Tyler Technologies, Inc. (TYL) Q1 2012 Earnings Report, Transcript and Summary

Hello. And welcome to today’s Tyler Technologies’ First Quarter 2012 Conference Call. Your host for today’s call is John Marr, President and CEO of Tyler Technologies. [Operator Instructions] As a reminder, this conference is being recorded today, April 26, 2012. I would like to turn the call over to Mr. John Marr. Please go ahead.

Thank you, Amy. And welcome to our first quarter 2012 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?

Thanks, John. During the course of this conference call management may make statements that provide information other than historical information that may include projections concerning the company’s future prospects, revenues, expenses and 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 refer you to our Form 10-K and other SEC filings for more information on those risks. John?

Our first quarter financial performance builds on a solid performance of 2011, as the marketplace began to show signs of modest improvement. Total revenues for the quarter were $82.7 million, or an increase of 13%, of which 8% was organic and 5% was due to the acquisitions made in the fourth quarter of last year and the first quarter of 2012. We continue to see strong growth in our recurring revenues from subscriptions and maintenance, which together grew over 17%. In addition, although we continue to see a gradual shift toward our SaaS model, our software license revenue grew by over 9% over the first quarter of 2011, representing the second consecutive quarter of year-over-year license revenue growth. Gross margin for the first quarter rose 80 basis points to 45.2% for the first quarter, compared to 2012 of 44.4%. However, our gross margin improvement was mostly offset by increases in SG&A costs related to facilities, increases in headcount for sales and certain internal support functions to support growth, as well as increased stock compensation expense. Increases in research and development expense also offset our gross margin improvement. This increase is primarily because there was no expense reimbursement offset from Microsoft during the first quarter. We had another strong quarter for bookings. Significant contracts for the first quarter included a multi-suite school agreement with the Socorro Independent School District in El Paso, Texas, to provide our Munis ERP, Tyler Student Information System, Tyler Pulse and Tyler Content Management Solutions. Socorro is one of the fastest growing school districts in Texas with more than 42,000 students and 7,000 staff. We signed a contract for our Munis ERP Solution with the City of Des Moines, Iowa’s largest city and the capital of the state. With our Odyssey Courts and Justice Solutions we signed a contract with Peoria County, Illinois, for an integrated justice system including case management and jail management. Peoria is our first Odyssey client in Illinois. We also announced an agreement for our Tyler SIS, Special Education and Tyler Pulse Solution with the Kansas City, Missouri, School District. Among our SaaS agreements announced in the quarter were a 10-year contract with the Town & School District of Ledyard, Connecticut, to provide our Munis ERP solution and a 7-year contract with the Missouri City, Texas, to provide our Munis ERP and Incode municipal court solutions. We also announced agreements for appraisal services with Fairfield County, Ohio, and the Town of Farmington, Connecticut. During the first quarter, we announced the acquisition of Akanda Innovation Incorporated of Toronto Canada. Akanda has been a partner of our Appraisal and Tax group since 1997. They develop complementary modules to Tyler’s iasWorld appraisal and tax software. The Akanda team will continue to provide expertise from a variety of technical disciplines including GIS browser-based and workflow technologies, because virtually all of Akanda’s revenues already passed through Tyler as a third-party software provider, the acquisition will not have a material effect on revenues. Also during the first quarter, we acquired UniFund L.L.C., which provides ERP solutions to schools and local governments. UniFund, located in Nashua, New Hampshire, is a reseller of Tyler’s Infinite Visions school enterprise solution. UniFund’s more than 250 clients located throughout the Northeast are now Tyler customers and its approximately 30 employees joined Tyler as well. UniFund had total revenues of approximately $5.5 million in 2011. Subsequent to the end of the first quarter, we announced the acquisition of Computer Software Associates CSA, effective April 2nd. CSA founded in 1982, is based in Billings, Montana. It is a reseller of Tyler’s Infinite Visions school enterprise solution in the Northwest. In addition, CSA built and maintains a robust line of proprietary software for county governments. This software includes solutions for land and vital records indexing for county recorders and tax solutions for county treasurers. Both products are highly competitive and complement Tyler’s existing application suites, while further increasing Tyler’s market share nationwide and in the county recorder and tax business. CSA had approximately $8.2 million in total revenues during 2011 and has more than 200 installations in 10 states. The CSA transaction complements 2 other recent Tyler acquisitions, Windsor Management Group and UniFund. Of the $13.7 million combined revenues in 2011 for UniFund and CSA, approximately $2.4 million is already passed through to Windsor. Now, I’d like Brian to provide some more detail on the operating results.

