John S. Marr – Chief Executive Officer, President, Director and Chairman of Executive Committee Brian K. Miller – Chief Financial Officer, Executive Vice President and Treasurer.

Charles Strauzer – CJS Securities, Inc. Jonathan Ho – William Blair & Company LLC Brian Kinstlinger – Maxim Group Scott R. Berg – Northland Capital Markets Aleksandr J. Zukin – Stephens, Inc. Kevin Liu – B. Riley Caris Matthew L. Williams – Evercore Partners, Inc. .

Hello, and welcome to today’s Tyler Technologies Third Quarter 2014 Conference Call. Your host for today’s call is John Marr, President and CEO of Tyler Technologies. (Operator Instructions) As a reminder, today’s conference call is being recorded today, October 23, 2014. At this time I would like to turn the call over to Mr. Marr. Please go ahead..

Thank you and welcome to our third quarter 2014 earnings call. With me on the call today is I would now like to turn the conference call over to Mr. Marr. Please go ahead. 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.

Next, I’ll have some preliminary comments, and Brian will review the details of our third quarter operating results and 2014 guidance. 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 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. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.

John?.

Our third quarter financial performance continued the trend of record results in virtually every meaningful matrix. From a historical perspective, this was our 15th consecutive quarter of year-over-year revenue growth and our 12th straight quarter of double digit revenue growth.

Our GAAP net income of $17 million made this our most profitable quarter ever. It was our second consecutive quarter with organic revenue growth greater than 20% and net income growth greater than 50%.

Our recurring revenues from subscriptions and maintenance continued to be major drivers as together they grew 20% and represented approximately 60% of total revenues for the quarter.

Our subscription revenue growth of 49% reflects strong growth in our e-filing revenues from courts as well as a continuing gradual shift toward cloud-based softwares and service business. Software license and royalty revenues achieved exceptional growth again this quarter, up 26% over last year.

This was our first $13 million license quarter and our fourth consecutive quarter where licenses and royalty revenues grew year-over-year by 20% or more. Gross margin improved 170 basis points to 48%, reflecting our high level of software licenses, as well as the earnings leverage from incremental recurring revenues.

During the third quarter we completed the acquisition of SoftCode, Incorporated. SoftCode, which was founded in 1991, specializes in software for managing civil process. SoftCode primarily serves county sheriff’s departments and offers a complete civil case management solution, from court to service attempts to final executions of payments.

With this acquisition, we broaden our portfolio of court and justice solutions with a product that is very complementary with our Odyssey suite.

SoftCode’s founding partners, management and employees have joined Tyler’s Courts and Justice Division and over the coming months their technology and service offerings will be integrated into our operations and branding. SoftCode’s annual revenues last year were in the $3 million range and we expect to see them grow meaningfully as part of Tyler.

We had a tough bookings comparison for this quarter as the third quarter of last year included bookings of approximately $72 million from our Texas e-filing contract as well as two statewide Odyssey court contracts.

Accordingly, total bookings were down 32% for the quarter; however, excluding bookings from eFileTexas from last year’s third quarter, bookings grew almost 5%, which we consider to be solid given the strong comp. On a trailing 12-month basis bookings are up 22% with Texas e-filing considered on a comparable basis to other e-filing arrangements.

Some of the notable contracts announced in the third quarter included an agreement with the City of Detroit, Michigan for appraisal services valued at approximately $7 million.

Tyler will provide the city with real property appraisal data verification, sketch conversions and valuation services for the city’s first full reappraisal in 50 years, and a project that is considered to be an important component of Detroit’s financial restructuring.

The California courts market took a break from new contracts this quarter, but we continued to add new customers for our Odyssey case management solution in other states. We signed an Odyssey contact with Kane County, Illinois, valued at approximately $4.1 million.

Kane County is the state’s fifth largest county and represents our second Odyssey client in Illinois. We also signed a contract valued at approximately $3.5 million with Harris County, Texas, to implement Odyssey in 16 Justice of the Peace courts. Harris County, which includes the City of Houston, is the third largest county in the United States.

