John Marr - President and Chief Executive Officer Brian Miller - Chief Financial Officer.

Alex Zukin - Stephens Jonathan Ho - William Blair Kevin Liu - B. Riley & Company.

Hello and welcome to today’s Tyler Technologies’ First Quarter 2015 Conference Call. Your host for today’s call is John Marr, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

And as a reminder, this conference call is being recorded today, April 23, 2015. I would like to turn the conference call over to Mr. Marr. Sir, please go ahead..

Thank you, Jamie and welcome to our first quarter 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I would like for Brian to give the Safe Harbor statement. Next, I will have some preliminary comments.

Brian will review the details of our first quarter operating results and 2015 guidance, then I will have some final comments and we will take your questions.

Brian?.

Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information that 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 the 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. Also, please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.

John?.

Thanks, Brian. Our first quarter financial performance built upon a strong year in 2014. From an historical perspective, this was our sixth straight quarter of revenue growth greater than 15%. Software license and royalty revenues were up 27% and at $14.3 million were the highest in company history.

Our 23% growth in recurring revenues from subscription reflects continued growth in our e-filing revenues from courts as well as a continuing gradual shift toward cloud-based software-as-a-service business. We had another very solid quarter for bookings, which were up 22%. On a trailing 12-month basis, bookings increased 13%.

However, bookings were up 31%, with the Texas e-filing contract considered on a comparable basis to other transaction-based e-filing arrangements. We continue to sign more multi-suite agreements for integrated Tyler solutions.

In the first quarter, we signed two such agreements, which included our Munis ERP, Incode court case management and EnerGov planning regulatory and maintenance solutions. With Bristol, Tennessee, we have signed a 7-year SaaS agreement in the town of Addison, Texas in the Dallas metropolitan area.

In Courts & Justice for our Odyssey court case management solution, we signed agreements with the Superior Court of California, County of San Mateo. The County of San Mateo chose Odyssey in 2014 for criminal and juvenile delinquency cases.

And based on its positive experience has now added Odyssey throughout its traffic, civil, family law, probate, small claims, adoption and juvenile dependency divisions. Other notable agreements for Odyssey included Brazos County, Texas, a former MCAD client, and a SaaS agreement with the Texas counties of Harrison and Chambers.

In our e-filing business, Fulton County became the 11th and largest metro Atlanta County to select our Odyssey eFile Georgia solution. Each county in Georgia can independently propose mandatory e-filing requirements. Fulton County is the first to do so with mandatory e-filing for all civil cases in state courts starting on June 1, 2015.

Gwinnett County and the Metropolitan Court Clerks Association also selected our eFile Georgia solution in the quarter. We announced an enhanced product suite for our EnerGov planning, regulatory and maintenance solution.

The public maintenance management suite offers modules for asset management, work order and maintenance management, request management, inspections and investigations and inventory management.

It can configure automated task, spatially mapped assets and affiliate them to designated sources, and track information to assure assets and costs are accurate. Our EnerGov product continues to gain momentum in the marketplace.

In addition to the multi-suite agreements with other Tyler products, we signed new EnerGov contracts in Q1 with Miami-Dade County, Florida, a SaaS agreement with Tustin, California. In appraisal and tax, the Dallas Central Appraisal District of Dallas County, Texas, signed an agreement for mass appraisal services using Tyler Verify.

Significant first quarter contracts for our Munis ERP solution included agreements with Pinellas Park, Florida and Bend, Oregon and a SaaS arrangement with big county schools in Georgia.

Major contracts for our iasWorld appraisal and tax solution include Lake County of Ohio and Erie County, Pennsylvania as well as a SaaS agreement with Chatham County, Georgia. Now I would like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2015..

Thanks John. Yesterday, Tyler Technologies reported its results for the first quarter ended March 31, 2015. I am going to provide additional data on the quarter’s performance and review our guidance for 2015. Then we will move on to John’s comments on the current quarter and our outlook for 2015.

In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with the peers in the software industry. Our non-GAAP earnings exclude share-based compensation expense, the employer portion of the 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. Revenues for the first quarter were $135 million, up 19.8% with 19.2% organic growth. Software license and royalty revenues increased 27.3% and this was the ninth consecutive quarter of double-digit growth in licenses.

In Q1, we received $850,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs, up from $659,000 a year ago. Subscriptions increased 23.3%.

We added 32 new subscription-based arrangements and converted 19 existing on-premises clients, representing approximately $22.2 million in total contract value, which was more than three times the total SaaS contract value of approximately $7.2 million in the first quarter of 2014.

In Q1 of last year, we added 32 new subscription-based arrangements and had 15 on-premises conversions. SaaS clients represented approximately 28% of our new software clients in the quarter compared to 27% in the prior year quarter.

Q1 2015 SaaS contract value represented 43% of the total contract value signed compared to 17% in Q1 of 2014 The fastest growing subscription-based revenue stream is from e-filing for courts and online payments. These revenues increased 28.5% to $9.6 million from $7.5 million last year.

Total e-filing revenue of $7.3 million this quarter grew 30.4% over last year, with 55% of that increase related to our Texas e-filing contract, which contributed $4.8 million of revenues this quarter.

Our blended gross margin for the quarter improved 70 basis points to 47.3%, mainly due to strong license and royalty revenue growth and leverage in our recurring revenues. Our non-GAAP gross margin also rose by 70 basis points to 48.2%.

SG&A expense increased 12.5% in the quarter and was 21.1% of total revenues, a decrease of 140 basis points from last year’s first quarter. Excluding non-cash share-based compensation expense, SG&A expense increased 11.5%, well below revenue growth of 19.8% for the quarter. Operating income was $27.2 million, an increase of 36.8%.

Non-GAAP operating income was $33.1 million, up 32.7%. The non-GAAP operating margin improved 230 basis points to 24.5%, as we obtained substantial leverage for both SG&A and R&D expenses. Net income rose 45.4% to $17.3 million or $0.48 per diluted share. The fully diluted share count increased by approximately 395,000 shares.

Our effective tax rate was 36.9% and benefited from a higher qualified manufacturing activities deduction. It is likely that our effective tax rate will rise during the year, if stock option exercises generate significant excess tax benefits that limit this deduction.

Free cash flow was negative $4 million compared to $12.9 million in last year’s first quarter. The comparison to last year’s first quarter cash flow was impacted by the timing of maintenance billings in the fourth quarter of 2014, which accelerated some cash receipts into Q4 that would have otherwise been in this quarter’s cash flow.

Cash payments for accrued incentive compensation and cash tax payments were also higher in this year’s first quarter than last year. In last year’s first quarter, it included unusually large cash collections related to milestone billings on certain contracts.

Day sales outstanding in accounts receivable were 71 days at March 31, 2015 compared to 66 days at March 31, 2014. DSOs decreased sequentially from 80 days at December 31, which is our normal seasonal trend related to the timing of maintenance billings. Our backlog at the end of the quarter was $689.6 million, up 27.6% from last year’s Q1.

Software-related backlog, which excludes backlog from appraisal services contracts, was $633.4 million, a 24.5% increase. Backlog included $137.9 million of maintenance compared to $117 million a year ago.

Subscription backlog was $208.4 million compared to $183.2 million last year and included approximately $46.6 million related to the Texas e-filing contract. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were $123 million, up 21.9% from last year’s first quarter.

We have previously discussed how our bookings are often somewhat lumpy from quarter-to-quarter, especially with respect to large contracts for which revenues are often recognized over several quarters or even years. For the 12 months ended March 31, bookings rose 13.4% over the prior 12-month period.

These bookings include the contract for statewide e-filing in Texas, which was signed in the third quarter of 2013. This is currently our only e-filing arrangement that was included in bookings and backlog at signing as it is our only fixed price e-filing arrangement.

Excluding backlog, but including revenues from eFile Texas, which puts the contract on a comparable basis to other e-filing arrangements, bookings for the trailing 12 months, rose 30.6%. Other than the Texas contract, bookings did not fully reflect the true long-term value of new transaction-based contracts for e-filing or online payments.

Revenue from these arrangements is recorded on a per filing or per transaction basis. And even though the volumes and future revenue streams maybe very predictable, we did not include future revenues in bookings and backlog, because they are dependent on those transactions occurring.

Only the current quarter revenues from those arrangements are included in bookings as they are recorded. Therefore, current bookings and backlog do not capture the future revenue stream from those arrangements. We added three new transaction-based e-filing contracts in the third – in the first quarter.

We signed 27 new contracts in the quarter that included software licenses greater than $100,000 and those contracts had an average license of $336,000 compared to 22 new contracts with an average license value of $451,000 in the first quarter of 2014.

Our total headcount grew by 78 to 2,934 employees at the end of the first quarter compared to 2,856 at the end of the fourth quarter. Based on our first quarter performance and our outlook for the balance of the year, we have raised our earnings guidance for 2015 from our initial guidance in February.

We currently expect 2015 revenues will be between $568 million and $575 million. We expect 2015 diluted GAAP EPS will be approximately $1.93 to $2.01. We expect this – that 2015 non-GAAP diluted EPS will be approximately $2.46 to $2.54.

For the year, estimated non-cash share-based compensation expense is expected to be approximately $19.5 million to $20 million. Fully diluted shares for the year are expected to be between 36 million and 37 million shares. We estimate an annual effective tax rate for 2015 between 37.5% and 38.5%.

The tax rate and share count each are affected by the timing and volume of stock option exercises throughout the year. We expect our total capital expenditures will be approximately $13.5 million to $14.5 million for the year.

Total depreciation and amortization is expected to be between approximately $15.5 million and $16.5 million, including approximately $6.5 million of amortization of acquired intangibles. Now, I would like to turn the call back over to John for his further comments..

Thanks, Brian. Market conditions in the first quarter generally continued the trends we saw throughout 2014 and activity in local government marketplace is normal. Our bookings and revenue growth are clearly well in excess of market rates as we continue to gain market share and expand our market leadership.

Our competitive position remains very strong across all our major product suites and win rates are high, reflecting both our long-term commitment to product development and our consistently high level of execution on our engagements.

We are especially pleased with the level of growth in software license revenues even while expanding our SaaS client base. We signed record high dollar volume of new SaaS contracts in Q4 and followed that in the first quarter with another strong quarter of SaaS bookings, more than tripled the level over a year ago.

While we expect that over time the percentage of new clients choosing a SaaS offering will expand, the mix of on-premise SaaS business varies from quarter-to-quarter. Last quarter, we announced that we would not be extending our current R&D arrangement for the Microsoft Dynamics AX product.

While this marks the end of the initial development arrangement with Microsoft, we have been working closely with their leadership team to create a relationship that better reflects the value Tyler brings to this product.

While details are still being finalized, we continue to expect a reduced R&D role with a stronger emphasis on the go to market side, assisting partners and leveraging our experience with sales and service channels in the public sector. As this quarter results show, sales for Dynamics are trending in the right direction and we expect this to continue.

Finally, we are looking forward to hosting some 2,800 Tyler clients at Connect 2015, our annual user conference being held May 3 through May 6 in Atlanta. At the conference, we will also host investors and analysts at a session on Monday, May 4, from 10:00 AM to 12:30 PM Eastern Time.

If you are interested in attending this session, please contact Brian Miller for more information. A live and archived webcast of the investor session will also be available at the Investor Relations section of our website. Now, Jamie, we will take questions..

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] And our first question comes from Alex Zukin from Stephens. Please go ahead with your question..

Hey guys, congratulations on a very strong quarter.

I wanted – my first question is just on what you saw in the 1Q period versus prior 1Qs, it looked like the sequential performance is one of the strongest you have ever posted and I am just wondering, did anything feel different this first quarter than maybe the first quarter of last year?.

No, I think over time, we have been ironing out the lumpiness from quarter-to-quarter, it’s reflected in higher SaaS revenues and maintenance revenues that obviously are very stable, but it was a strong quarter as you know from a license standpoint, good activity there and well in excess as well as the highest in any quarter, but well in excess of typical first quarters..

Much appreciated.

And then, can you guys remind us a little bit for 2Q last year, the impact on either backlog or bookings from the California contract and how we should think about that going forward?.

Last year in Q2, we had I believe it was $64 million of new contract bookings from California contracts, most of that is still in backlog. Those are recognized over – they are all percentage of completion contracts or SaaS deals. They are recognized over multiple quarters and then in some cases multiple years.

In the case of L.A., potentially out as long as 5 years. So the Q2 bookings number will obviously be a number that we are not likely to exceed, but it – being most of those revenues have not been recognized and will be done so over a long period of time..

Got it. That’s helpful.

And then just the last one for me, you guys mentioned an MCAD replacement on the call and I was wondering if you could talk a little bit about how the pipeline for MCAD replacements looks for the other two projects?.

Well, there has been some activity. There has been few replacements. There are – I think it’s still uncertain. There are some counties that continue to try to support the application on their own.

There actually are some associations or groups of customers that are trying to salvage their investment and have picked up the MCAD employees and the like, but there continue to be a steady trickle of those that are choosing or deciding that, that’s just not viable. So, it’s not a mad rush.