Thanks, John. Yesterday afternoon Tyler Technologies reported its results for the first quarter ended March 31st. You’ve seen the press release and our 10-Q has also been filed, so I’m going to comment on some of the key factors in the quarter and then move on to John’s comments on the current quarter, and update our outlook for the remainder of 2012. Revenues for the first quarter were $82.7 million, a new quarterly high, and up 12.7%, compared to $73.4 million for the first quarter of 2011. Organic revenue growth was 8.3% this quarter, led by increases in our recurring revenues for maintenance and subscriptions, as well as growth in our software license revenue for the second consecutive quarter. Our acquisitions of Windsor Management Group in the fourth quarter of 2011 and UniFund in early March accounted for revenues of $3.3 million in the first quarter, or 4.4 percentage points of gross. Software license revenues grew 9.1% from last year’s first quarter, of which organic growth accounted for 4.1% of the increase. Subscriptions continued to be our fastest-growing revenue line and grew to 43.1%. Organic growth was 38.2% in the quarter and the impact of acquisitions was 4.9%. In the first quarter we added 11 new subscription-based arrangements and converted 17 existing installed clients, compared to a total of 13 new subscription arrangements and 1 conversion in the first quarter of 2011. During the first quarter, approximately 19% of our new software customers chose the SaaS arrangement, while 81% bought our software with a deployed solution and perpetual license. The subscriptions line also includes the growing revenue stream from transaction-based revenues, such as e-filing in the courts and online payments. In the first quarter of 2012 these revenues totaled $2.2 million, up from $1.4 million in the first quarter of last year. Software services revenues increased 10.5%, of which 6.8% was organic and 3.7% resulted from acquisitions. Organic growth was primarily driven by higher software license revenue arrangements and services associated with recent large court system contracts. Maintenance revenue growth was 12.2%, of which 6.7% was from organic growth due to a combination of new revenues associated with license sales in the past year and annual rate increases for existing clients. Our maintenance revenue growth rate continues to be reduced somewhat by the offset -- by the effect of existing installed clients converting to our hosted offerings, which results in a loss of maintenance revenue offset by a larger increase in subscription revenue. The acquisitions of Windsor and UniFund contributed 5.5% of the maintenance growth in the first quarter. Together recurring revenues from subscriptions and maintenance comprised approximately 60% of our total revenues for the first quarter and grew 17.3% year-over-year. Appraisal services revenue decreased 8.3% in the first quarter, primarily due to the completion of a major revaluation project in Allegheny County, Pennsylvania. We were in the startup stages of several smaller new projects, including several in Ohio. Other revenue for the first quarter includes a $121,000 of royalties on sales of Microsoft Dynamics AX 2012 by other Microsoft partners. These royalties were paid in the quarter for sales in the fourth quarter of 2011. For the first quarter of 2011, our blended gross margin was 45.2%, compared to 44.4% in the year-ago quarter. Gross margin for our software licenses increased 290 basis points, with the higher level of licensed revenues and a mix with less third-party software. The blended software services, maintenance and subscriptions margin increased to 110 basis points, reflecting the leverage in the incremental recurring revenues. Also the hardware and other margin increased 210 basis points from the year-ago quarter. These were offset by a decrease in our appraisal services margin from 38.3% last year to 33.2% this year, reflecting the lower level of appraisal services revenue combined with the shift towards projects that are generally at normal margins compared to the higher margins we achieved on certain larger projects in the last 2 years. SG&A expense was 25.8% of total revenue, compared to 23.6% in last year’s first quarter. The increase in SG&A expense is attributable to a variety of factors, some of which are non-recurring. First quarter 2012 SG&A reflects increased headcounts in sales and some internal support functions, as well as costs associated with new office facilities. Onetime costs included increased payroll taxes associated with higher incentive compensation payments in the quarter and expenses associated with acquisitions. We also recorded higher stock compensation expense, which reflects the increase in our stock price and higher commissions related to the increase in sales over last year. In addition, the newly acquired companies added approximately $620,000 of SG&A expense for the quarter. Non-cash stock compensation expense was $1.8 million in the first quarter of 2012, compared to $1.4 million in the first quarter of 2011. $248,000 was included in cost of revenues and $1.6 million was included in SG&A expense for the current quarter. Net research and development expense increased 12%, to $5.1 million for the first quarter of 2012, compared to $4.5 million for the same period last year. We did not have any R&D expense reimbursement recognized under our agreement with Microsoft in the first quarter of 2012, while R&D expense was offset by $415,000 in the first quarter of 2011. We currently expect additional R&D reimbursement offsets of approximately $1 million in 2012. Although the timing of the reimbursement is subject to change, we currently expect it to all be recorded in the third quarter of 2012. Operating income for the first quarter was $10 million and was flat with the first quarter of 2011. Net income for the quarter was $5.7 million, or $0.17 per diluted share, compared to net income of $5.7 million, or $0.17 per diluted share, in the first quarter of 2011. The fully diluted share count declined in the first quarter by approximately 1.2 million shares compared to last year’s first quarter, primarily as a result of our stock repurchases in 2011. Our effective tax rate for the first quarter was 39.2%. We did not repurchase any shares during the first quarter. As of March 31, 2012, we had approximately 30 million common stock shares outstanding and authorizations to repurchase up to a total of 1.7 million additional shares. Free cash flow for the first quarter was $17.0 million, compared to $9.7 million for the same period in 2011. Excluding real estate CapEx, our free cash flow was $17.1 million versus $16.3 million for the year ago quarter. Receivables continued to perform well. Day sales outstanding and accounts receivable were 64 days at March 31, 2012, an improvement of 17 days, compared to 81 days at March 31, 2011. We collected a significant receivable which had been outstanding for an extended period of time in connection with wind down of a large contract. Our backlog at March 31, 2012, was $332.1 million, up 26.7%, compared to $262.1 million at March 31, 2011. Backlog related to our software business which excludes backlog from our appraisal services contracts, was $307.8 million in the current quarter, a 32% increase compared to $233.2 million a year ago. Appraisal services backlog was $24.3 million at March 31, 2012, compared to $29.0 million at March 31, 2011. Backlog at March 31, 2012, included approximately $98.5 million of maintenance, compared to about $81.6 million a year ago. Our first quarter bookings, which are calculated from the change in backlog plus revenues, were up almost 39% over the first quarter of 2011. Excluding acquired backlog bookings were up approximately 35%. For the 12 months ended March 31st, bookings were up approximately 16% over the prior 12-month period. Excluding the effect of acquisitions bookings rose approximately 14% in the last 12 months. During the first quarter of 2012, we signed 12 new contracts that included software licenses greater than $100,000 and those contracts had an average license of $503,000. In the first quarter of 2011, we signed 15 contracts with software licenses greater than $100,000 and those contracts had an average license of $232,000. With more of our backlog comprised of multi-year subscription agreements, as well as certain software contracts that will be multi-year implementations, the timing of the back -- the recognition of backlog has lengthened. On the balance sheet, we ended the first quarter of 2012 with $11.9 million in cash and investments, and $56 million in outstanding borrowings under our $150 million revolving credit facility. At March 31, we had $88.1 million of availability under the agreement. The average interest rate on our borrowings in the quarter was 3.3%. During the first quarter, we completed the acquisitions of Akanda and UniFund for a total of $5.8 million in cash. The purchase price of Akanda excluding liabilities assumed was $2.1 million of which $900,000 was paid in prior periods, and the net cash purchase price of UniFund was $4.6 million. We did not expect these acquisitions to have material impact on earnings for 2012. Also subsequent to the end of the first quarter, we completed the acquisition of CSA, for a cash purchase price of $9.8 million. Our total headcount grew by 21 to 2,112 employees at the end of the quarter, compared to 2,091 at the end of the fourth quarter. The quarter end headcount includes 44 people added with the 2 acquisitions. Now, I’d like to turn the call back over to John for his further comments.

