泰勒科技 (TYL) 2017 Q4 法說會逐字稿

Hello, everyone and welcome today's Tyler Technologies Fourth Quarter and Year-end 2017 Conference Call.

Your host for today's call is John Marr, Chairman and CEO of Tyler Technologies.

(Operator Instructions) As a reminder, this conference is being recorded today, February 22, 2018.

At this time, I'd like to turn the conference call over to Mr. Marr.

Sir, please go ahead.

Thank you, Jamie.

And welcome to our fourth quarter 2017 earnings call.

With me on the call today, are Lynn Moore, our President; and Brian Miller, our Chief Financial Officer.

First, I'd like for Brian to give the safe harbor statement.

Next, Lynn will have some preliminary comments.

Then Brian will review the details of our fourth quarter results and 2018 guidance.

Then I'll have some final comments, and we'll take your questions.

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.

Lynn?

Thanks, Brian.

We are pleased with our results for the quarter, which provided a strong finish to 2017.

We returned to double-digit revenue growth for the quarter with total GAAP revenue growth of 13% and non-GAAP revenue growth of 12%.

We also achieved solid margin improvement as our non-GAAP operating margin rose 120 basis points to a new high.

License and royalties revenues also reached a new high, and exceeded $20 million for the first time ever.

Subscription revenue was once again strong, growing 26%.

Total recurring revenues for maintenance and subscriptions grew 14% and comprised 64% of total revenue.

Bookings for the quarter were very strong, up 37%.

For the year, bookings grew 15% compared to 2016, and our quarter end backlog grew 18% to just over $1.1 billion.

Bookings were robust under both our license and subscription models, but as expected, our new business mix in the fourth quarter shifted back toward a higher proportion of license deals than in the second and third quarters.

Subscriptions represented about 1/3 of the total new software contract value in the fourth quarter.

The mix was impacted somewhat by a large statewide Odyssey contract as well as seasonally strong bookings for our Public Safety solutions, which are typically on-premises license deals.

Our largest new license deal in the quarter was the statewide Odyssey Courts & Justice's software contract with the state of Kansas judicial branch, valued at approximately $21 million, including a multiyear maintenance agreement.

This represents our 14th statewide Odyssey arrangement.

Other significant on-premises license deals signed during the quarter, each with a total contract value of $1 million or more, included multiproduct arrangements with Marion County, Florida for our Munis, EnerGov and ExecuTime solutions, Norman, Oklahoma, for our Munis and Incode solutions, Fredericksburg, Virginia, for our Munis, iasWorld, EnerGov and ExecuTime solutions, and Henry County, Georgia, in the Atlanta Metropolitan area, which signed contracts valued at $3.6 million for our New World Public Safety, Brazos and SoftCode solutions, as well as our Munis and EnerGov solutions.

We had a very active quarter in the public safety market, with the highest quarterly total contract signing since we acquired New World in 2015.

Significant New World Public Safety license deals included the cities of Orlando and Tallahassee, Florida, Elk County, Pennsylvania and Clayton County, Georgia, located in the Atlanta area.

Clayton County also signed a significant license contract for our EnerGov solution and the Visalia Unified School District in California signed a major new contract for our Munis ERP solution.

Significant new SaaS contracts in the quarter included multiproduct deals for our Munis and EnerGov solutions with the cities of Wilmington, North Carolina, and Wellington and Riviera Beach in Florida.

We also signed notable SaaS arrangements with Fontana, California, and Muscogee Creek Nation in Oklahoma for our Munis ERP solution, and with Addison, Illinois, for our New World ERP solution.

Finally, we signed a 5-year, $13 million extension of our statewide e-filing contract with the state of Oregon, which is converting to a fixed fee arrangement.

Now I'd like for Brian to provide more detail on the results for the quarter and provide our annual guidance for 2018.

Thanks, Lynn.

Yesterday, Tyler Technologies reported its results for the fourth quarter ended December 31, 2017.

I'm going to provide some additional data on the quarter's performance and provide our annual guidance for 2018, then John will have some additional comments.

In our earnings release, we've 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 and amortization of acquired intangibles.

A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

We've also posted on the Investor Relation section of our website under the Financials and Annual Report tab, schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues.

GAAP revenues for the fourth quarter were $217.9 million, up 12.7%.

On a non-GAAP basis, revenues were $218.1 million, up 11.8%.

Subscription revenues for the quarter increased 26.1%.

We added 83 new subscription-based arrangements and converted 19 existing on-premises clients, representing approximately $44.4 million in total contract value.

In Q4 of last year, we added 61 new subscription-based arrangements and had 6 on-premises conversions, representing approximately $18.4 million in total contract value.

Subscription clients represented approximately 42% of the number of new software contracts in the quarter, compared to 30% in the prior year quarter, while subscription contract value comprised 33% of total new software contract value signed this quarter, compared to 19% in Q4 of last year.

The value weighted average term of new SaaS contracts this quarter was 5.8 years compared to 5.6 years in last year's fourth quarter.

Transaction-based revenues from the e-filing and online payments, which are included in subscriptions, increased 28.2% to $16.3 million from $12.7 million last year.

That amount includes e-filing revenue of $12.5 million, up 29.8% over last year.

The growth in e-filing revenues was primarily driven by the ramp up of e-filing and research solutions in Illinois.

Annualized total non-GAAP recurring revenues for the fourth quarter were $563 million, up 14.2% from last year.

Our GAAP effective tax rate was significantly impacted by the enactment of the Tax Cuts and Jobs Act signed in December, mainly due to the remeasurement of our deferred tax assets and liabilities at the new corporate tax rate, which reduced our tax provision for the year and the quarter by approximately $21.6 million, and reduced our full year tax rate by 13.4%.

In addition, our GAAP tax rate includes significant excess tax benefit from stock option exercises, which reduced our tax provision for the year by approximately $40.6 million, and reduced our full year tax rate by 25.1%.

As a very profitable company with nearly all of our operations in the U.S., we expect that our effective tax rate going forward will reflect a significant reduction as a result of the new lower federal tax rate.

Cash flow from operations was $53.4 million compared to $51.8 million last year, up 3%.

Free cash flow, which is calculated as cash from operations less CapEx, was $48.1 million, up 10.2%.

Our CapEx for the quarter was $5.3 million, including $4.9 million related to real estate, compared to total CapEx of $8.2 million in Q4 of last year.

Cash flow for the quarter was negatively impacted by the timing of milestone billings associated with certain large contracts, which resulted in a higher-than-normal level of unbilled receivables as well as by higher federal tax payments that resulted in a higher prepaid tax position at year end.

We ended the quarter with $249.7 million in cash and investments and no outstanding debt.

Day sales outstanding in accounts receivable was 94 days at December 31, 2017, compared to 93 days at December 31, 2016.

In Q4, we repurchased 2,600 shares of our common stock at an average of $169.93 per share.

For the full year 2017, we repurchased 44,496 shares of our common stock at an average of $148.62 per share.

Our backlog at the end of the quarter was a record $1.1 billion, up 17.6%.

Software-related backlog, which excludes backlog from appraisal services contracts, was $1.1 billion, an 18.4% increase.

Backlog included $279.9 million of maintenance compared to $242.7 million a year ago.

Subscription backlog was $459.2 million compared to $364.1 million last year, and includes approximately $148 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 $290 million, an increase of 36.8%.

For the trailing 12 months, bookings were approximately $1 billion, a 14.8% increase, which is a new annual high.

A new metric that we're now providing is the annual recurring revenues of new software subscriptions.

Our software subscription bookings in the fourth quarter added a total of $7.1 million in new annual recurring revenue, up 155.5% from $2.8 million last year.

For the full year, we added $24.9 million of annual recurring revenue from software subscriptions, up 61.1%.

For comparison, if all of our new subscription contracts had been under license arrangements, we estimate that they would have represented additional license bookings of approximately $7.8 million for the fourth quarter, and $33 million for the full year.

We signed 48 new contracts in the fourth quarter that included software licenses greater than $100,000, and those contracts had an average license of $468,000, compared to 57 new contracts with an average license value of $406,000 in the fourth quarter of 2016.

Our guidance for the full year of 2018, which reflects the preliminary estimated impacts of the adoption of ASC 606, effective January 1, 2018, is as follows: we expect 2018 GAAP revenues will be between $912 million and $928 million and non-GAAP revenues will be between $913 million and $929 million; we expect 2018 GAAP diluted EPS will be approximately between $3.65 and $3.75, and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate; we expect 2018 non-GAAP diluted EPS will be approximately $4.73 to $4.83.

For the year, estimated pretax noncash share-based compensation expense is expected to be approximately $49 million; we expect R&D expense for the year will be approximately $58 million to $60 million; fully diluted shares for the year are expected to be between 40.0 million and 40.5 million shares.

GAAP earnings per share assumes an estimated annual effective tax rate of 11% after discrete tax items, and includes approximately $26 million of discrete tax benefits related to share-based compensation, which may vary significantly based on the timing and volume of stock option exercises; we estimate the non-GAAP effective tax rate for 2018 will be approximately 24%.

This rate was reduced from 35% for 2017 to reflect the enactment of the Tax Cuts and Jobs Act.

This rate is based on Tyler's estimated annual GAAP income tax 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 periodically to determine whether it remains appropriate in consideration of factors, including Tyler's periodic effective tax rate calculated in accordance with GAAP, changes resulting 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 $22 million to $25 million for the year.

Total depreciation and amortization is expected to be approximately $59 million, including approximately $35 million of amortization of acquired intangibles.

