泰勒科技 (TYL) 2014 Q4 法說會逐字稿

Hello and welcome to today's Tyler Technologies fourth quarter and year end 2014 conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a remind, this conference is being recorded today, February 5, 2015. I would like to turn the call over to Mr. Marr. Please go ahead.

Thank you, Kate. And welcome to our fourth quarter 2014 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. I would like for Brian to give the Safe Harbor statement and next I will have preliminary and Brian will review the details of the fourth quarter operating results and 2015 guidance and then I will have final comments and we will take your questions. Brian?

Thanks, John. During the course of the conference call management may make statements that provide information other than historical information that may include projections concerning the Company's future prospects, revenue 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 the 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?

Thanks, Brian. We finished an exceptional year in 2014 with fourth quarter financial performance that continued to trend a very strong growth in revenues and earnings. From a historical perspective, this was our 13th quarter of double digit revenue growth and the best fourth quarter in the Company's history by virtually any financial measure. Recurring revenues from subscriptions continues to be our fastest growing revenue line. Our subscription revenue grew 23% and reflects strong growth of our e-filing revenue from courts as well as a continued gradual shift with the cloud-based software and service business. Software license and royalty revenues were up 10% over last year. This was our seven consecutive quarter of software license and royalty revenue over $10 million.

We had another very solid quarter for bookings which were up 28%. On a trailing 12 month basis bookings increased 9%. However, bookings were up 27% with the Texas E-file contract considered on a comparable basis to other transaction based E-filing arrangements. This was a robust quarter for fast books with a total consider value of $31 million in agreements signed. Some the notable contracts signed in the fourth quarter included a seven year multi suite agreement with the city of Mobile, Alabama at approximately $11 million. This is the largest SaaS bookings with a total contract value of approximately $31 million in SaaS agreements signed.

Some of the notable contracts signed in the fourth quarter included a 7-year multi suite SaaS agreement with the city of Mobile, AL, valued at approximately $11 million. This is the largest SaaS deal in the Company's history in terms of total contract value.

Mobile selected the MUNIS ERP [inaudible] municipal Court, integral planning, regulatory and licensing and Tyler public safety solutions. Mobile is the second largest city in Alabama. We also signed a contract valued at approximately $8 million with Marin County, California for MUNIS ERP solutions. Following an extremely thorough evaluation Marin chose Tyler to replace more than 250 ancillary systems County wide including a financial system from a tier one ERP vendor to enhance reporting capabilities and information delivery to employees, elected officials and residents. Other significant agreements for the MUNIS ERP solution, each of which were valued at greater than $1 million included the cities of Miami Beach, Florida and Buckeye, Arizona, each of which also purchased our EnerGOV solution, Humbling County, NC, and Tiaga County, New York.

In addition to Mobile Alabama's major SaaS agreement for MUNIS included the Fayette County board of education in Georgia, [inaudible] County, Maryland and the Village of Woodbridge, Illinois. Our EnerGov planning regulatory licensing solution continued to win new business at a high rate with major contracts in the fourth quarter including a $1.1 million contract with the city of McKinney, Texas and a SaaS deal valued at approximately $4.4 million with Wake County, North Carolina, which is home of Raleigh.

In our Courts & Justice Division we signed new contracts for Odyssey case management solutions with Harris County, Texas, civil and probate courts. This deal is valued at $3.5 million and follows a third quarter contract with the justice of peace in Harris County. Harris County is the third largest County in the country and includes the city of Houston. Rockwell County, Texas in the Dallas area also became a new Odyssey client. Both Harris and Rockwell Counties are former AmCad clients. In Georgia, De Kalb County the third most populous county in the state and Chatham County, the states fifth most populous county, signed new Odyssey contracts valued at more than $3 million each. De Kalb County is in the Atlanta area and Chatham County includes Savannah. The Columbus consolidated government in Muskogee County signed agreement for IIS world appraisal and tax solution valued at approximately $4.3 million and also is contracting for appraisal services. Gwinnett County Georgia signed an appraisal service contract valued at nearly %5 million.

Also, Tulsa County, Oklahoma signed a SaaS agreement for our eagle recorder solution valued at $1.2 million. For Microsoft dynamics AX we signed contracts with the city of Kingston Ontario, [inaudible] County services authority based in Charlottesville, Virginia and emergency health network in Texas. Now, I would like for Brian to provide more details on the results of the quarter and give the annual guidance for 2015.

Thanks, John. Yesterday, Tyler Technologies reported its results for the fourth quarter ended December 31, 2014. These results are considered unaudited until the Form 10-K is filed which is expected to be on February 18. I'm going to provide additional data on the quarter's performance and review our guidance for 2015 and then move on to John's comments on the current quarter and our outlook for 2015. In our earnings release we have included non-GAAP measures we believe facilitate understanding of 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. The reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

Revenues for the fourth quarter $127.4 million, up 15.1% with 14.5% organic growth. Software license and royalty revenues increased 9.6% and were the second highest in the Company's history jut behind Q3 of 2014. The license revenue growth is particularly notable given the record high Level SaaS contract bookings in the quarter. In Q4, we received $881,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft bars up from $473,000 a year ago.

In addition, we had approximately $1.2 million of revenues related to Tyler's direct sales of dynamics which are included across our various revenue lines. These direct dynamics revenues increased 8.2% from $1.1 million in Q4 of 2013. Subscriptions continued to be our fast of the growing revenue line and increased 22.8%. We added 24 new subscription-based arrangements and converted 12 existing on premises clients representing approximately $31.0 million in total contract value compared to 26 new arrangements and 15 conversions in the fourth quarter of 2013 representing approximately $12.5 million of total contract value. New SaaS clients represented 17% of the software clients in the quarter compared to 26% of our new clients selecting SaaS solutions in the prior year quarter.

However, the average new SaaS contract value in Q4 2014 was almost three times as large as the average in Q4 of 2013. So, the SaaS contracts comprised 39% of the total new software contract value. Within our subscription lines the fastest growing revenue stream is from E-filing for courts and online payments. These revenues increased to $8.8 million from $6.7 million last year. Total E-filing revenue of $6.7 million this quarter grew 34% over last year with 96% of that increase related to the Texas E-filing contract which contributed $4.8 million of revenues this quarter.

Our blended gross margin for the quarter declined 20 basis points to 47.5% mainly due to the increase in professional services headcount over the last three quarters many of whom were not yet fully billable. The high level of SaaS contracts and the new business mix this quarter also contributed to the margin reduction as did a higher percentage of software services in this quarter's revenue mix. Our non-GAAP gross margin also declined by 20 basis points to 48.3%. SG&A expense increased 7.8% in the quarter and was 22.1% of total revenues.

A decrease of 150 basis points from last year's fourth quarter. Excluding non-cash share based compensation expense, SG&A expense in increased only 5.9%. Operating income was $24.6 million an increase of 26.4%. Non-GAAP operating income was $30.5 million up 23.7%. The non-GAAP operating margin improved 160 basis points to 23.9% as we obtained substantial leverage from both SG&A and R&D expenses. Net income rose 45.7% to $15.3 million or $0.43 per diluted share. The fully diluted share count increased by approximately 313,000 shares as a result of stock option exercises offset some what by stock repurchases in the current year. Our effective tax rate was 38.1%.

Free cash flow is $27.0 million compared to $793,000 in last year's fourth quarter. Excluding real estate CapEx our free cash flow was $27 million versus $5.9 million. Days sales outstanding and accounts receivable were 80 days at December 31, 2014 compared to 87 days at December 30, 2013. DSO's increased sequentially from 78 days at September 30, which is the normal seasonal trend relate to the timing of maintenance billings. Our backlog at the end of the quarter was $702 million, up 27.2% from last year's Q4. Software related backlog which excludes backlog from appraisal services contracts was $657.3 million, a 23.6% increase.

Backlog included $157.8 million of maintenance compared to $136.7 million a year ago. Subscription backlog was $205.5 million compared to $188.7 million last year and included approximately $51 million related to the Texas E-filing contract. Our bookings for the quarter which you are calculated from the change in backlog plus revenues were $155 million up 27.7% from last year's fourth 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 booking on a trailing 12-month basis can be meaningful in somewhat smoothing out the quarterly lumpiness. For the 12 months ended December 31st, bookings rose 9.4% over the prior 12 month period. These bookings include the contract for the statewide E-filing in Texas which is signed in the third quarter of 2013. This is currently 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 backlog but including revenues from E-file, Texas, which puts it on a comparable basis to other E-filing arrangements bookings for the trailing 12 months rose 27.2%. As a reminder, bookings do not fully reflect the true long-term value of new transaction based contracts for E-filing or online paints. 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 predictable we do not include future revenues in bogging and backlog because they are dependent on those transactions occurring. Only the current quarter revenues from the arrangements are included in those bookings as they are recorded. Therefore, current bookings and backlog do not capture future revenue stream from those arrangements.