Thank you, Brian. Our results for the quarter reflect the continued gradual improvement in the marketplace and the stability and steady growth of our recurring revenues, which were approximately 60% of total revenues as well as our ability to continue to improve our gross margins and to make what we believe are well-timed investments in our existing and future products. We continue to see modest improvement in the marketplace. Certainly, it is not all the way back to pre-current environment levels, but governments are addressing essential needs that have been deferred over the past few years. You can see in our numbers that bookings and backlogs have grown ahead of actual revenues recognized. We see these along with RP activity as leading indicators that we are returning to a modestly higher level of growth. During the past few years with lower than normal growth for Tyler, we’ve exercised the aggressive expense management. In the first quarter, you could see that we had made some important investments in sales, professional services, facilities and general support. It’s important we do this to realize the opportunity in the marketplace as well as to ensure we can deliver on the higher levels of business in a high-quality fashion. This said, we continue to be convinced that there remains a strong opportunity for margin expansion as revenues grow, although it may be lumpy at times. With the new business market slowly improving, the story is positive with respect to our recurring revenues. We continue to add clients in our SaaS and hosted offerings, including those that are new to Tyler and existing clients who convert to a hosted solution from an in-house Tyler system. As our industry transitions from the license on-premise model to a hosted SaaS model, it is critical that Tyler has a credible offering to make that conversion. I’m pleased that we are successfully making that conversion. Tyler now has 325 SaaS customers. Our subscription-based business has grown more than 30% each of the past 2 years and we expect it to grow as much as 40% this year on what is becoming a more meaningful base. We are also continuing to build revenues from our transaction-based revenue models, including our e-Filing solution with Odyssey File & Serve solutions for courts. We are providing the solution to clients in many cases under a modeling which we share and the filing fees collected by the courts. This model enables courts to implement e-filing and realize the efficiencies of eliminating paper from the system with little upfront cost, while funding the solution out of fees generated from the filings. We have approximately $1.2 million in quarterly e-filing revenues and have a very active sales effort for e-filing with both new and existing courts. Both Tyler and Microsoft partners are now actively selling Microsoft Dynamics AX and are starting to build a direct pipeline. We have very little visibility into the pipeline from Microsoft Partner channel and most of the early opportunities that Tyler is pursuing with Dynamics Solutions have not yet reached the point of selection. In Q1, we receive royalties of about $121,000 related to the sales of Dynamics by other Microsoft partners. These sales were made in the fourth quarter of last year. There are around 12 sales for the public sector in 6 different countries. These customers will also contribute approximately $180,000 in annual royalties on support agreements. These revenues are for the first full quarter the product was available, not really enough time for normal sales process. Given our limited short-term visibility, our current expectation for 2012 is still that we will have sufficient revenues to offset the reduction in R&D reimbursement compared to 2011, and that the net expense related to Dynamics for us will be similar to 2011. We do not expect that Dynamics will generate meaningful revenues before 2013. Our 2012 annual guidance is generally consistent with our initial guidance for the year provided in February. We’ve revised upward our revenue guidance to reflect the UniFund and CSA acquisitions and have slightly increased both the lower and upper end of our earnings guidance. Our current guidance is as follows. We currently expect 2012 revenues to be in the range of $360 million to $366 million. We forecast 2012 diluted earnings per share to be approximately $0.95 to $1.02. And we expect that approximately 60% of our earnings will come in the second half of this year. Fully diluted shares for the year are expected to be approximately $32.5 million to $33 million. For the year, estimated pre-tax expense related to stock options and employee stock purchase plan is expected to be $7.4 million, or approximately $0.18 per diluted share after taxes. We estimate an effective tax rate for 2012 of approximately 39.2%. We expect our total capital expenditures will be approximately $15 million to $16 million for the year, and total depreciation and amortization will be between $13.2 million and $13.7 million. Our Board of Directors has approved our plans to build a new office facility for our -Courts & Justice Division and corporate staff on the land we purchased in Plano last year. We expect that the cost of the construction will be $16.7 million, of which approximately $9 million will be spent in 2012. Now, we’ll take your questions.