The actual impact of ASC 606 is obviously subject to a number of variables and uncertainties, including the mix and timing of new contracts and specific terms contained in individual contracts.

For comparison purposes, under the prior ASC 605 basis, our guidance for 2018 would be as follows: GAAP total revenues would be expected to be in the range of $918 million to $934 million, non-GAAP total revenues would be expected to be in the range of $919 million to $935 million; GAAP diluted earnings per share would be expected to be between $3.75 and $3.85; and non-GAAP diluted earnings per share would be expected to be between $4.81 and $4.91.

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

Thank you, Brian.

This was another very strong quarter for Tyler, and we're pleased that we reached the high-end of our earnings guidance with our highest quarterly non-GAAP operating margin ever.

For the year, we exceeded the upper end of our initial guidance -- earnings guidance even as we faced a significant revenue headwind with a higher-than-expected level of subscription in our new contract mix.

Looking back at 2017, we're particularly pleased with the progress we made in the Public Safety area.

We significantly expanded our presence in the market with the New World acquisition in late 2015.

In 2016, we laid the groundwork for that business, investing in the client support organization, developing a strong roadmap for Tyler Alliance and our integrated Public Safety and Courts & Justice solution, and strengthening our sales organization and processes.

Those efforts showed tangible results in the market in 2017.

We are progressing very well with major development projects that are adding features and functionality to strengthen our competitive position and enable us to compete effectively at the upper end of the Public Safety market.

The market is viewing our strategy positively.

Although growth in our Public Safety division was well below our blended company rate in 2017, our public Safety win rates and the number of new clients added during the year more than doubled.

We also have had success in selling additional Tyler solutions, such as our Brazos e-citation solutions into the New World client base.

The Public Safety space has a number of good competitors, but we have a focused long-term strategy, and we believe Tyler has unique advantages that will enable us to continue to build momentum and accelerate growth in the coming years.

Public Safety is certainly not the only area of our business where we're investing at a high level in product development initiatives.

As we outlined at the beginning of last year, we ramped up our R&D spend on a number of projects company-wide in 2017, and R&D expense increased approximately 10% to $47.3 million in 2017.

As we've previously discussed, we have an ongoing whitespace analysis, through which, we identify gaps in our product suites and prioritize opportunities to improve the competitiveness of our products, broaden our offerings and expand our addressable market.

In many of these cases, we consider build versus buy scenarios.

While we continue to pursue strategic acquisitions, in many M&A processes, especially those that are banker led, we've seen transactions take place at valuations that are often well in excess of the levels we consider reasonable.

We always expect to pay fair prices for acquisitions, but over the years, we believe we've exercised discipline and patience when it comes to making the right decisions on acquisitions.

Our cash flow is robust and growing and will be enhanced by the reduction of our tax rate starting this year.

In addition, with the completion of the expansion of our Yarmouth office, our 2018 capital expenditures will be approximately half of the 2017 level.

Our balance sheet is extremely strong with $249.7 million in cash and investments and no debt at year end.

Against that backdrop, we have identified a number of internal development projects that we believe offer high potential to help drive growth and achieve our product objectives, and we've made the decision to incrementally increase our discretionary investments in internal product development.

As Brian noted in our guidance, we plan to increase our R&D expense by 23% to 27% in 2018, to a total of between $58 million and $60 million.

While the incremental spend is small relative to our cash flow, all of our software development is expensed.

So the short-term earnings effect is more meaningful.

These new discretionary investments span our product suites, including ERP, planning, regulatory and maintenance, Courts and Public Safety.

Some of these projects will add features, functionality and technology to enhance our current products and improve our competitive positions.

Other projects will broaden our offering with new products that will drive new revenue streams.

In addition, we are adding resources to our enterprise development group, which focuses on Tyler-wide development initiatives that further our connected communities vision.

Our singular focus on the public sector helped -- having a deep understanding of our market, anticipating client needs and innovating through long-term visions, such as connected communities, have been Tyler's strength for many years.

And we're confident in our ability to continue to make both organic and external investments that will further our strategy and drive long-term success.

We have a solid plan for 2018.

There is some noise around the numbers with accounting changes from ASC 606.

Looking at our 2018 guidance under ASC 605 accounting comparable to 2017, our non-GAAP revenue growth is just over 10% at the midpoint of our range, and our GAAP EPS growth at the midpoint under 605 is 24%.

We look forward to building on our fourth quarter with an acceleration in revenues and earnings growth, while ramping our R&D investments to drive future growth.

Now, Jamie, we'll take questions.

(Operator Instructions) And our first question today comes from Kirk from Evercore ISI.

John, I guess the first question I have is for you, just on the R&D increase, it seems like it's somewhat opportunistic for you guys, sort of -- trying to take advantage of your position of the market and the fact that things are going well.

But I'm just kind of curious, is this the new sort of norm, this level of spend on an absolute dollar basis?

And should -- after we uplevel this year, should that sort of -- should the incremental growth on R&D sort of normalize back to be in line with revenue or potentially slower than revenue growth as we think about 2019?

It's a great question, Kirk.

And it's kind of hard to answer just because we don't want to handcuff ourselves going forward.

I appreciate that now, for a couple of years, we've talked about incremental R&D spend, that's discretionary and widens the moat in terms of our leadership position, and at the same time, identifies some new opportunities and broadens our addressable market.

That happened last year and we're reinforcing and maybe even raising the bar a little bit this year.

I generally believe what we're doing is moving investments that could happen over a longer period of time forward.

And adding heads, we certainly added a lot of heads last year at Public Safety that could've been done over a longer period of time, but we felt we were in a position to make those investments and we felt they were important to do.

In this year, we'll identify similar opportunities across the suite of applications that we think are very good investments for us to make.

You combine that with looking at the market today and, as you said, being opportunistic.

We're not buying a lot of our stock back, we're not doing a lot of M&A, that certainly could change at any time, but we're in a very strong position to make these investments and we think it's the right thing to do.

It would be my expectation that again, these are moving headcount and investments forward and will create some lumpiness in the R&D spend and that we'll grow into it and we'll achieve the same margins that we've always expected to.

But I'd be cautious because if we see great opportunities in the future that we believe deserve funding, then we'll fund them.

So again, it's a very good question, and we'll certainly be as transparent as we can be going forward.

We certainly see higher margins and we believe they're completely available to us today, but we think these are the right investment levels for Tyler to have at this point in time.

Okay.

And then for Brian, how should we think about the tax -- the lower tax rates against sort of your cash flow?

Meaning, are there any -- obviously, the EPS is going up based on a lower sort of non-GAAP tax rate.

Does that flow directly through to the cash flow number?

I guess, I'm just want to get a sense on how we should think about sort of operating cash flow growth next year?

Yes, the reduction in the tax rate generally does flow through to cash taxes.

So that starting point of going down from roughly 35% to 24% before the discrete items from stock option exercises, which is a less predictable number but also a cash number, should flow right down to our cash tax provision as well.

Okay.

So should I think about operating cash flow growing roughly in the same range as EPS next year?

Is that a fair way or a decent starting point?

Yes, I'd say that's a pretty decent starting point.

Our next question comes from Brian Kinstlinger from Maxim Group.

Can you talk about your top 2 or 3 priorities in terms of product set that you plan to deploy the increased R&D budget?

This year, Brian, different than -- last year I would've answered Public Safety, obviously.

That we elevated that specifically, and the elevation there was disproportionate to other areas.

Although there were, again, a number of discretionary heads added across the other areas as well.

This year, it's broader.

So I can't give you 2 or 3 that stand out.

It's definitely spread out across most of our primary applications.

There's a fair amount happening at Munis, and those are across the board.

[These] functions, technology and innovation really all across the board.

So there aren't 1 or 2 lead projects.

It's really a distribution of heads across the different applications that we think all make sense.

Great.

And then my second question is, you mentioned bookings for Public Safety were the strongest since acquiring New World, and that I think you doubled the number of client wins and your win rate?

So how far along are you in the process of improving the competitive positioning, being able to bid on larger contracts and having a more consistent win rate as opposed to maybe this is 1 quarter, maybe 2 quarters, of solid wins?

The first result is improved win rates in the traditional market, and we've already seen that.

They actually are pretty consistent win rates.

It's really been about 3 quarters now that we're seeing something in the -- 50% to 100% improvement in the win rates, and so that's -- we're cautious to believe whether or not that's sustainable but certainly, those results are very encouraging.

The second phase of that is to broaden the addressable market space, namely moving up into larger jurisdictions, and that's a process.

You don't -- we don't all of a sudden set the bar at jurisdictions that are several times the size of what we've traditionally been competitive.

We will gradually grow into that space, and that's happening.

I think we'll see -- you'll never know for certain which deals you would've or not would've won historically, but I think we'll see deals in the first half of this year that will reflect a more competitive position in the larger jurisdictions.

Our next question comes from Alex Zukin from Piper Jaffray.

First, a couple question just on the guidance.

Kind of on the same track as the previous question.

For Public Safety, can you talk about what your guidance for 2018 implies for growth in that business versus the corporate average?

And kind of compare that to 2017 as well?

It will again be modestly below the blended Tyler rate.

So the win rates experienced in the marketplace are still somewhat leading indicators, but those manifesting themselves in the P&L to back it up are still a little ways out.

So we anticipate that Public Safety's actual recognized revenue this year will again be modestly below the overall Tyler blended rate.

Alex, this is Lynn.

And just to supplement that.

I think there were still some headwinds coming out of the acquisition that are being overcome by -- that have been overcome by our Public Safety division.

And I think that you see that sort of has an impact as well on the slightly below Tyler rate.

But we expect that in the future to catch up and accelerate and be in line or actually help drive the new growth rate going forward.

And I guess, what type of indicators are you guys looking for?

Because you're talking about over the next couple of years for this rate to be well ahead potentially of the corporate average.

So what do you need to see or has anything changed over the last 3 to 6 months to kind of influence of that opinion?

Well, it takes a while.

It's taking -- probably -- we're probably looking at 3 years by the time we're done from the beginning, so through this year, for things to kind of settle out.

So when we got the company, churn rates were higher and they don't stop overnight, they're coming down.

Tyler generally experiences almost 0, very, very low churn.

So that's an initiative that has to settle out and is, is improved on.

Winning this business and improving backlog to work from is happening.

Again, that leading indicator is reinforced by their experience in the marketplace.

And the last thing to happen is it actually shows up in the financial results.

And I think we're looking at later this year and early next year, we'll start to see their overall top line growth rate accelerate to and then beyond Tyler's overall rate, and I think that will drive higher margins.

Their margins are lower now than when we acquired them based on these discretionary investments that we're making.

And we think they'll go back to where they were over the next 12 months to 18 months, certainly.

Got it.

And then the other item around guidance.

Could you give us a sense for -- given the mix shift to subscription in 2017, was a bit ahead of your expectations.

Can you talk about how you're handicapping that for 2018?

Do you feel like you need to take a more conservative approach to this, given just the dynamics in the industry of the drive to cloud?

Kind of help us get a sense of how you're thinking about that?

Yes, I think our -- we've definitely taken that in account in our planning process.

The mix doesn't impact each of our business lines equally.

We have lines of businesses that [aren't] POC, so that doesn't impact it.

But in our larger areas, in Munis, we certainly budgeted in a higher than traditional adoption rate, I wouldn't say it's meaningfully higher, but it's certainly higher and that's to add a little more conservatism to our plan.

And Alex, this is Brian.

Clearly, as we've talked about a number of times, the mix is lumpy.

And it varies quite a bit from quarter-to-quarter and year-to-year.

It's also interesting to note that for 2017, the mix between licenses and subscription in new deals based on dollar volume, 63% licensed, 37% subscription, was exactly the same as it was in 2015.

So over that 3-year period, it's shaking out to be the same.

We do expect that over the long term, there will be more of a shift, but are -- at the midpoint of our guidance assumes a fairly similar mix to what we saw in 2017.

And as you've seen, we've widened the range a bit on our guidance, which also gives us a little more room to accommodate the various outcomes that we could see.

Got it.

And then just the last one for me, and this is a bigger picture question.

But John, given the breadth of the portfolio increasing, given the incremental investments you're making in R&D.

Could you -- I mean, we're not looking for long-term guide here, just give me kind of your comfort level for a time horizon that you anticipate being able to maintain double-digit revenue growth, is this something you think you could do over the next 5 to 10 years, or is it something that could start to dip a little bit over the next couple of years?

Just trying to get a sense of that long-term durability.

Well certainly, all those things could happen.

We dipped down this past year just below the double-digit level for the year.

We're pleased that in the fourth quarter, we comfortably got back into double digits.

As we said on the call, the midpoint of our guidance for this year is a little bit above 10%.

We believe that the investments we're making and the things we're doing are helping the curve that back up and everything we're doing, these investments we're making and everything we're doing in the marketplace is to bend that curve back up and get it comfortably above 10% again.

And all indications to us are that, that's very reasonable.

I don't know for certain where the growth rate will be 3 years from now, but we think we kind of have this core growth rate, just the way the company works.

If you take nearly 0 attrition, and you take price increases and you take the tail of the on-premise sales we sell and the contribution to recurring revenues there.

If you take the deals we know about on the e-file horizon, there are already customers.

You look at the SaaS business and those run rates.

That kind of puts out about an 8% or 9% growth rate for the overall company.

And so I think that's -- absent any major change in the industry or in our position in the industry, is kind of core growth rate is the way we look at it.

So these incremental investments and these things we're doing, which are a big focus of ours, and where we're spending a lot of the discretionary money we're spending are all about adding that other 2%, 3%, 4% that gets you to the traditional growth levels where we know our model works very, very well.

We believe that we're doing those things that will make that happen, and so we think -- I don't know, about 10 years.

But I think as you look over the next 5 years, that we have a very reasonable likelihood to perform in that area.

Our next question comes from Jonathan Ho from William Blair & Company.

Just wanted to start out with maybe some thoughts around what you're seeing in the pipeline of opportunity for 2018, and just your general feel for the environment?

And whether that is maybe having an impact in terms of your desire to make those additional investments?

Sure, Jonathan.

The pipeline on the markets -- behaved very, very well.

The deals are robust and yes, we certainly believe that making these investments will be received well by a good marketplace that has the capacity to reward us for that.

Having said that, we've invested through challenging times before.

I mean, some of the best investments we've made historically were during the 2009, 2010 weakness in the market because a lot of our competitors didn't, and they looked at it the other way and said this is a soft market, why would we want to be investing at this level, and when we came out of that time, we experienced a couple of very high double-digit growth years catching up on the business that had been deferred.

So I do think the market's strong right now and I do think we won't have to be patient to get a return on these investments.

But really, Tyler, historically, has invested in these products throughout up and down markets, and I think that's worked well for us.

Got it.

And then just as a follow-up, can you talk a little bit about sort of the competitive landscape, and are you seeing any shifts there, particularly around the Public Safety markets?

There aren't any significant shifts.

We said in the prepared remarks, that's a good marketplace.

There are strong competitors there.

No markets are easy and I think sometimes, when we achieve high market share, people think it might be a little less challenging than it is.

There are certainly good competitors across the board in this marketplace.

And while we get good results, we fight pretty hard to get them and nothing's to be taken for granted.

Public Safety though, I would say, what happened in tax, what happened in courts where we really became a dominant leader in a pretty short period of time, is less likely to happen there in that shorter period of time.

As we said, we believe Tyler has some unique advantages, and we know we'll invest and execute over the long term, and ultimately, we'll be rewarded with a strong leadership position.

But there's strong players in that space and they're not just going to turn away, so I think this would be a long process to continue to improve our position in that marketplace.

Our next question comes from Scott Berg from Needham & Company.

My first question, Brian, is for you around cash flows.

If you look at your operating cash flow margins, they're actually down a little bit year-over-year versus '16, and it looks like it's all working capital-related.

But does some of that kind of unwind here in '18?

Or will these be maybe slightly compressed from what we've historically seen?

No, I think the factors that we pointed to earlier, the increase in the receivables, much of that unbilled, related to billings -- milestone-based billings on some larger projects that we have going on, the timing of those, and the prepayment in taxes before we really knew what the level of option benefit we would get in Q4 was.

Both of those really turned around on 2018.

And as we've also stated, a much lower CapEx in 2018, roughly half the level they were this year.

So I think that the cash flow margins do improve in 2018.

Got it.

And then my follow-up for either, John and Lynn is, you guys have kind of talked all year about the success you've had in the Public Safety area and there have been plenty of questions asked about it today.

But you guys unrolled a new theme around connected communities at your conference last year, and I've been enamored with it because I get the long-term vision of how product come together, I get the R&D investments and how that will drive that.

But are customers understanding what that vision looks like, was that actually impacting the better win rates across your products last year?

Yes, Scott.

I think, customers definitely do see the value in that, we've certainly rolled it out at our user conferences.

There's a lot of excitement around it.

As we said before, it's a long-term process.

I don't know if that specifically has impacted win rates to date.

I do expect that it's going to impact win rates going forward.

Whether or not one jurisdiction and its neighboring jurisdiction and their options are between Tyler and another product, and we're in the next jurisdiction and the benefits that those 2 will bring if they go with Tyler and they can be connected, both through Public Safety and then from their court systems.

That's the value that we can bring that nobody else can.

We're actively working on that.

We talk about it, I don't know that we've specifically seen that as the driver in the win rates.

I think the driver in our win rates really has been the focus we've done so far, as we talked about in the prepared comments, of shoring up the customer reach -- references, doing things on the customer side, as John mentioned, to eliminate some of the churn, all the product investment, the new features and functionality.

I think that, coupled with the strength of Tyler behind it, the vision of Tyler Alliances, is creating excitement around Public Safety, and I do think that, over the next few years, that's going to help be the deciding factor in a number of deals is this Tyler Alliance vision that you're also excited about.

There's also -- always a number of things that affects the decisions.

So it will always be hard to isolate the primary reasons.

So we certainly think that contributes to our position in the marketplace but I would say tangibly, what we're seeing are a lot of multi-Tyler suite applications.

A lot of the names that Lynn referred to in the remarks were multi-suite applications, Munis and EnerGov, Munis and Muni-court and then starting to see Public Safety and Odyssey deals.

And no question, people see the incremental value to 1 Tyler application to another based on our more comprehensive vision.

Our next question comes from Brent Bracelin from KeyBanc Capital Markets.

The question I had was -- wanted to circle back to the subscription business.

If I just look at kind of revenue mix, it's the biggest 1-year increase in revenue mix from 19% to 20% of the mix now since 2014.

I think it's now 42% of software backlog.

So as you think about that mix shift this year, is there a preference within local government where you are starting to see this shift slowly increase more?

Or is there a dynamic here where you're including e-filing revenue in that subscription mix, that just the e-filing growth is the bigger factor driving a mix shift on the subscription side?

And I have one follow up.

It's definitely broader than e-filing.

Munis, this past year, had a much higher mix.

Not only a higher mix in names, the average value of SaaS deals was up significantly.

So it's pretty broad and it's crept up into the higher size deals.

That may be the biggest change from previous years is the average deal size was significantly higher.

So I think it's fair to say that it's not surprising.

Government's a little later to adopt this type of delivery than other industries, and I think it's moved for real and to stay.

I'm not sure it didn't get a little ahead of itself in the middle of this past year, and maybe it will settle down a little bit before it accelerates again.

But I think what we've expected, a long-term gradual shift is exactly what we're experiencing.

Got it.

So there's still some volatility around the mix trends, but net-net, it does sound like that large deal shift seems to be the biggest kind of change you're seeing now versus maybe a couple years ago, you weren't seeing that.

As a follow-up to that, on the maintenance side, Brian.

We saw maintenance growth slowed down to 9% year-over-year, I think that's the lowest growth rate in maintenance since we've seen at the end of '13, early '14.

What are the drivers there to reaccelerate maintenance?

Are there some price increases you can kind of flow through?

Obviously, as you see the mix shift to subscription, you no longer get the incremental benefit of maintenance.

So just trying to think about how we should level set the maintenance growth profile over the next couple of years in a environment where you are seeing a mix shift to cloud.

Sure.

While clearly, that mix shift does affect the maintenance line, it certainly more than offset on the subscription line, but it's a combination of more of the new business coming in the cloud and so, again, more of that on the subscription line and less new maintenance, as well as the flips or the conversions that we have.

And those continue at a steady but pretty strong pace of the number of customers each quarter that are currently on-premises, paying maintenance that moved to our subscription model and moved to the subscription line.

Typically, at 2x what they were paying in maintenance but it does have a negative effect on the maintenance line.

So those 2 things together are really what have slowed the maintenance growth, and I think, again, based on the kind of current mix, that 7.5%, 8% growth in maintenance is sort of the -- what you should expect.

We do get annual maintenance increases and we work very hard to be very consistent with those and to provide significant value associated with those annual maintenance increases through our evergreen model, and that hasn't really changed.

So we're not seeing really a difference in the way we're pricing maintenance increases.

And our attrition remains a very, very low on the maintenance side.

So no real changes there, it's really more just the mix of new business that's driving the lower maintenance growth.

Got it.

So as we think about maybe some downward pressure on the maintenance growth profile over the next few years, maybe the metric we need to look at is maintenance plus subscription growth rate?

I think you referenced that as what, growing 14%?

So that's probably the better proxy to look at on a blended basis going forward?

Yes, I would say so.

We are -- you've always been able to add the numbers up, but we're kind of pointing towards that metric and giving the annualized -- referring to the annualized recurring revenues of those 2 combined, as something you ought to look at.

Our next question comes from Mark Schappel from Benchmark.

Brian, first question for you.

I have another question on the product mix in Q4.

Was the -- the shift to subscriptions, was this driven by just market preferences in your view?

Or were there some internal policy or sales incentives that were being offered?

It's really market-driven.

Generally, sales reps are compensated very similarly for the same deal whether it's a subscription or a license deal.

And our pricing structure has not changed, so we really haven't changed the pricing to try to drive new customers to 1 model or the other.

And I'd say that to the extent that we are able to do that, we would have a preference towards the subscription model, but we do believe that in most cases, we have a fairly limited ability to push that new customer one way or the other.

So it's really primarily market-driven.

Great.

And John, as a follow up.

Any update on the success you're having with respect to the relatively new online dispute resolution solution?

Lynn is closer to that, I'll let him take that.

Yes, Mark, as you know, it's a pretty small acquisition, but it's an acquisition that we think has a lot of interest around the country, and we've already had significant interest in our client base.

We've had a number of jurisdictions who have agreed to sign up for some pilot -- court systems.

We've agreed to some pricing on that.

I think it's something that -- it does have excitement, like a lot of things that we do, it's going to take some time, it's going to take some time for those revenues to build and grow, but we're looking at something that is part of transforming the way justice is done, certainly, at certain levels of justice, I think it's a new efficient way.

And I think particularly some of our larger, more progressive clients are ready to embrace this and roll it out.

So it's going well, but like everything else, it's slow, I don't expect significant or meaningful revenues in the near term but over the long term, like a lot of our growth initiatives, we expect that it's going to add significant revenues at a little higher rate and add incremental growth to Tyler.

Our next question comes from Peter Heckmann from D.A. Davidson.

Brian, could you just give us a quick update, I know it's a small number, but Microsoft royalties recognized in revenue this year?

And then any anticipation of a material change in that relationship in 2018?

Sure.

Revenues were relatively flat this year, and as we've seen, it's not really a material number.

But our total royalties for the year, not including our direct channel, were $3.7 million.

Last year, they were $3.4 million.

So not a big movement there.

I think I'll let Lynn speak to the relationship and any changes there, although there haven't really been any significant ones lately.

Yes, there's no real significant change.

Royalties, I think, they've increased in the fourth quarter.

Our relationship with Microsoft is still good, and I'd say there's no material change at this point.

Okay.

And then if we could maybe let me shift gears to the statewide deals or e-filing.

Congratulations on Kansas, looks like there's some others in the queue.

Can you talk about how many states have now made an award for an e-filing project?

How many of those has Tyler won?

And in the few cases where you've lost, whether there may be some particular issue around technology or anything else that may have pushed the decision away from Tyler?

There are really -- there's a lot of different categories there, so there's not a short answer.

There are mandatory statewide deals, those are obviously the ones that are fully up the scale, and we can see there's good visibility on the numbers, whether they are click-based or fixed contract based on click, and then there's others that it's part of the contract, but they're not fully online yet.

But generally, our expectation is that all of our existing significant clients will have e-file, and some of them will come up with mandatory and we'll see the spike right off the bat, and we like those obviously, and some will take time as we have to drive adoption rates over the long term.

I think we've really only lost 1 significant deal at that level, say, in the last 5 years.

So our position's very strong, and you're going to occasionally lose a deal based on relationships, or pricing, or things that we can change our model to embrace without jeopardizing our overall strategy.

So very few losses and again, only one comes to mind that would have been significant.

And we have a presence in e-filing in 16 states.

And I believe all but 4 of those are statewide systems.

California, Georgia, Ohio, we do not have statewide, it's a county by county presence we have there.

Great, that's great.

And just last follow-up on e-filing, do you see any increase in the tendency or preference on the part of states or counties to move towards fixed fee rather than a transaction fee for e-filing?

I guess so.

We've seen a few of them who have done it, so people know it's an option.

I would stress that you don't want to over emphasize the difference because they're just looking for better visibility -- and something -- we know that governments have to budget, and that's what they're looking for.

So it really though is just doing the math and putting a number to it that is within the mid-range of what would occur.

So we're a subscription based and pretty much a click-based organization on that and that's our model.

But if somebody says, "hey, look, we've got a lot of history here, we can see, we know the range is this.

Let's negotiate something that's fair to both sides," obviously we would be a good partner and do that.

But, yes, we have seen more people take us up on that and it gives better visibility to the client and to us.

Our next question comes from Kevin Liu from B. Riley FBR.

Just a quick follow-up to that last question.

So for the deals that -- on e-file that you have seen move more to fixed fee, has that generally been with your annual terms fairly flattish relative to what you were doing on a click basis?

Or do you see any sort of increase or decrease in that rate?

Generally, it's very, very close.

Yes, unless their experience changes dramatically, it's relatively flat.

Now renewals are good for us because we have a lot of cost, bringing up the initial engagement and a lot of that's been recovered.

So flat renewals are not necessarily a bad thing for us.

And then just one other question, you talked about the research product you introduced last quarter.

Any sense for how traction for that is building within the marketplace?

And what's been your expense in terms of how much of an uplift you think you can get from an e-file customer if they adopt that?

I don't think we have enough data points yet to sort of point to where that uplift is going to go.

We're still at the stage where we're rolling this out and there's excitement in terms of for example, Illinois, where we announced it in terms of being fully turned on and fully utilized.

We haven't hit that yet.

So that's something that were going to watch over time, and there is some interest, we talked before about other states are interested in this product and we think that it's a good driver.

But we don't have enough data points yet to sort of give you more guidance on that.

(Operator Instructions) Our next question comes from Tim Klasell from Northland Securities.

This is Tyler Wood on for Tim.

How does the backlog duration look?

And then going into 2018, will this be converting into revenue at a different rate than what we've seen previously?

Yes.

As we've pointed out over the years, the percentage of our backlog, although continues to grow significantly, there is more and more long-term backlog in that number, with more subscription arrangements, which are typically, I think we said 5.8 years in duration in -- new bookings this year, and the multiyear e-filing arrangements, all of those things, and as well as some of the large software deals that are multiyear implementations.

So that percentage of backlog to be delivered, even though the dollars to be delivered in the next year coming out of backlog are larger, the percentage is smaller.

So at year end, it's right at 52% of our backlog, of that $1.1 billion is expected to be delivered in the next 12 months and the balance to be delivered over as long as -- the next 7 years, in some cases.

And that's come down over the last few years, so last year, going into 2017, it was 61% of our backlog was expected to be delivered in the next 12 months.

And so there is much more long-term visibility in the existing backlog.

Ladies and gentlemen, at this time, there appear to be no further questions.

Mr. Marr, I'll turn the call back over to you for closing remarks.

Well, thank you, Jamie, and thank you all for joining us on the call today.

If you have any additional questions, feel free to reach out to Brian, Lynn or myself.

Have a great day.

And ladies and gentlemen, with that, we'll conclude today's conference call.

We do thank you for attending.

You may now disconnect your lines.