John S. Marr - President, Chief Executive Officer & Director Brian K. Miller - Executive Vice President, Chief Financial Officer and Treasurer.

Charles Strauzer - CJS Securities, Inc. Brian David Kinstlinger - Maxim Group LLC Alex J. Zukin - Stephens, Inc. Stewart Kirk Materne - Evercore ISI Scott Berg - Needham & Co. LLC Jonathan F. Ho - William Blair & Co. LLC Tim E. Klasell - Northland Securities, Inc. Kevin Liu - B. Riley & Co. LLC Peter C. Lowry - JMP Securities LLC.

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

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

Thank you, Chad, and welcome to our third quarter 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, I'll have some preliminary comments and Brian will review the details of our third quarter operating results and give 2015 guidance.

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

Brian?.

Thanks, John. During the course of this conference call management may make statements that provide information other than historical information, and may include projections concerning the company's future prospects, revenues, expenses, and profits.

Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections.

We would refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise.

John?.

Aegis, a comprehensive public safety suite for dispatch centers, police officers, fire fighters, paramedics, correction officers, command staff and all first responders; and Logos, a suite of public administration software that meets the accounting needs of city and county governments.

Public safety represents approximately 67% of New World Systems' revenues. Under the terms of the agreement, we will acquire all of the equity of New World Systems for $360 million in cash and approximately 2.1 million shares of our common stock.

The cash portion of the purchase price will be funded from cash on hand and proceeds from a new revolving credit facility. The transaction is expected to close in the fourth quarter of 2015 and is subject to regulatory approval and customary closing conditions. This transaction is expected to be immediately accretive to Tyler.

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

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

In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry.

Our non-GAAP earnings exclude share-based compensation expense, the employer portion of payroll taxes on employee stock transactions, acquisition-related costs, and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

Revenues for the third quarter were $150.8 million, up 17.2% with 15.7% organic growth. Software license and royalty revenues increased 18.6% and at $15.7 million were the highest level in the company's history.

This was our eleventh consecutive quarter of double-digit growth in licenses, and in those 11 quarters, all but one have had growth of over 16%. In Q3 we received $1.0 million of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs, up 12.1% from $906,000 a year ago. Subscription revenues increased 27.9%.

We added 35 new subscription-based arrangements and converted 18 existing on-premises clients, representing approximately $27.2 million in total contract value. In Q3 of last year we added 38 new subscription-based arrangements and had 11 on-premises conversions representing approximately $16.7 million in total contract value.

SaaS clients represented approximately 22% of our new software clients in the quarter compared to 34% in the prior-year quarter. SaaS contract value represented 30% of the total new software contract value signed this quarter compared to 28% in Q3 of 2014.

The value-weighted average term of new SaaS contracts this quarter was 5.8 years compared to 5.5 years in last year's third quarter. The fastest-growing subscription-based revenue stream continues to be from the e-filing for courts and online payments. These revenues increased 34% to $11 million from $8.2 million last year.

Total e-filing revenue of $8.4 million this quarter grew 36.9% over last year with 19% of that increase related to our Texas e-filing contract, which contributed $4.8 million of revenues this quarter.

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

Our non-GAAP gross margin declined by 20 basis points to 48.6%. SG&A expense increased 16.5% and was 21.1% of total revenues, an improvement of 20 basis points from last year's third quarter. Excluding noncash share-based compensation expense and acquisition-related costs, SG&A expense increased only 11.7%.

Operating income was $31.5 million, an increase of 17.7%. Non-GAAP operating income was $39.3 million, up 21.5%. Despite slightly lower gross margins, the non-GAAP operating margin improved 100 basis points to 26.1% as we achieved substantial leverage from both SG&A and R&D expenses. Net income rose 18.5% to $20.1 million or $0.55 per diluted share.

The fully diluted share count increased by approximately 1.1 million shares, primarily from stock option exercises and, to a lesser extent, stock issued in acquisitions. Our effective tax rate was 36.5% and benefited from a higher qualified manufacturing activities deduction.

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

Days sales outstanding and accounts receivable were 77 days at September 30, 2015, compared to 78 days at September 30, 2014. DSOs decreased sequentially from 94 days at June 30, which is our normal seasonal trend related to the timing of maintenance billings.

Our backlog at the end of the quarter was $757.7 million, a new high, and was up 12.4% from last year's third quarter. Software-related backlog, which excludes backlog from appraisal services contracts, was $707.7 million, an 11.6% increase. Backlog included $171.9 million of maintenance, compared to $152.1 million a year ago.

Subscription backlog was $236.9 million, compared to $194.7 million last year. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were $186 million, up 25.7%. On a trailing 12-month basis, bookings rose 5.5% over last year.

We signed 28 new contracts in the third quarter that included software licenses greater than $100,000, and those contracts had an average license of $579,000 compared to 30 new contracts with an average license value of $475,000 in the third quarter of 2014. Our guidance, updated for the full year of 2015 is as follows.

We currently expect 2015 revenues will be between $578 million and $583 million. We expect 2015 diluted GAAP EPS will be approximately $2.01 to $2.07. We expect 2015 non-GAAP diluted EPS will be approximately $2.56 to $2.62. For the year, estimated noncash share-based compensation expense is expected to be approximately $20.3 million to $20.8 million.

Fully diluted shares for the year is expected to be between 36 million and 36.5 million shares. We estimate an effective annual tax rate for 2015 between 36.5% and 37.5%. The tax rate and share count each are affected by the timing and volume of stock option exercises.

We expect our total capital expenditures will be approximately $14 million to $15 million for the year. Total depreciation and amortization is expected to be between approximately $15.5 million and $16 million including approximately $7 million of amortization of acquired intangibles.

Note that this guidance does not include any impact from the proposed acquisition of New World Systems, as the completion and timing of the acquisition is subject to regulatory approval and customary closing conditions. Now I would like to turn the call back over to John for his further comments..

Thanks, Brian. We've reported for some time now that the markets have recovered from the 2008 financial disruptions and been behaving relatively normally. In the past several months we've actually experienced at least a modest acceleration in activity. RFP activity in Q3 was clearly ahead of longer term run rates.

It's a short period of time to draw any conclusions from, but directionally we are encouraged. I would characterize our competitive position as steady at a strong level and attribute the higher license revenues to a marginally stronger market. We continue to work toward closing the New World Systems deal in the fourth quarter.

Since signing the definitive agreement, we have had more exposure to their team and continue to be impressed. Along with the obviously strong knowledge, industry knowledge and strong competencies in the team, there is genuine excitement regarding the combination.

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

Thank you very much. We will now begin the question-and-answer session. Please limit your question to one and one follow-up, and then place yourself back in the queue for additional questions. At this time, we will pause momentarily to assemble that roster. Our first question comes today from Charlie Strauzer with CJS Securities..

Hey, good morning. John, Brian, John, you talked about the pickup you're seeing in the RFP space, RFP pipeline, I should say, in Q3.

Can you give us a little bit more granularity in terms of what areas you're seeing the pickup in? Is it more courts-related, financial, et cetera? And also looking into kind of Q4, is that kind of pace kind of staying where it was in Q3?.

Yeah. Really, probably the only area – courts is still a smaller market. So any trends there have to be longer term otherwise they're pretty anecdotal. It's really more in the financial side of the business where the volume of activity is large enough that even shorter swings are interesting to us. So I guess I'm talking more about the financial side.

It just seemed that there was a lot of RFP activity and a lot of activity that I think is worth noting in the third quarter. Again, there's ebbs and flows here and maybe it goes right back to the normal level but everybody wants to watch the local government marketplace, and there's always some pressure on their budgets.

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

Are you seeing these kind of more larger municipalities or agencies that are putting these RFPs out? Or is it just, kind of just a wider breadth of RFPs that you're seeing?.

It's a wider breadth, but as you saw, as I think Brian just mentioned, I mean the average software license fee in our over $100,000 category, went up about $100,000 year-over-year.

So there's pretty good activity on the higher end of our range and our addressable market but I do think over a long period of time we've consistently been becoming more and more competitive on, again, the higher end of our range, which is not the ultra-high side of the market where we don't play as actively but really this Tier 2, into the lower end of Tier 1 space.

I think Tyler's competitiveness has consistently improved..

Great. Thank you very much..

Thank you..

The next question comes from Brian Kinstlinger with Maxim Group..

Great. Thanks so much. I wanted to start with e-file. It's been such a good business for you.

So I'm wondering as you look at your e-file installed base, especially the large counties and states, do you expect any are going to mandate e-filing in 2016 and maybe specifically also touch on L.A., where you are with that process, in install?.

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

It is our clear perception that most of these clients, say for example most of the counties in California that are in the midst of their case management implementation, have the expectation that at some point in time as the case management systems are in place that they will move toward, they'll implement e-filing and that they will ultimately make it mandatory.

So I think the general atmosphere out there that when people have good back-end systems in place, that they intend to move forward with e-filing and ultimately appreciate that for them to get high adoption and to become a paperless courthouse, they need to implement mandatory and we're seeing a clear trend toward that.

So I can't give you quarter-by-quarter which jurisdictions will do that, but it's the clear impression we have that the vast majority of our clients are moving in that direction..

Right.

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

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

We have identified a number of sub segments or certain areas in the marketplace where we believe Dynamics is competitive and can build momentum and grow our presence in the marketplace. And so we're focused on that with some direct resources.

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

And I think Tyler's, you could look at it, for the past, last five years or six years, our experience in government has been applied to the R&D side, and we're transitioning to where we'll have less of a role in the R&D side.

We'll have reduction in head count there, and we'll bring our market expertise to the go-to-market side and try to enable their partners to attack all those sub-markets and extended markets that we don't have a strong presence in at this time..

Great. Thank you so much..

The next question comes from Alex Zukin with Stephens..

Hey, guys. Thanks for taking my questions. Congratulations on another great quarter. Seems like from a SaaS perspective, you saw a lot more dollar conversions this quarter than even kind of from the new business.

And I guess I'm just curious, is there any trend that we can take away from that? Anything that's changing? Are we reaching a new inflection point? And then, why the disparity in terms of the conversions versus the net new?.

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

I think the way we've described it is the local government marketplace is slower to make changes, that we're seeing a gradual shift in that direction. I think that's still accurate language for this, but we see traction in our installed base and in the new business market.

We're adding, what, I think, around 55 names, a little more than half of those new names, a little less than half conversions, and we're satisfied and happy with that. And it just gradually gains a little bit of momentum..

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

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

Got it. That's helpful. And can you guys talk about, I mean the Cook County deal.

How many of those types of deals are out there in any given year? And how does that kind of factor into how many of those do you think you guys do in any given year?.

Well, not many. Historically, kind of mega deals like that have been courts. And they're out there. I think our win rates are very good. In the courtside, Washington, Oregon, Maryland. Those were all big statewide deals in the last few years, kind of in this size range. And occasionally, they come around in tax and appraisal.

Cook, but it's a top three county, as we said. Our competitive position in those situations is very, very good. I think our win rates would be real high. There aren't a lot of companies that have our size and our resources and history and experience in that space. So I think we compete very, very well when they come out.

But they're obviously going to be more infrequent. So as a company, two, three kind of outsize deals is what we do in the course of the year normally..

Perfect.

And then on New World, what's been the reception, I guess, from prospective customers around the acquisition? In the sense that as you've continued to meaningfully increase your breadth of offerings, is it starting to, is it changing the conversation with prospective customers in any way in terms of size of initial wallet?.

Yeah. It's been very positive, the initial reception. As we know, there's a little overlap, between some of our products and some of their financial applications, but it really isn't that significant in the overall deal. The excitement is around the complementary nature of the deal.

So for our clients to have an industry-leading public safety system available to them that we clearly intend to integrate more seamlessly over time and add value to their existing solutions for their public book safety clients.

We've heard from clients that said, hey, we were looking for one or the other and now we know we can get one that will be integrated and add value and make us more efficient. There's been a lot of that positive response and even on the financial side, they have certain applications that are strong that we don't have.

We have, certainly a lot of applications that they don't have that are on top of the core financials that will become available to these clients. So the options that both client bases will have for complementary products has been what they're focused on and it's been pretty enthusiastic..

Got it. And maybe just one last one from me.

With respect to any trends, how insulated are you guys with respect to some of the macro events in the economy, from state budgets that may be exposed to issues around commodities? Can you just walk us through the dynamics of why that maybe not, doesn't matter as much for you guys?.

Yeah, I mean, over a long period of time – unfortunately I have that perspective now of 30 years or more – it is very rare that, let's say, normal economic cycles impact our market. And some of that's, we're just fortunate, and some of it's by design. So really in the last 30 years in my view, our market has been impacted twice.

One was a technical issue with Y2K, and the second was the 2008 financial crisis or disruption, whatever we want to call it. In 2008, it was extreme enough that state revenue sharing and federal revenue sharing going to local governments, at least got threatened, and in some cases, got impacted. So some of these projects were put on hold.

And in recent years, those projects have been executed because they're essential, and the market has been pretty good. So your typical ebbs and flows generally don't affect us for two reasons.

First, local government generally funds these types of really general fund types of investments through their own direct revenues, which are property taxes, utility revenues, the direct revenues to local government that don't get impacted, right? I mean, all of us pay less when we have a year where we earn less.

But we pay the same property tax bill that we have on the house we own, and we pay the same water bill. So those revenues are much more stable than state and federal revenues where sales tax and income tax can be more volatile.

And the second reason is that everything we do, and this is the part that would be by design, everything is an enterprise solution. It's important to them. And it's essential. They have to do it whether it's printing tax bills or running payrolls or managing the courts. And so this is not discretionary.

It has to happen when budgets are flush and when budgets are tight. So generally, we're impacted very little with the couple of exceptions that I noted..

That's very helpful. Thank you, guys..

Sure..

Our next question comes from Kirk Materne with Evercore ISI..

Thanks very much. Good morning, guys. I guess, John, my first question would be, as you guys have grown and you're adding New World to the mix here, I was just kind of curious of on your view of the ability for you all to start having a bit more of a broader channel of partners, especially services partners.

The bigger GSIs have generally not focused on state and local or at least local governments, and they sort of, it's more federal and state level.

But you guys are clearly showing that there's a lot of business to be done with sort of more local municipalities and a lot of things you guys are doing like e-filing or pretty transformational type of projects.

So I'm just kind of curious if over the next year or two, maybe not in the immediate near term, but as you put New World together, is there an opportunity to maybe start to get some greater distribution and maybe services leverage out of more services partners or integrators?.

Well, it's a good question and it really points to a conscious decision on our part that differentiates us from many of the other players.

And what I think what you're saying is you guys are evolving into a more substantial software company, obviously a lot of the software companies you follow use partners to get leverage in their service channels and presence out there in the marketplace.

And yes, we're a big enough company now that I think we could attract legitimate IT service integrators to implement our systems. It's a pretty conscious decision on our part to have not gone in that direction. So this is something when we're selling our systems that we focus on a lot, and that is that when we go out and bid a deal, we own that deal.

So it's not just our software, it's the conversions. It's the project management. It's the implementers. It's product extensions that may need to be done.

And the success rate in our view is considerably higher than when you have an integrator and a software company and multiple contracts or elements of contracts and some areas that aren't as clear as to who actually owns that responsibility.

And then post-implementation, whatever was done in the implementation, whether they're product extensions or the way the product was implemented is much more completely transitioned to post-implementation support relationship.

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

There's an incredible execution part of that business. And as important to having won the business in the first place it is successfully executing on those projects, which we have a very good record on. And obviously one feeds the other. The success in the market leads to new business. So you make a very good observation, Kirk.

We'd have higher margins if we didn't have as big a professional service side of our business. The business matrix may look a little better. But in our view, it's a strategic part of our offering that differentiates us, especially from Tier 1 software providers..

Yeah. That makes sense. And maybe just stripping out sort of the margin dynamics of it. I guess my question is more about just geographic reach and influence. Meaning, let's just take e-filing for example.

