John Marr - President and CEO Brian Miller - CFO.

Brian Kinstlinger - Maxim Group Pete Heckmann - Avondale Partners Kirk Materne - Evercore ISI Jonathan Ho - William Blair & Company Scott Berg - Needham and Company Alex Zukin - Piper Jaffray Mark Schappel - Benchmark Kevin Liu - B.

Riley and Company Tim Klasell - Northland Securities Brent Bracelin - Pacific Crest Frank Felice - Serendipity Ventures.

Good day and welcome to the Tyler Technologies Third Quarter 2016 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. Please also note that this is being recorded. I would now like to turn the conference over to John Marr, the President and CEO. Please go ahead, sir..

Thank you. And welcome to our third quarter 2016 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’ll have some preliminary statements. Brian will review the details of our third quarter results and the 2016 guidance.

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

Brian?.

Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections including 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 deliver 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?.

Our third quarter operating results were once begun very strong, and earnings exceeded our expectations. Total GAAP revenue growth was 29%, of which approximately 11% was organic. Our cloud-based business continues to experience strong growth.

Increases in SaaS revenues as well e-filing revenues from courts drove 27% growth in our recurring revenues from subscriptions, of which 23% was organic. Bookings for the quarter rose 43% to a new quarterly high of $266 million and our backlog rose over 23% to reach a new high of $936 million.

During the quarter we signed a four-year extension with a Texas office of court administration for our Odyssey File and Serve platform for eFileTexas. The initial contract runs through August 31, 2017 and this agreement which is valued at approximately $72 million extends that through August 31, 2021.

Also for our Odyssey File and Serve platform we signed an agreement with the administrative office of the Illinois courts to provide a statewide e-filing system, which will service the Illinois Supreme Court, Illinois Appellate court, and 87 circuit courts throughout the state and is initially valued at approximately $8 million.

The value of this contract is expected to grow as additional courts are added. Our largest license fee for the quarter was with Baton Rouge, Louisiana for our MUNIS ERP and ExecuTime timekeeping solution valued at $4.5 million.

Other significant license agreements for our MUNIS ERP solution included the city of Goodyear, Arizona, Santa Margarita Water District in California, the City of Ogden, Utah and the City of Lompoc, California which also includes our EnerGov solutions.

Significant SaaS agreements for MUNIS included the Chula Vista, California, the city of Oswego, Illinois and Bonneville County, Idaho. For our New World ERP solutions, significant contracts included the city of Delray Beach, Florida, which also included our EnerGov solution and Jefferson Parish, Louisiana.

Other significant contracts for our EnerGov solution included a licensed deal with the city of Alexandria, Virginia and a SaaS contract with Hawaii County, Hawaii.

For our iasWorld appraisal and tax solution, we signed notable contracts with Volusia County, Florida and Monroe County, Pennsylvania, which also included appraisal services valued at approximately $5 million. We also signed a deal for our AES tax solution with Ventura County, California.

Our largest SaaS deal for the quarter was a five-year multi-suite arrangement with Amarillo Texas for our MUNIS, EnerGov, and Eagle Recorder solutions valued at approximately $3.5 million.

For our Odyssey courts and justice solution we signed notable SaaS deals with Tazewell County, Illinois and Collin County, Texas as well as a license deal with Multnomah County, Oregon.

We also signed significant new license contracts for our New World public safety solution with Dona Ana County, New Mexico, which also included our soft code solution, Athens/Clark, Georgia -- Athens/Clark County, Georgia, which also included our Brazos solution, and in Deschutes County, Oregon.

Now I would like for Brian to provide more detail on the results for the quarter and update our annual guide abs for 2016.

Thanks, John. Yesterday Tyler Technologies reported its reports for the third quarter ended September 30, 2016. I’m going to provide some additional data on the quarter’s performance and update our guidance for 2016 and then John will have additional comments.

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

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

GAAP revenues for the third quarter were 194.5 million, up 28.9% with 10.8% organic growth. New World contributed GAAP revenues of 27.4 million, representing 18.1 percentage points of growth. On a non-GAAP basis, revenues were 197.8 million, up 31.1%.

New World contributed non-GAAP revenue as $30.7 million representing 20.3 percentage points of non-GAAP revenue growth. Non-GAAP organic growth was 10.8%. Software license and royalty revenues increased 27%. On an organic basis, license revenues increased 2.9%. Subscription revenues increased 27% with 23.3% organic growth.

We added 50 now subscription-based arrangements and converted 18 existing on-premises clients representing approximately $22.7 million in total contract value. In Q3 of last year, we added 35 new subscription-based arrangements and had 18 on-premises conversions, representing approximately 27.2 million in total contract value.

SaaS clients represented approximately 28%s of our new software clients in the quarter compared to 22% in the prior year quarter. SaaS contract value represented 29% of the total new contract value signed this quarter compared to 30% in Q3 last year.