In addition we signed an integrated justice system contract including Odyssey courts and jails with Webb County, Texas, which includes the City of Laredo. Our EnerGov planning, permitting and licensing software where we announced contracts with the city of Charleston, South Carolina, and Los Angeles County, California.

In the ERP market we signed a $4.1 million contract for our Munis solution with Jefferson County, Alabama, the home of Birmingham and the state’s largest county. We also signed Munis contracts totaling almost $3 million with the cities of Midland, Texas, and North Miami Beach, Florida, each of which also included EnerGov solutions.

Significant new SaaS contracts for Munis included Altamonte Springs, Florida, a $4.3 million contract that also includes EnerGov, and Oklahoma County, the largest county in Oklahoma and the home of Oklahoma City. Our EnerGov solutions continue to gain market share.

In addition to contracts that included both EnerGov and one of our ERP solutions, we signed significant EnerGov contracts with Riverside County, California, the nation’s 11th largest county and the City of Carlsbad, California.

Also in the quarter we announced agreements with New Port Richey, Florida, and the cities of Allen and College Station, Texas, which included both Munis and EnerGov solutions. Finally we signed a contract for our Infinite Visions financial software with the Tucson Unified School District, the second largest school district in Arizona.

Now, I’d like for Brian to provide more details on the results for the quarter and our annual guidance for 2014..

Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2014. Since our press release and Form 10-Q are both available, I’m going to add some color around some of the key factors in the quarter and review our guidance for 2014.

Then we’ll move on to John’s comments on the current quarter and our outlook for the remainder of 2014. In our earnings release, we have included 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.

Revenues for the third quarter were $128.7 million, a new quarterly high, and up 20.2%, virtually all of which was organic. Software license and royalty revenues increased 26.0%. In Q3, we received $906,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft [buyers] (ph), down from $1.0 million a year ago.

In addition, we had approximately $1.1 million of revenues related to Tyler’s direct sales of Dynamics, which are included across our various revenue lines. These direct Dynamics revenues increased 84% from $573,000 in Q3 of 2013. Subscriptions continue to be our fastest growing revenue line and increased 49.2%.

We added 38 new subscription-based arrangements and converted 11 existing on-premise clients, representing approximately $17 million in total contract value, compared to 24 new arrangements and 14 conversions in the third quarter of 2013. Approximately 34% of our software clients in the quarter selected our cloud-based solutions.

The subscriptions line also includes the fast growing revenue stream from e-filing for courts and online payments. These revenues doubled to $8.2 million from $4.0 million last year. Total e-filing revenue of $6.2 million this quarter included approximately $4.4 million related to our Texas e-filing contract, up from approximately $590,000 last year.

Our blended gross margin for the quarter rose 170 basis points to 48.0%. The increase reflects the higher level of license revenues as well as margin leverage from the incremental recurring revenues, primarily those from e-filing.

Gross margin expansion was somewhat suppressed in the first three quarters of 2013 as we incurred costs ahead of revenues related to the Texas e-filing contract. Our non-GAAP gross margin expanded by 160 basis points to 48.8%.

SG&A expense increased 11.2% in the quarter and was 21.3% of total revenues, a decrease of 170 basis points from last year’s third quarter. Excluding non-cash share-based compensation expense, SG&A expense increased 9.6%. Operating income was $26.7 million, an increase of 49.8%. Non-GAAP operating income was $32.4 million, up 40.3%.

The non-GAAP operating margin improved 350 basis points to a new high of 25.1% as we leveraged both SG&A and R&D expenses to grow operating margin at a much greater rate than gross margin. Net income rose 53.9% to $17 million, or $0.48 per diluted share.

The fully diluted share count increased by approximately 520,000 shares as a result of stock option exercises, offset somewhat by stock repurchases in the current quarter. Our effective tax rate was 36.3%. Our tax rate declined from previous quarters primarily due to lower estimated state taxes based on currently anticipated revenue allocations.

Free cash flow was $64.7 million compared to $35.7 million in last year’s third quarter. Excluding real estate CapEx, our free cash flow was $64.7 million versus $40.7 million. Free cash flow for the third quarter actually exceeded our cash flow for the full year 2013 and we ended the quarter with cash of $157.4 million.

Days sales outstanding and accounts receivable were 78 days at September 30, 2014, compared to 76 days at September 30, 2013. DSOs decreased sequentially from 104 days at June 30, which is our normal seasonal trend related to the timing of maintenance billings. Our backlog at the end of the quarter was $674.0 million, up 24.6% from last year’s Q3.

Software-related backlog, which excludes backlogs from appraisal services contracts, was $634.3 million, a 22.6% increase. Backlog included $152.1 million of maintenance compared to $135.3 million a year ago.

Subscription backlog was $194.7 million compared to $189.3 million last year and included approximately $56 million related to the Texas e-filing contract. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were $148 million, down 31.8% from last year’s third quarter.

Q3 of last year included the Texas e-filing contract booking of approximately $72 million as well as two statewide courts contracts that totaled almost $26 million. Excluding the backlogs from the Texas e-file contract, bookings grew 4.7% in the quarter.

Obviously, bookings can be somewhat lumpy from quarter to quarter, especially with respect to large contracts for which revenues are often recognized over several quarters or even years. We believe that looking at bookings on a trailing 12-month basis can be meaningful in somewhat smoothing out the quarterly lumpiness.

For the 12 months ended September 30, bookings were up 4.3% over the prior 12-month period. These bookings include the contract for the statewide e-filing in Texas. This is our only e-filing arrangement that was included in bookings and backlog at signing as it is our only fixed price e-filing arrangement.

Excluding the backlog but including revenues from eFileTexas, which puts the contract on a comparable basis to other e-filing arrangements, bookings for the trailing 12 months rose approximately 22.0%. As a reminder, bookings do not fully reflect the true long-term value of new transaction-based contracts for e-filing or online payments.

Revenue from these arrangements is recorded on a per-filing or per-transaction basis. And even though the volumes and future revenue streams may be very predictable, we do not include future revenues in bookings and backlog because they are dependent on those transactions occurring.

Only the current quarter revenues from those arrangements are included in bookings as they are reported. Therefore, current bookings and backlog do not capture the future revenue stream from those arrangements.

We signed 30 new contracts in the third quarter that included software licenses greater than $100,000, and those contracts had an average license of $475,000 compared to 29 new contracts with an average license value of $674,000 in the third quarter of 2013.

Our total headcount grew by 61 to 2,796 employees at the end of the third quarter compared to 2,735 at the end of the second quarter. Based on our results for the first three quarters of the year and our current outlook for the balance of the year, we have revised upward our revenue and earnings guidance for the year.

Our revised 2014 annual guidance is as follows. We currently expect 2014 revenues will be between $489 million and $494 million. We expect 2014 diluted GAAP EPS will be approximately $1.63 to $1.69. We expect 2014 non-GAAP diluted EPS will be approximately $2.06 to $2.12.

For the year, estimated non-cash, share-based compensation expense is expected to be approximately $15.0 million. Fully diluted shares for the year are expected to be between 35 million and 36 million shares. We estimate an effective tax rate for 2014 between 37% and 39%.

The tax rate and share count depend somewhat on the timing and volume of stock option exercises. We expect our total capital expenditures will be approximately $10.5 million to $11 million for the year.

Total depreciation and amortization is expected to be between $14.5 million and $15 million, including approximately $6.5 million of amortization of acquired intangibles. Now I’d like to turn the call back over to John for his further comments on the quarter..

Thanks, Brian. As I indicated earlier, we are very pleased with Tyler’s third quarter results, which by most measures, was the best quarter in our history. And as our revised guidance indicates, we have a very positive outlook for the remainder of the year. Most of the factors contributing to our success this quarter have similar themes to last year.

Activity in the local government market is good and has returned to normal pre-recession levels. Most importantly, our competitive position is very strong across all of our major product suites, and our win rates remain very high, which is enabling us to gain market share and expand our leadership position.

As you know, our bookings and backlog in the first half of the year benefited from our success in the California courts market, where we signed 13 contracts in the second quarter and have now been selected in 25 of the 28 decisions made by California courts.

The timing of some of these contracts was accelerated into the second quarter because some counties had limits on the availability of funds. While revenues for these contracts will be recognized over a number of years or in some cases years, the growth in backlog provides us with increasing visibility over future revenues.

There were no new California case management contracts awarded in the third quarter but it’s important to recognize that significant long-term opportunities remaining in that market. First we expect that over time the other 30 counties in California will acquire new case management systems.

Second, our existing contracts with several courts do not currently cover the – all case types and we expect to expand those relationships to include additional case types.

Third, while we have signed 17 California counties to transaction-based e-filing contracts, we expect that most if not all of the courts using Odyssey software will ultimately be using our e-filing solution as well.

These revenues will not start until our case management systems are implemented but in many cases we expect that the recurring e-filing revenues will be as much as two times the annual maintenance revenues.

Finally, we are pursuing opportunities to expand our relationship with California counties beyond case management systems to our Odyssey integrated justice solution, adding applications for jails, prosecutor, public defender and probation.

These expansion opportunities are not unique to California and are part of our long-term growth strategy for the courts and justice business nationwide. The eFileTexas system continues to perform exceptionally well and we believe that it can serve as the model for future e-filing systems in other jurisdictions across the country.

During the third quarter we added the courts in Clayton County, Georgia, as a new e-file client. While courts and justice has been our fastest growing product line in 2014, all of our business units are performing at a high level.

For example, all of our major product groups had double digit revenue growth in the third quarter and each business unit exceeded its plans for revenues and operating profits. With our Microsoft Dynamics AX relationships, results this quarter were again somewhat mixed.

Our royalty revenues from this quarter from sales from other buyers were down about 13% from last year. Royalties this quarter represent sales in 21 countries. We expect that royalty revenues will continue to vary from quarter-to-quarter and represent both a risk and an opportunity in our short-term results.

In our direct channel for Dynamics, revenues totaled $1.1 million, a substantial increase over last year. Tyler signed three new Dynamics clients through our direct channel this quarter; the City of West Hartford, Connecticut, the Buffalo and Fort Erie Peace Bridge Authority in New York and the Ohio Police and Fire Pension Fund.

Brian detailed our revised guidance for 2014 earlier in the call. The upward revision reflects our third quarter results, as well as our outlook for the remainder of the year, including opportunities and risk. Tyler’s results in 2014 have exceeded our internal plans by a wide margin.

It’s a testament to the skills and dedication of the Tyler team of nearly 2,800 professionals that we’ve been able to grow revenues at a rate substantially greater than the broader market is growing and expand margins while building our SaaS client base, investing in product development at a high level and absorbing onboarding costs associated with a net increase of more 220 employees through the first nine months of the year.

Thank you for joining us on the call and now we’ll take your questions..

Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Charlie Strauzer from CJS Securities. Please go ahead with your question..

Hi good morning. John, if you can explain a little bit more on the Microsoft product and your thoughts now that you’ve been in the marketplace for a while and the feedback you’re getting post some of the RFPs that are out there that you might not have won versus the pipeline when you look at some of the opportunities coming out.

Are there some bigger opportunities that you think that might benefit sales there and also are you seeing any push factors giving you any – in the interim?.

Well, it’s a little mixed as we said, Charlie. We’re pleased that we signed three contracts on a direct basis in the last quarter. We do have an active pipeline that’s growing. We’re identifying and establishing a presence in what I call sub-niches in the marketplace.