[Operator Instructions] Our first question comes from Nate Schneiderman at Roth Capital.

John, just to clarify the modest improvement in the market that you’re seeing, have you seen any sort of step function up from the levels you were seeing in Q4 and if so what specifically would you point to there that you’re seeing?

No, not really. I would characterize the market as having remained in a much lower activity range through the middle of last year. And as we started to see and report the second half of last year, our bookings and experience were improving. And I would just say that, that continued, that did continue through the first quarter and we’re still experiencing that in the second quarter. So I would not want to characterize it as some significant step up, but there certainly is some improvement. And I think it’s mostly attributable to these deferred projects that really do need to be addressed at this point.

And then, just a follow-up question then, kind of a clarification on the Microsoft situation. So, $120 million of royalties and you’re expecting -- sorry -- $120,000 of royalties, $180,000 up supports as $300,000 or so, $300,000 on 12 deals, it just -- I was under the impression that these Microsoft Partner deals were larger than deals which you were typically seeing. So, can you explain what’s going on there? And then, Brian, just related to the Microsoft, can you explain how the rev-rec is going to work in general when a Microsoft Partner sells it, will you tend to recognize all that revenue, one quarter later period of time then when the partner books the deal?

Yes. It’s a good observation. Obviously, the maintenance we report is not, that revenue was not included in the quarter. But we’ll be very conscious as we have been with our own business that, wow there’s a new business market and license and associated with that. We’ll be anxious to build our recurring revenue underneath that and look forward to where that supports our investment in the product and the licenses can be incremental and much higher margins. So, the fundamentals in building that business are very similar to our own proprietary business. Obviously, we’re just getting our royalty of that. So the sales to the customer were much higher. The reseller, or channel partner, kept their share there and then we share in the royalty that Microsoft gets after that. But we do have an arrangement with Microsoft, where both Tyler customers as well as their proprietary customers of all of their Dynamics products have a low cost transition, if they choose to, from their existing Microsoft or Tyler solution to AX. And I think that’s important and it will help us build that support base, et cetera. So a number of these were transitional clients, or licenses were artificially low. But again they have, they’ll help us build more in the way of the recurring support maintenance.

And Nate, on the revenue recognition. At this point, we’ll generally recognize all of our royalty upfront. We earn it without a further obligation. And in the quarter following the quarter in which the sale is made, we get that reporting typically 30 days after the end of the quarter so after we’ve already reported our earnings. And at this point, we don’t have a basis to estimate that. So we’ll record that in the quarter following the quarter that the sale is actually made in.

So what was reported in this quarter was for the fourth quarter of 2011, the product was released in August. So it’s very early, the normal sale cycle wouldn’t allow a normal process to be executed and a decision to be made. So obviously these were people that were waiting for the product and purchased it almost on its release. I think in another couple of quarters what we’ll see is more of the normal sales process resulting in those sales. So we’re -- I’d be looking for what happens a year after it was released, so what happens in the third quarter will be reported in our earnings in the fourth quarter this year -- that’s when we’ll start to see numbers that have been through the normal sales process.

Our next question comes from Brian Kinstlinger at Sidoti.

Maybe can you give us, John, an update. When you talked at the user conference/investor piece about a handful of states that are looking at core RFPs and we obviously talked about California as well and the counties there. So maybe give us a sense of the different stages -- in the procurement process of where they are. And then, will you need to hire given the robust pipeline and could that temporarily lead to lower EPS?

Are you talking specifically about courts?

Specifically about courts.

Okay. What Brian is referring to is, I think the market in general is behaving normally and what we’ve expected, it’s healthy. We know the states and the counties that are in the process or about to and I don’t think there is any surprises there. But significant change in the court marketplace recently was that the State of California that had a build going on with really IT services partners, very significant project, $1.9 billion project actually, that they effectively pulled the plug on that project. So the 83 counties in California, they really had been on hold for some time and a lot of – there probably had been very few purchases or transitions in the last 10 years in California and many of those counties are using systems that are 15 or 20 years old. They now all have to come up with their own independent strategies and no longer can just sit on the sidelines and wait for the State system to come out. So, obviously, California is a very, very significant sized state. And as I said there is 83 different counties of all different sizes. And so all of sudden, there is certainly is a new market opportunity that wasn’t there previously. We would hire, if the kind of people that could be helpful to us were available, but it’s a highly specialized skill to really know the courts, have the relationships and they are not just strict salespeople, these are people that need to be a resource to the courts in making their plan. So, probably there maybe a couple of new bodies that we’re able to find, people that can be effective. But for the most part, we’re going to have to lean on the people we have because building those skills is -- would only be a distraction really at this point. We’ll use the people we have for the most part.

