泰勒科技 (TYL) 2016 Q4 法說會逐字稿

Good day, everyone. Welcome to the Tyler Tech fourth-quarter year and year-end 2016 earnings conference call.

(Operator Instructions)

Please note that this event is being recorded.

I would now like to turn the conference over to John Marr Jr., Chief Executive Officer. Please go ahead.

Thank you, William and welcome to our fourth-quarter 2016 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer and Lynn Moore, Tyler's President. First, I would like for Brian to give the Safe Harbor statement.

Next, I'll have some preliminary comments. Brian will review the details of our fourth-quarter results for -- and 2017 guidance. Then will have some final comments and 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 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?

We are pleased with our results for the quarter, which provided a strong finish to 2016. Total GAAP revenue growth was 22%, of which approximately 12% was organic and non-GAAP revenue growth was just over 20%. For the year, our earnings exceeded the upper end of our initial guidance and we achieved exceptional margin improvement even as we invested at a high level in product development initiatives. License and subscription revenues were particularly robust as licenses grew 38%, of which 20% was organic and subscriptions grew 23%, of which 21% was organic.

It was another good bookings quarter with an 18% increased to $212 million. We continue to be pleased with the progress we have made with the integration of New World, both from an operational and a product perspective. Through the first full year as a part of Tyler, the public safety market was good in the fourth quarter and our year-end public safety pipeline was up more than 70% from the beginning of the year.

Our largest deal in the quarter was a statewide contract with the state of Maine for our Odyssey courts and justice solution, valued at approximately $17 million, including a multi-year maintenance agreement and a 10-year fixed fee arrangement. This represents our 12th statewide Odyssey arrangement and the first new statewide courts deal since the states of Idaho and Washington in the third quarter of 2013.

We also signed our first international agreement for Odyssey. The contract with the Northern Territory of Australia includes several applications from the Odyssey software suite. The project will be implemented in phases, but is expected to ultimately have a value of approximately $4 million US.

While the Northern Territory covers approximately one-sixth of the Australian continent, its population is the smallest in the country's eight states and territories. With only about 1% of the country's population. We believe that there will be additional opportunities for us to grow internationally with Odyssey in Australia, as well as in other countries in the coming years.

We also signed a new contract for Odyssey in California with the State Bar of California, as well as contracts with Loudoun County, Georgia, and Nueces, Texas. We continued to see an increasing number of contracts, which include multiple suites of Tyler products. Those signed during the fourth quarter included a seven-year SasS arrangement with Naperville, Illinois for our Munis and EnerGov solutions valued at over $7 million. A contract with Portland, Maine, the state's largest city for our Munis and EnerGov solutions and a contract with Fort Smith, Arkansas for our Munis, EnerGov and ExecuTime solutions. Other significant agreements for Munis included Long Beach, California, DeKalb County Schools Districts in Georgia, Lehigh County, Pennsylvania, Jacksonville Beach, Florida, and Spartanburg County, South Carolina.

For our iasWorld appraisal and tax solution, notable contracts included a SaaS arrangement with the Orleans Parish Assessor's office in Louisiana, a traditional agreement with Columbia County, Georgia. We also signed significant new license contracts for our New World public safety solutions with the Delaware Department of Safety and Homeland Security, Monroe County 911, and Fayette County in Pennsylvania, and the City of Chesapeake, Virginia. Now I would like for Brian to provide more detail on the results for the quarter and provide our annual guidance for 2017.

Yesterday Tyler Technologies reported its results for the fourth quarter ended December 31, 2016. I'm going to provide some additional data on the quarter's performance and provide our guidance for 2017 and then John will have some additional comments.

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. These measures exclude write-downs of acquisition-related deferred revenue and acquired leases, share-based compensation expense, the employer portion of payroll taxes on employee stock transactions, amortization of acquired intangibles, and the impact of the adoption of ASU 2016-09, improvements to employee share-based payment accounting on our income tax provisions. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

In Q4, we adopted ASU 2016-09, which addresses, among other items, the accounting for income taxes and cash flow presentation of share-based compensation. Under ASU 2016-09 excess tax benefits or tax deficiencies generated upon the settlement or exercise of stock awards are no longer recognized as additional paid in capital, but are instead recognized as an adjustment to income tax expense.

This change in accounting for income taxes is effective on a prospective basis as of the beginning of 2016. Cash flows related to excess tax benefits are now required to be presented as an operating activity rather than a financing activity. We elected to apply the statement of cash flows guidance related to excess tax benefits presentation as an operating activity on a retrospective basis.

