Hello, and welcome to today's Tyler Technologies Fourth Quarter 2019 Conference Call. Your host for today's call is John Marr, Chairman of Tyler Technologies. [Operator Instructions]. I would now like to turn the call over to Mr. Marr. Please go ahead..

Thank you, Kate, and welcome to our fourth quarter 2019 earnings call. With me on the call today are Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the safe harbor statement.

Next, Lynn will have some preliminary comments, then Brian will review the details of the fourth quarter results and provide our guidance for 2020. 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.

Lynn?.

Thanks, Brian. We closed out 2019 by reaching 2 significant financial milestones as our annual revenue surpassed $1 billion and adjusted EBITDA exceeded $300 million for the first time. This was also our 33rd consecutive quarter of double-digit revenue growth as GAAP revenues grew 19.4% and non-GAAP revenues grew 18.3%.

Organic revenue growth accelerated for the third consecutive quarter, returning to double-digit growth at 10.2% for non-GAAP revenues. Our core software revenues from licenses and subscriptions grew 30.5% on a non-GAAP basis, with 18.3% organic growth.

The mix of new business was once again weighted more towards subscription arrangements, which represented approximately 52% of the total number of new deals and approximately 54% of new contract value signed this quarter. Over the last five years, the percentage of new SaaS business has continued to rise.

And 2019 was the first year in which subscription arrangements made up more than 50% of the total contract value of new software deals, finishing at 63% for the year. This new business mix shift has put pressure on short-term revenue growth.

If the mix of new business in 2019 have been similar to 2018, we estimate that 2019 revenue growth would have been approximately 160 basis points higher.

As the trend toward greater cloud adoption continues to grow in our market, we are actively working with Amazon Web Services teams under the strategic collaboration agreement with AWS that we announced in October.

We're currently refining road maps for optimizing Tyler products for the cloud and for transitioning certain clients hosted in our data centers to AWS. GAAP subscription revenues grew 34.3%, and non-GAAP subscription revenues grew 32.7%.

Total recurring revenues from maintenance and subscriptions grew 22.7% on a GAAP basis and comprised 67.2% of total revenue.

Although the mix of new business in the fourth quarter was weighted more towards subscription arrangements, software license and royalties revenue reached a new quarterly high at $32.4 million, an increase of 25.3% over Q4 of 2018, driven by strong sales in our public safety and MicroPact units.

The total value of new contracts signed in the fourth quarter for New World Public Safety was more than double than last year's fourth quarter signings.

Also, as we discussed last quarter, there were several significant MicroPact deals that were signed by our partners in the third quarter, but the related contracts with Tyler were signed in Q4 and contributed to this quarter's license growth.

Bookings in the fourth quarter were particularly robust at approximately $331 million, up 33.5% over Q4 of 2018. Even excluding MicroPact, bookings were up approximately 26%. Bookings growth was primarily driven by the number of new deals, particularly midsized deals rather than by very large deals.

And our largest new contract was just under $9 million. We signed 314 new software contracts in the quarter, a new record. For the full year 2019, we signed over 1,100 new software deals, approximately 44% more than last year. Our 6 largest SaaS deals of the quarter, each had total contract values of greater than $3 million.

2 of these were for Odyssey court case management solution, an $8.7 million contract with Franklin County, Ohio, the largest court system in the state; and a $3.6 million contract with Jefferson County, Texas. With the Jefferson County deal, we now serve courts in all of the 20 largest counties in Texas.

We also signed two large multi-suite SaaS contracts that each included our Munis ERP, EnerGov Civic Services, ExecuTime time and attendance and Socrata Data Insight solutions. One with the city of Oxnard, California valued at $8.3 million and the other with the city of O'Fallon, Missouri, for $4.7 million.

In addition, we signed 2 large SaaS contracts with clients in Florida for our EnerGov Civic Services solution, a $6.3 million contract with St. Johns County and a $5.6 million agreement with the city of West Palm Beach, which also included our Socrata Data & Insight solution.

Our five largest on-premises license deals for the quarter, each had total contract values greater than $3 million. The largest was a multi-suite contract valued at $5.1 million with the city of Lawton, Oklahoma, which included our Munis ERP, EnerGov Civic Services, New World Public safety and Socrata Data & Insight solutions.