And just a follow-up on that question, just the various stages maybe of the 5 states that are on procurement and then, are you going to hire more developers -- not necessary the salespeople, but how soon ahead of these RFPs you have to start hiring on the development side given your win rate has been 80% on the state level?

I don’t – I don't want to comment on those individual processes. As you indicated there are number of states that are in the process. We don’t expect to -- our back-to-back quarters with deals like Oregon and Maryland as we did last year, but there certainly remain a number of significant opportunities out there and we do expect that division to have -- continue to have higher growth than Tyler experiences Tyler-wide. There will be marginal growth in both sales and development, but I think we’ve been staffed there for a higher level of business and that there will be leverage between the relationship between development, growth and cost and sales growth and cost and our ability to grow the division as a whole. So we would expect that those would have some leverage and support margin expansion over time. Where we will see the biggest headcount growth will be in the professional services side, of implementing these systems and that is -- that has less leverage in that model. So you’re seeing some of that in the first quarter in courts, but really Tyler-wide, where we have to go out and bring in some resources, and there's some period of time while we’re training those people and getting them up to speed before we can deploy them and generate revenue. So, we saw some of that with courts and again Tyler-wide in the first quarter. And we’ll see some of that throughout the year.

Our next question comes from Tim Quillin at Stephens, Inc.

So it’s my sense that Wiznet has been a great acquisition for you in terms of generating incrementally filing business. You clearly had a strategy with the last 3 acquisitions around Infinite Visions. And I’m just wondering is that more of access to the markets or is that a product that you think could be much bigger across your existing client base?

Well, it’s a blend of that. Clearly, they bring some access to geography and marketplace that we weren’t as strong in as we are in other places. But the product also has a very competitive position and even in the few months that we’ve had the products, it’s been successful in the marketplace and I’m very, very pleased with that. I think the transactions would have stood on more of a consolidation play, as a positive acquisition for us, but again our hope was and what our current experience is, is that product is competitive. It’s competitive in some sub niches that we’re not and that we don’t have a stronger presence in what our other products, so it’s a bit of a blend. We will certainly continue to sell that product, invest in it and support it going forward. I don’t see it as a product necessarily, though, that gets leveraged over our other sales channel, so somewhere in between.

Got it. And no buybacks during the quarter, which I think is the first quarter in a long time where that’s been the case. You’re making some acquisitions or have made some acquisitions, but what do you see over the rest of the year as uses for cash? And if I can sneak one additional easy one in for Brian is where -- where do the royalties get booked is that in the software licenses line?

I’ll add to that part quickly, on the royalties and other revenues.

Obviously, we’ve had what we felt was a great opportunity in our stock over the last 2 years and I think bought just under 20% of the outstanding stock in 2010 and 2011. So, we don’t really have a sense of urgency to have to buy more of it at this point. Obviously, we’re pleased that the stock has appreciated very nicely through acquisitions, the previous stock buybacks, investments in our own facilities, we’ve deployed a lot of capital and actually have $50 million it’s off the line of credit at this point. So I think we’re in a position where we don’t need to be overly aggressive and can be somewhat patient, but certainly if there were an opportunity in the stock, as in the past, we’d be aggressive again.

Next question comes from Charlie Strauzer at CJS Securities.

A couple of quick questions. For Brian, of the 620 of SG&A from the acquisitions you talked about, is that a good number to use kind of from how is going forward?

Yes. That’s the incremental over last year’s first quarter. It will be a little bit higher than that because the UniFund acquisition really was only in for a month and CSA, the latest one was not in this quarter at all. It was in April. So I think on a quarterly basis between the 4, or between the 3 acquisitions it’s probably going to be closer to about $1 million a quarter. So it will be a little bit higher than where we are right now.

Got it. Great. That’s helpful. And then John, when you look at the kind of success of this of SaaS, and you are kind of guided to over 40% growth this year, versus kind of where it has been, what do you think the main drivers there has been? Is it in more of the -- is it more of a combination of economics or is it more of the agent populous of the IT professionals at the local level?

It’s different for -- what’s interesting and what we’re pleased with is that somewhere around and even split of those customers have come from the new business market and the other side coming from existing long-term customers, really. And I think the catalysts of those decisions are different. So, when somebody comes to us in the first place or buys our system in the first place the catalyst generally is, as we’ve discussed, that they’ve got the deferred pent-up demand and they a system that really is reaching a point that it isn’t reliable and still 80% of those purchase on-premise because they have the infrastructure and they have the people, the IT resources, to support that system, although 20% adoption is a glowing percentage of that business for us. And what we’re finding in the basis is what you indicated as the latter, which is generally after they have the system sometime and after they have had a relationship with us that they’ve become comfortable with, we'd become a real partner of theirs, then when they have a point where they need to reinvest in their infrastructure or they have their IT professional exiting the workforce, and the people that they’ve been comfortable with supporting their system no longer available to them, that becomes a catalyst. They say, hey, instead of making that significant investment or instead of trying to find new IT specialists that don’t know our specific needs the way the people that have been here 20, 30 years know, they go and take a look at the SaaS offering and partnering with us on that. Obviously, our inside sales channel looks for those symptoms and offers SaaS transition as that approaches. So, again, the catalyst for our new clients versus transitional clients are little bit different. And we’re pleased that, that keeps moving along very nicely.

And the next question comes from Jonathan Ho at William Blair.

Guys, could you talk a little bit about what you’re seeing the competitive environment today and maybe talk a little bit about your win rate by segment?

Yes. Little bit, not too much into the competitive nitty-gritty, but I think in the courts area, especially in the higher-end deals, we probably have one of our strongest positions. We lost a couple of deals we would have liked a few years ago, but I think in the last 2 years or so we’re pretty much won all the important deals that we were involved in, so we’re very strong there. The product has always been strong there, but I think at this point our record on executing on the projects in a risk-adverse environment is very valuable to us as well. Obviously, it’s a broader market when you move to the financial systems and our biggest market there with a lot of different players. We’ve improved our win rates from, in real round numbers, from around 1/3 to around 1/2, which is a significant move, modestly better market. So we’re seeing a higher level of business there. I think pricing pressure has become a little more of an issue, so I think the reasons for losses have been more cost-oriented over the last year or so then quality of the software or reference ability are the traditional decision points. Tax and appraisal will probably improve modestly as well. We’ve had a kind of a re-look or improved user experience there that has definitely had some traction and done well in recent decisions as well.

Got it. And can you talk a little bit about sort of your expectations around the e-filing revenue? I mean, you gave some metrics in terms of the growth, but it seems like there probably are some system spends that are going to get taken later on this year. So, how should we think about growth in that business for the rest of 2012?

We talked about broadly that it’s kind of north of 40% growth rate on our subscriptions. That’s certainly a component, and I think that will grow much in line with our overall subscription growth. There a number of clients that are in various stages of ramp-ups. With new e-filing customers, there typically is fairly long ramp up period particularly between the time the system is implemented and the time that the jurisdiction may make use of it mandatory, and certainly the adoption rates go up significantly when it becomes mandatory. And so, we have clients like the State of New Mexico that are moving towards that mandatory status. We’ve got clients some like some of our clients in the State of Minnesota that there are in pilot project situations. And so, we do have projects in the -- or customers in the pipeline that are moving towards that higher level of business and so, I think that we would expect to grow in that 30% to 40% range this year.

Our next question comes from Raghavan Sarathy of Dougherty & Company.

I have 2 questions, first one is for John. John, you talked about modest improvement in the market conditions. Customers are looking at some of the deferred projects. Can you give us some sense for how this is translated into RPs or perhaps if you can quantify what you’re seeing in terms of RPs in the market in the current conditions?