The value-weighted average term of new SaaS contracts this quarter was 5.6 years compared to 5.8 years in last year’s third quarter. Transaction-based revenues from e-filing for courts and online payments, which are included in subscriptions, increased 14.2% to $12.5 million from $11 million last year.

That amount includes e-filing revenue of $9.5 million this quarter, up 11.9% over last year. Cash flow from operations grew approximately 22% to $67.1 million. Free cash flow, which is calculated as cash from operations less capital expenditures, was $59.5 million compared to $52.7 million in last year’s third quarter.

Excluding real estate costs, free cash flow was $62.2 million. Our CapEx for the quarter of $7.6 million included $2.7 million related to the expansion of our Yarmouth, Maine facility. We ended the quarter with a total of $57.3 million in cash and investments and debt of $34 million.

Days sales outstanding and accounts receivable was 87 days at September 30, 2016 compared to 77 days at September 30, 2015. Our backlog at the end of the quarter reached a new high at $935.6 million, up 23.5%. Software-related backlog, which excludes backlog from appraisal services contracts, was $892.1 million, a 26.1% increase.

Backlog included $236.2 million of maintenance, compared to $171.9 million a year ago. Subscription backlog was $337.5 million, compared to $236.9 million last year, and includes approximately $114 million related to fixed fee e-filing contracts.

As John mentioned earlier, we signed the eFileTexas extension this quarter which added approximately $72 million to backlog and also signed a new fixed fee e-filing arrangement with the state of Illinois, which added approximately $8 million to backlog. The state of Illinois is now our third fixed fee filing arrangement along with Texas and Indiana.

Our bookings for the quarter which are calculated from the change in backlog plus non-GAAP revenues were approximately $266 million, an increase of 43% from Q3 of 2015. Q3 bookings included $32 million from New World. On an organic basis, bookings excluding New World grew 25.8%.

For the trailing 12 months, bookings were approximately $847 million, a 31.7% increase over the prior period. Note that we have posted a spread sheet detailing our quarterly bookings calculation on the Investor Relations section of our website at www.tylertech.com/investors under the Financials and Annual Report tab.

We signed 38 new contracts in the third quarter that included software licenses greater than $100,000, and those contracts had an average license of $369,000, compared to 28 new contracts with an average license value of $579,000 in the third quarter of 2015.

Last year’s third quarter bookings included a $30 million tax software contract with Cook County, Illinois. Our updated guidance for the full year of 2016 is as follows -- we currently expect 2016 GAAP revenues will be between $755 million and $762 million and non-GAAP revenues will be between $770 million and $777 million.

We lowered the high end of the revenue guidance by 3 million. This is primarily attributable to delays in awards and contract signings for certain courts and justice deals that were in our plan for the second half of the year, some of which have now been awarded or signed.

These delays affected the timing of revenue recognition, particularly in professional services and to a lesser extent licenses and maintenance. This only affects the timing of revenues as we have not lost deals that we expected to win. We’ve also appropriately managed expenses and have raised our earnings guidance.

We expect 2016 GAAP diluted EPS will be approximately $2.01 to $2.07. We expect 2016 non-GAAP diluted EPS will be approximately $3.46 to $3.52. For the year, estimated pretax non-cash share-based compensation expense is expected to be approximately $29.5 million to $30.5 million.

We expect R&D expense for the year will be approximately $42 million to $44 million. Fully diluted shares for the year are expected to be between 38.5 million and 39 million shares. The share count is impacted by both the timing and volume of stock option exercises and stock repurchases.

We estimate the GAAP annual effective tax rate for 2016 will be between 38% and 39%. The non-GAAP effective tax rate is expected to be in the range of 35.5% to 36.5%. The tax rate is affected by the timing and volume of stock option exercises. With the issuance of ASU No.

2016-09, compensation, stock compensation topic 718 on March 31, which will require us to recognize the income tax effects of stock option exercises in the income statement, both our GAAP and non-GAAP effective tax rates could differ substantially from this guidance.

While we will adopt this standard in the fourth quarter of 2016, we’re currently unable to provide a reasonable estimate regarding the financial impact.

We expect our total capital expenditures will be approximately $40 million to $42 million for the year including approximately 21 million related to real estate including the purchase in Q1 of our previously leased office facility in Falmouth, Maine and the expansion of our owned office facility in Yarmouth, Maine.

Total depreciation and amortization is expected to be approximately $50 million to $51 million, including approximately $36 million of amortization of acquired intangibles. I would like to turn the call back over to John for his further comments..

Thanks, Brian. Activity in the local government software market remains strong and is consistent with the past several quarters. Our competitive trends and win rates continue to be high across our product lines.

As Brian detailed earlier, a performance in the third quarter exceeded our expectations and we’ve raised our earnings guidance for the full year. New World’s operations remain on track to deliver the revenue and earnings contribution that we expected at the beginning of the year.