The two largest license contracts for our MicroPact entellitrak solution were a $4.3 million contract for the Puerto Rico Vocational Rehabilitation Administration and a $4.2 million contract for the U.S. Department of Veteran Affairs, Vocational Rehab and Employment Agency.

We also signed a $4.2 million license arrangement with the city of Coral Springs, Florida for our Munis, EnerGov and ExecuTime solutions as well as a $3.5 million contract for our New World Public Safety solution with the city of Jackson, Mississippi, which is the largest public safety contract ever for New World.

I'd also like to highlight a contract with the North Carolina Administrative Office of the Courts that we announced earlier this week. The contract, which was signed in the first quarter of 2020, is a 10-year $14.5 million SaaS agreement to provide our Brazos Electronic citation solution for over 500 law enforcement agencies state wide.

It's a great example of our ability to expand existing client relationships through the unmatched breadth of our product suites. This latest contract builds upon our largest SaaS deal ever, an $85 million statewide contract for our Odyssey court case management solution in North Carolina, which was signed in June of 2019.

As a point of reference, when we acquired Brazos in 2015, Brazos had annual revenues of approximately $10 million.

As a result of the investments we've made in the Brazos products and organization and their integration into Tyler, we now generate approximately $17 million in annual revenues from Brazos, and this latest single contract is 1.5x their total revenues at acquisition.

Now I'd like for Brian to provide more detail on the results for the quarter and provide our annual guidance for 2020..

we expect 2020 GAAP revenues will be between $1.204 billion and $1.224 billion, and non-GAAP revenues will be between $1.205 billion and $1.225 billion.

We expect 2020 GAAP diluted EPS will be between $3.81 and $3.93 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate as well as the final valuation of acquired intangibles.

We expect 2020 non-GAAP diluted EPS will be between $5.60 and $5.72, of which approximately 55% to 60% is expected to be generated in the second half of the year. For the year, estimated pretax noncash share-based compensation expense is expected to be approximately $77 million.

We expect R&D expense for the year will be between $92 million and $94 million. Fully diluted shares for the year are expected to be between 41.5 million and 42.0 million shares.

GAAP earnings per share assumes an estimated annual effective tax rate of 10% after discrete tax items, includes approximately $31 million of estimated discrete tax benefits related to share-based compensation, which may vary significantly based on the timing and volume of stock option exercises.

Our estimated non-GAAP effective tax rate for 2020 is 24%. We expect our total capital expenditures will be between $36 million and $38 million for the year, including approximately $9 million related to real estate and approximately $7 million of capitalized software development costs.

Total depreciation and amortization is expected to be approximately $80 million, including approximately $54 million of amortization of acquired intangibles. Now I'd like to turn the call back over to John for his comments..

Thanks, Brian. We're pleased with our fourth quarter performance as we finished the year and the decade on a strong note. From a historical perspective, when we started the decade, our revenues were $290 million, with less than 50% of those recurring. Our stock price was $20.05, and our market cap was approximately $700 million.

We finished the decade with revenues of more than $1 billion, of which 67% are recurring, a stock price of more than $300 and a market cap of approximately $12 billion.

We're proud of our progress over the last 10 years and especially appreciative of our extremely talented team of more than 5,400 employees whose efforts are crucial to the success of Tyler and our clients.

We're even more excited about the opportunities ahead of us as we build on our strengths to expand our markets and drive toward $2 billion in revenues. Our robust bookings in 2019, and particularly in the fourth quarter are indicative of our competitive strengths as well as an active marketplace.

We expect to achieve double-digit organic revenue growth into 2020 and to show significant progress toward returning to the margin expansion trajectory that we achieved through most of the last decade.

Although R&D expense is expected to increase approximately 15% in 2020, the rate of growth is significantly below that of the last 2 years and includes our increased investment in cloud technologies as we continue to work in partnership with AWS to accelerate our move to the cloud as well as increased investment and expanding our revenue streams for payments.

Finally, Tyler was recently named for the second consecutive year to the Forbes Best Employers for Diversity List. Acceptance and inclusiveness are important attributes of our company culture, and we're honored to be recognized for this diversity. Now Kate, we'll take questions..

[Operator Instructions]. Your first question comes from Peter Heckmann with D.A. Davidson..

Brian, could you talk a little bit about bookings for the quarter and the year? And just if you have it, a constant term comparison? I know that at least in the second quarter, the term -- the average term is a little bit longer..

