Tyler Technologies, Inc. (TYL) Q3 2013 Earnings Report, Transcript and Summary

Hello, and welcome to today's Tyler Technologies Third Quarter 2013 Conference Call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. [Operator Instructions] And as a reminder, this conference is being recorded today, October 24, 2013. I would like to turn the call over to Mr. Marr. Please go ahead.

Thank you, Gary, and welcome to our third quarter 2013 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 statements. Next, I'll have some preliminary comments, 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 make -- 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. Please note also that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. John?

Thank you, Brian. Our third quarter financial performance continued a trend of steady growth, with results achieving or exceeding our expectations by most measures. This was our 11th consecutive quarter of year-over-year revenue growth, as well as our 50th consecutive profitable quarter. Our recurring revenues for subscriptions and maintenance continue to be major drivers of our growth, as together, they grew 16% and represented approximately 60% of total revenues for the quarter. Our subscription revenues growth of 34% reflects a continued shift toward cloud-based software as a service businesses, as well as fast-growing transaction-based revenue streams. At the same time, we are pleased that software licenses and royalty revenues were up 17% over last year, which is attributable to the growth of our proprietary licenses, as well as an increase in royalties in Microsoft Dynamics AX sales. Gross margins, as expected, declined 160 basis points to 46.3% as we are incurring cost ahead of revenues for certain e-filing contracts, mainly TexFile, as well as accelerating hirings to build capacity to deliver current and anticipated backlog. New contract signings were extremely strong across all of our major products, which is reflective, first, of our competitive strengths and, second, of an ongoing broader improvement in the local government market environment. Bookings in the third quarter were the strongest in our history, even before the addition of the TexFile contract, which contributed $72 million in bookings. Our Courts & Justice business had a strong quarter for new contracts. We signed Odyssey court case management software contracts with the states of Washington and Idaho, our 10th and 11th statewide court software contracts. These 2 deals have a combined value of more than $25 million. We also signed 4 Odyssey court software contracts in California. 3 of these were signed under the master service agreement. Merced County and Kern County would utilize Odyssey throughout their Superior Courts and Orange County will initially implement Odyssey in the Superior Courts for family and juvenile case types. Merced County will also use Odyssey File & Serve solutions for e-filing. In addition, we signed an Odyssey contract with the Fresno County Superior Court under a procurement that took place outside the MSA. Beyond California, we signed a contract for Odyssey with Shelby County, Tennessee. Shelby County is the home of Memphis and is the largest county in the state. They will be our first major Odyssey site in Tennessee. We signed a contract with Washington County, Pennsylvania for appraisal services, as well as iasWorld property appraisal and tax administration software. The contract, valued at approximately $7 million, will enable the county to conduct its first property reassessment since 1981. Among the more significant contracts for our ERP solutions were traditional on-premise contracts with the cities of Boulder, Colorado and Green Bay, Wisconsin, as well as Saas contracts in Joliet, Illinois and Hallandale Beach, Florida. For our Eagle recording and document management solutions, we signed a 7-year SaaS contract valued at approximately $3 million with Wayne County, Michigan. We also announced a new product, Tyler eTimekeeper, an application used via our web browser and, within mobile devices, allows public sector employees to access time and attendance tracking information remotely. Now I'd like for Brian to provide more details on the operating results of the quarter.