This change in accounting had a significant impact on the GAAP net income and GAAP earnings per share as our annual effective tax rate for the year was approximately 15%, compared to approximately 38% prior to the adoption. This accounting change also adjusted the calculation of diluted shares, resulting in a higher diluted share count. Non-GAAP net income was not impacted by the change in tax expense. However, non-GAAP EPS was impacted by the change in the diluted share calculation.

Without the change, our non-GAAP EPS for the fourth quarter would have been $0.91 and our non-GAAP EPS for the full year would have been $3.53. Please refer to the supplemental financial information schedule included in our earnings release for the detail of the reported and recast amounts for previous periods impacted by the adoption of this ASU.

GAAP revenues for the fourth quarter were $193.3 million, up 21.6% with 12.1% organic growth. On a non-GAAP basis, revenues were $195.1 million, up 20.3%. Non-GAAP organic growth was 10.4%. For purposes of calculating organic growth, we considered half of Q4 revenues from New World to be organic.

Software license and royalty revenues increased 38.4%. Organic license revenues increased 20.3%. Subscription revenues increased 23.2% with 21.4% organic growth.

We added 61 new subscription-based arrangements and converted six existing on-premises clients, representing approximately $18.4 million in total contract value. In Q4 of last year, we added 33 new subscription-based arrangements and had nine on-premises conversions representing approximately $32.4 million in total contract value.

SaaS clients represented approximately 30% of our new software clients in the quarter compared to 22% in the prior year quarter. SaaS contract value comprised 19% of the total new contract value signed this quarter compared to 49% in Q4 of last year. The value weighted average term of new SaaS contracts this quarter was 5.6 years compared to 6.6 years in last year's fourth quarter.

Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 12.7% to $12.7 million from $11.3 million last year. That amount includes e-filing revenue of $9.6 million this quarter, up 12.1% over last year. Cash flow from operations declined approximately 3% to $51.8 million. Free cash flow, which is calculated as cash from operations less capital expenditures, was $43.6 million compared to $49.6 million in last year's fourth quarter.

Excluding real estate costs, free cash flow was $47.7 million. Our CapEx for the quarter of $8.2 million included $3.4 million related to the expansion of our Yarmouth, Maine office facility.

In Q4, we repurchased approximately 125,000 shares of our common shock for an aggregate purchase price of $18.2 million or an average of $146.02 per share. For the full-year 2016 we repurchased approximately 882,000 shares of our common stock for an aggregate purchase price of $112.7 million or an average of $127.75 per share.

We ended the quarter with a total of $69.7 million in cash, cash equivalents and investments and $10 million of debt associated with our line of credit. For which we used $300 million to purchase New World Systems in November of 2015. Days sales outstanding and accounts receivable improved to 93 days at December 31, 2016 compared to 100 days at December 31, 2015.

Our backlog at the end of the quarter reached a new high at $953.3 million, up 12.9%. Software related backlog, which excludes backlog from appraisal services contract, was $914.6 million, a 14.8% increase. Backlog included $242.7 million of maintenance compared to $216.6 million a year ago. Subscription backlog was $364.1 million compared to $242 million last year and includes approximately $114 million related to fixed-fee e-filing contracts.

Our bookings for the quarter, which are calculated from the change in backlog plus non-GAAP revenues, were approximately $212 million, an increase of 18.4% from Q4 of 2015. For the trailing 12 months, bookings were approximately $880 million, a 31.9% increase over the prior period. Note that we have posted a spreadsheet detailing our quarterly bookings calculations on the Investor Relations section of our website at www.Tylertech.com /investors under the Financials and Annual Report tab. That spreadsheet has been updated to reflect a reclassification of New World's opening backlog in Q4 of 2015.

We signed 57 new contracts in the fourth quarter that included software licenses greater than $100,000, and those contracts had an average license of $406,000 compared to 30 new contracts with an average license value of $349,000 in the fourth quarter of 2015. Public safety accounted for eight of those contracts compared to six in last year's fourth quarter.

Our guidance for the full year 2017 is as follows. We currently expect 2017 GAAP revenues will be between $844 million and $854 million and non-GAAP revenues will be between $845 million and $855 million.

We expect 2017 GAAP diluted EPS will be approximately $3.26 to $3.34 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate under ASU 2016-09. We expect 2017 non-GAAP diluted EPS will be approximately $3.83 to $3.91. For the year, estimated pretax non-cash share-based compensation expense is expected to be approximately $37 million. We expect R&D expense for the year will be approximately $48 million to $50 million.

Fully diluted shares for the year are expected to be between 39 million and 40 million shares. The adoption of ASU 2016-09 increase our outstanding shares by approximately 1.3%, which lowers EPS by approximately $0.05. GAAP earnings per share assumes an effective tax rate of 20% after discrete tax items and includes approximately $29 million of estimated discrete tax benefits related to share-based compensation. We estimate the non-GAAP annual effective tax rate for 2017 will be approximately 35.5%.

Beginning in 2017, Tyler intends to adjust non-GAAP financial income using a tax rate equal to Tyler's annual estimated tax rate on non-GAAP income. This rate is based on Tyler's estimated annual GAAP income tax rate forecast adjusted to account for items excluded from GAAP income in calculating Tyler's non-GAAP income, as well as significant nonrecurring tax adjustments.

The non-GAAP tax rate used in future periods will be reviewed annually to determine whether it remains appropriate in consideration of factors including Tyler's periodic effective tax rate calculated in accordance with GAAP, changes from tax legislation, changes in the geographic mix of revenues and expenses, and other factors deemed significant.

We expect our total capital expenditures will be approximately $52 million to $54 million for the year, including approximately $24 million related to real estate.

Approximately $16 million of our 2017 CapEx is related to our cloud business, which includes hosted SaaS solutions and e-filing, including assets to accommodate future growth. Total depreciation and amortization is expected to be approximately $50 million, including approximately $35 million of amortization of acquired intangibles. Now I'd like to try and call back over to John for his further comments.

Thank you, Brian. As we noted earlier, our earnings for the year exceeded our expectations with New World's earnings contributing to our above-plan performance. Activity in the local government software market continues to be good and our fourth-quarter bookings reflect that.

As we move into 2017, our guidance calls for organic growth in the 10% to 11% range. Our near to midterm expectations are for growth in the 10% to 12% range although there will likely be opportunities from time to time to exceed that target and we expect to be well-positioned to take advantage of those opportunities.

In order to maintain or expand our growth rate on a bigger base, we are pursuing several growth drivers, including investing in existing products that do not currently have leadership positions, expanding our available market through internal development as well as acquisitions, and expanding into new geographies including disciplined international expansion.

With our very strong cash flow, we are choosing to invest more aggressively in a number of product development initiatives. We have plans to add approximately 80 developers over the course of (technical difficulty) than we did in 2016. A significant part of those investments involves projects to enhance our public safety products in accordance with our long-term plan to significantly improve win rates and gain market share in that space. Among those efforts include accelerating development of advanced features and functionality and scaling our solution for larger clients. We believe these investments will expand our public safety addressable market by a factor of four times and lead to increased win rates.

In addition, we are adding resources to our enterprise development group to accelerate a number of development projects, including those we discussed at our Investor Day last May. Those include elements of our Tyler foundation and user experience with platform services and next-generation apps like Tyler identity, bill presentation and payment, and constituent portal.

As you know, we have not capitalized any software development cost in recent years. With all of the costs expensed to either cost of sales or R&D expense, depending on the nature of the project. Although our increased investment in product development will put some pressure on margins in 2017, we still expect to achieve modest margin expansion this year.

We have also put in considerable effort over the last year on an extensive whitespace analysis of the public sector software space. We are evaluating our current product offering in adjacent spaces, identifying connections to our existing offerings, sizing the markets, and looking at competitive landscapes. This analysis is an ongoing project and it will enable us to a prioritized strategic investments, shaping both our M&A strategy as well as our internal development priorities.

Now we will take questions.

(Operator Instructions)

Brent Bracelin, Pacific Crest.

Thank you. My first question really is around the international kind of expansion, court and justice win in Australia seems like a nice foothold. Can you walk us through the broader strategy on what markets you plan to go into internationally and how meaningful that could be relative to 2017 and 2018 as a growth driver?

Sure, Brian. This is Lynn Moore. As we reported, we signed Northern Territory in the fourth quarter. That's a big step for us.

It is, obviously, our first stronghold outside of North America. We are going to begin implementation in the first quarter. As we reported, it's going to be a phased implementation and we are hopeful that the first phase will go live, which will be the civil administrative tribunals in the fourth quarter.

As we said before, I think the Australian opportunity is roughly about the size of our current Texas customer base. It's very similar to the United States in a sense that there are a lot of older legacy products that are running the courts there. There is no clear market leader and we think we are well-positioned to capitalize on that market.