If you had a bigger, say global or national partner, I guess, national in your case, partner working with you, do you think there's a way to get to more opportunities faster or do you think this is just a market where it is a slow and steady sort of wins the race kind of situation? So having a bigger more national brand from an integration perspective, helping you sort of get in front of more decision-makers potentially faster isn't something that's necessarily required when you're thinking about these kind of more sort of transformational deals?.

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

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

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

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

Sure..

Thank you. Our next question comes from Scott Berg with Needham & Company..

Hey, John and Brian. Congrats on another nice quarter..

Thanks..

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

But how do you view that business kind of on a go forward basis, maybe over the next one to two years? Can you see some of the similar types of demand trends like you see in maybe – in general in Courts & Justice may appear, or is that maybe just a short term impact to the company that you've seen recently?.

Well, it's a good observation. There's no question that, I think it was 2006 that they kind of got off the track a little bit, and we had to rein that division in and there was even some pressure to get out of that business because it didn't have as much growth and the appraisal service side wasn't completely consistent with what we did.

And so we have looked at it for that period of time, the last seven years, eight years, nine years as a sticky part of our business. As I said earlier, it's tax revenue. It's important, and to have a presence in that office is important even if it's not as robust a business for us. So we always looked at that as a lower grower.

And margins getting diluted somewhat by the appraisal service side of things. It hasn't been the case, obviously this year or maybe the last 18 months. And it's a good question. Is that a blip? And at least for let's say the next 18 months, it'll continue. There'll be higher growth than there has been historically.

Probably should grow at least at or maybe above Tyler's average growth across the company. And certainly on the software side of the business, which used to be half of the business and now it's I think about 70% of the business. Margins will continue to benefit from scale and expand.

So that business is definitely outperforming our long range forecast in terms of both growth and margin expansion. And we think for the foreseeable future, say 18 months to 24 months, that will continue. Hard to know beyond that..

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

Obviously, the New World acquisition will be accretive to your margin profile, and probably helps you get there a little bit more quickly.

But how do you view margins maybe two years to four years out, more longer term now, A), with that acquisition, and B), with some of the other leverage success that you're currently having?.

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

So they're not really – they will be accretive to our margin profile, but they're not really out of line with where parts of Tyler are. And our long-term goals on margins have been very consistent over a number of years and those still are in place.

We believe that if we can grow in the low to mid-teens that we get meaningful margin expansion at the gross margin line of 100 basis points a year or better, that would be an annual average. As you've seen, it doesn't happen necessarily in a straight line.

There are years where they're flat or with more pressure on margins, gross margins, as we have this year, and there are years where we have 200 basis points and 300 basis points of margin expansion.

But those long-term expansion goals we believe are still consistent with what we've done historically in the past, and that we have a lot of margin, gross margin improvement opportunity, some of that coming from New World.

But certainly in Tyler's businesses, as other businesses like our Courts & Justice business continue to gain scale, have new higher margin revenue sources such as e-filings, start to layer in there, as the recurring revenues, which are higher margin, continue to build to become a bigger piece of the product or the revenue mix, and as we continue to move beyond kind of the investment stage in some of our newer products, like our EnerGov product and those margins start to be enhanced.

All of those things are contributing factors to this long term 100-plus basis point annual margin expansion, assuming growth consistent with what our historical growth has been.

And as we've said, we believe that we can get substantial leverage from both SG&A and R&D, the two things below the gross margin line, that translate in to higher operating margin expansion.

And we've seen that, for example, this quarter, where we actually had a little bit of a pullback in the gross margin, but we still got 100 basis points of operating margin expansion because SG&A and R&D are both growing at a much lower rate than our revenue growth is. So we believe that those trends remain in place. Again.

they're not necessarily on a straight line. So there's sometimes we're above that profile and sometimes we're below it. But that's how we expect to continue to drive margin expansion in the long term and move from this mid 25%, 26% operating margin non-GAAP that we currently have to 30% and north of that.

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

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

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

Hey, guys. Let me echo my congratulations as well.

Just wanted to start out, can you just give us a sense of how much is left in backlog from the Texas e-file? And when we could maybe anticipate another extension of that?.

Sure. That contract was initially a four-year contract, and it currently has just shy of $37 million of remaining backlog as of September 30. And that's currently playing out at about $4.8 million a quarter, and it really stays at that level and takes a little bit of a step up, but very minor step up in 2017.