Thanks, John. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2013. Since our press release and 10-Q are both available now, I'm going to add color around some of the key factors in the quarter, then move on to John's comments on the current quarter and our outlook for the remainder of 2013. Beginning in the fourth quarter of 2012, we added additional non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. Our non-GAAP earnings exclude share-based compensation expense, the employer portion of payroll taxes on employee stock transactions and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. Also beginning with the first quarter of 2013, we have included the Dynamics royalty revenues in the software licenses and royalties line. These were previously included in hardware and other revenue, and prior year amounts have been reclassified for comparability. Revenues for the third quarter were $107.0 million, a new quarterly high, up 14%. Organic revenue growth was 11.5%, and EnerGov, acquired in November 2012, accounted for 2.5 percentage points of growth. Software license and royalty revenues increased 17.0%. Excluding the impact of acquisitions, software licenses and royalties grew 13.4%, which is attributable to the increase in Microsoft Dynamics royalties, as well as growth in Tyler proprietary license sales to new customers. In Q3, we received $1 million of royalties on public sector sales of Microsoft Dynamics AX 2012 by other Microsoft partners, more than triple the $269,000 in royalties a year ago and a sequential increase of more than 50% from Q2 of this year. In addition, we had approximately $573,000 of revenues related to Tyler's direct sales of Dynamics, which are included in software license, services, maintenance and subscription revenues. Organic license revenue growth continues to be pressured somewhat by the increasing percentage of new customers selecting subscription-based arrangements. Subscriptions continue to be our fastest-growing revenue line and grew 34.2%, all of -- of which all but 1.1% was organic. We added 24 new subscription-based arrangements and converted 14 existing installed clients compared to a total of 12 new arrangements and 19 conversions in the third quarter of 2012. Approximately 30% of our new software clients opted for one of our cloud-based solutions compared to 23% of new clients in the third quarter of 2012. There were several relatively large SaaS contracts this quarter, and 3 of the new Saas contracts and one of the conversions each had total contract values of more than $2 million. The subscription line also includes the growing revenue stream from transaction-based revenues such as e-filing for courts and online payments. These revenues rose approximately 54% to $4.0 million from $2.6 million last year. We expect to continue to see solid growth in these revenues as both current and new clients adopt our Odyssey File & Serve solution and more of them move towards mandatory e-filing. Software services revenues increased 12.5%, with 6.6% organic and 5.9% from acquisitions. Organic growth was primarily driven by the higher level of bookings in recent quarters. Maintenance revenue growth was 10.9%, of which 9.5% was organic. Our maintenance revenue growth rate continues to be reduced somewhat by the increasing percentage of new Saas clients as well as 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. Our blended gross margin for the quarter was 46.3% compared to 47.9% last year. This decrease was mainly due to the start-up cost expense related to the TexFile e-filing contract, with minimal-related revenues, as well as costs associated with accelerated hiring, particularly in professional services and support to ensure that we have the capacity to deliver our growing backlog of business. SG&A expense increased 17.6% in the quarter and represented 23% of total revenues, an increase of 70 basis points from last year's third quarter, with stock compensation being the major reason for the increase. Noncash share-based compensation expense was $3.1 million compared to $1.9 million last year. $408,000 was included in cost of revenues and $2.7 million was included in SG&A expense. Excluding noncash share-based compensation expense, and the employer portion of payroll taxes on employee stock transactions, SG&A expense was 20.0% of revenues, compared to 24 -- 20.4% last year. Net research and development expense was $6 million compared to $4.3 million. R&D expense in the third quarter of 2012 was offset by $1 million in reimbursements from Microsoft. We have not received any R&D expense reimbursements since last year's third quarter and do not expect to receive any further reimbursements from Microsoft on this project. Operating income was $17.9 million compared to $18.7 million, a decrease of 4.3%. Non-GAAP operating income was $23.1 million, up 3.7%. The non-GAAP operating margin declined 210 basis points to 21.6%. Net income was $11.0 million, or $0.32 per diluted share, compared to $10.8 million, or $0.33 per diluted share. The fully diluted share count increased by approximately 1.8 million shares. Non-GAAP net income was $14.7 million, or $0.42 per diluted share, compared to $13.2 million, or $0.40 per diluted share, in the third quarter of 2012. Adjusted EBITDA, which is EBITDA plus noncash share-based compensation expense, was $24.2 million, or $0.70 per diluted share, an increase of 2.9% compared to $23.5 million, or $0.71 per diluted share, in the third quarter of 2012. Free cash flow was $35.7 million compared to $31.8 million. Excluding real estate CapEx, our free cash flow was $40.7 million versus $32.9 million. This improvement is primarily attributable to an increase in cash from operations associated with higher deferred revenue collections related to growth in recurring revenues. Days sales outstanding in accounts receivable was 76 days at September 30, 2013 compared to 75 days at September 30, 2012. DSOs decreased sequentially from 106 days at June 30, which is our normal trend as we bill a significant portion of our maintenance in Q2, resulting in an increase in receivables with the related revenue deferred over the next 12 months. Our backlog at the end of the quarter reached a new high of $541.0 million, up 51.2%. Backlog related to our software business, which excludes backlog from appraisal services contracts, was $517.6 million, a 57.7% increase. Backlog included $135.3 million of maintenance compared to $108.7 million a year ago. Subscription backlog was $189.3 million compared to $79.5 million a year ago. Subscription backlog included approximately $71.5 million related to the TexFile contracts to provide e-filing for civil courts statewide in Texas. This contract was signed in November 2012 and under the original contract, Tyler was to earn revenues based on a fee per filing. Because these transaction-based revenues are contingent on future filings, they were not included in bookings or backlog at the time of the contract signing, which is also the case with our other transaction-based e-filing arrangements. The TexFile contract was amended in the third quarter of 2013 to provide for e-filing fees to Tyler under a fixed price arrangement regardless of actual filing volumes. The total value of the 4-year contract is approximately $72 million, which is generally in line with the total revenues that we expected to receive on a per-filing basis over the life of the contract. With the conversion to a fixed price contract, the entire contract value was included in bookings in the quarter. Excluding the TexFile contract, total backlog increased 31.2% over last year. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were up 135.9% to $217 million. Excluding the TexFile contract, bookings were still exceptionally strong, up 58.2%. For the 12 months ended September 30, bookings were up approximately 43% over the prior 12-month period. We signed 29 new contracts in the third quarter that included software licenses greater than $100,000, and those contracts had an average license of $674,000 compared to 16 new contracts with an average license value of $232,000 in the third quarter of 2012. Our total headcount grew by 51, to 2,482 employees at the end of the third quarter compared to 2,431 at the end of the second quarter. We currently expect to add approximately 125 additional employees by the end of the year. Now I'd like to turn the call back over to John for his further comments.

Thanks, Brian. As you've seen, this was a solid quarter, and results generally met or exceeded our internal expectations. Recovery in the broad local government market environment is continuing. Our competitive position and win rates are very strong, and our new business pipeline is active. Historically, the market slows down a little during the summer months. We often anxiously wait for Labor Day and people to return to regular schedules and start making decisions again. This summer, that clearly was not the case. Procurement processes seem to remain very active. In fact, I don't ever remember as busy a summer in sales. We've talked before about the continued investments we made during the slower markets of 2010 and 2011. And we benefited from those investments in this busier market. While the increased market activity is encouraging and has provided a significant increase in bookings and backlog, it will be interesting to see over the next couple of quarters whether this represents some catch-up of deferred decisions or more robust market that is sustainable. I suspect that it's a bit of both. As we mentioned earlier in the call, our royalty revenues for Microsoft this quarter nearly quadrupled over last year's third quarter, and increased sequentially from last year's -- last quarter by more than 50%. Quarterly royalties surpassed the $1 million for the first time. These royalties were generated by sales of Dynamics AX to approximately 57 public sector entities in 18 different countries. Although this was only our seventh quarter of royalties, we continue to be encouraged by the progress across the very broad marketplace, as reflected by the number of new deals in the widespread geographical foot print. In our direct sales channel for Dynamics, we signed 1 new contract during the quarter, which has not yet been announced, and have been selected or shortlisted in several other opportunities. Among our early Dynamics clients, Walker County, Texas went live upon financials and our Dynamics project that we signed with the City of Columbus, Ohio in late Q2 is now under way and going well. In Courts, there's obviously, continues to be a great deal of attention focused on the California marketplace. We remain very actively pursuing opportunities with courts in California following the state's termination last year of the project to develop internally our custom statewide case management system. We have now signed contracts for Odyssey with 6 of the state's 58 counties and expect to receive additional awards before the end of the year. As we discussed earlier in the call, we are making significant investments in the start-up of TexFile, a statewide implementation in Texas of our electronic filing solution for courts. We are well under way with work on the TexFile project, with 16 counties live, including 3 of the top 10 counties where e-filing will be mandatory for civil cases at the start of 2010. The amendment to convert the TexFile contract to fixed price provides us with even greater visibility over those revenues. We expect to recognize $3.1 million on TexFile in the fourth quarter and approximately $17 million next year. We are also pursuing a number of additional e-file opportunities with current Odyssey clients as well as with courts that do not use Odyssey. With each new e-file contract, we will incur costs ahead of revenues, which may put short-term pressure on margins, as has been the case this year. We believe that these recurring transaction-based revenue streams will contribute significantly to revenue and margin expansion in coming years. In light of our results in the third quarter, our bookings and general market conditions, we are increasingly confident in our outlook for the full year and, accordingly, have revised upward our revenue and earnings guidance. Our updated guidance for the full year 2013 is as follows: We currently expect 2013 revenues to be between $412 million and $416 million. We expect 2013 diluted GAAP earnings per share to be approximately $1.10 to $1.15. And fully diluted shares for the year are expected to be approximately $34.5 million. We expect 2013 non-GAAP diluted earnings per share to be approximately $1.49 to $1.54. For the year, estimated noncash share-based compensation expense is expected to be approximately $11.7 million. We estimate an effective tax rate for 2013 of approximately 39.5%. We expect our total capital expenditures will be approximately $27 million to $28 million for the year. Capital expenditures for the year include approximately $20 million related to real estate and office facility construction. Total depreciation and amortization is expected to be between approximately $14 million and $14.5 million, including approximately $6.5 million of the amortization of acquired intangibles. Now we'll take your questions.