We continue to be pleased with our progress on the integration of New World’s products and operations. And we continue to receive positive feedback from our clients and prospects regarding our strategy to bring more closely together Tyler’s public safety and justice solutions.

This was evident last week at the International Association of Chief of Police conference in San Diego where we saw an unprecedented level of interest from attendees in the Tyler Alliance vision for our integrated public safety and justice offering. Yesterday we also announced several executive transitions and promotions.

Effective January 1, 2017, I will assume the role of Chairman of the Board in addition to my position as Chief Executive Officer, with John Yeaman continuing his service as director until his current term ends in May of 2017 when he will retire. I would like to thank John for his service over the last nearly 20 years, his leadership to the company.

I think the team that we have today and their ability to work together with little distractions and the intangibles that provides to our culture are attributable largely to John’s leadership over the last 20 years. Lynn Moore has been named President of Tyler, also effective January 1, 2017.

Lynn has served as a Tyler leader and a close executive advisor to me for many years, and as President will work with me to continue the management and culture that have made us successful as a company. Lynn joined Tyler as general counsel in September of 1998 and has also served as executive vice president since February of 2008.

Abby Diaz, currently Vice President and Associate General Counsel is being promoted to the position of Chief Legal Officer, assuming leadership of Tyler’s in-house legal team. Prior to joining Tyler in 2012, Abby practiced law with Kirkland and Ellis. These changes do not indicate that we are taking the company on a different course.

We have seen significant growth in recent years and these changes are reflective of the way the company has developed. Tyler is fortunate to have strong leaders across our organization, with tremendous depth in our group presidents and division leadership and it’s reassuring to know we have multiple people capable of making right decisions for Tyler.

Lynn and I look forward to continuing to work together with our entire team on the evolution of the business, building on the momentum Tyler has experienced. Finally, last Thursday we celebrated a major milestone -- the 50th anniversary of the company’s founding in 1966.

Members of our management team rang the closing bell on the New York Stock Exchange to commemorate the event. On this occasion, we looked back with a sense of pride and the company’s successful evolution over the past half century, but more importantly we look forward to realizing the tremendous opportunities in front of us for the coming years.

Now we’ll take your questions..

Thank you very much. [Operator Instructions] Our first question comes from Brian of the Maxim Group. Please go ahead..

Hi, great. Thanks so much. I’m wondering if you could update us on the competitive landscape in e-file as well as CMS if any new players have entered the market.

And then related to that, can you update us on the Australian opportunity and how that competitive market differs?.

Sure. No, we really haven’t seen any new players enter that market. The market as you know they’re generally larger deals and a little lumpier. It’s been a little lighter through the first three quarters of the year, but it’’ certainly not reflective of the competitive position. We continue to win virtually all of the larger more meaningful deals.

And we do expect -- the pipeline shows that in the fourth quarter and in the next year that things become more active again. Australia, there are two active books on the street. We feel we’re -- obviously it’s a new market to us and we’re not as familiar with the processes.

But we feel well positioned in both of those deals and those decisions should occur either in the fourth quarter or during the first half of next year..

Thank you. The next question is from Pete Heckmann of Avondale Partners. Please go ahead..

I had a question on the Texas renewal. Were there any notable changes in terms or conditions? Just in terms of the run rate I was looking at, it seemed like the renewals were just a little bit less than the current run rate..

Notable is a relative term. Not very notable. It’s substantially very much a similar arrangement.

The run rate as you observed may be very, very modestly lighter but we also believe that now with several years of experience and a very strong partnership, not only with the courts but with the bar, that there could also be other revenue opportunities that could more than offset the very modest haircut in the run rate..

Okay. That’s fair. And then you mentioned that Illinois will be your third fixed-fee e-filing deal. Just in terms of the relative economics, I assume fixed-fee deals offer you more certainty but less growth.

Which way do you think the market may trend? Do you think there’s possibility that some of the states would allow transaction fees to convert to fixed?.

Well, they’re really not that different. We are committed to our e-filing solution being a more of a SaaS-type arrangement and not offering it as a licensed event with ongoing support. The courts like to have some certainty in what that’s going to be.

So in some cases when they’re absorbing those costs, it obviously makes sense for them to be able to quantify that and budget for it. But it really is looking at what are mature transaction levels, right? There isn’t tremendous fluctuation in those levels.

And so looking at what those levels are and really backing into an annual fee that would be very similar to a transaction fee. So I think it’s just really reflective of us obviously being a flexible partner in structuring the contract the way it works for them.

But the revenue that’s generated from the arrangement is very similar regardless of the way it’s contracted..

That’s fair. That’s fair. And just one last question and I’ll back in the queue. Brian I may have missed it.

Did you provide royalties, Microsoft royalties for the period?.

No. Microsoft royalties this quarter were $1.4 million..