We certainly are a little bit constrained by the success of Munis and our other proprietary financial products and we’re working hard to find the right places to grow our presence and gain momentum on a direct basis and that’s going pretty well and we’re encouraged by that. I think it’s gaining some momentum.

When I say it’s a little mixed, we just really have very little visibility into what’s going to come through their channel. We literally learn after the quarter and I don’t think they have an awful lot of visibility.

I don’t think that it’s a lack of transparency; it’s just that it’s through a channel, their partners and it’s hard to know exactly when they are going to win the deals.

The thing we are encouraged by is, as I said, in more than 20 countries this quarter, consistently a very worldwide geographic footprint for the product that not just represents the countries and the partners that secure those deals but that’s I think representative of them building a very broad partner alliance group and presence in the marketplace.

But certainly it’s taking probably a little longer than we expected and they expected to accelerate the numbers..

In the meantime you’re obviously showing some very good quarter growth in all the products. Thank you very much..

Yeah..

Our next question comes from John Weidemoyer from William Blair & Company. Please go ahead with your question..

Hi, this is Jonathan Ho.

If we were to take a look at your California case types that you could potentially add on to existing contracts, how much larger of an opportunity do you think you could get just from the counties that you’ve won so far and what would be the approximate timing for that type of add-on activity?.

I don’t know that we have that quantified but it might be fair to say that the volume of those deals is maybe in the half to two-thirds range so there is still another doubling or 50% of growth opportunity by adding other case types in the deals we’ve already done.

And it’s important to pursue that because while we’ve done fewer than half the counties so far in terms of awards, the deals we have won represent more than 70% of the population base.

So we have won many of the larger counties and our focus will be as we said to expand the case types, hopefully pursue integrated justice systems, including other applications entirely. And post-implementation the real benefit will be achieved as the e-filing comes online..

Got it. And then can you just talk a little bit about win rates? I know you guys have seen some improvements in prior quarters but are you seeing that trend accelerate, are you seeing it stay stable in terms of higher win rates? Just relative to your expectations how the win rates have been progressing..

Of course there is a lot of different product suites involved and I don’t think we can accelerate in courts and justice. We’ve won virtually all of the meaningful deals over the last few years so if you look there we’ll be happy with stable because it’s – anyway.

In some of the broader applications, it accelerated – really we saw are the meaningful acceleration in the second half of last year and I would say it’s stayed within a pretty tight range since then.

It was a meaningful move in the market, these are a lot of sub-market areas that we had focused on and really had tried to identify what we had to do to improve our presence in some areas where we hadn’t performed as well as others. And we’re focused on sustaining that.

It’s probably not possible to achieve the level of market share in those markets that are still vertical but you see horizontal players in them. There just are price points and sizes and different position criteria that no one solution can address all the time.

So I think the level we’re at is a pretty strong one and probably improvement would only be modest from there..

Great results on the quarter, thank you..

Thank you..

Our next question comes from Brian Kinstlinger from Maxim. Please go ahead with your question..

Hi, good morning.

As it relates to e-file I’m curious what percentage of your CMS installed base has your e-file solution and then did Clayton County, Georgia, have your CMS?.

I’m not certain that Clayton County is a CMS client or not. We have a significant presence in Georgia. There are several counties there that have our CMS that don’t currently do e-file and there are some that have e-filing from us that don’t have CMS. I’m not positive which one Clayton falls in.

And in terms of what percent, it’s not all of them and it’s probably more than half.

Obviously as you know we had a lot of case management contracts and customers before we even acquired Wiznet and built our e-filing solution but I think the way we look at it and the way we would look at the future which ensures what you are trying to quantify is we really feel regardless of whether or not it was part of the original engagement or not, it’s a high probability that as these systems are implemented and maybe they rest a little bit post-implementation but that virtually everybody is going to have a paperless court, which is really what e-file supports, it’s not just a filing instrument, and that we should have near complete saturation in our own customer base and that is the way we look at it..