Yes. The average term of new software subscriptions in the fourth quarter was 4.4 years. Last year in the fourth quarter, it was 4.1 years. So that change would have had -- had we had the same term as last year, our bookings growth would have been 32.3% this quarter.

So there were -- that mix, although, is -- as we've talked about, we've driven the average term length down over the last couple of years, leading with a shorter initial term. We still do some contracts that are 5 years. And the way the mix fell out this quarter is a little bit higher..

Okay. Yes, so not much difference on a quarter-over-quarter basis.

We assume it would be about the same, just a small difference in year-over-year growth for the full year '19?.

That's correct..

Okay. And then just payments has been growing really, really nicely.

Can you just remind us some of the areas that are contributing to that?.

Yes, sure. Pete, this is Lynn. Payments is something that we've been doing for some time now. I'd say, in 2019, we've really taken a hard look at it and looked at the market and started thinking that this is really a potential strategic driver for us. As you know, it's transactional business. It's online transactions, it's credit card fees.

It's things, for example, in our utility billing solutions, our tax, our courts, our payments for permitting and licensing, community development, parks and rec, miscellaneous payments. So historically, we've done a little bit of that.

We're consolidating that internally in Tyler under a business unit and putting some investment and focus on that this year. And I do believe it's a stream that we're excited about in the future. I think it's something that you're going to see it grow and something that we can really capitalize on.

But it -- I think it was John's comment, we -- it is something that will require a little bit more investment this year, as we bring all these various applications across these business lines together, work on a consistent UI and ID and stuff like that, but not long-term investments, but investments that will occur this year..

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

Congratulations on the strong bookings quarter.

I just wanted to start out, just trying to understand if there was anything abnormal in 2019 in terms of the pipeline? Or as we look at 2020 and start to sort of contemplate the bookings activity and pipeline there, it's a sort of a sustainable level that you guys are seeing?.

I don't believe there's anything abnormal about the pipeline in 2019 as opposed to the pipeline we go into 2020 with -- obviously, in the middle of the year, we had those 2 very large contracts, particularly the $85 million SaaS deal in North Carolina.

But we've continued to see strength as we mentioned on the call or on the comments earlier, it really wasn't -- fourth quarter didn't have any mega deals in it. It was a lot of solid mid-range deals and a high volume of deals.

Certainly, we're seeing more volume of deals from the acquisitions we've made over the last couple of years, and MicroPact had a very strong fourth quarter as well as Public Safety. But we're very confident in the competitive position of both of those products.

And as we've talked about in the past, that often there's a period of investment after acquisitions and after that we start to see the impact of leveraging our sales organization, leveraging our customer base. And we're certainly seeing that with public safety at this point. So I think we go into the year of 2020 with a strong pipeline.

And -- but nothing particularly unusual about the market activity or the pipeline as we finish 2019..

Got it.

And then as we sort of look at the public safety performance in the fourth quarter, can you talk about what made the most difference in terms of the investments? And maybe compare and contrast the opportunities that you could target and win rates relative to maybe last year?.

Yes, Jonathan, I think the -- as you -- we've talked about this for several years now, the investments we've been making at Public Safety, and part of it is -- too is as we talk a lot of these things take time.

We've had a lot of success over the last couple of years, both in sales, but then actually starting to implement and getting those customer references. Those investments are paying off. I think we mentioned the number of licenses in the Q4 of this year were more than double of last year. Same thing with number of new names.

There's just a lot of momentum going on in the marketplace right now and really validates our strategy. But it's also -- it's a testament to the work those -- that the folks at Public Safety have been doing. We talk a lot about the reputation of business. And there's been a lot of work going on. It takes time.

We talk about -- it's slow moving, but it starts gaining momentum. And I think we're starting to see that. And so it's investments -- obviously, in CAD, we've got some big projects coming out with our e-records.

But a lot of the new stuff we've been doing, for example, around mobility and things like that, that's really put us sort of the cutting-edge in the public safety market right now. So we're excited to get those big deals. We've talked about how we're moving up market and getting larger deals.

We've also starting to -- similar like we do with courts a couple of years ago, we talked about Franklin County and how we were making inroads into Ohio. We're seeing some of that in public safety. We're just starting to crack into some markets they hadn't cracked into before.