We signed 35 new contracts in the fourth quarter that included software licenses greater than $100,000 and those contracts had an average license value of $469,000. Compared to 34 new contracts with an average license value of $531,000 in the fourth quarter of 2013. Our total head count grew by 60 to 2,856 employees at the end of the fourth quarter compared to 2,796 at end of the third quarter. For the full year we added 283 employees.

Turning to 2015, our initial annual guidance is as follows. We currently expect 2015 revenues between $567 million and $575 million. We expect 2015 diluted GAAP EPS will be approximately $1.91 to $1.99. We expect the 2015 non-GAAP diluted EPS will be approximately $2.44 to $2.52. For the year, estimated non-cash share-based compensation expense is expected to be approximately $19.5 million to $20 million. Fully diluted shares for the year are expected to be between 36 million and 37 million shares. The estimated effective tax rate between 37.5% and 38.5%. The tax rate and share count each are affected by the timing and volume of stock option exercises. We expect our total capital expenditures will be approximately $13.5 million to $14.5 million for the year. Total depreciation and amortization is expected to be between approximately $15.5 million and $16.5 million including approximately $6.5 million of amortization of acquired intangibles.

I would like to turn the call back to John for his further comments.

Thank you, Brian. As I indicated earlier, we are very pleased with Tyler's strong finish to 2014. As initial guidance indicates we are looking forward to another successful year in 2015. Market conditions in fourth quarter generally continued the trends we saw throughout 2014. Activity in the local government market is good and has returned to normal pre-recession levels. Our competitive position remains very strong across all our major product suites and our win rates remain very high which is enabling us to gain market share and expand our market leadership position.

In the California courts market most of you are aware of our competitive wins over the last two years. We have been selected in 25 of the 28 decisions by California courts for the new case management systems. We are now actively engaged in those implementations and we are pleased to report the Courts in three California Counties are now live on Odyssey. We continue to pursue a number of significant long-term opportunities in California as well as other states. Those include expanding our relationships beyond case management to include our Odyssey integrated justice solution adding applications for jails, prosecutor, public defender and probation.

We also look to continue to add new E-filing arrangements with existing courts and software clients as well as new clients. These growth opportunities are not unique to California and all are part of our long-term growing strategy for courts and justice business nationwide. Texas and Georgia were both active states for new Odyssey business in the fourth quarter. While Courts & Justice was the fastest growing product suite in 2014, all of our business units are performing at a high level. We are encouraged that we have been able to grow license revenues over the last year while expanding our SaaS client business.

We had a high dollar volume of new SaaS contracts in Q4 and while we expect over time the percentage choosing a SaaS offering will expand, the mix of on-premise and SaaS business varies from quarter to quarter. As we announced Tuesday, subsequent to the end of the quarter, on January 30, we entered into a strategic sales and marketing alliance with record holdings a privately held Australian company specializing in digitizing the spoken word in court and legal settings. As part of the alliance we made a $15 million investment in record holdings and now hold a 20% interest in the company in the form of convertible preferred stock.

Investment will help record holdings expand more rapidly in the US. In Australia, record holdings is the leading provider of court transcript services through it's off-script subsidiary. We plan to leverage record holdings enterprise and relationships particularly in Australia and the British commonwealth as we make Odyssey available to courts internationally. Through its US subsidiary, for the record, the company marks Falcon a complete digital evidence recording platform for court administrators, clerks, and support staff. FTR's products are a natural extension of the solution that Odyssey provides to courts.

Our sales and marketing teams will collaborate to help them accelerate expansion in North America. By partnering with FTR in building integration between our products we will help our clients to operate more efficiently. Tyler and record holdings will also share in certain revenues in the future. As noted in the press release Tyler also announced today that it its contractual R&D commitment to develop public sector functionalities of Microsoft dynamics AX expires with the release of dynamics AX 7.

Tyler does not anticipate continuing its R&D commitment although it will continue to provide sustained engineering and technical support of the public sector functionality within Dynamics AX. Tyler further expects that licenses and maintenance royals or all of the applicable domestic and international sales to Dynamics AX [inaudible] will continue under the of the agreement. Brian detailed our initial guidance for 2015 earlier in the call.

Tyler's results in 2014 exceeded our original plan by a wide margin and we are confident in our ability to build on that success in the coming year. Although we expect to see some pressure on margin expansion in 2015, as we absorb onboarding costs associated with staffing in recent quarters, make some strategic incremental product investments and continue to grow our SaaS and E-filing client businesses our expectations clearly are that 2015 will be another year of very solid revenue and earnings growth for Tyler. Now, Kate, we will take questions.

(Operator Instructions). The first question comes from Jonathan Ho of William Blair & Company. Please go ahead.

Congratulations on the strong quarter. Wanted to start out with sort of the Microsoft arrangement and what you guys think in terms of the ongoing spend that is still going to be there even if you are not supporting sort of the full development effort at this point.

Well, again, the R&D contract naturally expires at the end of the release of the next version which hasn't been publicly announced but is probably sometime late in this year. So the R&D spend and the commitments to customers and sales channels and really everything that we currently have in our dynamics practice really won't be changing much in the current year. Subsequent to that, as that release goes out, a significant number of people that are involved in the R&D of dynamics will be redeployed and other proprietary projects and our activity on that side will be somewhat different. Our spend this year will be very much at the current run rates. And it will decline significantly next year.

Got it. And then, it seems like you guys saw some uptick in terms or changes in the dynamics around your SaaS business towards larger deals. Just trying to understand sort what you are seeing out in the field. Starting to see maybe a shift towards customers being willing to adopt in a different segment of the market in terms of the SaaS deal and maybe give us thoughts in terms of how that trend is progressing and whether you think more customers will elect SaaS over time?

As we said in the remarks that will vary quarter to quarter whether talking about the dynamics or our proprietary business and I think we have been around 30% or a third of deals in value for some time. And I think that is probably still a reasonable assumption. Certainly the sampling for dynamics is far too small to draw any conclusion based on the mix in a given quarter or two.

Great. Thank you.

Sure.

The next question from Scott Berg of Northland. Please go ahead.

Congratulations on a strong quarter. John, first to expand on the dynamics relationship with the ending of the contractual R&D relationship, does that mean all of the functionality is essentially built in at this point and nothing new will be needed in future releases after dynamic 7, or just trying to understand what your long-term responsibilities will be for that product especially if you will be gaining royalties on the future products after 7?

That's a fair question. Certainly, the initial features functions for the public sector that were targeted to be added and that our role represented are largely achieved. I certainly would say that if things were far more robust and the business were performing at a different level there would be a greater likelihood we would continue the level of spend we've had and continue to add more and more functionalities. Always things you can add, the market and competitive landscape are always changing. I think the initial objective has been satisfied and the decision is to not continue to invest at that level. Always been contemplated, what does that mean once our role is satisfied from an R&D perspective. And while we never disclosed the specific terms of the arrangement, it certainly was always understood that nothing is forever and there is a very long runoff where we will be compensated for royalties in the product based on the investment that we have already made. In broad terms the current rates, or percentages, of our royalty for licenses and maintenance will continue at their current level for about 10 years, and then for another nine years they will continue on a declining basis. So we will continue to share in those royalties for the product we helped build for a very long time.

Great. And then John, could you expand a little bit on the investment in record holdings and how that expands your opportunity? Obviously it takes the Odyssey case management system into different countries. But how do you view the [inaudible], the overall sales opportunity, the deal sizes there and just trying to better understand what that can mean to you. It will take some time, but on a longer term basis?

Sure, well, the first thing to say is we did end up making a financial investment that we think will be very helpful to the Company. It is a smaller private company and I think they can use that to much more quickly get to market and get a leadership position in a changing marketplace. It isn't where it started. It started as a natural partnership where obviously we have a very strong position here in America for Courts & Justice. They have a very strong position in Australia and to some degree in other parts of the world. They do something that is completely complementary to what we do and not at all competitive to what we do.

Their ability to introduce us to clients in the marketplace in Australia and to some degree in other parts of the Europe and some other places in the world is interesting to us. They have same kind of relationships that we enjoy here and they have got an exciting offering that they are investing in here in states that I think can be hastened along significantly by our relationships and by the capital investment we made. More specifically, in terms of the TAM, I understand Australia to be similar in size to Texas so while we all know it is a very big country geographically it is roughly that size of an opportunity. And as we saw when California went from really not an addressable market given their own build to becoming available to us it is hard to find new Texas' and new California's so that is intriguing to us and obviously a similar type of government and court system to the states, obviously English speaking so we think that is a significant opportunity for us.

Great. And then the last question for me at least, Brian, on the licenses for the current California Courts & Justice deals, I know the level of customization there initially was going to be a little more than some other states given some of the complexities there. Can you characterize how the run off of those licenses deals are expected to hit the P&L over the next 4-8 quarter in terms of is there anything substantially different in that timeline relative to other Courts & Justice deals or ERP deals?

As we mentioned in the prepared remarks we are actively engaged in virtually all of those implementations at this point. We recognize in 2014 total license revenues were for our California contracts were just under $2 million. And as we move into 2015 that recognition will accelerate virtually all of our licenses in the Courts and justice business are going to come out of backlog on a percentage of completion basis. Some of those play out over as long as five years in the case of Los Angeles. So we will certainly recognize more than that in licenses in 2015 and it will probably stay at a similar level in 2016. And we do anticipate adding additional California clients along the way as well as adding additional case types to some of the existing clients. But the key is we recognized very little of the licenses in California to date.

Total licenses for all of the California agreements are a little under $30 million so there is still quite a bit there to come in the next couple of years. And that is part of the reason we have confidence in being able to grow licenses at a continued nice rate next year even with a high level of SaaS business.

Great. That is all I have. Thanks for taking the questions.

The next question comes from Brian Kinstlinger linger of Maxim Group.

I'm wondering, in the seasonality of your business, which has decreased over the last decade, maybe how we should think about it in 2015?

Our seasonality as we have gotten bigger and as more and more revenues come from recurring revenue sources has smoothed out a bit. I think that trend will really continue. Inherently, some of the licenses in nonrecurring revenue sources can be somewhat lumpy but when we look at 2015, again, we probably expect to see that seasonality both from a revenues and earnings standpoint smooth out. Typically, the first quarter revenues are at the lowest level and then expand throughout the year. I think as we look at 2015, the last three quarters of the year revenues are fairly consistent from quarter to quarter and earnings would not fluctuate as much from quarter to quarter as we may have seen in some of the prior years and to some extent that was the pattern we saw in 2014 as well.

Great. 2014 was a fantastic year for RFP activity and win rates. As you enter 2015 how would you characterize the procurement environment and pipeline of RFP's that you see? Is it similar to 2014? Stronger than 2014? Maybe not as robust?

Probably some what similar with the exception of California. We ended up being about $20 million above revenues than what was in the initial guidance which is unusual for us. We are usually pretty close on the revenues and about half of that came from California. Two things, that market we knew became an opportunity with the change in the project they were managing themselves. But to see 29 Counties make decisions that quickly is unusual in our space. So a lot of that rolled forward and obviously there isn't going to be that kind of a market place this year.

The second thing that happened is there were budgetary pressures where they had to get underway and spend some of that money. So, ordinarily, you might see those in bookings and backlog but not realize much in the way of revenues in the current year when an opportunity presents itself. I would call that some what of an anomaly. Our Courts & Justice Division pipeline is strong and there is a lot of other opportunity in the country but clearly that was a little bit of an outside deal that happened quickly in 2014. That would be the exception. Otherwise I think everything else should perform relatively steady and on the trend that it has been on.

Great. The last question is, have you been able to identify the market value of AmCad's court business and what of that is addressable to you, and maybe how much you have been awarded. Details like that, and is everyone expecting to switch if the product is not supported any more? Just some details around that, please.

I don't think we will put a number on it. I think there are some early defections and I think that is meaningful not just for those deals, certainly Harris County is a very large County. But I think if enough significant clients move away from that its ability to sustain itself for the remaining clients will be impacted. You just don't know what is going to happen. This doesn't happen very often that somebody wholesale exits the marketplace. Generally there is a long process.

We all know it is hard to kill a software company, as they say. There is normally a very long process to someone leaving say the competitive new business environment and becoming a legacy vendor and often it's 8, 10, 12 years before their customers start defecting in numbers. This is certainly different. There isn't a company to support it on a sustainable basis. If there were enough clients maybe there could be an ecosystem developed around it and that doesn't appear to be happening. We would expect that is a fertile market for us in the next few years.

Great, thank you.

The next question from Alex Zukin with Steven. Please go ahead.

Congratulations on a very strong quarter. Picking up the theme of the last question, if you look at your pipelines looking at 2015 and 2016, can you step back and give us a sense of what gives you the continued confidence that the end market demand is there and strong and continues to be in the multi year up cycle?

We have all kinds of different leading indicators to it whether RP's and demos and the rates they are moving. If you remember, in 2009, 2010, 2011 there was a big pipeline but people weren't making decisions on time and weren't operating in the normal schedule of these processes and things continued to get delayed and on and on and that isn't our experience now. A reasonable number of new opportunities continue to enter the marketplace. The processes are moving along in an orderly typical fashion. You know, what we saw before the 2008 to 2011 or 2012 cycle that was slow, and so it just seems to us from again everything from RFP's to demo schedules to awards that the pipeline people come out of it, people go in it, and the processes most importantly because, really, if you remember specifically in those years it wasn't that there weren't deals out there.

People weren't making decisions and when they were they were scrutinized much further in additional meetings and processes were added to the situation and that is not our experience now. So it is not a tremendously robust mark. As we said, it is more typical than normal, and the biggest change in our growth in the new business market clearly is attributable to the improvement in our competitive position. As long as we have a healthy market invest as we have been, and this year we mentioned in the remarks, there are a lot of incremental investments in this year to support that and not take for granted that we are going to continue to benefit from the market share that we have enjoyed in the last year or two.

That is helpful. And then just another question on the incremental justice software systems that you are putting in behind into the Odyssey customers. What is the typical incremental uptick that you see from those deals or from those customers versus the initial deal?

Obviously, it depends a little bit on what we sold them initially. But what you are seeing, and we had some of it in the remarks, is very often there is an opportunity that is a multiple of the original agreement especially in very large Counties. And the reason is two-fold. Sometimes the initial engagements are not for all of the case types. So in the case of Harris County we go in for a certain case type and then, a quarter later, it is expanded to include a couple additional case types.

It can expand significantly because you went in for criminal and then you add civil and the second way it you only sold them case management initially maybe and then expand to include probation and jail and prosecutor and all the of the other types of applications as well. In a lot of cases we are happy to get our foot in the door. Could be a single case type. Could be a single application and when that is the case the incremental value going forward would be a multiple of the original engagement. If the original engagement included all case types and the full suite of applications, obviously it would be significantly less.

Thank you, guys. That is all from me.

The next question from Matt Williams, of Evercore ISI. Please go ahead.

Thanks for taking the questions and congratulations on a strong fiscal 2014. Maybe just two from me. First, you talked about some of the incremental kind of hiring this year on the services side and I know there has been a fair amount of investment on the E-filing side as well. Could you talk a little bit about how you expect to leverage some of that services capacity and maybe some of the other investments around E-filing as the Texas deal sort of matures a little bit and some of the implementations start to accelerate with sol of the services capacity?

Sure. We are absorbing. In this plan last year as you know we had nearly 300 basis points in operating margin expansion which is significant. We had a high growth rate and that helps your ability to do that. After a year like that, in our view, we certainly would hike to grow margins. There is a little margin expansion in the plan. It is not unusual that our margins do a little better than plan in the year so that would be great.

But in our view this is a year where we obviously need to grow the organization to perform the higher level of business that we have on our plate. So there are a lot of people that have actually already been hired but are still in the onboarding process. So we are training them.

They are parallel being other people and they are not yet financially productive so we are carrying that now and will in the year and we will continue to add people in that area as we go forward. I mentioned earlier, we are clearly as we went through the plan for this year choosing to support incremental development efforts. Features, functions, broadening what the products do for your clients and we feel it is a good investment to make to sustain the momentum that we had in the marketplace as we go forward.

Great. That is helpful. And then maybe just touching on the record holdings investment that may be looking across the broader portfolio whether it is in Courts & Justice or MUNIS or the ERP or schools offerings. Are there other opportunities that might make sense from a product standpoint, not necessarily from a specific company standpoint, but are there any opportunities from a sort of product functionality stand point where this type of investment, as opposed to a pure acquisition, might make some sense?

Well, probably not get too specific from a competitive standpoint but just talk about this in general. I don't believe there are entire enterprise areas that we have no meaningful presence in at this point in time. So I don't expect us to be talking to you about a product we built or a company we bought that is an entirely different suite of application than anything we have done historically.

Our objective as a Company is to have a leading position in all of the important enterprise areas of local government. So, obviously, the way the Company has been built everything doesn't enjoy exactly the same level of leadership. There are many areas where I think we are a clear leader with strong competitive and defensible positions and there are other areas, quite frankly, where we do reasonably well because of Tyler's broad offering, presence, brand et cetera. I think EnerGov is a good example of a case where we had applications in that space, they may not have been on their own industry leading, but they were functional and served our clients well as par of a broader suite. And we stepped up and acquired a company that had a presence and had the potential to be a clear leader in that narrow niche and that is what we he have been achieving with them.

There are other areas like that where we currently may not be a very clear leader in that specific niche but we have a presence and it is part of our broader suite and those are decisions we are making strategically. Do we invest further on our own organic products to grow them in that direction or from time to time when something presents itself is there an ability to acquire a product that improves those features within our customer base.

Great. Thanks for taking the questions.

Sure.

The next question comes from Kevin Lee, of B. Riley and Company.

Good morning. You talked about opportunity with record holding in terms of opening up the Australian market for Courts & Justice. Curious as to whether you feel there are other international markets that your existing products would serve well, and whether there are acquisition opportunities out there that could push you more so outside of the US?

We mentioned the UK in the remarks. It really would be the major English speaking countries in the world are potential opportunities for us. It is kind of early to be specific about that. We have had people travel to those countries and attend trade shows and talk to clients and talk to partners and we do believe that there is meaningful opportunity and that our product is competitive and reasonably ready to deployed in certain countries so that is something that we expect to pursue over the next few years. Will the revenue be significant in the forecast in the next few years? Probably not. Hopefully we will build a presence that will allow us to sustain our growth as we eventually begin to saturate the US marketplace.

The SaaS pipeline in the fourth quarter seemed like the customers are willing to buy a number of products on a hosted basis. Are you seeing that still within the existing deals that you have and are the durations for the deals also getting longer?

Okay, yeah, I said earlier I would stick with this 30% or a third level. You know, quarter to quarter it jumps around but if you look at trailing 12 months generally that seems to be the adoption rate. I would expect it will continue to expand over time but it seems to be at a slow rate certainly in the government marketplace. So that would be the way I would look at it as you kind of do your modeling. I would say yes, to the second part of your question. I think we had one 10-year engagement in the fourth quarter, several sevens. So the old three to five year engagement in some cases seems to be morphing to often seven, occasionally even longer.

Great. Thank you.

Sure.

(Operator Instructions). The next question comes from Mark Chappell of Benchmark. Please go ahead.

Thanks for talking my question here. Most of my questions have been answered. John, I just wanted to make sure I heard you correctly earlier in the call with respect to the decision to redeploy R&D resources away from Dynamics. Is that related to the slower than expected uptake rate of that particular product?

Well, the decision not to extend the R&D side of relationship beyond AX 7, no. You know, Microsoft that is their choice to a large degree and that is the decision around that. And then the question becomes what do you do with the R&D resources? Well, the reason we were brought into this in the first place is that these are largely strong subject matter experts that bring those skill sets to that product and have the same value back in the proprietary Tyler place.

Fortunately, this is a decision we are making well ahead of the release of that product so the ability to redeploy those strategically into different product sets within Tyler is something that will be absorbed through the normal headcount growth that we would have seen, attrition, maybe in some cases being willing to get a little ahead of what the normal headcount growth would be because we have experienced talented Tyler'ized kind of people rather than going out in the broader market to recruit. It is our expectation that the majority of those people will find productive places in proprietary Tyler environments.

So this was a Microsoft decision to discontinue the R&D around the product is that correct?

Yes.

Okay. Thank you.

It appears there are no more questions at this time. Mr. Marr, I will turn the call back over to you for closing remarks.

Thank you for joining us on the call today. Have a great day and if are there are any further questions feel free to follow up with Brian or myself. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.