I think it’s important to note as well that even a number of our existing clients that have e-file aren’t at full run rate. So for example in Minnesota we have a statewide CMS system. E-file is being rolled out across the state currently.

In Oregon we have – we are in the implementation for our case management solution and counties are coming online with e-filing as they come on to the court system but it’s not at full run rate yet. Same thing in Maryland. We are in the middle of an implementation; we have signed the statewide e-filing but aren’t recognizing any revenues there yet..

So one more difficult question on e-file.

If I exclude Texas e-file revenues down year over year, $0.5 million, and you’re talking about rolling more statewide workout, for example Minnesota, other counties have been won, so I’m surprised that with those wins that you’re seeing year over year X, again Texas you’re down, maybe you can provide some insight into that..

I’m going to have to take a look. Yeah, and there are some places where volumes are down slightly. I know that one of the counties in Nevada, there’s just a little bit less e-filing, less court activity this year over the last year. We don’t necessarily view that as a trend. But I’ll have to take a look at those numbers..

Okay, great. We’ll catch you back offline. Thank you..

Our next question comes from Scott Berg from Northland Capital Markets. Please go ahead with your question..

Hey John and Brian, congrats on a very solid quarter here. Quick question on the revenue piece in the quarter.

If you look at the revenue piece and then your guidance for the fourth quarter, can you give us some understanding of how much of that is based on deals that are just borne off the balance sheet and backlog versus incremental deals that are signed or won during the quarter? I’m just trying to find the right way to view those two/.

It goes back to vision. So courts and justice, which obviously is the fast grower and clearly we did the second half plan with the California stuff coming online, that’s earning things out of backlog and as we said that’s really just exceptional execution there.

Their billable hours are up about 50% over the last year, which is an incredibly challenging thing to do with a lot of new people, which we’ve had some great hires and aggressive onboarding and still delivering high quality service. So that deal is really burning through some backlog and executing well.

I think the Munis division, which would be where the other big piece of that came from, where they do sell contract, deliver and recognize any quarter at times, it’s not a big number and there will be only a few million dollars, but they are beating their projected license number and that’s just sales and deliveries.

So those would be the two biggest drivers.

And then the other thing that contributes is when you have a number of quarters like we’ve had in a row that are even a little bit ahead of plan, everything else just runs together so you generally beat your maintenance by a little bit, you beat your SaaS number by a little bit, you beat your PS number by a little bit.

And that’s momentum obviously that we enjoy right now. It should continue for a number of quarters. So again when you’re bringing in the new names and the new projects then all of those numbers generally tend to outperform by a little bit and it adds up to something meaningful..

Certainly an impressive quarter that’s for sure..

Thank you..

Brian, I wanted to ask, ASPs in the quarter. Maybe it’s a question for John, I’m not sure but your ASPs for your 100K deals was – has been up every quarter year to date and actually higher on a year-over-year basis for six straight quarters.

Usually we see companies have ASPs on large sales bounce around a little bit from quarter to quarter but that’s a pretty consistent trend.

Is that a reflection of pricing increases on products or is it more customers buying more on the upfront sale or is there maybe a third dynamic going on in this?.

You mean in terms of the long-term trend of those increasing or this quarter where the average license was smaller?.

No, I can take – I think it’s – when we talk about improvement competitively the greatest gain in terms of improvement competitively is I think with would call the tier 2 space which is generally the higher end of our market space, excluding courts where they are certainly a tier 1 player.

So that’s where we’ve seen a lot of improvement and there are a lot more of these $3 million, $4 million, $5 million deals when if you look back two or three years there were fewer of those and a lot more of the $400,000 to $800,000 deals..

Great, then I guess we’ll –.

There hasn’t been any significant change in pricing..

Okay. That’s great. And the last question I have then is I know that you guys have invested heavily in trying to staff professional services obviously to meet the large courts and justice deals that are up and John, you mentioned billable hours up 50% year-over-year.

How should we think about them flowing over the next two or three quarters? Do those investments begin to moderate and you get better leverage in those lines and do you still see a fair amount of investment into that implementation area for another two to four quarter stretch?.

The headcount should flatten dramatically from here forward..

Okay, that’s all I have. I’ll jump in the queue. Thank you..

And our next question comes from Alex Zukin from Stephens. Please go ahead with your question..

Hey guys, congratulations on another great quarter. I wanted to ask about the subscription deals, the cloud deals.

What in your mind has led to that meaningful uptick in the quarter and do you guys internally have a ratio in mind and how was the performance in the quarter and maybe over the last over four quarters versus that ratio and how should you think – how should we think about for next year? I know a lot of questions are in there..

Yeah, we do not really try to influence it too much and interestingly we like the mix. We’re getting up on that third of the new name area, great.

As you can see in the financials we are still growing licenses, we are still growing earnings while we’re building a nice SaaS business and a lot of the SaaS companies are sacrificing earnings in order to do that.

So it’s really the market share, the traction there is developing exactly where you would like it to, even though we are not over-influencing that, by this what I mean there isn’t any pricing bias or margin bias, they are on – the incentives for reps and management are similar.

We really – our feeling as we should capture the customer, whichever way works best for the customer. And once they are a customer as you know they are a customer that’s almost forever, and so we’re not over-biasing that.

I also think personally that our types of maintenance agreements, that are 98%, 99% retention, high-dollar maintenance agreements, high margin, that while the marketplace clearly distinguishes significantly between traditional on-premise maintenance revenues and SaaS revenues, I think our type of maintenance revenues are very valuable and the customers are very valuable if they happen to choose on an on-premise basis..

That’s very helpful. Thanks a lot, John..

Sure..

Also just a question about the competitive environment and the win rates and what is your take on the potential for pricing power given the [MCATs] (ph) of the world getting taken out, you seem to be – you seem to have – to be in a position with a market-leading products where there is not a lot of competition.

Just want to get your thoughts on that..

Well, I would not factor in a lot of price increases. Obviously we are very active in the new business market, we want to have great relationships and be able to defend a very strong value proposition with our clients.

We want them to talk that language when talking to prospective clients and I think that our current pricing as we achieve more and more scale and take advantage of that leverage it is giving us plenty of margin opportunity. So I wouldn’t factor in significant price increases.

What I would say is maybe a year ago 18 months ago we were pleased with the improvement in our products and competitive position to win more deals.

The next objective was to maybe win those deals by a wide enough margin that we could eliminate or marginalize the discounting that does go on in the marketplace and we do know that our discounting has been less aggressive. We haven’t had to discount as much. So that is a benefit that we’ll be pleased if there isn’t discounting.

We can go forward with our model and just let the model work and we’ll see margins expand through that..

Perfect. Thank you guys again..

Our next question comes from Kevin Liu with B. Riley & Company. Please go ahead with your question..

Hi good morning. Just looking at your guidance for the full year it looks like you guys would expect Q4 revenues to be slightly down given that your software backlog is actually up on a sequential basis.

Just wondering if you could talk us through some of the factors; is it just conservatism, is it reflective of the mix of deals you expect people to take up funds versus getting in the backlog. Any help would – or any color would be helpful..

Historically the third quarter is a strong quarter. And generally fourth quarter is a target to be somewhat flat. It’s not unusual and certainly we could have awards and performance that drives beyond that but there are some things in there.

We get our increase in maintenance because it’s our highest renewals, so that the maintenance of existing customer base, there wouldn’t be much movement in that. That’s 60% of our revenues so that’s event that takes in place in July and doesn’t change too much of a degree the rest of the year.

There actually are some third-party maintenance renewals that are recognized that are recognized once in the third quarter so that’s a one-time event that has to be replaced with other revenue growth in the fourth quarter.