Again, the product doesn’t stop working the day the company exited the marketplace, but I think the trend is that over time more and more of these clients are realizing what they have is not sustainable and we will see more and more of those clients enter the marketplace..

Got it.

And then Brian just on cash flow, any other volatility we should think about for 2Q, in general, if you look at the balance of the year, do you expect to roughly hold the same kind of cash flow margin as a percentage of revenue as you saw last year or do you expect them to increase?.

I think the margin will probably be similar. There are a couple – we have talked about a couple of these things that caused this year’s first quarter to be below last year’s first quarter, mostly timing things, but we did have a couple of unusual things last year.

In Q1, we had some – about $7 million of milestone billings that related to progress made on certain Courts & Justice contracts. Those weren’t present in this year’s first quarter, but we have those that occur at various times throughout the year, they just – the quarters that they fell in didn’t match up with last year.

The biggest thing I think is as you get into Q3, it’s typically clearly our largest quarter for cash flow.

We collected significant amount of maintenance revenues, but we did have some unusually high collections in Q3 last year related to some of the California contracts in courts, where not only did they have provisions that accelerate some of those signings into Q2, but that also translated into some of the billings.

So, we collected quite a bit of license revenue or license billings in Q3 of last year that won’t be replaced this year just like the bookings won’t. But in general, the trend should be similar to last year..

Got it. Thanks, guys..

And our next question comes from Jonathan Ho from William Blair. Please go ahead with your question..

Sure. Yes, congratulations on the strong quarter. Just wanted to get a sense, first of all, around the SaaS elections, it seems like there maybe some larger deals that came in on that tides.

Are you seeing that general trend in the pipeline? And maybe can you give us some more color in terms of why – it looked like the overall number of elections was maybe down a little bit, but on a percentage basis – but why the dollar amounts are so much higher?.

Well, some of the – if you look at backlog, sometimes they are higher, because we are seeing a trend toward I believe is more and more of these clients want good visibility on what their long-term costs are. So, we mentioned a 7-year deal in our prepared remarks and there are a lot of those 7-year, I think there is a couple of 10-year type deals.

Five seems to be kind of the minimum now. So, the term generally is longer. We don’t care too much about the term. It’s usually a customer selection since we have virtually no attrition. So, it’s not an important factor in ours. I think the word we continue to use is a gradual shift.

It is not a real fast trend in anyway, but a gradual shift, it’s lumpy so you have to look over a period of time, but it continues to tick up over time. I think our strategy of continuing to not deemphasize on premise or traditional deals is important. It’s our objective to get the customer on board.

And either way, we don’t have a lot of bias in terms of the cost or the way we offer these systems. We really feel the long-term value of the client is significant either way, and let the market determine that.

So I think it’s an important part of our strategy that we have competitive both traditional on-premise solutions as well as cloud-based SaaS solutions..

Got it.

And then you guys mentioned briefly that there is potentially a greater sales and marketing role with Microsoft, can you talk about maybe some scenarios that could play out and maybe where you see an opportunity to add more value or provide more assistance?.

As I said, we are continuing to have discussions with their leadership team. Our engagement with them is the same even though there was a decision to not continue the R&D arrangement the way it exists. That doesn’t take effect till late this year, coincidental with the next release, which isn’t determined specifically yet.

So there hasn’t been any change at this point and we are working with them closely to really define the relationship we ought to have and how our resources ought to be best utilized and deployed.

And I think the consensus among the two parties, even though we continue to work on the details is that we played a significant role in the development of the initial product and bringing our expertise there and that’s where it was most important.

Now that, that's reflected in the product, it could probably makes sense for us to play a significantly reduced R&D role and to have their central core development team manage that code.

And yet I think what we both also recognize is that Tyler’s experience in the public sector marketplace from a sales standpoint and from a service standpoint is significant. And we are really transitioning into a phase of the relationship where that’s where it would really bring significant value.

So I think, whatever results will be, as we announced last quarter, a reduced headcount in R&D, reduced spend there, but maybe some additional resources on the sales and service side, not necessarily exclusively directly, but hopefully to help bring their partner channel up to speed and to drive greater volumes.

The product is well received and these partners having success early on and committing additional resources is very important both domestically and internationally. So I think that’s where you will see Tyler’s focus going forward..

Great, thank you..

[Operator Instructions] Our next question comes from Kevin Liu from B. Riley & Company. Please go ahead with your question..

Hi, good morning. Just looking at the investments on the services and recurring revenue side as you guys continue to invest there, is that predominantly to support kind of the backlog you have in services or are there investments going into the SaaS infrastructure as well.