Thank you. Our next question is from Kirk Materne of Evercore ISI. Please go ahead..

Thanks very much.

John, just in terms of the courts and justice deals that were pushed out, were those awarded deals and they are a rolling them out more slowly or is the actual awarding of the deal getting pushed out? I’m just trying to get a sense on whether you guys have already been awarding the deal and it’s just a matter of rev rec or are your seeing more of a pause in people actually being able to deals as well?.

It would be both. There are -- Tyler-wide, we’ve mentioned this but we would kind of not rather get into tracking it. But over the past year there has been more awarded business that hasn’t contracted at Q end as is typical and that certainly has been the case with C&J.

There are a couple notable deals that have been awarded but have not yet been contracted and therefore aren’t bookings and backlog but they’re literally at the very, very end. And that has impacted the very marginal adjustment on revenues. It’s somewhat attributable to that.

These deals that we’ve had good visibility on for some time, in some cases we thought we would start a little bit earlier. We maybe lose a quarter of maintenance and a bunch of small things that add up to the few million dollar adjustment in revenue. So that is the case.

As I indicated earlier, though, the fourth quarter and into next year, the pipeline starts to become more active again..

Great. And then just Brian, obviously 26% organic growth is really strong.

Is there any way for us to think about it either on this quarter or more of a trailing 12 month basis what annualized bookings growth look like? I know a lot of people have questions as to you want more of an ACB figure would be relative to your guys’ longer term growth outlook into the low/mid-teens..

Yes. On a trailing 12-month basis, our organic bookings growth is just shy of 12.5%. So that smooths out some of these lumpier deals in there in the individual quarters. It’s in that low double-digit range..

Okay.

Is that fair to look at that as more of an annualized figure too?.

I would say so..

I know you have longer term deals. Okay, great. Thanks guys, I appreciate the time..

Thank you. Our next question is from Jonathan Ho of William Blair & Company. Please go ahead..

Hey, guys, congratulations on the strong quarter. I just wanted to start out.

You mentioned a number of deals that had EnerGov attached to them and I’m just wondering if you are seeing more of a trend towards larger deals that maybe are incorporating multiple systems?.

Yeah, I think we are. EnerGov will be the best example of it.

It’s basically if you look at Tyler and our win rates and our competitive positions have become very strong and you then look to, okay, how do we expand the addressable market space -- EnerGov is a great example of it where you used to have more of a lightweight solution in that space that was part of a broader Tyler suite.

You now have a heavier enterprise application that can be plugged into those lines basically and a proposal and drive incremental value in that engagement. And there are several other opportunities like that that we’re focused on. ExecuTime is a little of that to some extent.

But there are others that can be acquired and there are others that can be built, and that is part of our strategy to basically add more and more value to the relationships we have and drive incremental revenue and expand the addressable market space as our competitive position is driving win rates that are hard to continue to drive much higher..

Got it.

And then with the $8 million Illinois deal that you referenced on the e-file side, what is the potential for that opportunity? Is it sort of a one-year deal if you were to expand court types? What would be sort of the largest opportunity you could see come out of Illinois?.

The Illinois contracts start out, it’s a statewide arrangement but the 15 largest counties are not initially included in it. So they have the ability to opt in. We would expect that over time and some of the starting relatively soon that some of those larger counties will opt in. So it starts out at a $8 million total contract value.

So a couple million dollars a year but I think it has the ability to go up in the $5 million a year range if everyone were fully included..

Thank you. The next question is from Scott Berg of Needham and Company. Please go ahead..

Thanks a lot. This is actually Peter Levine for Scott. Just a couple quick ones here. I know in the second half of last year, you talked about an increasing ERP pipeline.

Considering your typical sales cycle, are those RFPs starting to play out now and to what magnitude?.

Yes, the ERP side of the business has performed very well this year, and has gained some momentum in the second half of the year. It’s actually one of our faster growing divisions in the company this year and probably about continue that momentum until at least the half of next year.

The win rates are significantly elevated from where they were traditionally which is very encouraging. Obviously the remaining segment of the market’s being split by several other players. So we’re really pleased with that performance.

They don’t tend to be the statewide C & J-type deals or the large multi-year e-file deals so we don’t drive into them as much, but that has occurred. Again the second half of the year has been very strong and we’re pleased with their performance..

Question on the New World side, I believe the initial pipeline dynamics had deal signings that were going to be I guess back end loaded. Are you seeing evidence of that in the quarter? I’m just trying to better understand the seasonality of the bookings of New World..

The back end is really all the way back to the fourth quarter. The Q3 results were pretty much a continuation of the first half of the year. Obviously their pipelines are newer to us but they have expanded.

The highly qualified pipeline has expanded actually about 23% since the beginning of the year and the broader pipeline has expanded around 35% since the beginning of the year. So that pipe has built as we said before and was our expectation. So we’re encouraged by that. We had a great show as I mentioned in San Diego a couple weeks ago.

we continue to be convinced that the opportunity that we saw when we did this acquisition remains and it’s a great opportunity for us..

Great. Final one here. You had a nice earnings beat, I think it was $0.04 or $0.05 if I’m correct. So what cost items are driving that? Just trying to better understand if you’re gaining better leverage or cost synergies related to New World or is it coming from I guess other natural parts of the business.

Well, it’s no one major driver. The biggest thing is head count. So we approve heads in the plan and the divisional and group leadership basically has the flexibility to bring those heads in as they go.

But they exercise a lot of discipline and if they’re able to get the work done, we don’t eliminate those heads out of the plan but a lot of it is just timing that different divisions and the quarter, these are divisions with hundreds and hundreds of employees that in the quarter, 23 heads light or something.

So that would be the biggest driver, that company-wide we are an able to manage the timing of head count and that drives some savings. There are a number of other variables as well. And then the other contributor is basically the mix of revenues.

So some of the lighter revenues really came directly out of the professional service side of the business which obviously is the lightest margin side of the business and you can see the recurrings being very strong, which is a strong margin part of the business. So a combination of all of those contributors..

Great. Thank you very much. I appreciate it..

I would like to add a quick correction on the question about Illinois e-filing. That contract would have revenues of about $7 million a year assuming all of the counties in the state were fully onboard..

Thank you very much, sir. Our next question is from Alex Zukin of Piper Jaffray. Please go ahead..

Hey guys, thanks for taking me question and congratulations again.

John, maybe can you talk a little bit more specifically about how New World has performed year-to-date on the revenue side versus your expectations? What have you been pleased with and disappointed with, and how are you thinking about New World’s organic top line growth maybe next year as it compares to kind of that low double-digit growth rate for Tyler?.

Yeah. As we said the flan is very much in line with what we had in the overall plan from the beginning of the year, both revenues and expenses. They have some of that head count management that I talked about just a minute ago, especially on the financial side.

On the public safety side, expenses are in line with our expectations but they are elevated from where they were. We’ve made a very conscious decision to add heads to that side of the business. It’s a good business. It’s a leader in the business.

But it’s not -- it doesn’t have the market share that say Odyssey and MUNIS and some of our very strong products have. And that’s our objective.

So expenses are elevated from there, historical run rates prior to the acquisition but there’s a conscious decision on our part to add heads to R & D, add heads to service on quality initiatives, raise the reference ability, improve the product competitively, and ultimately elevate the win rates to what we experience in our real strong leadership products.

Having said all that because I know we did a big acquisition and there’s a lot of interest in it, this can be a long-term process. This is not -- we don’t put the Tyler brand on it and add some heads and all of a sudden it’s an entirely different offering. That can happen over a period of years. The competitive landscape there is a very healthy one.

The competition in that marketplace is not something that you’re just going to run over. There’s some good competitors there. We will be committed to it for the long term. We believe we’ll achieve that elevated leadership position over time but I certainly wouldn’t want people to have the expectation that it happens in a quarter or two..

Got it.

And then if you look at the organic growth rates for the quarter and for this year, how much do you think that some of these pushouts at the end of the quarters, the shadow backlog, how do you think about what that’s shaved off of the top line growth rate for this year?.

We pay a lot of attention on the organic growth rate; much more than inorganic. And at around 11%, it’s a little lighter, it’s a fair amount lighter than the last couple years. We were up in the 16% range.

I think over the long, long term we talked to you folks about low to mid double-digit organic growth and we’re in that range but on the lower end of it. I see the awards and the market activity as we get toward the ends of this year as being healthy and strong.

I see us with a broader breadth of applications as we discussed with EnerGov and other opportunities. We mentioned the potential of a couple of deals in Australia, so beginning to do a little bit of international-type business. You have cycles. So as you know, we did a tremendous amount of business this California with courts.

We have awards like Illinois.

You have a lot of these different things that have kind of been a real strong execution mode this year especially in courts and then I think as though the counts go online and the e-file comes in behind them and you get that second recurring revenue stream of e-file on top of your maintenance, all of those things we would expect would contribute to a higher level of organic growth.

So we would think this a year, a good solid year, a little bit on the lower end of the range of organic growth that we’ve experienced and yet we think there’s a tremendous number of catalysts that allows to drive that back up as we move forward..

And then John just to hit one more time on New World, do you expect to start seeing any more meaningful revenue synergies as you cross-sell New World’s products more directly into your base and you can cross-sell some of your products into the New World base? Is that something -- clearly we’ve seen some upside on the expense side this year.

Should we expect to see some of that revenue synergy flow through next year? Then I’ve got a couple questions for Brian on gross margins..

Well, until you said next year, my answer would be certainly. And I certainly won’t be surprised to see those revenue synergies materialize next year. But I’m still cautious about people having expectations quarter-to-quarter on that.

But we mentioned this Chief of Police show and we’ve got SoftCode and Brazos and Odyssey and New World Public Safety and what we call Tyler Alliance and adding value across applications that no other companies can do.

We have solid players in each of those spaces but nobody that owns assets across the complete offering and has the ambition we have there. It was incredibly well-received. So we’re very enthusiastic that people see the value in that and that long term we’re going to have something to offer that’s hard to compete with.

But I do want to be cautious and being back on this call in 90 days and not having three names or examples for you. We’re very enthusiastic about what we’re doing there. We’re very confident that over the long run it’s going to be an offering that’s hard to compete with. But we’ll be patient to see how it materializes..

Got it. And Brian, on the gross margin side, you’re clearly exceeding your goal for gross margin expansion year-over-year. You’re up, I think 400 basis points. Your goal is to deliver 100 to 150 bases points of expansion.

How should we think about continuing to see synergies on the expense side, on the margin side from New World as we get into next year?.

Well, clearly New World has given us a big lift this year. And we expected that. We talked at the time of the acquisition about their margin profile being higher than our blended margin profile.

Not necessarily higher than some of the parts of Tyler that have similar characteristics to New World’s business, but higher than ours as a whole with a revenue mix that has more maintenance revenues in it, little bit lower level of professional services typically with mature products.

So they have of a lifted our overall -- that 400 basis point margin improvement just the effect of New World being there has added roughly half of that increase.

So I would expect that going forward with that now in our base, that we would be back more on that trajectory that we’ve talked about in that low double-digit revenue increase that we would be seeing again that sort of 100 to 150 basis points of margin improvement over time. That would sort be the annual average of that kind of growth rate..

Got it. And last one for me, guys, I promise. Can you remind people on your use of cash? You guys have clearly paid down a lot of debt this the year. You like to use cash for M&A but also stock repurchasing.

Can you frame kind of how you look at each of those cases right now and kind of what sways the decision tree for you guys over time?.

Sure. Go ahead, Brian..

No, you go ahead..

Okay. Our primary use of cash is always our priority is investing in the company and in Tyler products and you’ve seen that with elevated investments this year both in R & D and in operating expenses related to Tyler products, and the infrastructure of the company. M&A would typically be next in our priority.

So looking for good strategic fits and we would expect to continue to be active in the M&A market.

As we said, we don’t see something of the size of New World on the near term horizon but we would expect to continue to be active in evaluating and pursuing the kinds of acquisitions we’ve done in the past, and certainly have the capability from a management standpoint and from a financial standpoint of being able to execute those.

And then with respect to stock buy-backs, we’ve certainly been opportunistic over a decade plus and have created significant value through those buy-backs and we would expect to continue to have that as a component of our uses of cash but probably third in priority but certainly on an opportunistic look at those..

Thank you. [Operator Instructions] Our next question is from Mark Schappel of Benchmark. Please go ahead..

Hi. Good morning. Thank you for taking my question here. Brian, I wonder if you could just remind us what we could expect in the coming quarters here with respect to the e-filing in California..

California e-filing actually picks up reasonably strongly next year. We’ve looked at -- right now it’s a pretty small contribution from California e-filing. It is, we’re really just starting to see a number of counties go live on the system and then the e-filing follows that.

So for example right now our run rates in California this quarter was just less than a $250,000 of the e-filing revenue. And that’s expected to grow pretty meaningful next year I think to the couple million dollar run rate and over the next couple of years builds pretty significantly off of that.

If we -- so somewhere in the $2.5 million to $3 million range next year and then expanding really potentially exponentially from there to potentially somewhere in the $15 million to $20 million range as both with places that are committed to us or that already use our e-filing system. But that would be over the next, say, four-year time period..

Okay, thanks. And finally John, growth in the appraisal business has trailed the core software business here, at least this year, and I was just wondering if you could run through where you think that growth rate should be in that business and also remind us some of the ties it has to the broader software business..

Yes, I think you’re referring to the appraisal services..

Yes..

The tax and appraisal software business has actually performed really well and growth rates higher than what we would have expected over the long term. Appraisal services are cyclical and they’re predictable and we are in state by state kind of a slow period.

And we would expect that they would continue to be a little bit lighter through next year and then they’ll accelerate into 2018. But long-term growth there, we don’t look to be at high level. I think it’s more of a 5% grow over the long term which again could actually have negative growth one year and higher growth the next.

And that’s not a reflection of competitive position. It’s just a reflection of how the different state cycles run which we track and know. These guys have been doing this for decades. We do like the business even though it’s little bit different than our software business. The other part of your question is, it’s an essential service.

And in the states where we have these relationships, it’s another very sticky part of the relationship that supports our software relationships with these cities and counties that’s important and hard for other people to compete with.

So over the years and there was a time years ago, those who have been around the story a long time, where actually appraisals services, I think, it was 27% of all Tyler revenues which made us a very different kind of companies and now it’s obvious list down in the low single digits.

So it’s a nice strategic touch point on relationships with these cities and counties. It’s an appropriate percentage of our overall revenues and we’ll remain committed to it..

Thank you very much. Our next question is from Kevin Liu of B. Riley and Company. Please go ahead..

Hi, good morning. In terms of the integration of your courts and justice product with the New World public safety systems, can you update us on the timing when you could go to market with a fully integrated suite? And related to that just in terms of the conversations you’re having at the trade shows and the like.

Are you expecting RFPs to come out in the next year or so for an integrated solution or is this something more that you guys are pioneering and you’re getting a favorable response to that?.

Yes. So the first part of the question, it’s a process. There won’t be some major release where these products all of a sudden are seamlessly integrated and the user experiences and the work flow and all those things are Tylerized and as if one product.

that’s something we’ll achieve over time and it may be four or five years, say, before most of the major elements of that have been achieved.

But I think as we indicated, even at this show a couple weeks ago, to be able to talk about and be a little bit specific about what we’re doing now and when they can see these things emerge, it will be the kind of thing that even smaller steps in delivering early indications of where we’re going validating the story we’re telling, should start to influence and we believe will start to influence decisions.

We don’t -- we wouldn’t expect that all of a sudden we’ll see a big shift in our fees will come out for fully integrated criminal justice offerings.

Rather we’ll continue to see a case management RFP or a public safety RFP, and we think these are always really competitive situations and when you’re a finalist with one or two other players and people who are really reaching to try to find win one of these solutions, which one of these companies do we want to go with, that the Tyler story and what it offers down the road because they are an entering into a very long-term relationship, can actually affect a decision even in the next couple of years when the deliverables aren’t that much different than they are today..

Makes a lot of sense. Thanks a lot for taking the question..

Thanks..

Thank you. The next question is from Tim Klasell from Northland Securities. Please go ahead..

Hey, good morning. Two quick questions. First on the New World software acquisition. Seems like it’s coming along nicely.

How do you feel about doing similar sized acquisitions going forward now that you’ve digested New World? Do you consider that or is that -- should we consider that to be maybe a one-off that we might only see every two years or several years?.

Yes, it was not just a little out-sized from our historical acquisition. It was by a factor of many the largest deal we’ve done certainly based on the value of the deal. There are a very limited number of assets out there that would have that kind of value that we would see as a fit or as attractive and some of them we wouldn’t have any interest in.

We don’t see the real synergies and opportunities that we saw with New World. So I can’t sit here today and say there’s no likelihood at all that we’ll do another deal of that size but again there are very limited assets that we would be interested in at that level.

So the probability is of somewhat low and yet we certainly wouldn’t back off for one so there is always the possibility something could occur. If you back down from New World, most of our deals are $50 million or less, historically.

And I certainly see kind of a mid-range there, $30 million to $40 million, $100 million to $120 million where we do look at companies from time-to-time that we would be anxious to do a deal on. We will be disciplined as well.

Valuations are high and you don’t know the fields we don’t do it, right? So we’ve participated in a number of processes in that size range that in some cases we were just too disciplined to do the deal. But I wouldn’t consider it unlikely at all that you would see deals in that range over the coming years..

Okay, good. And then the awarded deals but not signed, it seems like this has been a little bit of a pattern over the past year and I don’t know if it’s just happenstance of that growing.

Is there something changing out there in the market, or is it again just happenstance?.

I don’t think there’s much changing in the market. I think we’re doing more large deals. And when you get into large deals, just the process from award to contract is longer. It’s a more deliberate and extensive negotiating process.

So they remain in that category a little longer than a standard deal that we do many of and we send them the contract and there literally would be a couple conference calls and it’s signed two or three weeks later. So I think a large -- doing more large deals contributes to that.

Obviously those are big numbers so to have a big number and award an unsigned business, there could be three, four names that are driving 70% of that in some cases. What we pay a lot of attention to is how long they stay in that category. So probably 70% of that is from the current quarter.

In other words, we were awarded it in the current quarter and it’s just going to slide into the next one. If they get two and three quarters old, then you start wondering whether this deal is a real deal that’s going to happen, and there isn’t much of that.

I would say 70% of it’s in the current quarter and then another 15% or 20% is in the past quarter. And very little of that is stale or old or has any risk to it. So it’s good business. It’s going to occur again. There’s a number of larger deals that the process is just more extensive.

There’s more negotiating when you get to an agreement, the contract literally works its way around the state house or the City Hall and has to get all the right signatures and it just takes a long time..

Thank you very much. Our next question is from Brent Bracelin of Pacific Crest. Please go ahead..

Thank you. Most of my questions have been asked and answered but maybe I’ll ask one here on the technology side. You guys have been talking about this kind of federated foundation, common UI, common service pricing and so on for the last year.