[Operator Instructions] Our first question comes from Charlie Strauzer of CJS Securities.

Just a quick question. When you look at -- this is kind of a little bit of a bigger picture question, but when you look at the Dynamics and the success you've had so far and in talking to some of the channel partners that you're getting royalties from, where do think the success points have been? And where do you think some of the pushbacks have been as well in terms of where you haven't won contracts and what's giving you kind of the confidence there as going forward?

I guess probably our impression is that there isn't any single or couple of real concentrations of where it's successful. The numbers are reasonable but they're not explosive at this point, but what is encouraging is the number of sites sold by the number of partners and in such a large geographical area. The number of countries that we're represented in. Obviously, most of those sales are through different partners. So the number of partners that are embracing Dynamics AX and building a practice around it in such a broad geography is what's encouraging to us. That's exactly why we enter this relationship. We're also hopeful, Dynamics will contribute in our traditional marketplaces as well, but we're encouraged by the exposure we're getting to the broader international markets that we otherwise, wouldn't have exposure to.

Our next question comes from Brian Kinstlinger of Sidoti & Company. Brian Kinstlinger - Sidoti & Company, LLC: My first question is has there been any timeline set or early discussions about the RFPs in some of the larger California counties for courts case management? And I guess as part of that, John, you mentioned you expected to win a few other counties by year end in California, can you talk about the size in terms of population?

It does seem that the smaller and midsized counties are moving first here. They're simply larger projects, and I think defining their scope and project pointers is more involved in the larger counties. We do expect larger county activity eventually. We're having conversations with them, but they're not in -- into the real official procurement mode at this point in time. And that's probably fine with us. Obviously, these projects and states' specific functionalities, integration extensions and a lot of the things that come with early county adoption in a new state are all things we're under way addressing and we'll be in an even better position to be responsive to as the larger opportunities come along. The other thing that happens is even in a county, it's kind of a serial process. They start with certain case types or certain courts within the county and then it will expand from there. So the dollars for the initial engagements sometimes don't look as high as we might think, but they're generally not for all courts and all case types within the county. So I think in all of these counties, this will -- there'll be multi-year projects that are geared in one court or one case type and expand from there. And we're hopeful that in most cases, they expand to include Odyssey File & Serve as well. Brian Kinstlinger - Sidoti & Company, LLC: Great and then my follow-up to that -- like, Orange County, I think you are talking about, but my follow-up is in light of the strengthening demand in your environment you've talked about, do you expect Dynamics sales might be stronger in '14 than maybe you thought 6 to 9 months ago? And when we think about the Columbus, for example, they were using some very old software that a bunch of their neighboring counties were using. And there was a talk a while back that many of those other neighboring countries would follow suit with Columbus. So maybe just talk about how the demand environment is in Dynamics and then maybe those counties and should things move a little bit quicker, given the environment is stronger.

Well, we're going to remain cautious on the trajectory of Dynamics revenues. If you look at the increases on a percentage basis quarter over same quarter last year or sequentially over the last quarter, they are impressive. I think when we model Dynamics, we would flatten that curve modestly as we look out over the next couple of years and set our expectation at that level. Certainly, there's the possibility that, that elevates and goes above that curve, but that's the way we think of it. We're building an entire business around it. That's important but it's complex, sales channels, service channels, product expansion channels. So we're still building a business around this and we want to be cautious about that outlook but we certainly are encouraged. Again, quarter over same quarter last year sequentially those are nice trends, and our expectations as we model forward will be to again bend those curves a little bit on the flat side and run the business from that.

Our -- your next question comes from Scott Berg of Northland Capital.

First one for John. Second one for Brian. John, can you comment of the overall deal environment in the quarter and was the strength in the quarter relative to an increased number of just general sales cycles going on? Or is it more reflection of improving run rates or some combination of both?

It's definitely a combination of both, and as I've said, in summer, we're usually frustrated when we are talking about the sales channel because we put a lot of work in the processes and they seem to stall and people are on vacation and so forth and even in the committees, one person out can stall a process, and decisions just continued to happen and processes moved forward. So clearly, people are addressing, whether they're deferred decisions or pent-up demand, but we clearly saw a much more active third quarter or summer market than what we traditionally see. And as I said, fortunately, we made significant investments in '10 and '11, when I think a lot of our competitors were more cautious and we certainly benefited from that in terms of win rate. If you look at Brian's comments on the number of deals over $100,000 and actually if we were to talk about the $500,000 or $1 million in licenses, in those average deal sizes, that also was a strong contributor. On our higher end is where we saw a lot of the improved competitive decision giving us some feedback. I think that sector of the market has probably weakened a little bit in terms of broader competition and, obviously, both with the investments we've made in the products as well as the reference ability of sites we've sold in that size range over the last 2 or 3 years that's probably the sector where we'll become the most improved.

Then piggybacking off that a little bit, Brian, 20 new license deals in the quarter are greater than $100,000. New subscription deals is up materially in the third quarter but you didn't beat much on the revenue line in the quarter, both on the license and total revenue. Is that an indication that these deals will be -- a large chunk of them are recognized ratably over a period of time, implementations over the next 4 to 6 quarters than, obviously, all upfront in the third quarter?

Yes, that is the case. On -- it's not driven necessarily by the size of the deals but the way that the contracts work out, typically the very large deals are a percentage of completion accounting, where we recognize the license as the services are performed generally over a number of quarters. That's certainly the case with all of our Odyssey deals, all of our appraisal and tax deals and the larger ERP deals that John mentioned as well. So yes, there's a larger percentage of those deals that are percentage of completion accounting that we don't get upfront.

Our next question comes from Jonathan Ho of William Blair. Jonathan Ho - William Blair & Company L.L.C., Research Division: Just to start out, I wanted to get a better sense. When you guys talk about hiring, in what areas are you looking to add additional staff? Is this mainly on the deployment and sort of fulfillment end of this or is this additional sales capacity, where you're just seeing so many deals in the pipeline that you feel like you need more folks there as well?

No question, the biggest headcount additions will come in the professional service and deployment side of the business and clearly that would be with the heads being added that are above planned. The TexFile heads, for the most part, are in plan. There's a fair amount of help desk work around e-file as they come online. The law offices and so forth call these help desks. So there's some help desk heads, but Professional Services would be the highest area. A little bit of development but we've got full complements of staff there. So certainly on a much lower rate than revenue increases and very few in sales. We kept our sales channel at a certain size through '10 and '11, when it was not that busy, but these are experienced people that know our business, have the subject matter expertise to work with the marketplace and we kept our headcount generally where it was and so, we have felt that we have more capacity in the sales channel than what we were performing at. I would say we might have a 4-, 5-, 6-head kind of growth in that area over the next 6 months or so but certainly not a significant number in relation to all the heads we are adding. Jonathan Ho - William Blair & Company L.L.C., Research Division: Got it. And just in terms of the Microsoft opportunity, is there a way that or have you seen any initiatives on Microsoft's side to maybe get the sales distribution partners to more rapidly adopt either through investments or training or just broader spending support for the product? I just want to get a sense whether there's any shift there or an acceleration that you guys are seeing?

I think Microsoft's folks themselves in the way they work with their partners, they are very aggressive and they're working hard. I've warned about it and it's just a business that takes a long time to grow. We have a product now. The product's well received in the marketplace and the early implementations are going well, but for their partners and even for us with our direct business, building out the sales channel, the service channel, the programmatic extensions, conversions takes time and I've kind of said -- I think you might want to look at Odyssey as an example. That's a product that was well received initially, the early adopters were very successful but it takes time to build a business around it. It's profitable and reliable and has good visibility and that's where we are with it. So I think it will continue to grow and we're encouraged by that but these are the kinds of things that definitely take some time to reach a point where they're significant contributors to our business.

Our next question comes from Raghavan Sarathy of Dougherty & Company. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Just one question for John. So you touched on this a little bit before that you are in conversation with the larger counties but they are not in procurement at that point -- at this point. Can you talk about how these counties are trying to address the funding challenge? I've noticed that the smaller to midsize counties are able to get money from AOC or probably use some sort of emergency funding, but when you look at the larger counties, you are looking at several million dollars of projects and how are they trying to address this funding requirement?

I guess I'm not aware of a consistent way that we could apply to a range of counties, but I think you're right. It's a combination of their own county resources and what they can get from the state and it is a challenge for them, obviously. The reality is the projects that we're executing are -- deliver more value in our view than the project they had on the table before, but there is not some large statewide funding for it. So they all have to put together their local resources and get what they can from the administrative office of the courts and the state, but I'm not sure that there is a single process that's typical from county to county. Raghavan Sarathy - Dougherty & Company LLC, Research Division: Maybe if I can ask this question a little differently. So the larger counties, they have been little bit slow to move. Is the funding a gaiting factor or is just the scope of the project itself is -- they are taking a little more time to evaluate vendors then get into a procurement process?

Right. I think it's more the latter. So they tend to have IT staffs. They tend to be in a position to keep the existing system as much as it's not current or competitive. They're in a better position to have a function for them and extend its life. Defining their scope and statements of work and exactly what the project includes is a bigger process and takes longer than a smaller county. So I think the smaller counties are in more urgent need. They don't have the resources to extend the life of their existing systems. The projects are little more straightforward and they can pull the trigger more quickly and, again, the larger ones have complexities that take some time to address.

Our next question comes from Mark Schappel of Benchmark.

John, you reported several large deal wins during the past quarter or 2 here and I was just wondering if there's any concern on your part being able to hire implementation consultants quick enough to staff these projects?

No, I don't think we're able -- I think it's actually what we do well. One of the reasons we're successful in this space is it's nice to have a product that demonstrates well and is current and competitive, and we do have that. But we've got a history of executing on time, within budgets and managing the scope. And there's a risk-averse market and that's a big part of our success along with exciting products and I think that's what we'll leverage through this growth patch. The market has certainly shifted a little bit. A couple of years ago, anytime you were looking for positions, you had many, many, many qualified candidates very aggressively pursuing those and certainly that's shifted a little bit. So our HR group is geared up and in recruitment mode and we're running a lot of different recruitment activities at all of our major divisions. So it's something that you can't take for granted and it's a good sign for the broader environment, obviously, that it's a little less of an employer market, but we still get a really good pool of people looking for these jobs and I still think we're an employer of choice in the markets that we're in. So it's an active, ongoing process to recruit and find the right and the best people for these positions and we've been successful in doing that, but it is also, certainly, a little more challenged in a couple of years ago and, obviously, that's a good thing if we're looking at the broader macro issues.

Okay, and then as a final question here, who do you compete with regarding the Orange County or courts deal?

Well, the 3 vendors on the MSA are involved in these deals and they can look at those. I think we were -- I think we've been kind of the preferred vendor for some time. There doesn't seem to be another vendor that's -- no other vendor has won multiple deals in California. So we feel good about establishing ourselves as the leader in that marketplace.

Our next lesson comes from Matt Williams of Evercore.

I just had one in terms of sort of the, I guess, lower end of the markets. We've seen a lot of headlines and press releases around some of the larger deals. Is that, I guess, sort of lower end holding up as well as maybe the large end is? Or is there any sort of pressure there? I guess, just any commentary on kind of the run rate or the smaller deal sizes and sort of how that market is holding up as well?

Well, that is certainly where Tyler has grown up from and I think it is holding up, and we continue to have a strong position in that marketplace, where we've been strong for some time. Now I would say that the vision that focus on those size accounts performed more in line with what our expectations were. In the lower tiers of the divisions that sell across sizes, the same would be true. I would say the outperform in terms of the additional deals over what we might have expected weren't on our higher end of the range. And, as you know, for some time that's been one of our growth strategies, is to move up that scale somewhat and become a strong in, I guess I'd call it, the tier 2 space of the whole marketplace, which is kind of our high end of the range, and we've had a lot of success there over the last quarter and so we're -- we feel good about that.

Great, and then maybe just 2 quick ones on the California deals that have come out, I think Fresno was not under the MSA, I was just wondering if there was anything in particular with that deal that structured it outside of the MSA? And then I guess on the Orange County deal, I know I believe it's family and juvenile for right now. Did that project sort of start at that level, with just those 2 courts or was that sort of a -- started at a much higher level and, whether it was needs based or financially driven, it sort of trickled down just to those 2?

No, I think the strategy was to start with the most urgent areas and, obviously, they can manage their exposure that way and it gives us an incentive to perform well and expand into the other courts and case types.

Okay, and then on the Fresno deal, any color as to maybe whether that was outside the MSA?

No, not really, not certain other than there's a little uncertainty around the MSA and the timing, so they were actively engaged in their process while the MSA was being finalized. So I guess it would be interesting to see if, now that it's a fact that the MSA exists, whether other countries would choose to run an independent procurement process. Certainly, they can. And if their scope or their project, they feel, is unique or they need that amount -- those processes do have a benefit. They -- obviously, the RFT [ph] can be very specific about what the project is going to be and our response is very specific as well, and that, obviously, becomes the basis of the scope of work for the project. So it could be that some counties feel that there's a value to that process and may choose to run an independent procurement process. At this point, the majority of the deals we're working on, we would assume would go through the MSA.

Our next question comes from Kevin Liu of B. Riley & Co.

Just in terms of the bigger SaaS deals you're seeing hit the backlog now, I'm curious if you could add some more color whether those are just longer duration or more whether you're perhaps seeing more adoption by some of the larger cities and counties out there?

Well, we mentioned one, Wayne County. That's kind of unusually long, 7 years. We don't even necessarily encourage that but sometimes there's some cost. Usually, that's because there is cost involved in the deployment at the start-up that we need to be certain we're going to recover if we're going to include them in the SaaS fee. So that's usually the reason for the extended terms, because we have 0 attrition in our SaaS business, so we're not usually overly concerned about getting customers tied up for a longer period of time. Typical durations are 4 years, 5 years. Some of them are 3 years. And I think that works well for both the client and for us. In terms of size, that's the larger number because of the number of years, 7 years included in it. They tend to not be our largest accounts at this point. They tend to be the lower and midrange accounts at this point, and that trend seems to be continuing. As the market clearly opened up here recently and people recommitted, and if that's a indication of them becoming healthier and stronger, I was wondering a little bit because one of the reasons for us with the adoption of SaaS to move from 12%, 15% of our new-customer decisions to 30%-ish was to spread their cost out over a longer period of time, and if that softens, is it going to go back to the old numbers? And it really hasn't. Those numbers have held up strong. So we're encouraged by that.

And then just one on the TexFile contract, I wanted to clarify some of the differences in the terms. In terms of when you guys start to receive payments, should we just assume kind of fixed fee whenever the system is live? And then I'm just wondering if it's cash receipt on kind of an annual or a quarterly basis here?

We actually started to receive -- to recognize revenues this quarter under the fixed-price arrangement. So we recognized a little less than $600,000 this quarter. It will be about $3.7 million, $3.8 million in Q4 and around $17 million next year. So those revenues are being recognized and the billing is generally quarterly in arrears, so we receive the cash afterwards.

[Operator Instructions] The next question comes from Brian Kinstlinger of Sidoti & Company. Brian Kinstlinger - Sidoti & Company, LLC: I have 2 follow-ups. The first one is, if you can talk about any large counties or states other than Texas, of course, that are expecting to mandate e-filing over the next 4 quarters and, if so, can you name which ones those are?

No, we generally would rather not do that. Obviously, I know the investment community is interested in that but, obviously, there's a competitive marketplace out there as well. So we'd prefer to not draw any attention to any competitive processes we're in. Generally, we don't till they're contracted. Occasionally, especially in these larger deals, the client announces things ahead of that and then, obviously, we affirm that. But otherwise, we'd rather not comment on specific engagements. Brian Kinstlinger - Sidoti & Company, LLC: I'm sorry, I misunderstood. I should have worded it better. Counties or states where you're already installed, for example, if you have e-file already in Minnesota or if you have e-file already in an existing state or county, the e-file piece, where you're already in there and it's not a competitive process, are there any mandates coming through those?

No, again, they are competitive processes, Brian. Certainly -- just like we are pursuing e-file opportunities in states and large countries where we don't have the case management system, if we were talking to one of our clients about it, they may go to bid, they may sole source it, but it's certainly a competitive process and I don't think it's to our benefit to talk about those.

There are couple of relatively small ones that are already signed. For example, in Oregon, each county, I believe it's 6 months after they go live, they become -- e-filing becomes mandatory. And we've talked about before in Minnesota, which has been an Odyssey client for some time, e-filing is being rolled out across the state. Neither of those are tremendously large. The 2 largest counties in Minnesota have already been mandatory for some time and are included in our current numbers.

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

Okay, thank you, Gary, and thank all of you for joining us on the call today. If you do have further questions, certainly feel free to contact myself or Brian Miller. Have a good day.