yes they are a competitor and yes they are substantially larger in terms of revenue and profits. This is primarily due to the fact that they serve two other markets than we do. They offer a financial (accounting and payroll) solution and a judicial (court accounting, case management, etc.) solution in addition to a property tax solution. I cannot speak for Tyler, but it is my opinion that most of their momentum and success is currently coming from their financial and judicial product lines. They do not specifically break out their property related numbers in the financials, but I am guessing that Manatron's revenues are at least as high if not higher than their's. Furthermore, I suspect that much of Tyler's property revenue is from mass appraisal projects, whereas the majority of our revenue is from property software sales and related services, such as maintenance.

We made the decision about four years ago to focus soley on property because that is where our core competency lies. We have over 3,000 years of property tax "subject matter expertise". Our property tax software touches over 25 million parcels of property across the U.S. where there are about 150 million parcels in total. Our software bills and collects over $60 billion of taxes annually. We have about 350 people devoted to property, which is our sole focus. And we have invested over $15 million in our new GRM software, which we have recently introduced to the market. All of this coupled with our recent acquisition of ASIX - a highly respected company in the property tax industry - and our recent wins in Georgia, Idaho, Kansas, Minnesota, Nevada, South Carolina and Virginia give us a competitive advantage when we bump up against them.

[David Zhang]

Thanks Paul. What about your gross margins -- how have they been tracking and is there additional leverage in your model?

[paul.sylvester]

Our gross profit margin for the fourth quarter improved by 217 basis points to 53.1%. Our gross profit margin for the year ended April 30, 2007 improved to 48.9% versus 30.6% for the prior fiscal year.

We believe that our margins need to be close to 50% for us to report a reasonable profit given the current amount we continue to invest in our software. If we get our model rolling, we should be able to produce much higher margins, which are typical for software companies. For example, we believe that we have a cost structure in place that could support another $1 to $2 million of revenue per quarter, without having to add significant expenses. This means that we have the opportunity to produce incrementally improving gross margins as we grow our revenues.

These margin improvements were driven by the following factors. First, we completed a restructuring at the beginning of fiscal 2007, which resulted in lower personnel expenses for the year.

Second, there has been a reduction in the Company’s payroll expense as a result of the reduced appraisal services activity. Our outsourced labor has also decreased by $666,000 and $1.4 million for the fourth quarter and year ended April 30, 2007 versus the respective prior year periods primarily because the prior year amounts included significant contracted labor expense related to the City of Baltimore implementation and the current year amounts do not.

Third, effective May 1, 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 is being implemented in many states and all of the clients will be using the same and single thread of code, we believe that its useful life is greater than the historic state specific software that did not cross state boundaries. This change in accounting estimate resulted in a reduction of software amortization expense during fiscal 2007 of $502,000 and software amortization is one of the components of our cost of revenues.

Fourth, our cost of sales for the three months and year ended April 30, 2006 included approximately $321,000 and $420,000 of expense related to cost to complete accruals, whereas the current three months and year ended April 30, 2007 did not include any related expense.

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

[amc.law]

Paul,

Will pursuing the California market create a possible repetition of Baltimore? Are other states in which you will not have to do a full customization of the product provide a better likelihood of growing the product into the standard of the industry?

[paul.sylvester]

We do not expect another situation like Baltimore in California or any other state. That contract was unique and we have learned from it.

Our whole purpose of developing GRM was to avoid future customiztion projects of this nature. Furthermore, GRM has been developed in such a fashion that it appears to be a custom product for each state, but under the covers, it is the same line of code, which allows us to leverage our investments more effectively.

We do believe we are setting the standard for the industry with GRM.

[Frank Li]

Hi Paul,

We're seeing a lot of consolidation in the enterprise software space, as software providers try to assemble complete solutions for their customers.

Could that happen in the government market as well, and if so what kinds of applications would your products complement?

Many thanks for your detailed and informative answers.

[paul.sylvester]

I believe consolidation has been happening in the local government market and will continue to do so in the years ahead. And it not only has been happening because of providers trying to assemble complete solutions. Other reasons are that it's just getting too expensive for small companies to make it on their own given the ever increasing cost of technology. Many small companies are looking for an exit as the owners are nearing retirement age or they don't want to make the investment in the next generation of software like we are doing with GRM. And of course there are other reasons.

The kinds of applications that complement our property tax software which immediately come to mind include accounting systems, Geographic Information Systems (GIS) building permits and land records systems. These would all be used by local governments. In the private sector, we are finding that more companies such as banks, realtors and title companies are interested in property information and are looking for ways to create large data bases that will help them in their businesses.

[susanharris53]

Is it true Manatron has lost 6 Florida clients in the past year to Grant Street Group, a newcomer to the tax software business? If so, why? How much recurring annual revenue has Manatron lost from this mass defection? Are there any other Manatron clients in Florida that are considering a switch to Grant Street? Is there any evidence that Grant Street will compete with Manatron in any of the other markets where Manatron is the dominant tax software vendor and if so, how will Manatron respond to the threat?

[paul.sylvester]

Grant Street Group is a fairly new competitor in the state of Florida and unfortunately, we have lost a few of our legacy clients to them during the last year. However, for competitive and Regulation FD reasons, I am not going to elaborate on this any further.

I will point out though that Florida has been and continues to be a significant and important market for Manatron where we have made and will continue to make significant investments in our software, services and staff. We have an office in Tampa where over 20 of our employees who live in Florida work out of. In addition, there are a number of other employees who reside outside of the state of Florida who devote a substantial amount of their time to that market.

Manatron is by far the leading provider of property tax solutions in the state of Florida and has been since we officially entered that market in April of 2000 as a result of our acquisition of CPS. We currently serve nearly 30 counties/clients in that state and in fact have recently added two new ones - Clay County and Nassau County - which you can read more about on our web site at manatron.com.

As we have stated numerous times in our conference calls, our goal is to not only preserve our core markets like Florida, Indiana and Ohio, but to continue to grow them as we have in the past.

[Uncle Foobar]

Hi Paul,

Two questions: from news stories during the last year, i've become concerned with how much animosity is aimed at assessors by tax-payers and the abatement loads. Much probably has to do with seemingly stumbling upon new-found wealth due to real estate values without planning for the tax consequences.

How do your products (web city i think) help make it easier for the customer's customer?

Second: watched MANA stock for a week. It seems pretty sleepy. Let's say an institutional or individual investor wanted to buy 5,000 to 10,000 shares. Do you have private placements or block trading lined up?

Thanks,
Foob

[SeekingAlphaEditors]

This Seeking Alpha interactive Q & A is now closed for further questions. Thank you very much to Paul Sylvester, and to all of our readers who participated.

~ The Seeking Alpha Team