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Tyler Technologies Inc. (NYSE:TYL)

Q4 2007 Earnings Call

February 28, 2008 12:00 pm ET

Executives

John Marr - President and CEO

Brian Miller - Chief Financial Officer

Analysts

David Yuschak - SMH Capital

Brian Kinstlinger - Sidoti & Company

Dale Warmington - Dale Capital

Charlie Strauzer - CJS Securities

Trey Kuppin - Banc of America Securities

Eden Steinberg – Unidentified Company

Rich Wilkinson - Deltech

Operator

Hello and welcome to Tyler Technologies fourth quarter 2007 conference call. Your host for today's call is John Marr, President and CEO, of Tyler Technologies. Mr. Marr, please begin your call.

John Marr

Welcome to our fourth quarter 2007 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First I'd like for Brian to give the Safe Harbor Statement. Then I'll have some preliminary comments and Brian will review the details of our operating results. Then I'll have some final comments and we'll take your questions. Brian?

Brian Miller

Thank you, John. During the course of this conference call management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. John?

John Marr

During the fourth quarter Tyler continued its trend of improving results. By most measures the fourth quarter represented new highs including total revenues, license revenues, operating income and backlog. These strong results in the quarter allowed us to achieve our financial objectives for the year. For the quarter we posted 18% revenue growth and 50% growth in earnings per share.

Our full year 2007 results were in line with our expectations. We were especially pleased with our 2007 free cash flow of over $30 million, which grew by almost 35% over the last year and exceeds GAAP net income by 73%.

We ended the year with a strong cash position of approximately $56 million after investing over $23 million in acquisitions and company stock repurchases. And despite an uncertain economy and softness in the real estate market we continue to see a stable and normal marketplace where our strong and constantly improving products improve our competitive position. Now I’d like for Brian to provide more details on the operating results.

Brian Miller

Thanks John. Yesterday Tyler Technologies reported its results for the fourth quarter ended December 31, 2007. We ended 2007 with a very strong fourth quarter establishing new highs in many of our key financial metrics. For the fourth quarter of 2007 Tyler had revenues of $60.4 million, up 18.1% from the fourth quarter of 2006.

Operating income was $9.6 million, an increase of $3.3 million or 53.2% from the fourth quarter of 2006 operating income of $6.3 million. Net income for the quarter was $6.2 million or $0.15 per diluted share compared to net income of $4.2 million or $0.10 per diluted share in the fourth quarter of 2006.

Fully diluted shares for the fourth quarter were $40.4 million and for the year were $41.4 million. We excluded the effect of the Banc of America warrants from the potentially dilutive common shares as of September 10, 2007.

Results for the fourth quarter of 2007 included a total of $660,000 of non-cash expenses associated with our share-based compensation plan of which $69,000 is included in the cost of revenues and $591,000 is included in SG&A expense.

Cash flow from operations was $9.6 million for the fourth quarter compared to $4.1 million a year ago. Free cash flow was $8.5 million up 158% compared to free cash flow of $3.3 million for the fourth quarter of last year.

For the year ended December 31, 2007, free cash flow was $30.3 million compared to $22.5 million for the same period in 2006, an increase of 34.6%. Total depreciation and amortization for the fourth quarter was $3.4 million and for the year was $11.2 million.

EBITDA for the fourth quarter of 2007 increased 47.2% to $13 million from EBITDA of $8.8 million in the fourth quarter of ’06. A reconciliation of GAAP income to EBITDA is included in our fourth quarter earning press release. Our software-related revenues, which include software licenses, subscriptions, software services and maintenance increased in the aggregate 20.4% over the fourth quarter of 2006. Software license revenues increased 11.2% over last year's fourth quarter driven in large part by growth in our financials, imports and justice products.

Subscription-based revenue, which primarily consists of revenues derived from ASP services and other hosted software as service offerings, software subscriptions and disaster recovery services increased 48.2%. Software services were up 24.3% from last year's fourth quarter as we benefited from the approximately 90 additional implementation and training staff we added during 2007.

Maintenance revenues grew 19.2%. Appraisal services revenues for the fourth quarter decreased 4.5% from the fourth quarter of 2006 to $4.8 million. The decrease in appraisal services revenues is due to substantially completing business associated with Ohio's revaluation cycle. The level of appraisal revenues in 2008 will ultimately depend on our ability to replace the Ohio appraisal services business.

The revenue mix for the fourth quarter of 2007 compared to the fourth quarter of 2006 was as follows: software licenses 18% versus 19% last year, subscriptions 5% versus 4% last year, software services 27% versus 25% last year, maintenance 38% versus 37% last year, appraisal services 8% versus 10% last year and hardware and other 4% versus 5% last year.

Overall, 87% of our revenue mix was software-related for the fourth quarter of 2007 compared to 86% in the fourth quarter of last year. For the fourth quarter of 2007 our overall gross margin was 40.4%, up 80 basis points compared to 39.6% in last year’s fourth quarter.

Our gross margin improvement was driven primarily by improved software services, maintenance and subscription gross margins due to leverage in the utilization of our support and maintenance staff as well as revenue growth outpacing staffing cost of our maintenance, ASP and the disaster recovery services.

Sequentially gross margins increased 100 basis points from 39.4% in the third quarter of 2007 as we continued to see improved utilization of the implementation staff we hired earlier in the year.

Software license margin for the quarter was 70.2% versus 71.3% last year. The decrease in software license gross margin is primarily driven by the one-time acceleration of amortization of certain previously acquired software. The blended margin for software services, maintenance and subscriptions was 35.1% compared to 32.7% for the same quarter last year and increased from 33.9% in the third quarter of this year, again primarily due to improved staff utilization and leverage in maintenance subscription revenues. The gross margin for appraisal services was 34.9% compared to 34.0% in last year's fourth quarter. SG&A expenses were $13.3 million for the fourth quarter of 2007 and $12.8 million for the same period in 2006.

Fourth quarter 2007 SG&A expenses were 22% of revenues compared to 25% for the same period in ’06. SG&A expenses for the fourth quarter of 2007 were the lowest level as a percentage of revenue since we have been in the software business due to cost controls and leverage of our infrastructure. SG&A expenses for the fourth quarter of 2007 included $591,000 of share-based compensation expense versus $417,000 in the fourth quarter of 2006.

Research and development expenses of $1.2 million increased 42% in the fourth quarter compared to the fourth quarter of last year and increased 84% from the third quarter of 2007. In September of 2007 we amended our software development agreement with Microsoft in which Microsoft has agreed to assist in funding our Microsoft Dynamic AX development costs in exchange for intellectual property rights for use outside of the public sector. The increase in R&D expenses compared to the third quarter of this year is due to lower R&D reimbursements in the fourth quarter relative to the third quarter, and an expense incurred in the fourth quarter for third-party consulting services.

We currently expect that virtually all of our new product development costs in 2008 will be expensed rather than capitalized. Our effective income tax rate was 38.9% for the fourth quarter versus 38% for the same quarter in 2006. Our backlog at the end of the calendar year was $250.1 million compared to $205.9 million at December 31, 2006 and $225.8 at September 30, 2007.

Backlog related to our software business, which excludes backlog from appraisal services contracts was $222.5 million at December 31st, an increase of $24.4 million or 12.3% from the third quarter of this year and an increase of $39.3 million or 21.4% from December of last year.

New contract signings for our Odyssey court systems and our tax and appraisal software products were primarily responsible for the growth in backlog. Appraisal services backlog was $27.6 million at December 31, 2007.

During the fourth quarter we repurchased 360,600 shares of common stock on the open market an average cost of $13.94 per share.For the full year of 2007 we repurchased a total of approximately of 1.3 million shares of our stock at an average cost of $12.93 per share.

In January of this year we purchased an additional 814,000 shares of our common stock at an average price of $12.92. Our remaining authorization of shares that may be repurchased as of today is 967,000 shares. Our capital expenditures during the fourth quarter were $1.1 million primarily related to internal use, computer hardware and IT software systems and included $9,000 of capitalized software development. CapEx for the fourth quarter of last year was $833,000 and included $33,000 of capitalized software development costs.

Although during 2007 we continued to invest heavily in product development, the vast majority of our development cost in 2007 were expensed as either R&D or cost of maintenance revenues. Amortization of post acquisition software development costs was $1.1 million in the fourth quarter.

Day sales outstanding and accounts receivable at 12-31-07 was 95 days, an improvement compared to 102 days at December 31, 2006. The increase in DSOs from 93 days at September 30, 2007 is due to normal seasonality with relatively large annual maintenance billings at the end of December. Our stockholders equity at December 31, 2007 was $137.2 million. We continued to have no debt outstanding and ended the fourth quarter of 2007 with $55.7 million in cash and cash equivalents and short-term investments.

We ended the quarter with 1,627 employees a decrease of 13 compared to September 30, and up a 114 from the beginning of the year. The increase in headcount from approximately 1,500 at the beginning of the year includes 83 personnel from our acquisitions of ADF and EDP during 2007.

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

John Marr

Thanks, Brian. We are pleased with the quarter and another year of progress very much inline with our long-term plans. Along with the successful year financially we made significant progress across our product lines as well as expanding our sales and service channels to deliver our new levels of business.

For the year earnings grew 22%, free cash flow exceeded our expectations in the fourth quarter and should continue to be well above GAAP earnings in 2008 due to higher depreciation and amortization including new amortization from acquisitions, low CapEx, growing deferred revenue mainly from growth in our maintenance base but also from slower revenue recognition on some contracts due to terms and accounting requirements as well as non-cash stock compensation expense.

We achieved results while making substantial investments in new product development and continuing to invest in our existing product line, as well as building additional capacity in both our sales and service channels. We remain encouraged by the opportunity our partnership with Microsoft can represent and as a result have invested at a higher level than planned at the beginning of 2007.

During the year and even during the current quarter we have continued to invest heavily in the school area through product development as well as with our acquisitions of Schoolmaster and VersaTrans. Schoolmaster has a strong presence and customer base in the student administration area and expands our presence in the West. And VersaTrans brings a new and completely complimentary product set to our school offering servicing the transportation area. During 2007 we experienced strong growth from subscription-based services, which have less up front revenue but have high margins and high visibility. Our current estimated 2008 annual run rate for subscription based revenues is approximately $13.6 million.

Backlog continues to grow ahead of revenues and ended the year at another record high level of more than 20% higher than the beginning of 2007. Our guidance for 2008 remains as previously announced with revenues of $259 million to $265 million. Diluted earnings per share of $0.49 to $0.53 with fully diluted shares of approximately of 40.5 million shares.

For the year estimated pre-tax expenses related to stock options and employee stock purchase plan is expected to be $2.9 million or approximately $0.06 after taxes. We estimate an effective tax rate of approximately 38.1% for 2008. Free cash flow is expected to be between $34 million and $41 million with total CapEx of approximately of $4.5 million to $5.5 million for the year and total depreciation and amortization of $13 million to $14 million.

Our guidance for 2008 includes the projected results of the two acquisitions Schoolmaster and VersaTrans. Based on very preliminary estimates of the purchase accounting adjustments we believe that these acquisitions together will be slightly dilutive to earnings but will be accretive to EBITDA and cash flow.

We will now take your questions.

Question-and-Answer Session

Operator

Our first question comes from Brian Kinstlinger from Sidoti & Company. Please go ahead with your question.

Brian Kinstlinger - Sidoti & Company

Hi, guys how are you?

Brian Miller

Good Brian. How are you?

Brian Kinstlinger - Sidoti & Company

The first question I had is a maintenance question. Brian you mentioned a one-time amortization from acquisition. Would that be $1 million I see from acquired software? Is that what that is?

Brian Miller

That’s part of that. We had -- we accelerated the amortization of some of our accelerated software -- some of our acquired software that added about $600,000 of amortization in the current quarter that was basically a one-time acceleration.

Brian Kinstlinger - Sidoti & Company

Where do I see that, like so where I know where it might come out next quarter and be a little bit lower? Where on the-- which line item is that?

Brian Miller

On the income statement that's in amortization of acquired software.

Brian Kinstlinger - Sidoti & Company

And just a big picture question, maybe, John, you can give us a sense and I think it's courts but maybe even some better detail on the courts growth versus financial growth which one's stronger, maybe some numbers around it? And then give us a sense of when you think is -- you guys have talked a lot about the education space. When do you think that can become a meaningful number to your business my guess is right now, it’s relatively small? Thank you.

John Marr

Okay. Well, certainly as a percentage courts is our fastest growing division as we've expected for some time. We've got a significant backlog on the Odyssey product. We've continually been investing and building out the channel to deliver on that and we're doing that well, the implementations are going well. The customers are happy and referencable and so that's going well. Their growth is the highest within the company in terms of percentage. On Odyssey itself it's maybe double the company growth rate or approaching that, whereas financials is growing pretty much in line with the overall company growth rate. I'd have to do the math but on an absolute dollar basis which one is contributing more, but that's a general overview of that.

On the school side you know, the acquisitions of ADP, EDP and Schoolmaster and VersaTrans all bring, I mean, these are all real companies with real customers, heavily weighted on maintenance and install base. So, that’s starting to be a meaningful part of our business just really thinking right now because we include that in our financials division, I don’t look at those in the results but I would say that in the 8% to 10% of our revenues going into the year if you add those up and then you want to remember again they are in the financial division. But probably it's about half of the large government financials revenue what comes from schools. So overall it's probably more on the 40% range.

So, depending on how you want to look at that we're doing a significant amount of business in schools. We have been for some time on the financial side and the acquisition of these administrative systems and the acquisition of the product we acquired two years ago and our further investment in that is to build out the complimentary applications like scheduling, grading, attendance, now transportation with VersaTrans, the way we have an offering on the city and county side such as courts and justice and tax and appraisal and utilities. So it's really following the same strategy.

Brian Kinstlinger - Sidoti & Company

Great thanks.

Operator

Thank you. Our next question comes from David Yuschak from SMH Capital. Please go ahead with your question.

David Yuschak – SMH Capital

I could hear you guys but you couldn't hear me.

John Marr

Okay, David.

David Yuschak – SMH Capital

Hey, just real quick on your EBIT margins, your best EBIT margins you've had in corporate history the last two quarters and I think it beats the other -- your best quarter probably was maybe three or four years earlier and that may have been on your Minnesota software but I don't remember. Are we beginning to see the kind of scale across your product line that's giving you the ability to get these margins to where they're at right now and -- because you've always argued you can get these numbers a lot higher. So, I'm just wondering if it's just breadth here right now of what you're seeing or is it the ones that have been underperforming are beginning to get to scale to get you that boost?

John Marr

Well, we had a strong quarter in licenses and across the board and so obviously there's a lot of leverage in those incremental revenues within a particular quarter. And I would say that we do expect 2008 to be as 2007 was, a year that builds as we go along. So, it will unfortunately drop back from obviously the Q4 levels in the first quarter and grow throughout the year. So we're going to see more of that and as a result, obviously you'll see the margins contract a bit early in the year, David. I think that leverage is clearly there. I tried to emphasize on the guidance call a month ago that I think we have the ability in the next year or two to realize reasonably higher margins but we tried to point out that we really are making a conscious decision -- while we all want to have better earnings we are making a conscious decision to invest very significantly in the company and its products and some of these acquisitions, we believe, we are doing well establishing a leadership position in this space. The way projects are run these days and the way they're accounted for, most of that investment runs through the P&L. So that will keep some pressure on margins, but it's a conscious decision and in our view a good investment in the future.

David Yuschak – SMH Capital

As far as just R&D and as far as supporting that Microsoft product, is there any -- you probably feel comfortable now about what you need to do in that incremental spend to get that down the road, but is there anything in that expectation that could help -- could lead maybe even boosting that investment in that product category even more than what you've now anticipate boosting it to?

John Marr

That's possible. We have a current staffing plan that's built into the numbers we've put out in 2008, but it certainly is possible, everything we've seen so far has been reassuring in terms of the opportunity and to the extent that we can put more on this product and make it have that much more value to our clients and be that much more competitive in the marketplace, it's going to be the right thing to do. So, it certainly is possible. We are already at a level above where we thought we'd be at this point in terms of resources, but I think it's more likely to grow than to fall backward and that's based on the significance of the opportunity and as we make those adjustments, we'll share it with you.

David Yuschak – SMH Capital

Now does that mean it's just more robust that you're going to bring to the market compared to the past rather than maybe bringing a timeline into it?

John Marr

Yes. I would not want to encourage anyone to expect a release to be earlier. We've talked about late '09 or more than likely into 2010 before we see revenues from this. And I think it is definitely more about including more functionality in the system, addressing more markets in terms of sizes and internationally, et cetera. And again, just more functionality, more addressable marketplace, but it should not affect the timeline.

David Yuschak – SMH Capital

Okay, thanks.

Operator

Our next question comes from Dale Warmington from Dale Capital. Please go ahead with your question.

Dale Warmington – Dale Capital

Yes, quick question as it relates to your SG&A. There was a 200 basis point increase from 25% down to 22%. Can we expect this trend to continue into the fourth and could you elaborate some more as to how you were are able to achieve this magnitude in terms of reduction of SG&A?

Brian Miller

Well, within the SG&A there's a fair amount of leverage. As a small public company, there are significant costs that are relatively fixed and as we grow the revenue side, those don't have to increase particularly on a lot of the administrative functions. We've had a lot of emphasis on controlling those SG&A costs and leveraging the existing infrastructure as we grow. So, it's certainly in quarters where you see significant revenue growth like you see in this quarter that's intensified. We would expect over time to continue to see SG&A come down as a percentage of revenues 300 basis points in a year is fairly dramatic. But, I don't think you'd expect to see that same level of reduction on into '08, but we would expect to continue to see marginal improvement of SG&A as a percentage of revenues.

Dale Warmington – Dale Capital

And one last question, in terms of visibility, as toward the end of the quarter what type of revenue visibility do you have? I mean you have a backlog of $250 million, all right. What portion do you anticipate recognizing within the quarter?

Brian Miller

Well, the backlog going into the quarter, we have -- it varies from quarter-to-quarter. We have a significant portion of the backlog particularly in certain areas like courts and justice and tax and appraisal where we tend to have longer term implementation as well as basically all of the maintenance which is close to 40% of our business as well as the subscription business which is 5% of our business, so all of those by definition are coming out of backlog.

John Marr

I think it's really down in the -- we're down from much higher levels the ways things have evolved, I’m going to say 5%, 6%, 7% of revenues in any given quarter don’t come out of backlog and so that’s starting to be a much smaller number then it was historically as we have more and more contracts again as we said based on terms and accounting going to backlog and then we recognized over a period of time and maintenance and recurring services like ASP becoming more significant parts of our business. So, that’s a good thing and it definitely improves our visibility. At the same time I would say you know, 5% or 6% is material obviously to our earnings, so we will still see some fluctuation and then have some lack of visibility on the last couple of [inaudible] that we are looking at in each quarter but it has definitely become a less significant amount of the revenue in the current quarter.

Brian Miller

And on a broader basis of the $250 million backlog that we go into the year with, about two-thirds of that is expected to be recognized in 2008 and the balance is out in future years.

Dale Warmington – Dale Capital

Thanks a million.

Operator

Our next question comes from Charlie Strauzer from CJS Securities. Please proceed with your question.

Charlie Strauzer – CJS Securities

Hello Brian.

Brian Miller

How are you Charles.

Charlie Strauzer – CJS Securities

Hey, a couple quick questions, John, just a little bit more high level stuff. If it you look at the subscription software growth, it's been really kind of kicking in a little bit here and it's been a nice kind of success story and is it really just a byproduct of you're focusing the sales force more on offering that or your customers are saying to you hey, you know what we've got an aging work force, this is definitely a better model for us. It's harder for us to find the personnel to kind of replace these people who are retiring or who are moving on to the private sector. Give us a sense of what's driving the growth there?

John Marr

Yes, it would be the latter. Since we introduced this, I don't know six years ago now, we have never had any bias in the way we price it to the customer or on the way we incent or direct the sales channel. We've felt that we want to capture the market share we can capture and that it's up to the client as to what the best way to take delivery of the product or the service is. So, we continue to have that. We like the recurring business, but generally we're trying to not direct it and again would hate to lose a client or some market share because we were directing it one way or the other.

So, it is more the clients having appeal for it. And I know like a large deal this past year was the Fort Worth school district and that was originally bid as a traditional deployment and even during the process they saw our changes in their staff and IT infrastructure and said hey, let's take a look at this the other way and concluded it made sense to them. So, it's the marketplace responding to it more than us directing it.

Charlie Strauzer – CJS Securities

That's one of the things I think that you've talked about for a long time is that as the kind of the baby boom generation moves more towards retirement it's going to be harder for these government agencies to find qualified personnel. So, it might make more sense with that going forward?

John Marr

That's right. It generally is a reaction to their own situation more than what we're directing whether it is turnover in the IT area, whether it's aging equipment and infrastructure that would have to be replaced, but something that enables them to take a look at it objectively and say maybe it makes sense to get this as a service.

Charlie Strauzer – CJS Securities

Got it. And then shifting gears for a second to the school and education related segment that you're moving into, if you can give us a better sense of the kind of competitive landscape there, it seems like it's a more competitive environment than some other public companies that focus on educational software as well. How do you differentiate, is it more because you're more in the public school arena versus they're in maybe universities? Are there -- is it more fragmented than before than, than other areas that you're in? Give us a sense of that if you can?

John Marr

Well you kind of have two major areas in schools. You've got the financial side, which is an extension of our other financial products. So, our investment's largely made there and obviously it's an opportunity to leverage that investment into a related market. And there I think it is -- the financial system especially if you include human resources, which is pretty -- has a lot of unique functionality for schools versus public sector in general or even more broadly the commercial world and as you know we compete with products, especially on our high end that are sold to the commercial world as well. And its one thing to go to the public sector, but it's even more significant to go into schools where you have substitute pay and you have many different types of bargaining units and just an awful lot of different things. So, the specialization is even a little more extreme and I think we have some differentiation there that allows us to protect our pricing and we don't have different pricing for schools than we do for cities and counties. So, we don't -- we haven't seen any unusual pressure there.

On the administrative side which is where we've been doing the acquisitions and investing in new products, that's entirely different obviously than there are no horizontal applications that would play there. It's very much a unique vertical market that products have to be built specifically for and that would be a case of what you referred to in fragmentation. It's a market where there are some people consolidating a bit. We're one of them and bringing customer groups and products together and trying to build a national presence in something that has what we've achieved on the financial side.

Charlie Strauzer – CJS Securities

Excellent. Great. That sounds great. And then finally one housekeeping question. I might have missed this if you said it earlier, but what would the-- what was the option expense number for the quarter, the SFAS expense?

Brian Miller

The total for the quarter was $660,000 and $591,000 was in SG&A, $69,000 in cost of revenues.

Charlie Strauzer – CJS Securities

Great, thank you very much.

Operator

Our next question from Brian Kinstlinger from Sidoti & Company. Please go ahead.

Brian Kinstlinger - Sidoti & Company

Hi, guys. Two follow-ups. I want to talk about R&D for a little bit. I think from your, from your -- I didn't know if you mentioned it today, but in your guidance call you talked about increased R&D and you discussed it a little bit today, looks like you're budgeting for almost 50% more R&D. First of all, can you give us a sense of how many people you plan to have on that Microsoft opportunity versus -- development versus how many you have now and give me a sense of what else you're spending on? My guess is education but maybe split it out and quantify where most of the money is going?

John Marr

Yes. I think you're right. Some of the education and the Microsoft projects are what you see in R&D and as you know, while we invest significantly in our existing products that are deployed, they're generally expensed to cost of maintenance. We haven't disclosed specific staffing levels. We think of that as a little bit proprietary and competitive but I think I've said before that we had several dozen people that we were gearing up to and reached that early in the year and we're certainly looking at maybe say a 50% increase in what was the target number that we certainly achieved by the middle of the year sometime in the second quarter, and we're probably looking about 50% more bodies on that that we're gearing toward right now.

Brian Kinstlinger - Sidoti & Company

And would you say that, I mean could you quantify sort of versus the total R&D spend just as percentages can you give us a sense of roughly how much is that plan for Microsoft project versus education versus and maybe what else is in there in percentages?

John Marr

Brian, I would say significantly more for the Microsoft project. I don't –

Brian Miller

Yes, I'd say more than half of it is on the Microsoft project, education and other enhancements and other products would be scattered through there and we don't really break out our spending by product area.

Brian Kinstlinger - Sidoti & Company

Great thanks.

Operator

Thank you. Our next question comes from Trey Kuppin from Banc of America.

Trey Kuppin – Banc of America

Hello.

John Marr

Hey, Trey. We can hear you.

Trey Kuppin – Banc of America

Okay. Great, thanks. Just two quick questions. First, getting back to operating margins, could you talk a little bit about I guess qualitatively excluding the recent acquisitions, would you be expecting any operating margin expansion in '08 just kind of for your core business? Could you talk a little about that?

Brian Miller

Yes, sure. We would be expecting operating margin expansions. We said that the acquisitions are expected to be slightly dilutive and that would be in the $0.01 to $0.02 a share range on an operating income basis or a net income basis but accretive to EBITDA and to cash flow. So excluding the impact of those we would be seeing margin or operating margin improvement for the year.

Trey Kuppin – Banc of America

Okay, great. And then just my other question was in terms of the Odyssey business, I know that you mentioned that the growth rates on the call. Are you expecting to see an acceleration there as some of the recent hires become more productive or what's kind of I guess a reasonable long-term growth rate for that part of the business?

John Marr

Our growth rate is going to come down year-to-year simply because the base goes up significantly. They were a pretty small part of our business two or three years ago and therefore, I think last year Odyssey alone the growth rate was over 50% and it'll come down more in the low 30s this year on an absolute dollar basis it will grow a little more than it did last year. But obviously, the rate will come down and when it's a mature unit further out will be more in line with our company. But, I would expect for the next say three years certainly that it will have a growth rate pretty meaningfully in excess of our company growth rate, but not I think the 50 year -- 50% growth rate last year was probably too high going forward given the bigger base.

Trey Kuppin – Banc of America

Okay, great thank you.

Operator

Our next question comes from Eden Steinberg from Unidentified Company. Please go ahead with your question.

Eden Steinberg – Unidentified Company

Hi, guys. Question for you. What was the share count at the very end of the quarter?

Brian Miller

At the end of the quarter we have -- well today we have 37.96 million shares outstanding and at the end of the quarter it's a little higher than that. Hang on a second.

Eden Steinberg – Unidentified Company

That’s fine, that’s actually what I was going to ask. So, that’s after the 814,000 in January?

Brian Miller

That’s correct.

Eden Steinberg – Unidentified Company

And then, can you give us any kind of sense of what the appetite is to continue to buy stock, I think you said you had 960 something left?

Brian Miller

Yes. We would expect our stock repurchase program to continue to be active. We're somewhat opportunistic with it. We take into account our cash flow, the seasonality of that, our M&A opportunities, where we stand with those, level of spending on R&D. So all the uses of cash and look at stock repurchases as one of those opportunities that we've obviously been very active consistently over the last few years and have consistently executed on our repurchase authorizations. We'd expect to do so, but at this point we wouldn't want to predict exactly how that will fall out, but we should continue to stay active.

Eden Steinberg – Unidentified Company

And if you're at under 38 million now, I think you guys said that 40.5 million you were assuming in the EPS guidance?

Brian Miller

Fully diluted. So we're 30.960 million is the primary share, the actual shares outstanding and the difference is obviously the options, the options in the diluted.

Eden Steinberg – Unidentified Company

What's the current fully diluted share count?

Brian Miller

For the year, the fully diluted -- for the year the fully diluted was 40.358 million so the spread is about 2.4 million from basic to fully diluted, is that --?

Eden Steinberg – Unidentified Company

But, sorry, I don't mean to belabor this, but I'm confused. The share count currently after the January buyback diluted is 37.96?

Brian Miller

No I'm sorry, that's the primary. That's before the dilutive effect.

Eden Steinberg – Unidentified Company

What do you think the diluted after the January buying is?

Brian Miller

It would be about 2.4 million above that number.

Eden Steinberg – Unidentified Company

Okay. And then, but I’m showing the fully diluted for the average in the December quarter was about -- was just over 40, which would be the same number?

Brian Miller

It’s about 40.4 and the fully diluted would be --

John Marr

I think our annual estimate assumes a higher stock price is probably that difference. So, you get about a 2 million share spread, what we talked about at the end of the quarter, but we have to assume the stock price to do the calculation for fully dilution. And I think we assume a little higher stock price than where we traded and as we traded down a little bit in the fourth quarter which gives you another few hundred thousand shares on the fully diluted calculation.

Eden Steinberg – Unidentified Company

Okay.

John Marr

I think that's the difference.

Eden Steinberg – Unidentified Company

What price are you assuming to get to 40.5 million for ’08?

John Marr

It's in the high $14 range so that's probably a little conservative based on the current market.

Eden Steinberg – Unidentified Company

Okay. Alright, thanks guy’s nice quarter.

Operator

Thank you. Our next question comes from Brian Kinstlinger from Sidoti & Company. Please go ahead with your question.

Brian Kinstlinger - Sidoti & Company

Guys, this will be my last question, sorry. I wanted to ask about the appraisal services business. A while back before you were even CEO, John, you walked in obviously it was declining business to hurt you guys. I just want to try to understand given Ohio has ramped down in case of other things ramping down what is the breakeven revenue for that business now since you cut costs about a year and a half ago?

John Marr

We haven't really -- what we've really tried to go do is go above that kind of the opposite way, which is the way we manage that and what they've really worked hard to do is to develop an organization that can scale up and down within what our reasonable revenue expectations and maintain their margins . So, we believe we're organized. Obviously your margins are going to change somewhat, but stay within a reasonable level whether we do a $16 million in appraisal services or $23 million or $24 million and we don't -- that would be about as broad a range as we could imagine. So, we've kind of gone about it that way. The margins could come down a few percent on the lower end of that or go up another 100, 150 basis points on the high end of that. But that's kind of the way we're managing that.

Brian Miller

But we generally expect that revenues either increases or decreases year-over-year would be in the single-digits in that business so it would operate within a narrower range of revenue.

Brian Kinstlinger - Sidoti & Company

So unless there's like a quarter of your revenue comes out that's still going to be a profitable division?

John Marr

Yes. We really -- I mean -- there are always extreme situations that can create results we're not looking for, but I think the range in the revenues there is literally a few million dollars, which is a few -- which is pretty insignificant to our overall revenue level and I think they’re even at their operating margin level that you're talking about a couple hundred basis point swing. So, we feel as long as nothing that we can't imagine would happen that that is not a real threat to our overall performance and the revenues are now relatively insignificant to the overall company.

Brian Kinstlinger - Sidoti & Company

So, any other large contracts coming off of in Ohio in the next year?

Brian Miller

No large ones. Ohio was a whole series of contracts. Ohio was all on -- all the counties are on one revaluation cycle, so there were a number of projects going on at the same time that wound down and we are ramping up this year on the New Orleans revaluation that replaces a large part of those revenues. So, it's -- again it's within a relatively narrow band that we would expect to see the revenues vary from what we have in our plans.

Brian Kinstlinger - Sidoti & Company

Thank you again.

Operator

Thank you. Your next question comes from Rich Wilkinson from Deltech. Please go ahead with your question.

Rich Wilkinson - Deltech

Good afternoon gentlemen. Whenever I see a number of small acquisitions in a single segment I begin to wonder about product overlap. In your school segment do you see overlap between the product lines of these acquired companies and, if so, what do you plan to do about that?

John Marr

Well, we've got different types of companies we're acquiring there. Some of those companies have products that are good solid products currently, perform well for their existing base and are still attractive to the market and we'll support and extend the life of those products as far as they would have been able to go on their own. But in some cases those customers will have other Tyler products that we were already developing or already have as follow-on products further down the road. So, in those cases there's overlap, but there's synergies and a good fit where we would have a product we're already building that down the road after the useful life of those existing products has expired, that we would have some real scale in those areas where we have that overlap. And if you look at Schoolmaster, for example, it's a different geography. It's a good product, good customer set and at some point in time those people need be to looking at next generation, and we would have products to offer them. And then there are others. So the answer is both like VersaTrans, which is our transportation acquisition that we did in January and that's an entirely new product, completely complementary to what we already do and yet it's a significant need by schools.

It's basically bus routing and scheduling and those sorts of things which all of us who live in a school community know is a significant task for the schools. So every school needs something like that. They're a leader in that space and offering that product through our national sales channel and into our installed base, should be a real good opportunity for us and it’ll give us a broader offering that'll be hard to match by other people in the space. So, in some cases like VersaTrans it's broadening our offering without any overlap and in other cases it's more of a customer base and a geography that we can access, and we'll support those products throughout whatever useful life they could have and offer follow-on products beyond that.

Rich Wilkinson - Deltech

Thank you very much. Congratulations on your quarter.

John Marr

Okay, thank you.

Operator

At this time there appears to be no more questions. Mr. Marr I will return the call over to you for closing remarks.

John Marr

I appreciate all of you joining us on the call today. If there are any further questions feel free to contact Brian and myself. Thank you and have a great day.

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Source: Tyler Technologies Inc. Q4 2007 Earnings Call Transcript
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