And also, I'd say, leveraging our -- the inside sales channel, leveraging other products, bringing Brazos along, we mentioned a lot in Oklahoma deal, where we're partnering with other sales teams at Munis and sort of leveraging the whole Tyler -- total Tyler concept has really been resonating with the Public Safety customers..

The next question is from Rob Oliver with Baird..

Lynn, one for you. Clearly, some early success here with new subscription offerings from you guys over the past year, and that's been a pivot, we've seen that number grow nicely. I'm curious, the pace of conversions more than doubled, albeit still off of a really small base.

I'm just curious how you guys think about that conversion side of the story versus selling new subscriptions? How you are thinking about it from a go-to-market perspective, if you're thinking about approaching clients early -- earlier than the renewal point of their contract? And then, as you look at your pipeline of renewals over the next couple of years, how you think about that? And then I just had 1 quick follow-up for Brian..

Yes, sure, Rob. I mean, you're right. We've talked about it. The market continues to tend to shift towards Saas. As we look at conversions, it is something that we're thinking about and mapping out plans, that obviously also lines up with our strategic collaboration with AWS.

I don't know that we'll necessarily have a significant acceleration of that planned in the near term, but it is something that we are looking at. Stepping back, our relationship with AWS, we are trying to modernize our products.

We do recognize the shift, but there still is a piece of the market that is still focused on on-prem, and we want to make sure we don't lose that as we go through this change and recognize the shift in the market..

Great. And then, Brian, just for you quickly. You guys obviously are coming off this period, the last couple of years, where you had elevated R&D growing around 30-ish percent. It looks like it's going to be up 15% this year.

So seeing that moderation that I think you spoke about, I know John mentioned in his comments that you guys would be sort of returning to that margin growth again. Is that -- I'm not sure if I missed it, if there's a time line on that.

So are we then assuming that this trajectory now you've established of that R&D growth moderating will continue beyond this year without giving specific guidance?.

Yes, I think that's a correct assumption. Our R&D guidance is up around 15% from this year, which -- from '19, which is about half the growth rate that we've seen in the last 2 years. Actually, if you look at the run rate that we exited Q4 with, the 2020 R&D is only up about 10% from that Q4 run rate. So it is moderating.

The R&D around our products -- existing products is flattening. We've sort of grown into that level. Lynn talked about some of those investments we've made in public safety, broadly across our product lines.

So most of the incremental R&D is around the acquired companies, emerging revenue streams like payments and our -- optimization of our products for the cloud. So we talked about sort of growing into this higher level of R&D and seeing that moderate, and I think you'll continue to see that.

From a margin perspective, I think the midpoint of our guidance for next year implies roughly flat margins with 2019 after a couple of years of declines, mostly driven by the increased R&D and the acquisitions. And I think we would expect to see that improves -- lead towards improved margins as we move out of 2020.

But certainly, getting back on that trajectory of margin improvement that we've historically seen is a key part of our long-term model..

Rob, if I could add to that. I think, historically, we've taken a pretty balanced approach to investing in growth and focusing on margin expansion. And we've talked about in the last few years about the elevated investments, and as Brian mentioned, growing into those and potentially redeploying some of those.

It is a focus on us to look at margin expansion opportunities.

But at the same time, I want to be careful to also recognize that when we see market opportunities out there, marketing opportunities, either a new or emerging revenue stream like Tyler payments, changes in the competitive landscape, either see some weakening of some competitors or we see some opportunities with some competitive advancements in our products or shifts in the market as we continue to move to the cloud and we think about modernizing our apps, which we think over time will also lead to margin expansion.

We will continue to take advantage of those opportunities. I just want to make sure that, that's also set out there..

The next question is from Kirk Materne with Evercore..

Congratulations on the nice end to the fiscal year. Maybe John or Lynn, if you guys could just talk a little bit about the broader market? Obviously, you service a market that doesn't exactly move on a dime in terms of technology trends, but the number of deals and the velocity of deals, I think, this quarter was really impressive.

[indiscernible] major deal from a bookings growth perspective.

So are you just reaching a much broader audience of deals at this point in time? Or how do you see sort of your end market, is that picking up? I'm just trying to get a sense on how much of this is sort of the market may be picking up a little bit in terms of spending? And then how much of this is you being able to sort of go after a much broader set of opportunities?.

Yes. Sure, Kirk. I'll start and let John jump in. From my perspective, as Brian mentioned, the market and the pipeline are solid. I wouldn't say that there's been any material change in the last quarter or 2 on some level. I think it's a little bit of validating some of our investments. We've been increasing our competitive position.

We've been doing things both internally with builds and through acquisitions. We're out there executing really well in the market. There still continues to be a lot of activity that's outside of RFP. I don't know that that's anything specific to the market as so much as our internal performance and validating our -- again, our prior R&D investments..

Yes, I think that's right. I would say that, Kirk, it's more attributable to our addressable market space. So we continue to try to broaden the breadth of products we have through organic builds as well as the acquisitions we've done, the size and range of clients that we're competitive with.

So some of our products were competitive in certain size, cities or communities, and we've broadened that. Public safety would be a good example, as we announced in this one of the largest deal ever.

In terms of market size, the only thing I'd say that's a little different and it's -- again, more of it's attributable to what we're addressing in the marketplace. Some of these companies that we competed with pretty recently are maybe becoming a little more legacy and their attrition is accelerating to some degree.

So some of the better competitors we've had over the last 10 years, I think, are seeing significantly higher attrition rates than what we experience in most of our products. And those are really good opportunities. Those are the right-sized cities and counties and districts that we look for.

And as they come back in the marketplace, that -- those are really good opportunities for us..

And then just one last one for you all. And I realize it's too early in terms of the AWS relationship. But as you think about sort of the technology shift towards AWS as your infrastructure platform.

Did you have any thoughts on how that might inform your thought process around M&A? Meaning are you be able to build perhaps a little bit faster if you have a little bit more flexible infrastructure? Would it slow you down from buying some of the companies you bought, if they would have to be ported over? I'm assuming it's maybe too soon for you guys to have really definitive view on that, but I'd be curious if that's come up at all as you guys think about sort of build versus buy over the next couple of years?.

Hey, Kirk....

Interestingly, some of the acquisitions we've done already -- they already had maybe more comprehensive relationships with AWS. So it will work both ways. There could be some acquisitions that aren't as cloud oriented or have other facilities that they're using, but AWS is a big player.

So a lot of the acquisitions we do are obviously smaller companies than us. They don't have their own clouds. They generally hosted somewhere else. And AWS is a place where many of them may already be hosted. So it will work both ways, but in a lot of cases, the target companies are AWS customers..

The next question is from Scott Berg with Needham & Company..

Congrats on a very strong quarter. I guess, I can't remember who said it, I think it was John in the pre-scripted remarks that you expect organic revenue growth to remain in the double-digit range here in 2020.

I guess, can you unpack that a little bit? And I asked the question relative to assumptions around mix on new deals that are subscription or license. Usually, we see a company as they tilt stronger towards subscriptions, revenue growth kind of decelerates or is a little bit lower because of the rev rec impact of the shifting transaction mix..

Yes. And I think that the midpoint of our guidance implies and certainly the upper point implies double-digit growth, just a little north of 10%. The lower end of the guidance range would be a little bit below that. I think the organic implied range is roughly 9% to close to 11%. There's a couple of things.

Now licenses are well under 10% of our total revenues. So the impact, as more of our businesses become subscription driven over the last few years, is less significant. I think we're starting to see some of the contribution from some of our recent acquisitions, which generally we expect to grow above Tyler's core organic growth rate.

And also as some of our subscription arrangements that were longer-term arrangements entered into in prior years start to come up for renewals and see increases in those, that also helps contribute to the growth. So there are a number of factors there.

The exact mix of new business between SaaS and license is difficult to estimate, often customers make that decision late in the process. So even with deals that have happened this quarter, there are a few that we're not certain which way they're going to go.

But generally, I'd say, the assumption is that the mix of subscriptions will be a little bit higher in 2020 than it was in 2019. But again, 2019 was skewed a bit by the very large deal in North Carolina.

And we continue to see a mix in those larger deals that's weighted even generally a little bit more heavily towards license deals, although that's changing over time. So there are a number of factors that go into that growth rate. But it clearly is accelerating a bit from what we've seen in 2019..

Very helpful. And then for from follow-up perspective, just trying to think about the model with the increasing payments and transaction mix going forward, even though it's a small change.

But can you remind us what the kind of the gross margin profile is on those more transactional revenues? And just trying to understand if that's maybe a tailwind or headwind for margins as it becomes a greater mix of the business going forward?.

So I think it's certainly a tailwind for margins over the long term. Those transactional margins, we don't really break them out completely. But the margins on those are well above our blended overall margins, particularly when we get any start-up costs associated with a new contract behind us.

But those would be margins, I think, on a payments arrangement or a e-filing arrangement that's at scale, that fully implemented, those margins would be well above our blended overall margins..

The next question is from Charlie Strauzer of CJS Securities..

This is Brendan on behalf of Charlie. So I just want to ask, looking at the R&D beyond just this year.

Do you see an inflection point where you get operating leverage on that line? Or is there just too many opportunities right now and you think, at least for a while, you'll be, I guess, outgrowing your top line with R&D or similarly? And then another -- the second question with New World, obviously, a really strong quarter with public safety, and really exciting that you got the Jackson contract.

Is there any other progress going on with moving upmarket beyond the Jackson deal?.

With respect to R&D, yes, we -- I'd say, beyond 2020, as Lynn said, we sort of reserve the right to adjust our investments to address market opportunities, competitive opportunities and to take advantage of those over the long term.

But generally, we would expect that we continue to see more leverage in R&D after this period of elevated investments over the last couple of years, and 2020 certainly shows progress towards that.

In the public safety area, one of the goals of the increased investments we've made in that product at New World over the last couple of years was to position ourselves to have the features and functionality to compete for larger opportunities.

And we've seen some evidence of that this year going live in Orlando, Florida, a jurisdiction that has more than 1 million calls for service through its 911 system each year. And now the Jackson deal being the largest deal in New World's history. But we're still kind of in the early stages of that. These are long sales processes.

And it's only been within the last year that we've really been in a position to start to respond to those larger RFPs. So we would expect there to be meaningful opportunities ahead for us to continue to pursue larger deals in the public safety area and to be successful there..

And I think the follow-on, the public safety thing is, it's -- a big result of that is the fact that we've really got a competitive offering across a full suite of public safety solutions.

So as we continue to build out and bring additional solutions to market as well as leverage other pilot products, for example, in Jackson, it's just -- it's not just CAD and records, but it's fire records. It's our mobile solutions. It's Tyler Corrections that we've been investing in. It's our Brazos offering. It's Socrata.

So when you're able to -- you're able to compete in those larger jurisdictions when you have a fuller suite of competitive offerings..

[Operator Instructions]. The next question comes from Keith Housum of Northcoast Research..

Can you just remind me in terms of the AWS agreement in terms of any impact on R&D? Is there a time where the investment to put everything to the cloud is going to, I guess, peak? And how long will that period last out of the additional investments to get out and over into the cloud?.

Yes, Keith. So as we talked about over the last year, while there are already some initiatives going on within Tyler, part of what the AWS agreement did was, it's helping us move there across all our product suites together. And we're still -- we're still finalizing some of those product road maps.

We're obviously making -- already starting to make some investments on those. The timing of those are going to take -- it's going to take a couple of years. These things aren't going to happen overnight.

At the same time, we're still going to be investing our competitiveness, but we're also evolving the back end architecture to make them more cloud efficient. So I wouldn't put a specific time line on it right now, but it's not 12 months, but it's not 5 years, it's somewhere in between..

Okay. Appreciate it. And just a follow-up, I hope I'm not getting too granular here into the guide. But a look at the software licenses, gross margins over the past year or two, actually, those have come down a little bit.

How do you think -- I guess, what's happening there that would cause it to come down? And how should we think about the gross margins, the software licenses business and royalties next year?.

I think some of the change in the margins there is around the amortization of software, the allocation of purchase price of acquired companies to software.

So typically, when we acquire someone, part of their purchase price is allocated to the acquired software and that amortization, which is generally over 5 years or less, is expensed as part of the cost of software. So given the elevated level of acquisitions we've had over the last couple of years, that's driven that up a bit.

So I would expect -- these costs are not incremental costs, but they stay at the same level. So I'd expect that as -- in software licenses, we probably expect to see something like mid-single-digit growth in those next year. And so you probably see margins be similar to this year, including the amortization..

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

Okay. Thanks, Kate, and thanks for joining us on the call today. If you have any further questions, please feel free to contact Lynn, Brian or me. Have a great day..

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