So the contract runs through September of 2017, and $37 million of backlog left. So it's about halfway through right now..

Got it. And then, go ahead..

I expect that we certainly have a close relationship with Texas and we had a big event recently where we celebrated the go-live of Texas e-filing in all 254 counties several months ahead of schedule when those last counties went live, so that project is working extremely well.

The Chief Justice of the Supreme Court held a press conference and celebrated the success of the project, so it's obviously working very well and I expect that before we get too close to the end of the contract we'll have discussions with them about extending it.

It does have – the contract provides for a series of one year renewals in the original contract, but we're still a little bit off from approaching the end of that..

Got it.

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

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

I mean, sometimes when you see operating profit at a higher level than say the beat on the revenue, so in other words more falling through, a lot of that is sometimes that you almost always trail behind, so the head count growth we have in the fourth quarter probably won't be met, but it's certainly not a problem. Tyler's an employer of choice.

In all of our major geographies, we recruit aggressively. We have a strong presence in the marketplace and it's a matter of timing like I said.

Sometimes you schedule positions and it's 30 days, 60 days later, but we certainly don't see ourselves as looking at those pools as having run out and it being a long-term problem, but it's just an ongoing part of our business..

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

There really hasn't been anything definitive done since the last call say, but the general direction of the relationship that we've reported is still our expectation which would be considerably lower R&D head count and spend and some increase as I said earlier on the sales side and the service side of things, but overall a net decrease in heads and costs for us.

Revenues are not explosive, but they're going in the right direction, so the performance of that business should continue to improve..

Great. Thank you..

The next question comes today from Tim Klasell with Northland Securities..

Good morning everybody and my congrats on the quarter as well. Most of my questions have been answered, but you mentioned the RFP pipeline has been building nicely.

As we look on to 2016, could that change the seasonality? Do you guys have any feeling that, gee, there's a certain quarter or two where a lot of these deals may close or a large one? Or is it too difficult to judge at this point?.

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

And so therefore, I think that's why you're seeing this predictability, these marginal beats. They're really getting into a pretty tight range, and I think that's a function of the maturing of the business overall.

High recurring revenues, more large deals coming out of percentage of completion and the impact of licenses within a quarter being less in terms of total influence on the numbers..

Okay. And just a specific deal related question. At Cook County, obviously their systems were ancient.

But was there a specific catalyst that happened where they suddenly said that we really had to modernize their systems?.

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

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

Okay..

The next question is from Kevin Liu with B. Riley & Company..

Hi. Good morning. Just one question on the subscription business. You talked about the growth there being driven by both e-filing as well as online payments.

I wanted to clarify whether the online payments piece is distinct from kind of the e-filing transaction piece you get? And if so, what products those are tied to, the size of that business and how much growth you're seeing there?.

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

Yeah. For example, this quarter e-filing was about $8.5 million of revenues, online payments separate from that is about $2.5 million.

Online payments is primarily where we process either traffic tickets or utility bills, in many cases for smaller clients that don't want to manage their website themselves, but use our software, and we get a convenience fee for that. Because it tends to be more with the smaller clients it's not as nearly as fast growing business as the e-filing.

So most of that growth is on the e-filing side..

Got it. And also one quick one on Dynamics. Just the royalties there seem to be on a little bit of an upswing.

As you start to transition over to doing more kind of sales and support of the VARs, do you feel like you'll start to get better visibility there? And do you expect kind of the current run rate of revenues to continue?.

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

All right. That's all I had. Thanks so much..

Sure..

The next question is from Peter Lowry with JMP Securities..

Great. Thanks. Just one quick big-picture question.

Can you recap just what the greatest demand drivers in the state and local governments (51:45) right now? But then looking forward say three years to five years, do you see any change in what the drivers might be?.

Not really. I mean again, it's what we say, it's a steady market. These are all enterprise essential apps. There's a huge inventory of systems out there that are aging and not well supported. And every year a small percentage of those go back out in the marketplace.

So it's our kind of hope and expectation that this continues to be a pretty steady market..

Okay. Great. Thank you..

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

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

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