And then just a follow-on to that is when would you expect that pace of investment to start to moderate?.

Are you referring to headcount investments or investments both in headcount and development?.

Really just trying to understand where the dollars are being spend, is it primarily on the headcount side for services or is there spend going elsewhere.

And then wondering when we can get to see some margin expansion on that side of the business?.

Well, I think there is a little bit of both. Clearly, our headcount has been increasing. We have talked about this year there being a bit of a headwind. Ordinarily, with this kind of revenue growth, you would see more than 70 basis points of growth margin expansion.

And some of that pressure on margins is a result of the headcount we have added over the last several quarters. And there is typically a – several months on-boarding period from the time we hire somebody on the development – well, not so much on the development side, but on the professional services side and at this time they become billable.

And so we are still absorbing some of those. We expect that to moderate throughout the year as our headcount growth slows down second half of the year.

And those heads are split between development resources and professional services on the implementation side and to some extent support and the implementations and support people are related to delivering the backlog we have as well as the things that are in the pipeline.

But I think the headcount moderation should – or the headcount expansion should moderate as we get into the second half of the year. The development side, we talked about in our year end comments about some incremental investments that we are making in product development this year above kind of the level we have been at.

And John may want to expand on that a bit?.

Yes, I think that’s right. There is no leverage really in our professional service business. And obviously, those revenues have increased significantly over the last year, year and a half, California driving some of that, but our general growth in new businesses. So, we have ramped that up.

That should flatten over time, but to the extent professional service revenues grow, there really isn’t any leverage on that. All our other lines obviously licenses, subscriptions, maintenance are highly levered, but that would be the one that isn’t.

As a reminder, some people – some software companies try to deemphasize or minimize their revenues on the professional service side.

And while it doesn’t perform financially like the other lines, it’s an important part of our strategy and our ability to execute, deploy new contracts on time, on budget, satisfy clients, get them on maintenance and subscription I think is exceptional.

In relation to the industry, it’s a challenging business, but in relation to the industry, it’s exceptional. And I think that’s because we control virtually all elements of those engagements when a lot of companies partner with integrators and I think have challenges that we simply don’t have. So, that’s a choice we make.

And while it’s not favorable from a economic standpoint, it’s very favorable in terms of the overall performance of the company. As Brian indicated, obviously, we have significant resources financially at this point. We continue to look at our own stock, which is richer than it’s been historically.

We continue to look at assets in the marketplace, where valuations are relatively high as well. And it could be that one of the best places for us to invest is in our products and expanding our products in terms of their footprints. And so at this point, it’s hard to know exactly where R&D goes.

But again, investments in our own products and some of the recently acquired products are attractive and we believe we are uniquely positioned to make those kinds of investments, whereas PE firms and financial buyers can buy the assets that are out there.

So, we do have a unique ability to invest in successful products, continue to expand our leadership position and ensure that we continue the momentum we have. So, those will be things we will be considering as we move forward..

Great. And if I could just slip in one more, on the Courts & Justice side, you mentioned the extended agreement with the County of San Mateo.

Are you seeing kind of a broader opportunity amongst a lot of the California court systems that you have signed up in terms of being able to go back and up-sell or cross-sell other solutions at present?.

Yes, definitely. And that’s – I think it’s something we have discussed in the past. As Brian indicated, we don’t expect to repeat the Q2 bookings that we had last year. If you remember, they had a budgetary deadline kind of to get those resources, those budgets deployed.

And so we had a big second quarter in 2014 and we don’t see that repeating, but many of those counties purchased 1 or 2 or 3 case types and they all have many case types and it’s certainly our strategy.

And I think it’s their expectation as well that if we continue to be successful with those engagements that we will continue to resell into those environments, additional case types as well as sell and implement the e-file side of the business as well.

So, big start last year for California, very pleased with winning all the three counties, but definitely a lot of opportunity remains in that marketplace..

I will take the opportunity because clients as well, Kevin, to sell additional products in our Courts & Justice suite and we have talked about that as well.

So, the opportunity to sell jails, prosecutor, probation, other products that are integrated with the court solutions is an opportunity that we are – we expect to see progress in and be able to report success there as we move through this year..

Alright, thanks and congrats on a great quarter..

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

Okay. Thank you, Jamie and thank you all for joining us on the call today. If there are any further questions, feel free to reach out to me or Brian Miller. Have a great day. Thank you..

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines..