泰勒科技 (TYL) 2015 Q4 法說會逐字稿

Hello and welcome to today's Tyler Technologies fourth quarter and year end 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. Later we will conduct a question-and-answer session and instructions will follow at that time. And as a reminder, this conference is being recorded today, February 18, 2016.

I would like to turn the conference call over to Mr. Marr. Please go ahead.

Thank you, [Gilda], and welcome to our fourth quarter 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer.

First I'd like for Brian to give the Safe Harbor Statement, next I'll have some preliminary comments, then Brian will review the details of our fourth quarter operating results and 2016 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?

Thanks, Brian.

The fourth quarter was certainly eventful, with our acquisition of New World Systems corporation, completed on November 16, 2015. New World is a leading provider of public safety and financial solutions for local governments and brings an important element to our portfolio of solutions.

Founded in 1981 and based in Troy, Michigan, New World has over 2000 public sector customers and more than 470 employees. New World Systems is highly complimentary to Tyler and the combination supports our strategy of being an industry leader in all major enterprise applications essential to local government. The purchase price was $360 million in cash, which was funded from cash on hand and proceeds from a new revolving credit facility and 2.1 million shares of Tyler's common stock, making this the largest acquisition in Tyler's history by a wide margin.

The integration of New World's operations and products with Tyler is well underway. And as you can imagine, it is a major effort and will continue through this year. Our combined employee and client groups are enthusiastic about the addition of New World to Tyler, to the Tyler family, and the opportunities that the combination provides.

The acquisition also introduces a certain amount of noise to our fourth quarter results, as well as to our outlook for 2016. With that acquisition-related expenses and adjustments as well as accounting changes to conform New World to Tyler's policies and practices. We'll try to identify and quantify those items as we discuss our results.

Although our guidance for 2016 assumes revenues from New World of approximately $124 million, which is a lower first year contribution than we projected when the acquisition was announced. Since the deal closed we have become more excited about the acquisition and the long-term opportunities it brings. Excluding New World, the midpoint of our revenue guidance infers organic growth of approximately 12% for 2016, and the high end would have organic growth of approximately 13%.

We are pleased with our solid performance in the fourth quarter, with organic revenue growth of 15.3%, our ninth straight quarter of revenue growth greater than 15%, in total non-GAAP revenue growth of 27.2%. Not surprisingly, we have seen some decisions delayed as prospects get comfortable with the acquisition. Tyler has a strong commitment to New World clients to support and enhance their products for the long-term, as we have with previous acquisitions, and they should be confident that Tyler will be a strong partner for them.

Continued strong growth in our e-filing revenues from courts as well as a gradual shift to cloud based software a service business led to 29% growth in our recurring revenues from subscriptions. With the addition of New World year-end backlog grew 20% over last year. Bookings for the quarter rose 13.5%, and including approximately $23 million from New World.

For the trailing 12 months, bookings were up 3.3%. The comparison to last year is a difficult one because in Q2 of 2014 it included $64 million related to contract signings with California courts. Excluding the California courts contracts, the trailing 12-month bookings rose 15%. Q4 was another very strong quarter for SaaS contracts with total contract value of $32.4 million, the highest quarter ever.

Our largest new contract signed in the fourth quarter was a ten-year SaaS agreement, valued at approximately $8.4 million with the City of Raleigh for our EnerGov Solutions, which continues to have success in the marketplace. The City of Burnaby in British, Columbia, Canada, also signed an on-premise agreement with EnerGov, valued at approximately $3.4 million. We signed two significant SaaS contracts in Texas for our Odyssey solution, the first was a five-year SaaS arrangement with Wichita County valued at approximately $4.7 million, and the second with Hunt county, valued at approximately $3.4 million.

In addition, we signed new e-file agreements with the State of Idaho and Orange County, California, superior courts. For our New World Public Safety solution, we signed significant license arrangements with the City of Casa Grande, Arizona, Indiana County Emergency Management in Pennsylvania, and Statesville, North Carolina. Also for our New World ERP solutions we signed license agreements with Gerald R. Ford International Airport in Michigan and Fayetteville, Georgia.

We signed several notable SaaS contracts for our Munis ERP solution including San Juan County, New Mexico, Knox County Schools in Tennessee, and Marietta City Schools in Georgia. We also signed significant new on-premise contracts for Munis with the cities of Glendale, Santa Monica, and Simi Valley, California, Manassas, Virginia, Greenville County, South Carolina, and Los Cruces, New Mexico. Finally, for our appraisal and tax IAS World solution, we signed a notable license agreement with Sussex County, Delaware.

Now I'd like for Brian to provide more detail on the results for the quarter and provide our annual guidance for 2016.

Thanks, John.

Yesterday Tyler Technologies reported its results for the fourth quarter ended December 31, 2015. I'm going to provide some additional data on the quarter's performance and review our guidance for 2016 and then John will have some additional comments on the quarter and our outlook for 2016.

In our earnings release we have included non-GAAP measures that we believe facilitate understanding of our results in comparisons with peers in the software industry. These measures include write downs of acquisition-related deferred revenue and acquired leases, share based compensation expense, the employer portion of payroll taxes on employee stock transactions, acquisition-related costs, and amortization of acquired intangibles.

A recognition of GAAP to non-GAAP measures is provided in our earnings release. Revenues for the fourth quarter were $158.9 million, up 24.7%, with 15.3% organic growth. Software license and royalty revenues increased 15.2%. This was our 12th consecutive quarter of double-digit growth in licenses. Organic license growth was approximately 1.1%. In Q4 we received $319,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs down 63.8% from $881,000 a year ago.

For the full year we received $3.4 million, an increase of 12.4% compared to $3 million in 2014. Subscription revenues increased 29.3%, with 26.6% organic growth. We added 33 new subscription based arrangements and converted nine existing on-premises clients, representing approximately $32.4 million in total contract value. This represented our highest quarter ever for SaaS bookings.

In Q4 of last year we added 24 new subscription-based arrangements and had 12 on-premises conversions, representing approximately $31 million in total contract value. SaaS clients represented approximately 22% of our new software clients in the quarter, compared to 17% in the prior year quarter. SaaS contract value represented 49% of total new software contract value signed this quarter, compared to 39% in Q4 of 2014. The value weighted average term of new SaaS contracts this quarter was 6.6 years compared to 6.4 years in last year's fourth quarter.

Subscription-based revenues from e-filing for courts and online payments increased 28.3% to $11.3 million from $8.8 million last year. Total e-filing revenue of $8.6 million this quarter increased 28% over last year. Our GAAP blended gross margin for the quarter declined 140 basis points to 46.1%, mainly due to the impact of acquisition-related write downs of deferred revenue and increased amortization of acquired software.

Our non-GAAP gross margin rose by 130 basis points, to 49.6%. SG&A expense increased 51.1%, and was 26.7% of total revenues, an increase of 460 basis points from last year's fourth quarter. Excluding non-cash share-based compensation and related expenses, and acquisition-related costs, SG&A expense increased 27.3% and was 19.6% of total revenues.

For the full year, SG&A expense, excluding non-cash share-based compensation and related expenses, and acquisition-related costs, increased 14.8% and was 18.5% of total revenues, an improvement of 80 basis points over 2014. GAAP operating income was $19.8 million, a decrease of 19.6%. Non-GAAP operating income was $40.7 million, up 33.5%. Non-GAAP operating margin improved 120 basis points to 25.1%. GAAP net income declined 43.7% to $8.6 million or $0.23 per diluted share.

Non-GAAP net income was $22.4 million or $0.59 per diluted share, up 16.3% compared to $19.3 million or $0.54 per diluted share in Q4 of last year. A fully diluted share count for the quarter increased by approximately 2.2 million shares, primarily from stock issued in acquisitions and, to a lesser extent, stock option exercises.

Our effective tax rate for Q4 was 55.9%, as we cumulatively adjusted the annual rate to 40.2% from the 36.7% tax rate we were estimating through Q3. This obviously represents a significant increase from our expectations at the beginning of the quarter. The increase in the effective tax rate primarily reflects the tax implications of the very high level of stock option exercises by employees in the quarter, as those create a limitation on certain tax deductions, and therefore negatively impact our effective tax rate.

When options are exercised and sold the employee recognizes ordinary income, for which we receive a cash tax benefit. However, this gain creates a limitation on certain deductions that in turn increases our book tax rate. The timing and the amount of stock option exercises is difficult to predict and can result in some volatility in our rate as we saw this quarter.

The effective tax rate was also negatively impacted by certain non-deductible acquisition related costs. Had our annual effective tax rate stayed at the 36.7% we were estimating at the end of the third quarter, non-GAAP EPS would have been $2.64 for the year or $0.10 higher.

Free cash flow was $20.7 million compared to $27 million in last year's fourth quarter. Cash flow for the quarter was impacted by approximately $5.5 million in acquisition-related costs. Also a significant amount of New World's maintenance billings take place in the fourth quarter, with more than $15 million build post-acquisition, which increased our receivables balance at year-end but should enhance first quarter cash flow.

We also ended the year with the a $21 million Federal tax receivable as a result of tax payments made early in the year before we knew the extent of excess benefits from option exercises, this will reduce our cash tax payments in 2016. (Inaudible) sales outstanding and accounts receivable were 101 days at December 31, 2015 compared to 80 days at December 31, 2014. DSOs increased sequentially from 77 days at September 30, 2015. Mainly due to the impact on the DSO calculation of only including seven weeks of post-acquisition revenues from New World but including all of their outstanding accounts receivable at December 31, 2015.

Excluding New World, DSOs were 80 days at December 31, 2015, unchanged from last year. Our backlog at the end of the quarter was $844.5 million, a new high, and was up 20.3% from last year's fourth quarter. Including approximately $83.2 million of New World backlog. Software-related backlog, which excludes backlog from appraisal services contracts, was $797 million, a 21.2% increase.

Backlog included $216.6 million of maintenance, compared to $157.8 million a year ago. Subscription backlog was $242 million, compared to $205.5 million last year. Our book bookings for the quarter, which are calculated from the change in backlog plus revenues, were approximately $176 million, an increase of 13.5% from Q4 of 2014.

For the trailing 12-month bookings were approximately $664 million, a 3.3% increase from 2014. Q4 includes New World's estimated bookings from the date of acquisition to December 31, 2015 of approximately $23 million. As John mentioned earlier, the full year comparison to 2014 is a difficult one because Q2 of 2014 included bookings of approximately $64 million related to contract signings with California courts. Excluding the California courts contracts, bookings for the trailing 12 months rose 14.9%.

We signed 30 new contracts in the fourth quarter that included software licenses, greater than $100,000, and those contracts had an average license of $349,000, compared to 35 new contracts with an average license value of $469,000 in the fourth quarter of 2014. Our guidance for the full year of 2016 is as follows. We currently expect 2016 GAAP revenues will be between $750 million and $765 million and non-GAAP revenues will be between $765 million and $780 million.

We expect 2016 GAAP diluted EPS will be approximately $1.90 to $2.02. We expect 2016 non-GAAP diluted EPS will be approximately $3.33 to $3.45. For the year estimated pre tax non-cash share based compensation expense is expected to be approximately $30 million to $31 million. We expect R&D expense for the year will be approximately $46 million to $48 million, fully diluted shares for the year expected to be between 38.5 million and 39.5 million shares.

We estimate the annual effective tax rate for 2016 will be between 38% and 39.5%. 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 $31 million to $33 million for the year, including approximately $10 million related to real estate. Total depreciation and amortization is expected to be approximately $49 million to $50 million including approximately $36 million of amortization of acquired intangibles.

Now I'd like to turn the call back to John for his further comments.

Thank you, Brian.

At a macro level, activity in our market remains good, and our competitive position continues to be very strong. The pipeline is generally at a very high level, local governments budgets are healthy, and we are not seeing any signs of broad spending slowdown in our space.

As you can see, our guidance for 2016 is below consensus in respect to both revenues and EPS. When the acquisition was announced last fall, our 2016 revenue expectation for New World was around $134 million. We now expect that their 2016 revenue contribution will be about $124 million. The $10 million reduction in revenue reduces our EPS expectations by about $0.10. There are too main reasons for the differences.

First changes to conform New World's revenue recognition to Tyler's practices, our expected result in slower revenue recognition of both licenses and services, reducing 2016 revenue by $3 million to $4 million. This is just a difference in timing of revenues. Second, we now expect that it will be a little slower getting out of the blocks with New World's growth and therefore have lowered our expectations for 2016.

We carried a somewhat lighter pipeline into the year, and the process of strengthening the sales channel, integrating products and ramping up cross selling all are underway but unlikely to drive significant revenue growth in 2016. We are putting in place the foundation with our organization and products to enable New World to grow at a rate consistent with Tyler's overall growth rates.

We'd consider any revenues from business acquired within the last year to be in-organic, therefore, about half of New World's revenues in Q4 of next year will be considered organic. As will some of the amount of (inaudible) revenues in the first half of the year. Using the midpoint of our guidance range and our current expectations for New World's revenues, our 2016 non-GAAP organic revenue growth rate would be around 12% at the midpoint of our guidance range, and a little over 13% at the high end.

We've consistently talked about our target organic growth rate in the 12% to 14% range, and we've achieved that as an average over more than a decade. In the last couple of years we have grown above that target rate. A variety of factors have contributed to take higher growth rate, including our success in California courts and some large e-file opportunities. There will be other catalysts to elevated growth, at times, but not every year.

Our core of business is strong, the market is active, and our long-term growth expectations have not changed. We expect our 2016 R&D expense will be approximately $47 million, compared to Tyler's R&D expense of about $30 million in 2015. After offsetting an expected reduction in Microsoft dynamics R&D spend 2016 included about $12 million of incremental R&D expense. Investment in New World Public Safety will account for a significant portion of the increase, but the investment in the cross Tyler's products included the newly created corporate R&D group.

In total, we expect to increase our R&D staff by about 65 heads compared to last year's level. We continuously evaluate opportunities to put our capital to work, including M&A activity and investment in our products. While we expect to continue to evaluate acquisitions, it is unlikely we'll do another large acquisition while we're digesting New World.

As we have studied our near term opportunities, we believe that investing in Tyler to accelerate R&D spend will provide a compelling go long-term return. We have made the decision to fund more development projects this year than previously planned, which we believe will strengthen our competitive position across our product lines, allow us to widen the moat between ourselves and competitors, and, in particular, expand our positions in the public safety markets.

As you know, we expense all of our R&D so increasing the spend directly affects EPS. We look at this as an investment, somewhat like making a $12 million acquisition but doing it internally. In some ways making the investment internally is more certain than M&A. Again, this is not to say we won't do additional acquisitions, but in the near term, we intend to focus on investing more directly in Tyler organically.

Now we'll take your questions.

Thank you, sir. (Operator Instructions). Our first question comes from Patrick (inaudible) with Evercore ISI. Please go ahead.

Hi, it's actually Kirk Materne with Evercore. Thanks for the additional commentary on the New World acquisition, John.

I guess maybe the first question I have is just on the change in the revenue expectations. I think you mentioned, I don't know, about half of it was just rev rec timing, the other half, I think you mentioned earlier in your prepared remarks, there was some pauses as people sort of get their arms or customers get arm around what this means for them. I guess two questions around that.

One, do you feel comfortable that, after a pause in sort of the first half of the year things will start to accelerate and I guess, two, does the New World acquisition have any impact on sort of the organic Tyler, you know, sort of sales motion, meaning, you know, I understand sort of the pause from a New World customer perspective, but, you know, from a core Tyler Technologies customer, are they taking a step back and evaluating what New World means for them as well?

No, but probably to start with your, you know, their reduction, it's probably almost a third. So a third may be rev rec. maybe a little more than a third and we had some of that built in but it turns out to be more than we thought. You know, a third-ish is probably slowing down some sales processes and people getting more comfortable with this.

And then a third, I would say, you know, this is new to us, but they would be telling us that their pipe is a little lighter than the last few years. So, again, it's no one significant issue, but, you know, a few different things putting some pressure on their revenues. We did, as we indicate and as you asked, we feel better about the long-term potential of, certainly, the public safety side of New World now than we did at the time we did the acquisition.

We're very impressed with the team. They're very easily blending into Tyler, very similar cultures and, you know, ways of operating. They're enthusiastic to be part of Tyler.

We feel with these investments, that we're keying up now, that we can improve this product competitively and we think the combined story of New World and Tyler will be more compelling than New World was on its own. So we're very enthusiastic about that long-term, but as we indicated, it's going to be a little bit slower out of the blocks for those three different reasons.

In terms of Tyler, no, there's no impact on Tyler's decisions because we did a large acquisition, if there's any confusion in the product strategies. I don't know of any indication or any instance where one of our own organic deals was affected by the acquisition.

Okay. And just a really quick one on sort of the increase in R&D, sort of, investment, I think that makes a ton of sense, I guess after we get through sort of the step function up this year, does the opportunity for EBITDA growth, you know, of sort of 20% where it's been, you know, over the last few years, does that come back into play or is this something where, that you just need to, you've maybe investing a little bit, not as much as you should be?I guess I'm trying to get a sense on what sort of the EBITDA growth trend should be after we sort of normalize this uptick in spending this year. Thanks.

Yes, yes, fair enough. And I have to be a little careful, right, in answering that question because we clearly want to remain in a position to have the flexibility to make good investments that we feel are compelling. And, you know, I could tell you, don't worry, next year they rebound and we find a great opportunity that we want to invest in and we'll do that, and I know you'd want us to do that. So you have to be a little careful about how you answer that question.

But I guess I'd say it this way. We definitely expect, that as our company grows, that the benefits of the scale that we realize will drive margins higher. I don't have any question about that in the long-term. But I actually will be pleased to find other opportunities where we feel if we make a R&D investment, it will give us a great return in the future and we'll literally look for those and make those investments.

But in the long-term, yes, we expect those investments to drive revenues higher, and the typical, you know, model and scale benefits will kick in and margins will expand. You know, as we said, you know, we expense all of this, but we look at this as an important investment, building a new data center, which is capitalized, or doing a major acquisition, but it obviously runs through the P&L.

I would estimate, as we look at it this way, that of the $47 million R&D spend, about half of that, maybe a little more, is what I would call discretionary competitive investment. So if you were trying to run the company right now to maximize its current earnings, taking care of all the deliverables you need for your contracts and customer work, and even doing, you know, the core maintenance to the product that you need to do, I think there's a $25 million spend on top of that, that is a great investment to Tyler but is discretionary and really is to be the catalyst for growth down the road. And you guys can, you know, kind of look at that and model it as you'd like.

Thanks, John. Appreciate it.

Sure.

The next question comes from Alex Zukin with Stephens. Please go ahead.

Hi, guys. Two questions for me. The first around the software and services backlog. On an organic basis, it looks like it's basically flat with the prior year and it hasn't been that way since 2012, I believe. So I'm just wondering if you could shed some light on that, around the puts and takes there.

Well, I think, you know, it is relatively flat this quarter. I think most, we have seen more of an increase on the subscription side in the last couple of quarters have been very strong object the subscription booking side so I think some of that is offset by an increase in the subscription bookings and backlogs. So that's probably the major impact there. There's probably also a little bit of an impact from the, you know, how the New World acquisition fits into that. But that's the biggest changes through the subscription side, the growth there.

Got it. And then what about just if you look at it on a total backlog nature? It's up about or on an organic basis, up about 8%. Was there any kind of puts and takes in terms of the quarter volatility of that metric that put it at that level? Was that a level that you came in happy with? Maybe just that one.

I don't think there's anything particular unusual there. This quarter, as we talked about frequently, the timing of large deals affects that. This quarter there weren't any sort of mega-deals. It seemed to be a pretty normal quarter in terms of bookings.

I think, as I said, a very strong quarter on the SaaS side. Kind of an average quarter, actually down a little bit from last year's quarter on the license side. But all in all, nothing remarkable about it. Just kind of at normal bookings quarter, activity and pipeline remain strong. As John noted, we have seen some delays in new signings on the New World side, particularly in the first quarter after the acquisition, and that's not surprising. So, I mean, I think if it were a normalized quarter for New World bookings, we would have seen more growth there.

Got it. That's helpful. And then, John, how would you characterize the core RFP pipeline for Tyler going into 2016 versus, you know, maybe going into the last two years and then can you just also talk about, you know, is there a little bit of a heightened level of conservatism in the guidance?

Well, I think, okay. In terms of the RFP activity, as I kind of said, there's nothing here unusual. All the leading indicators are pretty consistent with the last two or three years, since, you know, the recovery from the bumps of 2009, 2010, 2011, whatever. Nothing different there. Really nothing different in our core business.

I think the activity toward the end of the year, in some divisions, particularly Munis, for example, the amount of business that kind of uncontracted, not in backlog, so if backlog is a little flat, a lot of that's timing. There are a lot of awards that weren't contracted in the quarter that will get contracted in the first quarter.

So that core flow is very normal, and something we're pretty satisfied with. I think our growth will come from continuing to improve our competitive position in that situation.

Got it. And just maybe the conservatism around the guide.

Well, maybe a little? You know, I think over the years, most of the things that happened that are surprising, you know, affect you in a downward way during the year, right? They drive some expenses you didn't see or some revenue slips, and most of the good things that happen, it takes a little longer to recognize that revenue and get the upside.

So I think, sure, over the year, management has learned that and has become a little bit more conservative, and I think we used to probably, you know, deliver more in the mid or low end of the range and I think in recent years we've delivered, with no certainty, but delivered in the high or on the outside of the high end of the range. And so that's been an evolution at Tyler, I think is accurate.

In terms of New World, I just think there's an awful lot of moving parts, there's a lot of noise. And so we're taking a little more conservative position, which I think is appropriate. And the net of it is, what we've tried to do is give you guys an accurate impression of what we see, but it's probably got a little broader range given, you know, the moving parts that we're digesting this year.

Okay. Great. Thanks, guys. I'll cede the floor.

Sure.

The next question comes from Jonathan Ho with William Blair & Company. Please go ahead.

Hi, guys, I just wanted to start out with just maybe going back to the $12 million in investment, I just want to understand, you know, sort of why the decision now to increase those investments, and, you know, did you guys see sort of, you know, a number of opportunities or, you know, key product gaps in the portfolio or opportunities to displays competitors? I'm just trying to understand sort of why the decision to make those investments this year.

Sure. It really isn't just this year. I'd say that $12 million, you know, as I indicated earlier, is incremental to hedge we've been adding on a discretionary basis, invest in things we thought were important. And probably our run right now, as I said, is maybe around $25 million in annual spend that are resources that we can target what we think are important and timely investments that will give us a good return. So it's the extension of a process but I think we've been working on for the last few years.

I think in the last few years, M&A activity and the cost of those assets are higher, the cost of owning stock in terms of deploying capital has been higher, and the company executes well on building and investing in existing products, getting them to market and proving their competitive position and being in a very good position to opportunistically take advantage of opportunities that come in front of us. And we think that's a very good investment for Tyler shareholders.

It's a company that knows how to execute, and when you're in that position, you should invest in your own company and that's what we're doing. In terms of where those go, integration is a big thing. You know, the unique thing about Tyler is, we're the only company, as we say over and over, that really has all the major enterprise applications that are essential to local government. And as those products become further integrated, they add value to each other, and that's something that our competition really can't do.

So we have good competitors in each of those sub verticals, but the people we compete with in courts don't have financial systems. And the people we compete with in financial systems generally don't have tax systems or public safety systems. So one of the major themes, and we mentioned the corporate R&D team, is to better integrate these different products that, on that on their own are all very competitive, but as they become more seamlessly integrated and actually add value to each other's application, really creates something for Tyler that's going to be hard to match by the rest of the market.

So that would be an example of something we're integrating. Technology drives the need for new functionality. Mobility right now, obviously, a very big deal. User experiences get tired and have to be refreshed. That's a big investment for us. That's a big determining factor in a sales process. And in extending functionality.

So some of our applications really have come along with our core and strong applications but maybe on their own were not industry-leading. So enterprise asset management, for example, would be an area where we had an application, probably wasn't industry-leading, but with added expertise and subject matter experts and headcount and the objective is to make that by itself industry-leading as we go forward. So it's across the applications, in our view, it will continually drive a stronger competitive position, and it will position us to be very competitive when new opportunities come online.

You know, an example would be e-files. We didn't just, kind of, go bid and win the Texas e-file deal that kind of catapulted us as a leader in that space across the country. We had done an acquisition, we had consciously invested in that product and brought it up to be industry leading and we were in a great position to take advantage of an opportunity when it came out and we're right now consciously doing that across our product suites.

Got it. And then, just relative to your comments about maybe some New World customers or potential customers slowing down their evaluation process, in your experience, when you've made acquisitions of other companies, you know, how long has it taken for the customers to get comfortable and, you know, is this a situation where, you know, they start to evaluate other competitors or reopen businesses or is this more of a get to know you type of a scenario?

I don't think they usually go backward in the process. It's always hard to know, whether it deal with loss that might not have been. I say if that has happened, it's been three or four and again you'll never know for certain. But it's not 12 or 15. It's a few. And some deals, again, were delayed and have been awarded subsequently. So I do not think it will be a long-term impactful effect.

Certainly not on public safety because the answer, you know, when they say, hey, what's this mean to us, and we tell them what our objective is, we talk about these investments, we're making, makes this an even better investment for them, and I really think that's an easy story to tell and that, you know, most people in the marketplace would see that as an improvement.

So I think it really is, hey, we need someone to come out, we need them to explain what's going on, we need to get comfortable with that, we might need to talk to some Tyler folks or customers and, again, I think on the public safety side that it's going to improve our win rates and I think it will be a non-issue, you know, certainly by midyear this year. Their ERP side, you know, it's a little harder because obviously Tyler has very strong products already in that space so people can be concerned, but we can point to our Infinite Vision solutions, which have done very well for three or four years now, since we bought those companies and, you know, having an Incode and a Munis, so we already have multiple suites of financial systems that all have important addressable market spaces that are not much overlapping at all and there is certainly room for New World in that.

And we're carefully targeting those markets and identifying them and I think as we demonstrate, that we continue to invest, there's been no headcount reduction, that people will see that and get more comfortable with it.

Thank you.

The next question comes from Brian Kinstlinger with Maxim Group. Please go ahead.

Great. Thanks. Wondering if you guys can talk about the pipeline of large Odyssey and e-file contracts? It sounded like there's a number of RFPs in the U.S. and Australia and maybe expected timelines of awards as you see it?

Yes, a little bit. It's hard to know exactly, but there are a few deals, state-wide kind of deals that we're engaged in that we feel good about in some large counties. Obviously we've got the six or seven counties, (inaudible) count them in California, which we have virtually no e-file revenue, a little bit right now, and that would be the biggest market. And some of those had e-file as part of their initial engagement, some of them contracted subsequently. A few were mandatory.

But certainly in the next few years, as those sites go online, that's a major growth opportunity. So there's still a lot of runway left for e-file.

And then in terms of bookings, clearly this was a difficult year for comps compared to last year, given California. What's a reasonable goal for bookings growth going forward? Is it 10%, is it 15%? I know you've done even more than that in the past. Or your larger size. Maybe give us a sense of what's reasonable.

Well, it's an important number, I appreciate, but by itself it's hard to say that, Brian, because, you know, like we mentioned, a ten-year deal with Raleigh is $8.5 million and it might have been a $2 million deal if it was on-premise. So the mix of SaaS versus traditional, the length of the terms, ten years or four years, so I'd be careful to, you know, focus on that exclusively.

It really has to be looked at, you know, within a number of different things. So if you do normalize that for the Californias or if you had a spike in SaaS versus traditional, then I do think that it would be at least 10% and probably should grow a little north of our overall revenue growth rate because the SaaS contracts add more revenue, add more backlog than they will revenue.

Great. Thanks, John.

Sure.

The next question comes from Scott Berg with Needham & Company. Please go ahead.

Hi, John and Brian. Thanks for taking my questions. I've got a couple quick ones here.

John, first of all, can you clarify your comments at the beginning with regards to the delayed decisions? The way you made it sounded like there were some Tyler, you know, maybe Tyler focus decisions that were also delayed but your other comments would not suggest that. I just wanted you to clarify that really quick.

No, you're right. Sorry for giving that impression. But I don't know of any Tyler decisions that were materially affected. You know, it certainly could have been a call or something but nothing material on Tyler decisions affected by the New World acquisition.

Okay. Great. Thanks. Brian, I wanted to see if you could talk about the New World financials just a little bit relative to the 8-K that was disclosed, their gross margins look abnormally high relative to other software companies I'm sure most of us cover.

Is there going to be any change as to how they recognize expenses or revenue? I know there's some obviously moving parts on the revenue side that we've already been made aware of but more thinking on the expense side as we model out 2016.

Well, when you look at those historic New World financials that were filed with the 8-K, there are a number of differences throughout those from both Tyler's accounting there, as you mentioned, revenue recognition, policies, although both in accordance with GAAP, there's would have been in some cases somewhat more accelerated than they are under Tyler policies.

There's obviously the purchase accounting adjustments that affect the deferred revenue recognition. They were a Sub S corporation so didn't have corporate taxes included there. The way they classified R&D in their historic statements would have been different from ours where we have a significant amount of our development expense up in cost of sales, and then a portion of it on the R&D line, theirs would have been more on the R&D line, so that would have elevated their gross margin versus ours.

So there's quite a number of changes through there. But add at a very high level, their gross margins and operating margins were higher than ours and should contribute to increasing our blended margins. And part of that is just the nature of the business. They were a relatively simple business, had not done any acquisitions or been acquired so they really have two core products, the ERP product and the public safety product, both of which have been developed organically, more than 50% maintenance revenues, which generates very high margins when you've got that level of scale in maintenance revenues from a couple of relatively mature products.

So clearly it's hard to infer a lot from those pro forma statements, but that's kind of a high level look at it.

Great. Thanks. John, it hasn't come up really at all on any of the other questions but could you type out the dynamics royalties a little bit? It looks it was the weakest quarter in at least two years and I wanted to see if you're understanding that those opportunities are maybe less than or greater than your understanding of how that business has been trending the last couple years.

Yes, it was a weak quarter. We've said we literally opened the file and they send it to us and we really don't know what we're going to get so we don't have a lot of visibility on it. I will say we have gotten the files of the current quarter, and it rebounded somewhat, we'll obviously announce that with next quarter. So it's lumpy.

And, again, it rebounded to pretty much what was in our plan, so it's going to bounce around. They're not as robust as we'd like them to be but we really don't have a lot of visibility.

Great. Last question for me. Brian, you've talked the last couple years about walking your EBITDA margins or operating margins, excuse me, up to kind of 30% range. Obviously you're making an investment this year, but is there any change to maybe how we think about those margin structures, you know, as we get to maybe 2018 or 2019?

No, I don't think so. I think our long-term model is still consistent, that as we grow revenues in that low to mid teens and as we talked about, kind of 12% to 14% has been where our long-term average has been, that over the long-term, we expect that that, obviously, lots of puts and takes with a mix of revenues between SaaS and license, with the acquisition, with investments in products, but over the long-term, we expect that that kind of growth will yield north of 100 basis points on average, and it doesn't happen in a straight line every year but on average in gross margin improvement, and better than that on the operating margin and EBITDA margin lines.

And even with these investments this year, you know, I think our EBITDA margin, because of the New World business overall gives us a lift in that, you know, we'll still see I think relatively stable EBITDA margins. And we'll see gross margin improvement.

Great. That's all I have. Thanks for taking my questions.

Sure.

The next question comes from Charlie Strauzer with CJS Securities. Please go ahead.

Good morning. This is actually Robert Majek in for Charlie.

Good morning.

Given the pull back in your recent acquisition in New World, what is your appetite for share buybacks currently?

Brian, did you announce that number?

We didn't announce, we have 1.4 million shares left in our authorization. We have bought, given the broader pullback in the market in the last few weeks, we've bought a modest amount of stock. I don't think we announced the number till year-end. But we've bought a modest amount. And then, but, as we said, we've got about 1.4 million shares left in our authorization. And John can comment on our appetite for that going forward.

Yes, so we have been active in the last two weeks, since the tech sold off a little bit, obviously recovered a little bit the last few days and now we're back down to a level below where we have been active. So I guess from there, you could infer that we would intend to be active at this level. I don't think we would be, you know, trying to do something that's, you know, too significant at this level. It's still not a discounted stock. But it certainly got down to an area we would take a long-term view. All of our long-term objectives, we think, are strongly in place, and we think buying at this level and looking out a couple of years, as to what that means, makes a lot of sense for us. So at the current level we would not be overly aggressive but we will be active.

All of my other questions have been answered. Thank you.

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

Hi, good morning. Just in terms of the bookings metrics this quarter, it did seem like more of a shift toward SaaS business. I'm just wondering what you're seeing in the pipeline in terms of any potential shift away from on premise to license. And then also I'm curious whether some of the larger opportunities you signed started off as SaaS deals or whether clients ultimately shifted over the course of the quarter.

You know, it just hasn't changed that significantly in a number of years now. So high twenties, low thirties in terms of percentages of new names, tend to be where it settles out, you know, in any individual quarter it can bump around, but it really isn't changing. I know we hear so much about the cloud. We offer both.

We don't try to have a bias in directing them one direction or another. We believe the main has great value to us in the long-term and we welcome them either way. But the numbers don't change too much. I think sometimes you see a higher percentage of bookings look like SaaS names are growing and sometimes that can be distorted as I indicated earlier. The Raleigh deal, for example. It's a ten-year deal.

It's one name, but it's a ten-year deal so it distorts a little bit how many dollars are going in the backlog as SaaS dollars versus traditional dollars. But really not a material shift in the number of years at this point.

Got it. And just in terms of your e-filing growth, obviously another strong year in 2015, as you look forward now between, you know, the states you have contracted and that could potentially come online versus the overall backlog of business there, you know, what sort of growth do you expect for e-filing this year?

This year is a little bit lighter because we've literally are bringing a lot of clients, a lot of Odyssey clients online and implementing them and the e-file revenues will follow after that. So I think there will be a little bit of a pause this year, it will be a little lighter growth but if, we're not talking about names, we're not working, we're just talking about California names, some of the other large counties and states we're working with where we know it's their clear intention to, you know, introduce e-file and eventually go mandatory. I think you'll see that growth rate bounce back two, three, and four years out.

Great. Thank you.

We grew about $9 million in 2015, and I expect it will be, the growth would be more in the $5 million, $6 million range in 2016, and then when some of the California stuff comes online, we probably see that accelerate in 2017.

Got it. Thanks for taking the question.

The next question comes from Tim Klasell are Northland Securities. Please go ahead.

Yes. Two quick questions here. First, on the product side, you know, the E91 initiatives are getting a lot more press here recently, and wondering, what sort of synergies are you seeing with those initiatives, particularly as it relates to New World? Are those two product sets helping each other? So maybe a little color there would be appreciated.

What two products?

With New World, with, you know, public safety and with your E91 initiatives around, you know, video and some of the new next generation 9-1-1.

Yes, our focus will be, you know, we have some Tyler products in that area that will be maintained, that will be invested in, but clearly in terms of investing in next gen, E9-1-1 solutions to handle texting and a lot of the things that traditionally haven't been handled, multimedia coming through there, that is part of the significant increase in R&D in the New World side of our business.

Okay. That's helpful. And then finally, on your tax rate, obviously that's up a little higher than what we had been modeling. Is that something permanent or that something that maybe you can work down over the years and, you know, relative to what the expectations you laid out for 2016?

Generally the tax rate is in a pretty tight range. It certainly moves around for a number of different reasons. The outside the box increase, which is a little higher, 55%, obviously I hope it's way higher, is associated, almost exclusively, with the exceptionally high activity of options we had in fourth quarter, with a very high stock price, understandable.

Our average holds for our employees is over seven years so then there's a lot of options out there, that's a good thing, and there was a lot of activity, understandably, and that causes the elimination of deductions that we get and that's what drove the rate higher. And being in the fourth quarter it's completely absorbed in that quarter and so it really is a one off experience.

Okay. But even 2016 guidance is a little bit higher than the model and I'm sure New World had, probably, some impact there. Is that, sort of, the steady state run rate that we should expect in the guided 38% to 39.5%? Is that the, sort of the range we should be thinking about for, you know, the next few years?

Yes, I think that 38%, 39% is generally the range. We've widened where we've historically been and, you know, we've put a little bit wider on the high end because of the uncertainty around the level of option exercises.

But, you know, our rate is pretty close to statutory rates. We don't have significant international operations so everything is pretty much fully taxed at full domestic rates as well as state taxes so that 38%, 39% range is probably pretty good.

Obviously we work on tax planning, look for places where we can get marginally improvements but, absent more overseas business and jurisdictions with lower tax rates, we likely are going to be close to that range.

Okay. That's helpful. Thank you very much.

The next question comes from John Rizzuto with SunTrust Robinson Humphrey. Please go ahead.

Hi. This is (inaudible) sitting in for John. Just two questions. So, the first one, when you look out to 2016, given your guidance, what do you see as far as the revenue mix between, let's say, license services versus maintenance and such, you know, license services, maintenance versus, let's say, subscription? I guess that's the first question. And, I guess, implicit in that is, like, is there a change in a pace of license revenue as we move to the Cloud? Thanks.

In a broad range I think the addition of New World probably shifted a little bit more into the licenses side because New World didn't really or hasn't, historically, had as much of a subscription offering. So, they're almost exclusively licenses so, I think, the mix is a little bit more on licenses next year, a little bit lower on services but really maybe only a point of the mix, something like that.

They also had a higher proportion of maintenance so that probably raises it a point but I think, generally, our mix this year will be similar. You know, 2015 it was about 10% licenses, that might be more like 11% in 2016.

We're about a little less than 24% services and I think that might go down a point or two in the mix, subscriptions were about 19%, that might also go down about a point but stay pretty similar, maintenance might go up a point or two, it's around 41.5% in 2015, might go up a, again, a point. And then appraisal is a relatively slow growing business so it probably will modestly continue to be a little bit smaller piece of the mix. But no dramatic changes in the mix.

Okay. Okay. That's helpful. And, I guess, with R&D spending, you know, it's rising but, overall, you pointed out, like, you know, you still expect the gross margins, operating margins to rise. So could you just talk about where you really see the leverage, you know, there's some impact from New World and you really see leverage in New World, and other than New World, maybe, in the core business.

Well, you know, at Tyler, like New World's a good example. So their margins were higher and they'll be affected a little bit as we go through this transition but they'll settle out at a much higher level than what Tyler's blended margins are but they're a good example and they're very similar to a lot of our more mature business units.

So, I think, the reason they're higher, they're not making a lot of investments outside of their core products. They maintained and invested in those well but they really didn't have a lot of new initiatives around them. When you look at Tyler, our core divisions that have reached a level of scale, you know, Munis or Incode or Infinite Visions or, you know, TMJ getting to that point, their margins are very similar to New World's, which I think are the appropriate margins for more mature business units, it's reached a certain level of scale where the employers are well served, customers are well served, investments are being made in maintaining and extending products and improving their competitive position.

At Tyler we're consciously choosing to always be investing in new products and new initiatives that bring that core rate down and so over time, as those investments, in relation to the more mature business units are smaller, the dollars won't be smaller but as the percentages are smaller, we'll see our blended rates move toward where they are for those mature units that exist, which really is in the 55% to 60% gross margin level and in the 35% operating margin level.

So we know that's attainable, we choose to be making these investments as we go, which brings the blended rate down but we believe it's a good investment for the company.

Perfectly clear. Thank you.

And, just to be clear, the guidance for 2016 implies, really, a modest increase in gross margin, modest increase in EBITDA margin, little bit bigger increase in EBITDA margin, but a decline in operating profit margin because of the elevated R&D that falls below gross margin but is in the operating margin.

The next question comes from Peter Lowry with JMP Securities. Please go ahead.

Thanks. Hi, Brian, one quick question. Given the noise around the high level of stock option exercises in New World Systems, is there anything you can say, in terms of guidance, in terms of how we should think about cash flows in 2016? Anything you would highlight?

Well, cash flows, as I mentioned, a couple of things that kind of brought down cash flow in 2015 a bit below our normal cash flow margin, the costs associated with the New World acquisition, the timing of some of the taxes where we paid taxes earlier in the year and then this excess tax benefit from the option exercised earlier is created at the end of the year and so that'll benefit our next year taxes. And New World's billings, the timing of their maintenance billings is favorable for us for 2016 cash flow.

But, I think, we should, as I said, see some EBITDA expansion and cash flow should, sort of, grow normally in line with that. So, nothing terribly unusual but, I think, some of the things that, maybe, held cash flow down a bit in 2015 will turn around and maybe put us a little bit above the curve in 2016.

Okay. Great. Thank you.

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

Okay. Thank you. And we appreciate everybody joining us on the call today. If there are any further question then feel free to reach out to Brian or myself. Have a great day.

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