Could you maybe just provide us an update on the federated strategy where you’re at from the technology standpoint, what you’ve accomplished in the last year and when should we start to expect you to expose some of these new technologies to customers?.

Yes, we’re real pleased with it. We have talked about taking some significant leadership from different areas of the company on the technology side. Jeff Green leads a big team. And they generate technology that’s been used by the different dictions. They also coordinate with divisions that are leaders in different places. You mentioned user experience.

That would be a good example of that and then expose that to the other divisions.

And so it’s a process that’s changed organizationally but it’s going very well and there will be releases very late this year and early next year that will reflect that and I’ve seen demonstrations and screenshots of products from different divisions that previously you would clearly say those come from different companies and today it would take a pretty experienced eye to recognize the differences..

Thank you. Our last question is from Frank Felice of Serendipity Ventures. Please go ahead..

Thank you for taking my call. A lot of the technical questions have been addressed by the group so many appreciate it. Congratulations on the great quarter.

In addition to I guess going back a little bit, strong dominance in the courts base, a lot of Odyssey acquisitions, really quick in the state of California pretty much dominating most of the counties very shortly, couple year timeframe so congratulations on that and doing well and getting them moving.

Also commending you on the acquisition of New World from a technology staff perspective.

In comparison to some recent Motorola consolidation in the public safety market space with Motorola purchasing Spillman recently and then the consolidation that’s occurred which seals a little bit more market share consolidation rather than a real strategic technology alignment which I think was really smart from the New World perspective.

You answered questions regarding New World and Tyler integration so I appreciate that and the candor that it would take, four to five years, to do a lot of integration.

But the one question and maybe it hasn’t been addressed or maybe it will be addressed over time is with the acquisition of New World, there’s a little bit of overlap between your product stacks, specifically ERP and public safety.

Has any decisions been made at this point as far as what direction you’ll go, ERP and public safety as well as retaining both products, leading it one of the products over the other’s, or continuing to push both. I think that’s my only question..

It was a good observations and appreciate the question. And maybe not being active in some of the other names you mentioned shows that we are careful about creating too much conflict in our channels and our product strategies. But you can’t do a lot of big deals without some of that. And we do have -- Tyler public safety solution.

It’s certainly a fraction of the size of the New World public safety solution. Obviously we’ve talked about investing heavily in the New World solution. Obviously MUNIS is one of our core products that drives highest revenues and operating profit in the company and yet New World has a very strong offering there as well.

I think you can look at Tyler historically.

Look at the Infinite Vision products, you look at our Incode local government products and you look at a number of different products that had niches in the marketplace that while they will may look somewhat conflicting, were they MUNIS or New World public safety or some of our large products, there’s a niche and there’s a market space there that they can continue to be effective and they have important customer bases and we have a history of continuing to invest in those products and having them continue to meet those customers’ needs for a very long period of tile and in those specific market segments, continuing to be competitive.

Pleased to see obviously New World ERP isn’t going to generate the number of deals that MUNIS does, but we mentioned a number of very competitive and important wins in the quarter that continue to reinforce the competitive position and there’s segments of the marketplace where I can they will continue to be very, very competitive and provide incremental business to Tyler that we wouldn’t have had before.

And reversely, the same is true of Tyler’s public safety solution where it had certain market spaces where it’s strong and while it’s a fraction of the size of New World’s public safety system, we’ll continue to maintain that product, invest in it and make sure it serves those customers’ needs and in the segments of the market where they’re strong, they’ll continue to add customers..

Final item on that and I appreciate the response. Being in the business myself for the last 15, 20 years, the tag line you guys stated, most recently at IACP, "from dispatch to disposition," is strong, it’s absolutely can see how it resonated with the market.

No other vendor that I can recall going back 15, even 30 years has been able to do consolidate anything from dispatch to disposition.

So even -- I mean I think you even respectfully disagree, I think states like Texas and California I think Tyler will be greatly benefited by in that four to five year timeframe of integrating those products as thoughtfully and smartly as possible because those states typically Texas, California, Illinois, have a strong history of integrated criminal justice and public safety software systems that is really no other vendor is really is going to be able to pull off as one vendor solution and that’s what a good majority of these counties really want.

They want that single throat-to-choke essentially rather than a piecemeal solution. So, I think it’s going to benefit Tyler in that four to five-year time from of putting thought into the integration. So that’s it.

That’s all I really wanted to state but I think that’s a good message for the market because there’s no one else out there that is really going to be able to pull that off in the next four to five years..

Thank you very much. Gentlemen, we have no further questions in the queue.

Do you have any closing comments?.

Well, thank you very much, appreciate everybody joining us on the call today, appreciate your interest, and if you do have any further questions, feel free to reach out to Brian or myself. Thanks again and have a great day..

Thank you very much, sir. Ladies and gentlemen, that concludes today’s conference. Thank you for joining us and you may now disconnect your lines..