RP activity the last couple of years has been off about 30% from the environment before the recession, if you will. And it’s probably up in between 10% and 15% range from that level. So, it’s recovered somewhat, but not back to where it was before.

Okay. And then a question for Brian. You included $10 million of additional revenue from acquisition. Can you give us some sense of where that might fall among license services and maintenance? Is it mostly maintenance or did you sell new licenses?

There is some new license business and we did give the breakdown in the call in terms of how much of the new -- of each revenue line in the quarter came from acquisition. But these businesses are primarily maintenance oriented there similar to the rest of our business. And just a second, I’ll give you a little bit more of the split. In total those businesses, UniFund, CSA and Windsor, generate about in the range of $15 million in maintenance out of, say, $24 million in total revenues. And we’re not sure exactly how that fall out this year because of the maintenance haircut we take in the first year with purchase accounting. But in the range of $15 million of maintenance out of $24 million of revenues, and the balance of the revenues are fairly evenly split between new licenses and professional services.

Next question comes from Brian Kinstlinger at Sidoti.

Yes. First maybe, John, can you give us a ballpark, you mentioned about a $1.5 million from e-filing revenue a quarter. If you were -- I tried to ask this once before I think, but if you were to put all of your customers in courts on e-filing, what is that general market opportunity. Is that in the $50 million to $100 million range or is it significantly smaller than that?

Well, its $1.5 million for the quarter, so our annual run rate is around $5 million now. If all of them are on, it would certainly be a multiple of that. I don’t think it would be $50 million, maybe in the $20 million range, but I don’t really have that number. As Brian indicated, a big thing is whether or not it’s mandatory. So to simply implement e-filing and just see what the adoption is, you’re going to have relatively low adoption or it’s going to take a very, very long time to ramp that up. So what’s critical is not just to get the clients to adopt it, but to pass some legislation where it’s mandatory, at least for certain types of filings. And then, obviously, the adoption is very high, and the ramp up happens very quickly. So it’s kind of a 2-tier process to get the courts to want to do it and agree to do it, but have them also lobby for the legislation that makes it mandatory.

And then, how many of your 8 states are going through any mandatory legislation processing? And then the last question, organic sales, organic growth in software license was 4%. You won a lot of large deals at the end of last year, do you expect that will accelerate throughout the year?

I don’t know how many are going through the legislation. Do you Brian have any information on that?

I don’t know. I know New Mexico is currently mandatory or it has made it mandatory, but there is a phase-in period. A couple of states we currently have, and I think North and South Dakota, are on -- have e-filing that they purchased it on a license basis. And I don’t believe we’re doing e-filing in New Hampshire, Indiana. Minnesota is working towards the pilot project now. So, I think it’s really right now only -- and then it’s been -- we have an agreement with Maryland that obviously hasn’t implement it yet. So, I think there is only one of our states that’s really fully on the mandatory and I’m not sure what the status on the rest of them are.

On the licenses, we would expect higher growth than that throughout the year, although it’s always the hardest number to project. Some of it's in backlog and some of it -- has better visibility, but there is always a component of it that is more sell and deliver and recognize. And then, obviously, it’s hard to project new business in terms of what’s going to be SaaS versus traditional and obviously if it’s SaaS, we’re fine with that, but that could put some -- it could keep the growth to a lower level. But our current expectation is that the growth for the year would be at a higher level than what we saw in the first quarter.

[Operator Instructions] Our next question comes from Charlie Strauzer at CJS Securities.

Brian, just a quick follow-up on SaaS. Just what percent of revenue in the quarter was SaaS?

In terms of actual SaaS posted clients?

Yes. In terms of the revenue you got from SaaS, what percent of revenue do you think it was in the quarter roughly?

That’s about 10%, about 12% of the revenue in the quarter I think was SaaS with total subscriptions. And of that, it’s about -- when you take out the e-filing and online payments, the real SaaS type arrangements was just shy of $7 million in the quarter.

At this time there appear to be no more questions. Mr. Marr, I will turn the call back over to you for closing remarks.

Okay. Thank you, Amy. And thank you for joining us on the call today. If you do have any future questions, feel free to call Brian or myself. Have a great day.

The conference has now concluded. Thank you for attending. You may now disconnect.