And holiday schedules and a number of things play into professional service because typically professional services are a little lighter in the fourth quarter. So you’re right, they look flat sequentially but you actually have to make up for a few things just to get too flat and certainly there is an opportunity to have some growth..

And the timing of the professional services would be the biggest factor there probably with respect to just pure billable days as people take off the latter part of December to try to get a lot of implementation work done..

Thanks, that’s helpful. And just one final question, with respect to your SaaS business. You have a number of conversions that you’re doing, it’s been fairly constant year over year.

I’m curious as to whether you’re hearing more from your existing customers about interest on switching over or whether you expect this piece to continue on as we move forward..

We haven’t seen any acceleration, you’re right, and I think a lot of those that had an interest early on have – we’ve addressed those. We’re very active going into those customer bases and trying to find those opportunities. We’ve talked about it before.

And a catalyst typically would be people retiring and a change in skills or a need for a new infrastructure and a capital investment they’d like to avoid and our inside sales channel’s in tune with those opportunities and I think that will allow the pace to chug along as it is.

At some point, we may do something that makes it more attractive to that base to try to accelerate that..

Great. Appreciate you taking the questions and congrats on a solid quarter..

And our final question today comes from Matt Williams from Evercore. Please go ahead with your question..

Hey good morning, guys, thanks for fitting me in. Two questions for me. Number one, Brian maybe if you could talk a little bit about some of the margin levers that you guys are looking both at the gross margin and the operating margin leverage going forward.

I know gross margins you mentioned in the nine-month year-ago period were suppressed a little bit.

So as we look out to 2015, thinking about 100 [BPS] (ph) of margin expansion there, what are some of the drivers at the gross and operating level?.

Well, clearly the most – there are two areas that have the most leverage. One is just the volume of the software licenses and with the very strong growth we’ve had we’ve seen a nice push from that. Obviously very high margin on the incremental revenues on licenses, close to 100% on those.

And the second is the incremental leverage or incremental margin in the recurring revenues, both maintenance and particularly the transaction-based revenues. And as we mentioned as you just noted, last year we thought really an outsize effect there where we had more significant costs associated with the startup of eFileTexas ahead of those revenues.

Now we have those revenues and the costs are mostly behind us. We have some more e-file projects, for example the one in Massachusetts is ramping up but they aren’t at the same scale as the Texas one. And actually the Texas revenues will continue to grow as well as other e-filing revenues.

So those – just the incremental margins and the recurring revenues are the biggest lever there.

In addition, I think we’re doing a good job of continuing to bring the service-to-license ratio down particularly on some of the larger projects, particularly in the courts space, where the service component, although still significant in most of the courts projects, is a less – is a smaller piece of the project and so that mix is helping us in growing the margins as well, so just a lower service mix..

Great, that’s helpful. I appreciate it. And then maybe just, John, maybe one for you.

Given the cash balance that continues to build maybe just any comments on opportunities from an M&A standpoint, nothing specific but just what you are seeing in the market, how is the pricing environment and are there any opportunities that you guys might target over others, thanks..

Funny when he said it was the last question I couldn’t believe we were going to get through the call without that question.

Obviously cash was incredibly strong in the third quarter; got the highest cash position we’ve ever had and with the visibility we have in our business it’s going to continue to accumulate and create a stronger, stronger balance sheet. So we’re certainly aware of that. We certainly consider it a very important strategic opportunity to deploy that.

And historically I think we’ve deployed our capital, especially with our repurchase, well and created a lot of shareholder value. You guys I’m sure know the market is pretty robust right now, it’s active, but it is expensive as well.

We certainly are looking at the right opportunities very, very carefully and we have some things that we would love to achieve strategically and financially and we’ll look to be opportunistic and find the right opportunities.

Great, thanks for the color and congrats on the quarter..

Sure. All right, thank you for joining us on the call today and if you do have any further questions feel free to contact myself or Brian Miller..

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines..