泰勒科技 (TYL) 2015 Q3 法說會逐字稿

Hello and welcome to today's Tyler Technologies third-quarter 2015 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. (Operator Instructions)

As a reminder, this conference is being recorded today, October 22, 2015. I would like to turn the call over to Mr. Marr. Please go ahead, sir.

Thank you, Chad, and welcome to our third-quarter 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer.

First I would like for Brian to give the Safe Harbor statement. Next, I will have some preliminary comments, and Brian will review the details of our third-quarter operating results and give 2016 guidance. Then I will have some final comments, and we will 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?

Thank you. Our third-quarter financial performance was very solid, with double-digit growth at all revenue lines. From a historical perspective, this was our eighth straight quarter of revenue growth greater than 15%. And in six of the last seven quarters, revenue growth has exceeded 17%.

Software license and royalty revenues were up nearly 19% and, at $15.7 million, were the highest in Company history. Continued strong growth in our e-filing revenues from courts as well as the gradual shift toward cloud-based software-as-a-service business led to 28% growth in our recurring revenues from subscriptions.

We had a very solid quarter for bookings, which rose almost 26%. On a trailing 12-month basis, bookings grew 6% in a difficult comparison, because Q2 of last year included bookings of approximately $64 million related to contract signings with California courts. Excluding the California courts contracts, the trailing 12-month bookings rose 18%.

Two of our largest new contracts signed during the third quarter included our iasWorld appraisal and tax administration solutions. The largest was a $30 million agreement with Cook County, Illinois. The integrated solution will replace [40]-year-old technology used by the County's Offices of the Assessor, Clerk, Treasurer, Board of Review, and the Department of Geographic Information Systems.

The County selected multiple Tyler software solutions to meet its property tax administration needs, including CAMA, tax, Field Mobile for collecting and reviewing information in the field, Public Access for online access to property and tax data, and Tyler Content Manager. Cook County has more than 800 local government parcels and a population of 5.3 million. The county, with 128 municipalities, is the second most populous county in the United States and includes Chicago, the most third most populous city in the United States.

We also signed a multi-suite five-year SaaS contract with Lake County, Illinois, for our iasWorld Tyler appraisal and tax administration solution in our EnerGov planning, regulatory, and maintenance platform valued at approximately $8.5 million. We signed two significant agreements for our EnerGov solution during the quarter. The first was with Los Angeles County's Department of Public Works in California, valued at approximately $9 million.

This was a follow-on agreement to our initial EnerGov contract with the Los Angeles County's Department of Regional Planning in 2014. The second contract was with Boulder, Colorado. It is valued at approximately $1.6 million and is a follow-on agreement to our initial contract in the fourth quarter of 2014.

We signed several notable contracts in Texas for our Munis ERP solution, including on-premise contracts with Hays County Consolidated Independent School District and the City of League City, and a SaaS contract with Coppell Independent School District. We also signed new SaaS agreements for Munis, each worth more than $1 million, with Madison County, Tennessee; Williamsburg; James County Public Schools in Wythe County -- all in Virginia; in the city of Benicia, California; and the Allegheny County School District in Maryland.

For courts and justice, significant contracts in the quarter for our Odyssey solution included an on-premise agreement with Potter County and a SaaS agreement with Karnes County, both in Texas. Also, three California counties -- Santa Cruz, Alameda, and San Diego -- all signed e-filing contracts as a follow-on to their 2014 court case management agreements. Finally, we signed a significant agreement for our Eagle Recorder solution with Santa Clara County, California.

As you know, on September 30 we signed a definitive agreement to acquire privately-held New World Systems Corporation for $670 million in cash and stock. New World Systems, a leading provider of public safety and financial solutions for local government, will bring an important element to our portfolio of solutions.

Founded in 1981, the Troy, Michigan-based Company has over 2,000 public sector customers and more than 470 employees. New World Systems is highly complementary to Tyler, and the combination supports our strategy of being an industry leader in all major enterprise applications essential to local government.

New World Systems's principal products are Aegis, a comprehensive public safety suite for dispatchers, police officers, firefighters, paramedics, correction officers, command staff, and all first responders; and LOGOS, a suite of public administration software that meets the accounting needs of city and county governments. Public safety represents approximately 67% of New World Systems's revenues.

Under the terms of the agreement, we will acquire all of the equity of New World Systems for $360 million in cash and approximately 2.1 million shares of our common stock. The cash portion of the purchase price will be funded from cash on hand and proceeds from a new revolving credit facility. The transaction is expected to close in the fourth quarter of 2015 and is subject to regulatory approval and customary closing conditions. This transaction is expected to be immediately accretive to Tyler.

Now I would like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2015.

Thanks, John. Yesterday Tyler Technologies reported its results for the third quarter ended September 30, 2015. I am going to provide some additional data on the quarter's performance and review our guidance for 2015, and then John will have some additional comments on the quarter and our outlook for 2015 (sic).

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, acquisition-related costs, 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 $150.8 million, up 17.2%, with 15.7% organic growth. Software license and royalty revenues increased 18.6% and, at $15.7 million, were the highest level in the Company's history. This was our 11th consecutive quarter of double-digit growth in licenses, and in those 11 quarters, all but one have had growth of over 16%.

In Q3 we received $1.0 million of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs, up 12.1% from $906,000 a year ago. Subscription revenues increased 27.9%. We added 35 new subscription-based arrangements and converted 18 existing on-premises clients, representing approximately $27.2 million in total contract value.

In Q3 of last year we added 38 new subscription-based arrangements and had 11 on-premises conversions, representing approximately $16.7 million in total contract value. SaaS clients represented approximately 22% of our new software clients in the quarter compared to 34% in the prior-year quarter. SaaS contract value represented 30% of the total new software contract value signed this quarter compared to 28% in Q3 of 2014. The value weighted average term of new SaaS contracts this quarter was 5.8 years compared to 5.5 years in last year's third quarter.

The fastest-growing subscription-based revenue stream continues to be from e-filing for courts and online payments. These revenues increased 34% to $11 million from $8.2 million last year. Total e-filing revenue of $8.4 million this quarter grew 36.9% over last year, with 19% of that increase related to our Texas e-filing contract, which contributed $4.8 million of revenues this quarter.

Our blended gross margin for the quarter declined 40 basis points to 47.6%, mainly due to continued onboarding of professional services and development staff to support our current backlog and anticipated new business. Since September 30, 2014, our implementation and development staff has grown by 182 employees. Our non-GAAP gross margin declined by 20 basis points to 48.6%.

SG&A expense increased 16.5% and was 21.1% of total revenues, an improvement of 20 basis points from last year's third quarter. Excluding non-cash share-based compensation expense and acquisition-related costs, SG&A expense increased only 11.7%.

Operating income was $31.5 million, an increase of 17.7%. Non-GAAP operating income was $39.3 million, up 21.5%. Despite slightly lower gross margins, the non-GAAP operating margin improved 100 basis points to 26.1%, as we achieved substantial leverage from both SG&A and R&D expenses.

Net income rose 18.5% to $20.1 million or $0.55 per diluted share. The fully diluted share count increased by approximately 1.1 million shares, primarily from stock option exercises and, to a lesser extent, stock issued in acquisitions.

Our effective tax rate was 36.5% and benefited from a higher qualified manufacturing activities deduction. Our effective tax rate may increase during the fourth quarter, as stock option exercises increase and generate significant excess tax benefits that limit this deduction. Free cash flow was $52.7 million compared to $64.7 million in last year's third quarter.

Days sales outstanding and accounts receivable were 77 days at September 30, 2015, compared to 78 days at September 30, 2014. DSOs decreased sequentially from 94 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 $757.7 million -- a new high -- and was up 12.4% from last year's third quarter. Software-related backlog, which excludes backlog from appraisal services contracts, was $707.7 million, an 11.6% increase. Backlog included $171.9 million of maintenance compared to $152.1 million a year ago. Subscription backlog was $236.9 million compared to $194.7 million last year.

Our bookings for the quarter, which are captivated from the change in backlog plus revenues, were $186 million, up 25.7%. On a trailing 12-month basis, bookings rose 5.5% over last year.

We signed 28 new contracts in the third quarter that included software licenses greater than $100,000. And those contracts had an average license of $579,000 compared to 30 new contracts with an average license value of $475,000 in the third quarter of 2014.

Our guidance, updated for the full-year of 2015, is as follows. We currently expect 2015 revenues will be between $578 million and $583 million. We expect 2015 diluted GAAP EPS will be approximately $2.01 to $2.07. We expect 2015 non-GAAP diluted EPS will be approximately $2.56 to $2.62.

For the year estimated non-cash share-based compensation expense is expected to be approximately $20.3 million to $20.8 million. Fully diluted shares for the year are expected to be between 36 million and 36.5 million shares. We estimate an effective annual tax rate for 2015 between 36.5% and 37.5%. 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 $14 million to $15 million for the year. Total depreciation and amortization is expected to be between approximately $15.5 million and $16 million, including approximately $7 million of amortization of acquired intangibles. Note that this guidance does not include any impact from the proposed acquisition of New World Systems, as the completion and timing of the acquisition is subject to regulatory approval and customary closing conditions.

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

Thanks, Brian. We've reported for some time now that the markets have recovered from the 2008 financial disruptions and been behaving relatively normally. In the past several months we've actually experienced at least a modest acceleration in activity. RFP activity in Q3 was clearly ahead of longer-term run rates. It's a short period of time to draw any conclusions from, but directionally we are encouraged.

I would characterize our competitive position as steady at a strong level and attribute the higher license revenues to marginally stronger market. We continue to work toward closing the New World Systems deal in the fourth quarter. Since signing the definitive agreement, we have had more exposure to their team and continue to be impressed. Along with the obviously strong knowledge, industry knowledge, and strong competencies in the team, there is genuine excitement regarding the combination.

The early reaction from clients and prospects has been that they are excited about the complementary nature of the combination, positioning Tyler to provide the most comprehensive offering in the market, which will help government be more productive for their citizens. Now, Chad, we'll take questions.

(Operator Instructions) Charlie Strauzer, CJS Securities.

John, you talked about the pickup you have seen in the RFP space -- the RFP pipeline, I should say, in Q3. Can you give us a little bit more granularity in terms of what areas you are seeing the pickup in? Is it more courts-related, financial, etc.? And also, looking into kind of Q4, is that kind of pace staying where it was in Q3?

Really, probably the only -- courts is still a smaller market. There is -- so any trends there have to be longer-term; otherwise, they're pretty anecdotal. So it's really more on the financial side of the business where the volume activity is large enough that even shorter swings are interesting to us.

I guess I am talking more about the financial side. And it just seemed that there was a lot of RFP activity and a lot of activity that I think is worth noting in the third quarter. Again, there is ebbs and flows here, and maybe it goes right back to the normal level. But everybody wants to watch the local government marketplace. And there is always some pressure on their budgets.

And again, in the short term anyway, what we are seeing for activity in the marketplace suggests that is going to remain at least steady, if not accelerate a little bit. So that is somewhat encouraging to us.

And are you seeing these -- kind of more larger municipalities or agencies that are putting these RFPs out? Or is it just kind of a wider breadth of RFPs that you are seeing?

It is a wider breadth, but as you saw, or as I think Brian just mentioned, our average -- the average software license fee in our over-$100,000 category went up about $100,000 year-over-year. So there is pretty good activity on the higher end of our range in our addressable market.

But I do think over a long period of time we've consistently been becoming more and more competitive on, again, the higher end of our range, which is not the ultrahigh side of the market, where we don't play as actively. But really, this Tier 2, in the lower end of Tier 1 space -- I think Tyler's competitiveness has consistently improved.

Great, thank you very much.

Brian Kinstlinger, Maxim Group.

I wanted to start with eFile. It has been such a good business for you. So I am wondering, as you look at your e-file installed base, especially the large counties and states, do you expect any are going to mandate e-filing in 2016? And maybe specifically also touch on LA, where you are with that process and install.

Predicting exactly when certain counties or states go mandatory is difficult. Even if they have a clear intention, some of them have legislative processes they need to go through. So not to avoid the question, Brian, but it would be hard to be that specific for you.

It is our clear perception that most of these clients -- say, for example, most of the counties in California that are in the midst of their case management implementation have the expectation that at some point in time, as their case management systems are in place, that they will move toward -- you know, they will implement e-filing, and that they will ultimately make it mandatory. So I think the general atmosphere out there, that when people have good back-end systems in place, that they intend to move forward with e-filing and ultimately appreciate for them to get high adoption and to become a paperless courthouse, they need to implement a mandatory. And we are seeing a clear trend toward that.

So I cannot give you quarter by quarter which jurisdictions will do that. But it is the clear impression we have that the vast majority of our clients are moving in that direction.

Great. And my follow-up: with more RFP activity that you have discussed -- especially you mentioned the higher end picking up -- how does Dynamics fit in your proposal plan? Should we see more direct sales from Dynamics in your view and maybe gaining more traction? Or will you be continuing to propose Munis even at the high-end level much more so than Dynamics?

Well, certainly our direct channel and our direct presence in the marketplace is considerably larger with Munis and considerably more established. And they are doing well in that space. So we are certainly not going to back off that.

We certainly -- we have identified a number of subsegments or certain areas in the marketplace where we believe Dynamics is competitive and can build momentum and grow our presence in the marketplace. So we are focused on that with some direct resources.

I think the growth in our sales channel around Dynamics is supporting their partners, both domestically and internationally and at different levels of government -- federal government, not-for-profits, higher ed, etc., agencies. So there is a pretty comprehensive plan that we've worked together with Microsoft on.

And I think Tyler's -- you look at it -- for the last five or six years, our experience in the government has been applied to the R&D side. And we are transitioning to where we will have less of a role in the R&D side. We will have reduction in headcount there. And we will bring our market expertise to the go-to-market side and try to enable their partners to attack all those sub markets and extended markets that we don't have a strong presence in at this time.

Great, thank you so much.

Alex Zukin, Stephens.

Congratulations on another great quarter. Seems like from a SaaS perspective, you saw a lot more dollar conversions this quarter than even some of the new business. I guess I'm just curious; what -- is there any trend that we can take away from that, anything that is changing? Are we reaching a new inflection point? And then why the disparity in terms of the conversions versus the net new?

It goes up and down quarter to quarter, so you need to look at a number of quarters. Q2 really wasn't very good for newer conversions. Q3 was better, and Q4's outlook is pretty good. So it bounced around a little bit.

I think the way we have described it is -- you know, this is the local government marketplace. It's slower to make changes -- that we are seeing a gradual shift in that direction. I think that is still accurate language for this.

But we see traction in our installed base and in the new business market. We are adding, what, I think around 55 names? A little more than half of those new names, a little less than half conversions. And we are satisfied and happy with that. It just gradually gains a little bit of momentum.

And Alex, it really was weighted more toward -- the numbers we gave on the -- in the remarks earlier, the dollar value of the SaaS deals, that $16.7 million in contract value was a combination of both the new and the SaaS customers -- the new and the conversions last year. And the $27.2 million is a combination of the two.

So it is still is more heavily weighted towards the new customers. And we did have a couple of very large new SaaS customers this quarter. So I don't think there was a big change in the dollar value of the conversions.

Got it. That's helpful. And can you guys talk about the Cook County deal? How many of those types of deals are out there in any given year? And how does that kind of factor into -- how many of those do you think you guys do in any given year?

Well, not many. Historically, our kind of megadeals like that have been courts. And they are out there. I think our win rates are very good. On the court side Washington, Oregon, Maryland -- those are all big statewide deals in the last few years, kind of in the size range. And occasionally they come around in tax and appraisal. Cook -- but it's top three county, as we said.

Our competitive position in the situations is very, very good. I think our win rates would be real high. There are not a lot of companies that have our size, and our resources, and history, and experience in that space. So I think we compete very, very well when they come out. But they are obviously going to be more infrequent. So as a Company, two, three kind of outsize deals is what we do in the course of a year, normally.

Perfect. And then on New World, what has been the reception from prospective customers around the acquisition in the sense that -- you know, as you continue to meaningfully increase your breadth of offerings, is it starting to -- is the changing the conversation with prospective customers in any way in terms of size of the initial wallet?

It has been very positive, the initial reception. We know that there's a little overlap between some of our products and some of their financial applications. But it really is not that significant in the overall deal. The excitement is around the complementary nature of the deal -- so for our clients to have industry-leading public safety system available to them that we clearly intend to integrate more seamlessly over time and add value to their existing solutions for their public safety clients.

We've heard from clients who said, hey, we were looking for one or the other. Now we know we can get one that will be integrated, and add value, and make us more efficient. There has been a lot of that positive response -- and even on the financial side. They have certain applications that are strong that we don't have. We have, certainly, a lot of applications that they don't have that are on top of the core financials that will become available to these clients.

So the options that both client bases will have our complementary products has been what they are focused on. And it has been pretty enthusiastic.

Got it. And maybe just one last one for me: with respect to any trends, how insulated are you with respect to some of the macro events in the economy from state budgets that may be exposed to issues around commodities? Can you just walk us through the dynamics of why that maybe not -- does not matter as much for you guys?

Yes, over a long period of time -- unfortunately, I have that perspective now of 30 years or more -- it is very rare that, let's say, normal economic cycles impact our market. And some of that it's we are just fortunate, and some of it is by design. So really, in the last 30 years, in my view, our market has been impacted twice. One was a technical issue with Y2K; and the second was the 2008 financial crisis, or disruption, whatever we want to call it.

In 2008, it was extreme enough that state revenue sharing and federal revenue sharing going to local governments at least got threatened, and in some cases that impacted. So some of these projects were put on hold. And in recent years those projects have been executed because they are essential, and the market has been pretty good.

So your typical ebbs and flows generally do not affect us for two reasons: first, local government generally funds these types of really general fund types of investments through their own direct revenues, which are property taxes, utility revenues -- you know, the direct revenues to local government that do not get impacted. Right?

I mean, all of us pay less when we have a year where we earn less, but we pay the same property tax bill that we have on the house we own, and we pay the same water bill. So those revenues are much more stable than state and federal revenues, where sales tax and income tax can be more volatile.

And the second reason is that everything we do -- and this is the part that would be by design -- everything is an enterprise solution. It is important to them. And it is essential. They have to do it, whether it is printing tax bills, or running payrolls, or managing the courts. So this is not discretionary, and it has to happen when budgets are flush and when budgets are tight. So generally, we are impacted very little, with the couple of exceptions that I noted.

That is very helpful. Thank you, guys.

Kirk Materne, Evercore ISI.

John, my first question would be: as you guys have grown, and you're adding New World to the mix here, I was just kind of curious on your view of the ability for you all to start having a bit more of a broader channel of partners, especially services partners. The bigger GSIs have generally not focused on state and local -- or at least local governments, and it is more federal and state level.

But you guys are clearly showing that there is a lot of business to be done with more local municipalities. And a lot of things you guys are doing, like e-filing, are pretty transformational type of projects. So I am just kind of curious if, over the next year or two, maybe not in the immediate near-term, but as you put New World together, is there an opportunity to maybe start to get some greater distribution and services leverage out of more services partners or integrators?

Well, it's a good question. And it really points to a conscious decision on our part that differentiates us from many of the other players. I think what you're saying is: you guys are evolving into a more substantial software company. Obviously a lot of the software companies you follow use partners to get leverage in their service channels and presence out there in the marketplace.

And, yes, we are a big enough company now that I think we could attract legitimate IT service integrators to implement our systems. It is a pretty conscious decision on our part to have not gone that direction. So this is something, when we are selling our systems, that we focus on a lot -- and that is that when we go out and bid a deal, we own that deal. So it is not just our software. It is the conversions; it's the project management; it's the implementers; it's product extensions that may need to be done.

And the success rate, in our view, is considerably higher than when you have an integrator in a software company, and multiple contracts or elements of contracts, and some areas that are not as clear as to who actually owns that responsibility. And then post-implementation -- whatever was done in the implementation, whether they're product extensions or the way the product was implemented, is much more completely transitioned to post-implementation support relationships.

So if you were to be hearing what we are telling our marketplace, it's that having the IT service side and having a complete one-throat-to-choke kind of approach differentiates us. We announce these new deals to focus on California courts, and to the market -- they can add up the contracts and see where we are going directionally.

There's an incredible execution part of that business. As important to having won the business in the first place is successfully executing on those projects, which we have a very good record on; and, obviously, one feeds the other. The success in the market leads to new business.

You make a very good observation, Kirk. We would have higher margins if we did not have as big a professional services side of our business. The business matrix may look a little better. But in our view, it's a strategic part of our offering that differentiates us, especially from Tier 1 software providers.

Yes, that makes sense. And maybe just stripping out sort of the margin dynamics of it, I guess my question is more about just geographic reach and influence, meaning -- let's just take e-filing, for example. If you had a bigger, say, global or national -- national in your case -- partner working with you, do you think there is a way to get to more opportunities faster? Or do you think this is just a market where it is a slow and steady sort of wins the race situation? So having a bigger, more national brand from an integration perspective, helping you get in front of more decision-makers potentially faster is not something that is necessarily required when you thinking about these kind of more strategic, transformational deals.

I think our bias in our current end market is to continue to do most of that directly. It's not like we have a bright line, where we would not partner with somebody who had relationships or presence in certain markets. But generally our bias -- and I feel, certainly in courts, because that is a pretty well-defined and somewhat limited market.

I think we are trying to manage our sales channel and our service channels to be able to address all the market that is out there. I think we really know the states and major counties that are coming out in the coming really three, four, five years, and feel we have the capacity to address that.

You mentioned international. I think that for a lot of reasons could be a place that we might partner more. Obviously, culturally, and presence, and relationships, and a lot of things that we could leverage. So as we go that direction over a long period of time, probably a little more of it there.

Okay, I will leave it to others. Thanks very much, John.

Scott Berg, Needham & Company.

Congrats on another nice quarter. Two questions from me. First of all, John, your tax and appraisal software business was a laggard in the business a couple years ago. Obviously, we have seen a lot of larger deals the last couple of years, whether it is New York City or the $30 million deal you announced in the quarter there.

But how do you view that business kind of on a go-forward basis maybe over the next one to two years? Can you see some of the similar types of demand trends, like you are seeing maybe in general in courts and justice and near peers? Or is that maybe just a short-term impact to the Company that you have seen recently?

It's a good observation. There is no question that -- I think it was 2006 that they kind of got off the track a little bit, and we had to rein the division in. And there was even some pressure to get out of that business, because it did not have as much growth. And the appraisal service side wasn't completely consistent with what we did. And so we have looked at it for that period of time, last seven, eight, nine years, as a sticky part of our business.

And as I said earlier, it is tax revenue. It's important to have a presence in that office. It's important even if it's not as robust a business for us. So we always looked at that as a lower grower, and margins getting diluted somewhat by the appraisal service side of things.

Hasn't been the case, obviously, this year or maybe last 18 months. And it's a good question. Is that a blip? And at least for, let's say, the next 18 months, it will continue. There will be higher growth than had been historically. Probably should grow at least at or maybe above Tyler's average growth across the Company.

And certainly on the software side of the business, which used to be half of the business and now is, I think, about 70% of the business, margins will continue to benefit from scale and expand. So that business is definitely outperforming our long-range forecast in terms of both growth and margin expansion. And we think for the foreseeable future, 18 to 24 months, that will continue. Hard to know beyond that.

Great. And a follow-up for Brian. Brian, you have historically talked, at least over the last couple of years, on the Company's desire to get operating margins above 30% and ways you can get there over the next couple years.

Obviously, the New World acquisition will be accretive to your margin profile. It probably helps you get there a little bit more quickly. But how do you view margins maybe 2 to 4 years out, more longer-term now -- A, with that acquisition; and, B, with some of the other leverage success that you are currently having?

As we talked about in the New World acquisition announcement call, New World does have margins above our current blended gross margins. But their margins are consistent with a similar business within Tyler that has a lot of scale and has a high degree of recurring revenues from a single product.

So they are not really -- they will be accretive to our margin profile, but they are not really out of line with where parts of Tyler are. And our long-term goals on margins have been very consistent over a number of years; and those still are in place: that we believe that if we can grow in the low to mid-teens, that we get meaningful margin expansion at the gross margin line of 100 basis points a year or better.

That would be an annual average. As you have seen, it doesn't happen necessarily in a straight line. There are years where they are flat or with more pressure on margins, gross margins, as we have this year. And there are years where we have 200 and 300 basis points of margin expansion.

But those long-term expansion goals, we believe, are still consistent with what we have done historically in the past, and that we have a lot of margin -- gross margin improvement opportunity, some of that coming from New World. But certainly in Tyler's businesses, as other businesses, like our courts and justice business, continue to gain scale; have new higher-margin revenue sources, such as e-filing, start to layer in there; as the recurring revenues, which are higher-margin, continue to build to become a bigger piece of the product or the revenue mix; and as we continue to move beyond the investment stage in some of our newer products, like our EnerGov product, and those margins start to be enhanced -- all of those things are contributing factors to this long-term 100-plus basis point annual margin expansion, assuming growth consistent with what our historical growth has been.

And as we have said, we believe that we can get substantial leverage from both SG&A and R&D, the two things below the gross margin line that translate to higher operating margin expansion. And we've seen that, for example, this quarter, where we actually had a little bit of pullback in the gross margin. But we still got 100 basis points of operating margin expansion, because SG&A and R&D are both growing at a much lower rate than our revenue growth is.

So we believe that those trends remain in place. Again, they are not necessarily on a straight line. So, there is some -- sometimes when we are above that profile and sometimes we are below it. But that is how we expect to continue to drive margin expansion in the long-term and move from this mid-25%, 26% operating margin non-GAAP that we currently have to 30% and north of that.

And as we said, there are parts of our business where we are above that, even about that target currently. And we have a plan to move other parts of our business more in line with that.

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

Jonathan Ho, William Blair & Company.

Let me echo my congratulations as well. Just wanted to start out -- can you just give us a sense of how much is left in backlog from the Texas eFile, and when we could maybe anticipate another extension of that?

Sure. That contract was initially a four-year contract, and it currently has just shy of $37 million of remaining backlog as of September 30. That is currently playing out at about $4.8 million a quarter, and it really stays at that level. It takes a little bit of a step-up, a very minor step-up in 2017. The contract runs through September of 2017. And, as I said, $37 million of backlog left. So it's about halfway through right now.

Got it. And then -- go ahead.

No, I expect that we certainly have a close relationship with Texas. We had a big event recently where we celebrated the go-live of Texas e-filing in all 254 counties at several months ahead of schedule when those last counties went live. So that project is working extremely well.

The Chief Justice of the Supreme Court held a press conference and celebrated the success of the project. So it's obviously working very well. And I expect that before we get too close to the end of the contract, we will have discussions with them about extending it. It does have -- the contract provides for series of one-year renewals in the original contract. But we are still a little bit off from approaching the end of that.

Got it. And then, just wanted to understand just in terms of, I guess, the staffing level increases that you guys talked about in terms of headcount -- have you been able to hire enough people? And how comfortable are you with headcount levels relative to the expense side, now that you have kind of increased it over the period of this year?

Yes, we have been in a growth and recruitment mode for a long time. I think our HR side of the business has got recruiters embedded in all of these different divisions. So it's an active machine, generally.

Sometimes when you see operating profit at a higher level than say the beat on the revenues -- so in other words, more falling through, a lot of that is sometimes that you almost always trail behind. So the headcount growth we have in the fourth quarter probably won't be met. But it is certainly not a problem.

Tyler is an employer of choice in all of our major geographies. We recruit aggressively, and we have a strong presence in the market place. And it's a matter of timing, like I said. Sometimes you schedule positions, and it's 30, 60 days later. But we certainly don't see ourselves as looking at those pools as having run out and it being a long-term problem. But it is just an ongoing part of our business.

Got it. And just one last one if I may. In terms of Microsoft, has there been sort of any update there in terms of the, maybe, wind-down of the relationship or reallocation of resources? Just want to get a sense of what's happening there.

There really has not been anything definitive done since the last call, say. But the general direction of the relationship that we reported is still our expectation, which would be considerably lower R&D headcount and spend; and some increase, as I said earlier, on the sales side and the service side of things. But overall, a net decrease in heads and COGS for us. Revenues are not explosive, but they are going in the right direction. So the performance of the business should continue to improve.

Great, thank you.

Tim Klasell, Northland Securities.

Congrats -- my congrats on the quarter as well. Most of my questions have been answered, but you mentioned the RFP pipeline has been building nicely. As we look out to 2016, could that change the seasonality? Do you guys have any feeling that, gee, there is a certain quarter or two where a lot of these deals may close, or a large one? Or is that just too difficult to judge at this point?

It's probably too difficult to judge. And it should continue to level out. The recurring revenues as a percentage of revenues at Tyler are so significant; the bigger deal experience, which is mostly POC accounting, is pretty straight-line as well. So the sell, deliver, and recognize licenses is becoming a very small percentage of our overall business.

And so, therefore, I think that is why you are seeing this predictability, these marginal beats. They are really getting into a pretty tight range. And I think that's a function of the maturing of the business overall, high recurring revenues, more large deals coming out of percentage of completion, and the impact of licenses within a quarter being less in terms of total influence on the numbers.

Okay. And just a specific deal-related question -- on Cook County, obviously their systems were ancient. But was there a specific catalyst that happened where they suddenly said we really had to modernize their systems?

I don't know of a specific catalyst. As we indicated, it's a 40-year-old platform. I'd say it has been a number of years in the making for them to -- you know, this was a long project for them to create, design, manage the scope. And it has been a several-year process at the least. So just time to make a change.

Okay, thank you very much. That is helpful.

Kevin Liu, B. Riley & Company.

Just one question on the subscription business. You talked about the growth there being driven by both e-filing as well as online payments. Wanted to clarify whether the online payments piece is distinct from kind of the e-filing transaction fees you get. And if so, what products those are tied to, the size of that business, and how much growth you are seeing there?

A little of both. Online payments is really how the e-filing revenue is captured, so I think we mean that more. We do have some online payments business as well, but it would be very insignificant compared to the overall e-filing business.

Yes. For example, this quarter e-filing was about $8.5 million of revenues. Online payments, separate from that, was about $2.5 million. Online payments is primarily where we process either traffic tickets or utility bills, in many cases for smaller clients who don't want to manage that website themselves but use our software. And we get a convenience fee for that.

That is a -- because it tends to be more with the smaller clients, it is not as nearly as fast-growing business as the e-filing. So, most of that growth is on the e-filing side.

Got it. And also, one quick one on Dynamics. Just the royalties there seem to be on a little bit of an upswing. As you start to transition over to doing more kind of sales and support of the VARs, do you feel like you will start to get better visibility there? And do you expect the current run rate of revenues to continue?

No. We really don't have any better visibility. I think is their footprint and presence in the market continues to mature, hopefully the consistency and the direction of it is a little bit predictable. But we don't have any specific insight into the activity in that channel.

All right, that is all I had. Thanks so much.

Peter Lowry, JMP Securities.

Just one quick big-picture question. Can you recap just what the greatest demand drivers in the state and local government software are right now? But then looking forward, say, 3 to 5 years, do you see any change in what the drivers might be?

Not really. I mean, again, it's what we say. It's a steady market. These are all enterprise, essential apps. There is a huge inventory of systems out there that are aging, and not well supported, and every year a small percentage of those go back out in the marketplace. So it is kind of our hope and expectation that this continues to be a pretty steady market.

Okay, great. Thank you.

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

Okay. Thanks, Chad, and thank you to everybody for participating on the call today. We appreciate it. And if you have any further questions, feel free to reach out to Brian or myself. Thank you very much. Have a great day.

Thank you, sir. That concludes today's call. Thank you for attending. You may now disconnect.