We are tracking a number of opportunities there right now, but I think our primary focus too is really getting Northern Territory up and running. That's tough stuff; like I said, that's our first foray. I think once we do that, we will certainly enhance our competitive position to capitalize on other opportunities throughout Australia. As we mentioned, we are going to take a disciplined approach to international opportunities and right now we are sort of looking at Australia to be our first foothold for courts and justice.

Perfect. One quick follow-up for Brian, if I could. On the GAAP guide of 12% revenue growth this year, what is the kind of implied growth rate on the software license and software subscription side? That's a business that has been growing faster than the corporate average. Should we expect that to grow in the mid-teens here, or what are you factoring into that GAAP guidance of 12% relative to what the software contribution could be?

Yes, I think if you kind of broadly look at it, licenses would probably be a mid-teens growth. I think services, as we saw in Q4, was a little bit lighter and we certainly would like to keep services growth below our overall growth rate. I think we're probably looking at more like mid-single digits on services growth, certainly in the single-digit range.

Subscriptions probably also fall down in the mid-to-upper teens. Maintenance would be in the 9% to 10% range. Appraisal services actually will, as you know, that business is a cyclical business with appraisal cycles that come on different timing in different states and this is the year, it's a bit of a down year for those cycles.

We expect appraisal services will probably be down in the 5% to 6% range below 2016 revenues. And hardware and other although it is a small line, with the growth in our Brazos Technology business unit, we expect that hardware will probably be up in the 30% range. So broadly those are the parameters around the revenue lines.

Very helpful. Thank you.

Alex Zukin, Piper Jaffray.

Thanks, guys. First, congrats on the quarter. I wanted to ask maybe first for you, John. You don't push out shadow backlog. These were issues that you confronted in 2016. I wanted to ask how you saw them play out in the fourth quarter and then what are the expectations for those in 2017?

Help me on what you mean by shadow backlog.

Well, when you push -- when there will be deals that were contracted but not signed.

Yes. Sure. We have just noted we don't provide the detail on that, because it can bounce around, but we just noted that the volume of unsigned awards has certainly been at an elevated level and it continues to be that way.

They do get converted. We don't have any experience of deals that are unsigned that are not being contracted eventually, but the process itself, especially in larger deals, can go on for some time. Again, that elevated level continues and we'll announce those deals as they get contracted. But it does give us confidence and better visibility into the guidance we are providing and the sustained level of growth we expect.

That's helpful. And then maybe just one more. The assumption, Brian, for New World growth of 2017, how does that compare to what you did in 2016? And overall maybe can you just level set, how does that compare to your expectations when you acquired the company, the growth rate that you're projecting for 2017 for New World?

I think it's generally in line with what we expected. This is a multi-year growth opportunity in the public safety market, which was the primary focus of the New World acquisition. We expect that to play out over a number of years.

Looking at full-year growth for New World in 2016 versus 2015, in 2015, obviously, most of the year was not part of Tyler, so there may be some differences in their accounting before being a part of Tyler.

But if you look at the numbers that were filed with last year's pro forma, New World as a whole grew a little north of 7% in 2016 versus 2015. The public safety piece grew a little faster than that. The ERP piece grew slower than that as we have narrowed the market in which we sell the New World ERP solution.

The plan for 2017, the guidance would include public safety growth generally around the overall Tyler growth level, maybe a point above it or so, but in line with the Tyler growth level.

We've said that over time as we've talked about some of the development initiatives, the ability to start to cross-sell more aggressively, realizing the benefits of Tyler alliance with our courts and justice solution, we expect to both expand that growth through both expanding the addressable market in the public safety space as well as improving our win rates. Which today in public safety is a pretty competitive market. And our win rates they are well below what we see in some of our other more mature Tyler products.

We would expect that if you look over the next few years, that growth rate will continue to accelerate, but I'd say it looking back at the first 15 months it's been generally in line with what we expected. And we didn't expect it to be an overnight sensation.

That's helpful. And maybe just sneaking one in on the margins. I think, John, you mentioned that there is some modest upside for margins in 2017, but that it is an investment year particularly on the R&D side and the product modernization expansion side.

Where would the upside come from, particularly as you could realize some synergies, operational synergies, of New World. Where would be the drivers on upside for margins, potential drivers for upside for margins in 2017?

Within the short run, 2017 it's just execution. The Management Team has a record of doing that very well, so it's not unusual that throughout the year we achieve better margins than maybe in the plan. There is a little bit of that allowed for in our guidance because the record again is pretty long now and happened

It's generally managing headcounts. These heads, service heads, R&D heads, all of those are in the plan, but we will still be disciplined as we go through the year with turnover and filling the new heads and managing those costs. It's just an execution thing that again, the team does very well on. Generally, we can rely on some good performance there.

In the longer term, obviously, it's more the model and leverage in the model. We appreciate your patience.

We are investing at a higher level than probably even we thought we would, and it's just a result of opportunities we see that we think should be funded. We think that three, four, five years from now to have an even stronger leadership position in our core applications and to achieve leadership in some of the surrounding applications where maybe right now we are not there is going to deliver greater value in the Company then taking those margin gains right now.

Got it. That's helpful. Thank you guys.

Scott Berg, Needham & Company.

Hi, everyone. Congrats on a really nice quarter. One question and follow-up I guess. First question, John, is on the platform investment. A year ago you called out investing, I believe it was an incremental $15 million in the platform to try to help bring some of the technologies together. That's a longer term piece.

You seem more aggressive on this call in terms of organic product development. Two part question.

First, I assume those $15 million that you spent last year are also pulling out this year, you're not pulling back on that? But then, secondly, is this really more of a multi-year strategy to get more aggressive on the organic product side?

Yes, I think it is, Scott. And yet I'll be honest with you, we, obviously, are opportunistic and we look at this and look at where we think the greatest return can be.

Markets, whether you are acquiring public companies or private companies are rich. As we talked about, we are doing I think a much more sophisticated look at these markets with our whitespace initiatives and determining the adjacent markets that we think can be catalysts for growth on a long-term basis, trying to pick up those extra incremental growth points on our core growth.

As we go through that, Tyler has maybe almost a unique ability to build these products and prove these products and invest. Certainly, they run through the P&L and put some pressure on margins, but long term to have a seamlessly integrated product that has the broad breadth of offering that the public sector can benefit from is just simply a great opportunity for us to invest. And we did last year, as you said. We are incrementally investing that this year.

I think if you look at the very long term, these are accelerating. These are situations we're accelerating R&D headcount into these products from future years. And I still believe that curve flattens well below the overall growth rate of the Company and there will be margin opportunity there, but we won't try to achieve that prematurely at the expense of competitiveness.

We like the strategy, because it has clearly been favorable for you over the last decade.

My follow-up question is on the Australian contract deal. I believe I read a press release that said you are going to be engaging with NEC for part of the implementation. Wanted to try to understand. And I know that you are bringing your own employees over there to help with that as well.

Trying to understand, A, is their involvement. Then B, is that part of the longer term strategy as you go international that you probably have to engage with some other professional services or integrators, implementers to actually get these products live?

Yes, Scott. This is Lynn Moore. I think that's more of a case-by-case strategy. This is our first, again, it is our first foray. We are sending our people down there. We got our expertise there.

We felt it was necessary to partner with NEC for parts of this. I don't know that we are sitting here today saying that's our long-term strategy. Like I said earlier, it's most important that we get the Northern territories up and running.

We've had so much success in the United States, we've got so much credibility here that carries through down there, but getting them up and running, getting them functional, getting them live, doing all the things that we do here in the United States is what's going to put us at a competitive advantage for the rest of the opportunities there. So we will look at that as we go forward. I wouldn't say that's the long term or specific business model.

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

Brian Kinstlinger, Maxim Group.

Great. Thanks so much. A year ago -- it's a follow-up question what some people have asked. A year ago you announced increased investments in NWS and you are putting money in that to improve their products and their win rates.

Were you aware of their lower win rates when you bought them and then the $60 million or so that you are increasing it sounds like in R&D, is that enough to get the software where you needed to be, or do you think you'll have to increase investments even more in 2018?

We knew the win rates when we did the acquisition. They've probably deteriorated, these things bounce around marginally from there. That analysis for us is suggested that we should make this level of investment, so we certainly knew the win rates. We knew the market landscape. We are familiar with the competitors in that space.

It's a very competitive market space and is more fragmented than the other markets that we are in. It just less mature than the other markets we are in. That works both ways. It requires an investment and it requires great execution to gain in that space, but in terms of it working both ways, it also has a significant opportunity that comes along with it.

The win rates that we have with products like Munis and Odyssey, they simply can't go up that much because there isn't that much room left. They are already winning significant shares in the marketplace. We can broaden the footprint a little bit, we can bolt-on extensions, things we're talking about, which we are very focused on, but the public safety market it wasn't so much exactly what the market share was as the opportunity that was compelling to us that drove the decision to do that deal.

In terms of the level of investment, yes, we believe we are making the right level of investment. Obviously, there has been a lot of exchange between the leadership of that division and the corporate Executive Team in terms of determining exactly where that was. We don't want to lose the discipline that Tyler has in these areas, but we do want to be aggressive about taking advantage of the opportunities that are there. So every credible investment, whether it is feature and function, whether it's in technology, or whether it is in the integration to the other Tyler criminal justice products, all of those have funded.

I believe that our product roadmaps that are very detailed are pretty solidly in place for the next two years. So I believe that the headcount and the level investment that we are sharing with you now is pretty certain for the next two years. Obviously, years out from there, as I said more broadly earlier, I would expect that the growth and expense in R&D would level in relation to the overall growth and we start to see that leverage kick in. I think the level of investment for the next two years is pretty well-known.

Great. And then my follow-up. Again, NWS.

When you acquired them their margins were much higher than yours. Is that a function of the lack of investing in maybe they've had? Tyler has been tremendous in investing in their existing products.

And then I just wanted to make sure I heard you correctly, despite their lower win rates they are growing as fast as the Tyler business?

So their margins were higher than Tyler's blended margins, so when you look at the whole company, they were in line with some of our more mature divisions, simply because our more mature divisions are larger. Everybody runs these companies a little differently. New World was an incredibly successful company, but I would say it was being run a little tighter than we run operations.

These are somewhat subtle differences, but I would say our level of long-term investment is a little bit higher. Maybe our level of investment in some of the service deliverables is a little bit higher. If you're interest is in taking advantage of the highest growth rate you can achieve on a sustained basis, the Tyler model would suggest running it a little less tight and that's what we've done.

We look at that as we absorb the company into our model, a one-term adjustment and then we get back into a margin expansion mode and eventually get back to and hopefully above the margins they achieved. But with our objectives as a public Company and growth oriented, we are running it a little less tight than it was run.

Thank you.

Brian, from a growth-rate perspective, yes, they are growing in line with or as I said, just slightly, maybe a point above Tyler's overall growth rate in 2017. As John mentioned, their win rates are lower than some of our other Tyler products just because it is a more competitive marketplace today, there are a greater number of competitors. New World doesn't focus historically on the entire public safety market.

They really focus primarily on the mid and lower mid part of that market, so with these initiatives, including some of the things we are doing today, we are going after a much bigger public safety market. So we want to have higher win rate and in a bigger slice of the market. So they are still able to -- and it is a growing market place. Even with the win rates we are at today, we are able to grow that business, but longer term we think that opportunity for it to grow above our overall growth rate and contribute to long-term growth is significant.

Thanks so much, guys.

Kirk Materne, Evercore ISI.

Thanks very much. Maybe just to start, John, have you guys seen any major change or any incremental change rather in terms of people looking more at the cloud offering versus the on-prem? I guess I'm trying to get a sense on what you are thinking that might look like in 2017 and does that have any impact, obviously, it's positive for bookings., but does that have any impact on your revenue guidance for next year? Thanks.

The answer would be no major change. It bounces around. If you look at an individual quarter, you can see changes, but if you are tracking trailing 12-month rate, we remain in this 30%, low-30% adoption in the new market, both in terms of names and dollars. Yes, it shows up heavier in the bookings in the backlog and yes it puts pressure on short term, but being somewhat stable and I've said this for years, Tyler has the best of both worlds.

We haven't taken a big hit on margins or earnings in order to support our cloud business. They've been growing in parallel and the adoption works well for us. Our strategy doesn't have bias. If you are on-prem only or cloud only, then you are missing a significant segment of the marketplace and we are a comprehensive vertical player and want to have strong offerings in both of those channels and we do.

As you can see, we are looking at a little better than 20% growth in perpetual licenses as well as cloud. I think there really aren't a lot of companies that can not cannibalize their perpetual licenses and even grow them as they grow a nice cloud business, so we are pleased with that.

Brian, the e-filing business in 2017 versus 2016, are you still expecting a little bit of a step up on that? Can you just remind us what the assumption is for this year. Thanks.

I think for 2017 in e-filing, our expectation is mid-teens growth. Pretty similar to the kind of growth we saw in e-filing in 2016. So I think we grew roughly 15% in 2016 and it's growing somewhere around that same rate in 2017.

As you know, we have somewhat long lead times on some of these. We have a number of e-filing arrangements that we have a lot of visibility over jurisdictions that are either already committed to doing e-filing with us but won't start until some point in the future. Perhaps, when there's an existing case management implementation goes live. There are a number of those in California, for example.

Others where they are currently doing e-filing but were rolling out across the state in a phased manner. Or in places that are doing e-filing today but it is not mandatory and as they move to mandatory somewhere down the road, the volumes and the revenues will increase. So we've talked about over the next three-to-five years expecting to grow that business.

We finished with e-filing revenues in 2016 just shy of $37 million. To grow that with the visibility we have today going roughly double to around $75 million over the next four-to-five years. To get there, we would look for that than to accelerate a bit from that level and grow more in the 20% range in the 2018, 2019, 2020 timeframe. We do expect with some of the visibility we have for that growth rate to accelerate as some of these go lives happened in 2018, 2019.

Great. Thanks a lot.

Tim Klasell, Northland Securities.

Just two quick questions. One from a high level. On the international, particularly in Australia obviously courts and justice is a kick off there.

Have you thought of some of your other products like public safety? Is that something you would want to bring international to just given that might have a broader reach besides the countries that have the same language and similar legal systems, I should say, as the US, i.e., could public safety or others expand into other international markets as well?

Yes. I would say our strategy, again, this is something you just want to put on the list of these incremental growth drivers over a long period of time. Nothing explosive in the short term. Leading with courts and justice. We look at our products, everything is vertical, but some things are more vertical than others.

Those would be applications that exclusively work in the public sector. So courts and justice, public safety, tax and appraisal. Some of these applications. Those hyper vertical applications that are exclusive to the public sector versus the enterprise apps like financial and human resources and others are likely the products we would move internationally with first.

So public safety for both of those reasons, being sub-vertical as well as being related to our courts and justice offering, if it becomes established in certain markets would be a candidate for that. Right now we are obviously, very focused on the things we have been discussing on the call in terms of the current investments in those products and achieving higher market share and a broader footprint here in the states, but it certainly is a candidate down the road for international expansion.

Great. And then just a detailed question for you, Brian. On the affect of 2016-09, as we look at share count growth going forward even past at 2017, does that affect that at all or is that just a one-time step-up that we can keep the same share account growth going forward?

It is primarily -- we will see how it shakes out. I think it's primarily a one-time step-up. We think increased our share in 2016 and 2017 it increases our shares by about 1.3%. To the extent that we have a much larger stock option exercise gain it could increase that slightly, but I think it's going to be right around that rate. So I don't think it moves as much as it moves the tax rate.

Great. Thank you, very helpful.

Jonathan Ho, William Blair & Company.

Hey, guys. Let me echo my congratulations as well. I just wanted to start out with a question around your comment around the public safety market expanding by potentially four times. Can you give us a little bit more color on maybe where these will come from and maybe how quickly investments can open up that much of a market expansion?

Sure. It's two different things. We've talked about expanding the breath of the product so to include incremental products that are either part of the core sale or add-on sales over time, but the larger driver would be the size of the jurisdictions that we are competitive in. As Brian indicated earlier, New World has been mostly a mid-range player.

Not to say they haven't done smaller and larger deals, but that's been their sweet spot. And the most significant growth in the addressable market would be from being able to move up into Tier 0, Tier 1 opportunities and down as well and broaden the size of that addressable market. So this is a long-term initiative, but making progress on win rates and market share in a growing and larger footprint is our strategy.

Got it. Just as a follow-up, I know there was some noise during the quarter that was related to court case implementations. I think you have put out several press releases tied to that. I just want to verify that there was no real long-term impact to your business or win rates to the backlog.

Yes, no, there hasn't been. Obviously, it's a distraction. We've got a lot of customers. We have hundreds of implementations underway at any given time. Depending on how you measure it, 15,000 clients.

So it's a challenging business and there will be issues. Normally, Tyler does an exceptional job on execution and getting through the challenges of implementations and customer issues. These two have gotten a little hotter than what we normally experience and, unfortunately, a little more public. We don't like to resolve customer issues publicly, but I think what we've said, you can go out and read, which really is that these are issues specifically associated with those particular accounts.

We don't believe we're the direct cause of those things. We can be the solution to those issues or those accounts if they want us to be and so we are working with them to achieve those things. But, no, it has not manifested itself in any affect on our new business that we can see in any meaningful way. Obviously, there is a number of dynamics that affect every new business decision or customer situation, but it has not become a meaningful problem for us outside of those specific accounts.

Thank you.

Kevin Liu, B. Riley & Company.

Morning. I guess first question here, regarding the 70% increase in the New World Systems pipeline. Could you just elaborate a little bit on some of the factors driving that whether it's just cross-selling into your customer base, better field coverage, or maybe just larger transactions in general?

It sounds like a big number. I don't know that it is an enormous change in that market space other than to say it's healthy and it's growing. We may be more aggressive in identifying opportunities.

We are broadening that footprint probably even ahead of our capabilities to be competitive in some of those spaces. I think the data point is to establish that is a large and growing marketplace. That we have a broader look at that market then we had in the past or they had in the past and so there is a substantial opportunity there.

Got it. And I think in recent years, John you've characterized the market for Munis and other financial products as being pretty robust. How would you characterize it at present and how does that play into the guidance for the current year?

It's probably modestly higher. It has been steady, robust to some degree, not explosive. Leading indicators would suggest that's at least stable if not modestly growing.

They have done a great job in improving their win rates and their competitive position. So the challenge is, obviously, to sustain the growth rate they've had historically. Again, win rates have allowed them to continue to do that and we continue to work with those products aggressively to try to sustain that.

Great. Thanks for taking the questions.

Shane Svenpladsen, Avondale Partners.

Good morning. With respect to e-filing opportunities other than Michigan, are there any opportunities in the market right now that you are tracking?

Well, we normally wouldn't comment on the opportunities in the marketplace. We announced on this call or we've talked about on this call Maine, which includes a 10-year e-file arrangement on a fixed-fee basis. The numbers that Brian spoke of doubling the e-filing revenues in the coming four or five years really only includes things like Maine and things like other opportunities that we have high levels of visibility on.

But generally to answer your question, sure, there are opportunities out there, our expectation is that the majority of the marketplace will have paperless courthouses and e-filing and usually with a mandate on that in the coming year or so. There is incremental opportunity beyond that, but generally we wouldn't comment on specific opportunities in the new business market.

Fair enough. And then just a quick housekeeping item. What were Microsoft dynamics royalties in the quarter?

Sure. Dynamic royalties were about $432,000, and that compared to $319,000 last year's fourth quarter and then our direct royalties from our Dynamic's deals sold by us were $1.3 million.

Thanks.

Mark Schappel, Benchmark.

Good evening. Just one question here, John. In your prepared remarks, you mentioned that you are planning to invest in certain product areas where the Company doesn't have a leadership position today. I was wondering if you could just give us some indication of what some of those areas would be outside of public safety?

Yes. I guess leadership is a relative term, but for example, Odyssey's position in case management and electronic filing would be very strong and by anybody's definition a leadership position. Our presence in jail, while it could be strong in certain markets, may not be anywhere near that level of market share in leadership. So that would be an example.

It really speaks to our overall growth strategy. So we see a little lower growth rate this year. You could say that's a trend that core growth on a bigger base as we said just naturally it's going to decline over time. We are not accepting of that. This would be one of many areas where we say, hey, can we have the presence in jail that we have in case management? Can we have the presence in other areas?

An inorganic example would be an ExecuTime, obviously EnerGov a few years ago. The whole white space initiative is to find these contiguous products and market spaces that we either have a smaller footprint or smaller presence and invest in those organically or in the case of an EnerGov or an ExecuTime acquire something that we can then invest in. Really even e-file was this way with Wisnet a number of years ago now and have an incremental catalyst to growth that takes what may be a natural core growth rate of 10% or 11% and get you back in the 13%, 14%, 15% growth range. That's what that whole strategy is about.

Thank you.

Pat Walravens, JMP Securities.

Hi there. This is Matt on for Pat. Thank you very much for taking the question. I have just two.

One, could you comment a little bit on the M&A pipeline? Two, have you seen any change in the demand environment or the rate at which your prospects and customers are willing to adopt technology under the new presidential administration? Thank you.

Obviously, I wouldn't comment on a specific M&A opportunity, but generally I think I said earlier in the call, it's a rich environment right now and some of these white space initiatives that we are working on that we would love to do an acquisition on in a lot of cases is just richer than our taste. We will always be opportunistic and disciplined and so my expectations would be that it would not be a real hot market in 2017.

That can change tomorrow with one deal, as you know, but as a general observation, it's a pretty rich market and I'd probably take the under if we were trying to put a historical number out there against that. The President, we get asked about this. We've seen some notes even that could suggest less investment or spending under a Trump administration.

I'd just remind everybody that everything we do is essential to local government and it's non-discretionary, they have to do it and we don't see a lot of changes, even in timing at this point in time. So the answer to that would be, no, we haven't really seen any changes.

Great. Thank you very much.

Looks like we have no further questions. This will conclude our question-and-answer session. I would like to turn the call over to Mr. John Marr Jr. for any closing remarks.

Great, well thank you all for joining us on the call today. Appreciate all of your questions. If there are any further questions, feel free to reach out to Brian, Lynn or myself and we would be happy to work with you. Thanks again and have a great day.

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