Good day, everyone, and welcome to the Tyler Tech fourth quarter and year-end 2016 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to John Marr Jr., Chief Executive Officer. Please go ahead.
Thank you, William, and welcome to our fourth quarter 2016 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer, and Lynn Moore, Tyler's President. First, I'd like for Brian to give the safe harbor statement. I'll have some preliminary comments. Brian will review the details of our fourth quarter results and 2017 guidance. We'll have some final comments and 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 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?
We are pleased with our results for the quarter, which provided a strong finish to 2016. Total GAAP revenue growth was 22%, of which approximately 12% was organic, and non-GAAP revenue growth was just over 20%. For the year, our earnings exceeded the upper end of our initial guidance, and we achieved exceptional margin improvement even as we invested at a high level in product development initiatives. License and subscription revenues were particularly robust as licenses grew 38%, of which 20% was organic, and subscriptions grew 23%, of which 21% was organic. It was another good bookings quarter with 18% increase to $212 million. We continue to be pleased with the progress we've made with the integration of New World, both from an operational and a product perspective.
Through the first full year as a part of Tyler, the public safety market was good in the fourth quarter, and our year-end public safety pipeline was up more than 70% from the beginning of the year. Our largest deal in the quarter was a statewide contract with the state of Maine for our Odyssey Courts and Justice solution, valued at approximately $17 million, including a multi-year maintenance agreement and a 10-year fixed fee arrangement. This represents our 12th statewide Odyssey arrangement and the first new statewide courts deal since the states of Idaho and Washington in the third quarter of 2013. We also signed our first international agreement for Odyssey. The contract with the Northern Territory of Australia includes several applications from the Odyssey software suite. The project will be implemented in phases but is expected to ultimately have a value of approximately $4 million.
While the Northern Territory covers approximately one-sixth of the Australian continent, its population is the smallest in the country's eight states and territories, with only about 1% of the country's population. We believe that there will be additional opportunities for us to grow internationally with Odyssey in Australia as well as in other countries in the coming years. We also signed a new contract for Odyssey in California with the State Bar of California, as well as contracts with Lowndes County, Georgia, and Nueces, Texas. We continue to see an increasing number of contracts which include multiple suites of Tyler products. Those signed during the fourth quarter included a seven-year SaaS arrangement with Naperville, Illinois, for our Munis and EnerGov solutions, valued at over $7 million.
A contract with Portland, Maine, the state's largest city, for our Munis and EnerGov solutions, and a contract with Fort Smith, Arkansas, for our Munis, EnerGov, and ExecuTime solutions. Other significant agreements for Munis included Long Beach, California, DeKalb County schools districts in Georgia, Lehigh County, Pennsylvania, Jacksonville Beach, Florida, and Spartanburg County, South Carolina. For our iasWorld appraisal and tax solution, notable contracts included a SaaS arrangement with the Orleans Parish Assessor's Office in Louisiana, a traditional agreement with Columbia County, Georgia. We also signed significant new license contracts for our New World public safety solutions with the Delaware Department of Safety and Homeland Security, Monroe County 911 in Fayette County in Pennsylvania, and the city of Chesapeake, Virginia. Now, I'd like for Brian to provide more detail on the results for the quarter and provide our annual guidance for 2017.
Yesterday, Tyler Technologies reported its results for the fourth quarter ended December 31st, 2016. I'm going to provide some additional data on the quarter's performance and provide our guidance for 2017, and then John will have some additional comments. In our earnings release, we've included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. These measures exclude write-downs of acquisition-related deferred revenue and acquired leases, share-based compensation expense, the employer portion of payroll taxes on employee stock transactions, amortization of acquired intangibles. The impact of the adoption of ASU 2016-09, improvements to employee share-based payment accounting on our income tax provision. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. In Q4, we adopted ASU 2016-09, which addresses, among other items, the accounting for income taxes and cash flow presentation of share-based compensation.
Under ASU 2016-09, excess tax benefits or tax deficiencies generated upon the settlement or exercise of stock awards are no longer recognized as additional paid-in capital, but are instead recognized as an adjustment to income tax expense. This change in accounting for income taxes is effective on a prospective basis as of the beginning of 2016. Cash flows related to excess tax benefits are now required to be presented as an operating activity rather than a financing activity. We elected to apply the statement of cash flows guidance related to excess tax benefits presentation as an operating activity on a retrospective basis. This change in accounting had a significant impact on GAAP net income and GAAP earnings per share, as our annual effective tax rate for the year was approximately 15%, compared to approximately 38% prior to the adoption.
This accounting change also adjusted the calculation of diluted shares, resulting in a higher diluted share count. Non-GAAP net income was not impacted by the change in tax expense. However, non-GAAP EPS was impacted by the change in the diluted share calculation. Without the change, our non-GAAP EPS for the fourth quarter would have been $0.91, and our non-GAAP EPS for the full year would have been $3.53. Please refer to the supplemental financial information schedule included in our earnings release for the detail of the reported and recast amounts for previous periods impacted by the adoption of this ASU. GAAP revenues for the fourth quarter were $193.3 million, up 21.6%, with 12.1% organic growth. On a non-GAAP basis, revenues were $195.1 million, up 20.3%. Non-GAAP organic growth was 10.4%. For purposes of calculating organic growth, we considered half of Q4 revenues from New World to be organic.
Software license and royalty revenues increased 38.4%. Organic license revenues increased 20.3%. Subscription revenues increased 23.2%, with 21.4% organic growth. We added 61 new subscription-based arrangements and converted 6 existing on-premises clients, representing approximately $18.4 million in total contract value. In Q4 of last year, we added 33 new subscription-based arrangements and had 9 on-premises conversions, representing approximately $32.4 million in total contract value. SaaS clients represented approximately 30% of our new software clients in the quarter, compared to 22% in the prior year quarter. SaaS contract value comprised 19% of the total new contract value signed this quarter, compared to 49% in Q4 of last year. The value-weighted average term of new SaaS contracts this quarter was 5.6 years, compared to 6.6 years in last year's fourth quarter.
Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 12.7% to $12.7 million from $11.3 million last year. That amount includes e-filing revenue of $9.6 million this quarter, up 12.1% over last year. Cash flow from operations declined approximately 3% to $51.8 million. Free cash flow, which is calculated as cash from operations less capital expenditures, was $43.6 million, compared to $49.6 million in last year's fourth quarter. Excluding real estate costs, free cash flow was $47.7 million. Our CapEx for the quarter of $8.2 million included $3.4 million related to the expansion of our Yarmouth, Maine office facility. In Q4, we repurchased approximately 125,000 shares of our common stock for an aggregate purchase price of $18.2 million, or an average of $146.02 per share.
For the full year of 2016, we repurchased approximately 882,000 shares of our common stock for an aggregate purchase price of $112.7 million, or an average of $127.75 per share. We ended the quarter with a total of $69.7 million in cash equivalents, and investments, and $10 million of debt associated with our line of credit, for which we used $300 million to purchase New World Systems in November of 2015. Day sales outstanding and accounts receivable improved to 93 days at December 31st, 2016, compared to 100 days at December 31st, 2015. Our backlog at the end of the quarter reached a new high at $953.3 million, up 12.9%. Software-related backlog, which excludes backlog from appraisal services contracts, was $914.6 million, a 14.8% increase. Backlog included $242.7 million of maintenance, compared to $216.6 million a year ago.
Subscription backlog was $364.1 million, compared to $242 million last year, and includes approximately $114 million related to fixed fee e-filing contracts. Our bookings for the quarter, which are calculated from the change in backlog plus non-GAAP revenues were approximately $212 million, an increase of 18.4% from Q4 of 2015. For the trailing 12 months, bookings were approximately $880 million, a 31.9% increase over the prior period. Note that we have posted a spreadsheet detailing our quarterly bookings calculations on the investor relations section of our website at www.tylertech.com/investors under the Financials and Annual Report tab. That spreadsheet has been updated to reflect a reclassification of New World's opening backlog in Q4 of 2015.
We signed 57 new contracts in the fourth quarter that included software licenses greater than $100,000, and those contracts had an average license of $406,000, compared to 30 new contracts with an average license value of $349,000 in the fourth quarter of 2015. Public safety accounted for eight of those contracts, compared to six in last year's fourth quarter. Our guidance for the full year of 2017 is as follows. We currently expect 2017 GAAP revenues will be between $844 million-$854 million, and non-GAAP revenues will be between $845 million-$855 million. We expect 2017 GAAP diluted EPS will be approximately $3.26-$3.34, and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate under ASU 2016-09. We expect 2017 non-GAAP diluted EPS will be approximately $3.83-$3.91.
For the year, estimated pre-tax non-cash share-based compensation expense is expected to be approximately $37 million. We expect R&D expense for the year will be approximately $48 million-$50 million. Fully diluted shares for the year are expected to be between 39 million-40 million shares. The adoption of ASU 2016-09 increased our outstanding shares by approximately 1.3%, which lowers EPS by approximately $0.05. GAAP earnings per share assumes an effective tax rate of 20% after discrete tax items and includes approximately $29 million of estimated discrete tax benefits related to share-based compensation. We estimate the non-GAAP annual effective tax rate for 2017 will be approximately 35.5%. Beginning in 2017, Tyler intends to adjust non-GAAP financial income using a tax rate equal to Tyler's annual estimated tax rate on non-GAAP income.
This rate is based on Tyler's estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating Tyler's non-GAAP income, as well as significant non-recurring tax adjustments. The non-GAAP tax rate used in future periods will be reviewed annually to determine whether it remains appropriate in consideration of factors including Tyler's periodic effective tax rate calculated in accordance with GAAP, changes from tax legislation, changes in the geographic mix of revenues and expenses, and other factors deemed significant. We expect our total capital expenditures will be approximately $52 million-$54 million for the year, including approximately $24 million related to real estate. Approximately $16 million of our 2017 CapEx is related to our cloud business, which includes hosted SaaS solutions and e-filing, including assets to accommodate future growth.
Total depreciation and amortization is expected to be approximately $50 million, including approximately $35 million of amortization of acquired intangibles. I'd like to turn the call back over to John for his further comments.
Thank you, Brian. As we noted earlier, our earnings for the year exceeded our expectations, with New World's earnings contributing to our above-plan performance. Activity in the local government software market continues to be good. Our fourth quarter bookings reflect that. As we move into 2017, our guidance calls for organic growth in the 10%-11% range. Our near to midterm expectations are for growth in the 10%-12% range, although there will likely be opportunities from time to time to exceed that target. We expect to be well-positioned to take advantage of those opportunities. In order to maintain or expand our growth rate on a bigger base, we are pursuing several growth drivers, including investing in existing products that do not currently have leadership positions, expanding our available market through internal development as well as acquisitions, expanding into new geographies, including disciplined international expansion.
With our very strong cash flow, we are choosing to invest more aggressively in a number of product development initiatives. We have plans to add approximately 80 developers over the course of 2017. We'll invest approximately $6 million more in R&D than we did in 2016. A significant part of those investments involves projects to enhance our public safety products in accordance with our long-term plan to significantly improve win rates and gain market share in that space. Among those efforts include accelerating development of advanced features and functionality and scaling our solution for larger clients. We believe these investments will expand our public safety addressable market by a factor of four times and lead to increased win rates. In addition, we are adding resources to our enterprise development group to accelerate a number of development projects, including those we discussed at our Investor Day last May.
Those include elements of our Tyler Foundation and user experience with platform services and next-generation apps like Tyler Identity, Bill Presentation and Payment, and Constituent Portal. As you know, we have not capitalized any software development cost in recent years, with all of the costs expensed to either cost of sales or R&D expense, depending on the nature of the project. Although our increased investment in product development will put some pressure on margins in 2017, we still expect to achieve modest margin expansion this year. We've also put in considerable effort over the last year on an extensive white space analysis of the public sector software space. We're evaluating our current product offering in adjacent spaces, identifying connections to our existing offerings, sizing the markets, and looking at competitive landscapes.
This analysis is an ongoing project. It will enable us to prioritize strategic investments, shaping both our M&A strategy, as well as our internal development priorities. Now we'll take questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. In the interest of time, we do ask that you limit yourself to one question and one follow-up. We will now pause momentarily to assemble our roster. The first questioner today is Brent Bracelin with Pacific Crest. Please go ahead.
Okay, you're on air.
Thank you. My first question really is around the international kind of expansion, Odyssey win in Australia seems like a nice foothold. Can you walk us through the broader strategy on what markets you plan to go into internationally, and how meaningful that could be relative to 2017 and 2018 as a growth driver?
Sure, Brian, this is Lynn Moore. Yeah. As we reported, we signed Northern Territory in the fourth quarter. That's a big step for us. It's obviously our first stronghold sort of outside of North America. We are going to begin implementation in the 1st quarter. As we reported, it's going to be a phased implementation, and we're hopeful that the phase 1 will go live, which will be the civil administrative tribunals in the fourth quarter. As we said before, I think the Australian opportunity is roughly about the size of our current Texas customer base. It's very similar to the United States, in the sense that there are a lot of older legacy products that are running the courts there. There's no clear market leader. We think we're well positioned to capitalize on that market. We're tracking a number of opportunities there right now.
I think our primary focus, too, is really getting Northern Territory up and running. That's tough stuff. That's our first, like I said, our first foray. I think once we do that, we will certainly enhance our competitive position to capitalize on other opportunities throughout Australia. As we mentioned, we're going to take a disciplined approach to international opportunities. Right now, we're sort of looking at Australia to be our first foothold for Odyssey.
Perfect. Then one quick follow-up for Brian, if I could, on the GAAP guide of 12% kind of revenue growth this year. What's the kind of implied growth rate on the software license and software subscription side? That's a business that has been growing faster than the corporate average. Should we expect that to grow kind of in the mid-teens here, or what are you factoring into that GAAP guide of 12% relative to what the software contribution could be?
Yeah, I think if you kind of broadly look at it, licenses would probably be a mid-teens kind of growth. I think services, as we saw in Q4, was a little bit lighter, and we certainly would like to keep services growth below our overall growth rate. I think we're probably looking at more like mid-single digits on services growth, maybe certainly in the single-digit range. Subscriptions probably also fall down in the mid to upper teens. Maintenance would be in the 9%-10% range. Appraisal services actually. As you know, that business is a cyclical business with appraisal cycles that come on different timing in different states. It's a bit of a down year for those cycles. We expect appraisal services will probably be down in the 5%-6% range below 2016 revenues.
Hardware and other, although it's a small line, with the growth in our Brazos Technology business unit, we expect that hardware would probably be up in the 30% range. Broadly, those are the parameters around the revenue lines.
Very helpful. Thank you.
Our next questioner today is Alex Zukin with Piper Jaffray. Please go ahead.
Yeah, thanks, guys. First, congrats on the quarter. I wanted to ask, maybe first for you, John, deal pushouts, shadow backlog, these were issues that you guys confronted in 2016. I wanted to ask how you saw them play out in the fourth quarter, what are the expectations for those in 2017?
Help me on what you mean by shadow backlog.
Well, when there would be deals that were contracted-
Oh, okay. Yeah
at the end of the quarter.
Sure. We've just noted. We don't provide the detail on that because it can bounce around, but we've just noted that the volume of unsigned awards has certainly been at an elevated level, and it continues to be that way. They do get converted. We don't have any experience of deals that are unsigned, that are not being contracted eventually, but the process itself, especially in larger deals, can go on for some time. Again, that elevated level continues, and we'll announce those deals as they get contracted. It does give us confidence in better visibility into the guidance we're providing and the sustained level of growth we expect.
That's helpful. Then, maybe just one more. The assumption, Brian, for New World growth in 2017, how does that compare to what you did in 2016? Overall, maybe can you just level set, how does that compare to your expectations when you acquired the company, the growth rate that you're projecting for 2017 for New World?
I think it's generally in line with what we expected. This is a multi-year growth opportunity in the public safety market, which was the primary focus of the New World acquisition. We expect that to play out over a number of years. Looking at full year growth for New World in 2016 versus 2015. In 2015, obviously, most of the year was not a part of Tyler. There may be some differences in their accounting before being a part of Tyler. If you look at the numbers that were filed with last year's pro formas, New World as a whole grew, a little north of 7% in 2016 versus 2015. The public safety piece grew a little faster than that. The ERP piece grew slower than that, as we've sort of narrowed the market in which we sell the New World ERP solution.
The plan for 2017, the guidance would include public safety growth, generally around the overall Tyler growth level, maybe a point above it or so. They're kind of in line with the Tyler growth level. We've said that over time through, as we talked about some of the development initiatives, the ability to start to cross-sell more aggressively, realizing the benefits of the Tyler alliance with our courts and justice solution. We expect to both expand that growth through both expanding the addressable market in the public safety space as well as improving our win rates, which, today in public safety, it's a pretty competitive market and our win rates, there are well below what we see in some of our other more mature Tyler products. We would expect that if you look over the next few years, that growth rate will continue to accelerate.
I'd say in the looking back at the first 15 months, it's been generally in line with what we expected, and we didn't expect it to be an overnight sensation.
That's helpful. Maybe just sneaking one in on the margins. I think, John, you mentioned that there is some modest upside for margins in 2017, but that it is an investment year, particularly on the R&D side and the product modernization expansion side. Where would the upside come from, particularly as you could realize some synergies, operational synergies with New World? What would be the drivers of upside on margins, potential drivers for upside for margins in 2017?
Within the short run, meaning 2017, it's just execution, and the management team has a record of doing that very well. It's not unusual that throughout the year, we achieve better margins than maybe in the plan. There's a little bit of that allowed for in our guidance, because the record again, is pretty long now and happened. It's generally managing headcount. These heads, service heads, R&D heads, all of those are in the plan. We will still be disciplined as we go through the year with turnover and filling the new heads and managing those costs. It's just an execution thing that again, the team does very well on and generally we can rely on some good performance there. In the longer term, obviously, it's more the model and leverage in the model. We appreciate your patience.
We are investing at a higher level than probably even we thought we would, it's just a result of opportunities we see that we think should be funded. We think that, three, four, five years from now, to have an even stronger leadership position in our core applications and to achieve leadership in some of the surrounding applications where maybe right now we're not there, is going to deliver greater value to the company than taking those margin gains right now.
Got it. That's helpful. Thank you, guys.
Our next questioner today is Scott Berger with Needham & Company. Please go ahead.
Hi, everyone. Congrats on a really nice quarter. One question and follow up, I guess. First question, John, is on the platform investment. A year ago, you called out investing, I believe it was an incremental $15 million in the platform to try to help bring some of the technologies together, that's a longer-term thesis. You seem more aggressive on this call in terms of organic product development. I guess it's a two-part question. First, I assume those $15 million that you spent last year are also flowing this year. You're not pulling back on that. Secondly, is this really more of a multi-year strategy to get more aggressive on the organic product side?
Yeah, I think it is, Scott. Yet, I'll be honest with you, we obviously are opportunistic, and we look at this and look at where we think the greatest return can be. Markets, whether you're acquiring public companies or private companies are rich. As we talked about, we're doing, I think, a much more sophisticated look at these markets with our Whitespace initiative in determining kind of the adjacent markets that we think can be catalysts for growth on a long-term basis, trying to pick up those extra incremental growth points on our core growth. As we go through that, Tyler has maybe almost a unique ability to build these products, improve these products, and invest. Certainly, they run through the P&L and put some pressure on margins.
Long term, to have a seamlessly integrated product that has the broad breadth of offering that the public sector can benefit from is just simply a great opportunity for us to invest. We did last year, as you said. We are incrementally investing that this year. I think if you look at the very long term, these are situations where we're accelerating R&D headcount into these products from future years. I still believe that curve flattens well below the overall growth rate of the company, and there will be margin opportunity there. We won't try to achieve that prematurely at the expense of competitiveness.
Great. Well, we like the strategy because it's clearly been favorable for you over the last decade. My follow-up question is on the Australian contract deal. I believe I read a press release that said you're going to be engaging with NEC for part of the implementation. Wanted to try to understand, and I know that you're bringing your own employees over there to help with that, as well as trying to understand, A, their involvement, and then, B, is that part of the longer-term strategy as you go international, that you probably have to engage with some other professional services or integrators, implementers to actually get these products live?
Yeah, Scott, this is Lynn Moore. I think that's more of a case-by-case strategy. This is our first foray. We are sending our people down there. We've got our expertise there. We felt it was necessary to partner with NEC for parts of this. I don't know that we're sitting here today saying that's our long-term strategy. Like I said earlier, it's most important that we get the Northern Territory up and running. We've had so much success in the United States. We've got so much credibility here. That carries through down there, but getting them up and running, getting them functional, getting them live, doing all the things that we do here in the United States, is what's going to put us at a competitive advantage for the rest of the opportunities there. We'll look at that as we go forward.
I wouldn't say that's a long-term or specific business model.
Great. That's all I have. Thanks for taking my questions.
Our next questioner today is Brian Kinstlinger with Maxim Group. Please go ahead.
Great. Thanks so much. To follow up question kind of what some people have asked. A year ago, you announced increased investments in NWS, and again, you're putting money into that to improve their products and their win rates. Were you aware of their lower win rates when you bought them? And then the $6 million or so that you're increasing, it sounds like, in R&D, is that enough to get the software where you need it to be, or do you think you'll have to increase investments even more in 2018?
We knew the win rates when we did the acquisition. They've probably deteriorated. These things bounce around marginally from there. That analysis for us has suggested that we should make this level of investment. We certainly knew the win rates. We knew the market landscape. We're familiar with the competitors in that space. It's a very competitive market space, and it's more fragmented than the other markets that we're in. It's just kind of less mature than the other markets we're in. That works both ways. It requires an investment, and it requires great execution to gain in that space. In terms of it working both ways, it also has a significant opportunity that comes along with it. The win rates that we have with products like Munis and Odyssey, they simply can't go up that much because there isn't that much room left.
They're already winning significant shares of the marketplace. We can broaden the footprint a little bit. We can bolt on extensions, things we're talking about, which we're very focused on. The public safety market, it wasn't so much exactly what the market share was as the opportunity that was compelling to us that drove the decision to do that deal. In terms of the level of investment, yes, we believe we're making the right level of investment. Obviously, there's been a lot of exchange between the leadership of that division and the corporate executive team in terms of determining exactly where that was. We don't want to lose the discipline that Tyler has in these areas, but we do want to be aggressive about taking advantage of the opportunities that are there.
Every credible investment, whether it's in feature and function, whether it's in technology, or whether it's in the integration to the other Tyler criminal justice products, all of those are funded. I believe that our product roadmaps that are very detailed are pretty solidly in place for the next two years. I believe that the headcount and the level of investment that we're sharing with you now is pretty certain for the next two years. Obviously, years out from there, as I said more broadly earlier, I would expect that the growth and expense in R&D would level in relation to the overall growth and would start to see that leverage kick in. I think the level of investment for the next two years is pretty well-known.
Great. My follow-up, again, on NWS, sorry. When you acquired them, their margins were much higher than yours. Is that a function of the lack of investing maybe they've had? Tyler's been tremendous at investing in their existing products. I just want to make sure I heard you correctly, despite their lower win rates, they're growing as fast as the Tyler business?
Their margins were higher than Tyler's blended margins. When you look at the whole company, they were in line with some of our more mature divisions, simply because our more mature divisions are larger. Everybody runs these companies a little differently. New World was an incredibly successful company. I would say it was being run a little tighter than we run operations, and that these are somewhat subtle differences. Yeah, I would say our level of long-term investment is a little bit higher. Maybe our level of investment in some of the service deliverables is a little bit higher. If your interest is in taking advantage of the highest growth rate you can achieve on a sustained basis, the Tyler model would suggest running it a little less tight, and that's what we've done.
We look at that as we absorb the company into our model, kind of a one-term adjustment, we'll get back into a margin expansion mode and eventually get back to and hopefully above the margins they achieved. With our objectives as a public company and growth-oriented, we're running it a little less tight than it was run.
Thank you.
Brian, from a growth rate perspective, yeah, they're growing in line with, or as I said, just slightly, maybe a point above Tyler's overall growth rate in 2017. As John mentioned, their win rates are lower than some of our other Tyler products, just because it's a more competitive marketplace today. There's a greater number of competitors. New World doesn't focus historically on the entire public safety market. They really focus primarily on the mid and lower-mid part of that market. With these initiatives, including some of the things we're doing today, we're going after a much bigger public safety market. We want to have higher win rates and in a bigger slice of the market. They're still able to, and it is a growing marketplace. Even with the win rates we're at today, we're able to grow that business.
Longer term, we think that opportunity for it to grow above our overall growth rate and contribute to long-term growth is significant.
Great. Thanks so much, guys.
Our next questioner today is Kirk Materna with Evercore ISI. Please go ahead.
Thanks very much. Maybe just to start, John, have you guys seen any major change or I guess any incremental change rather, in terms of people looking more at the cloud offering versus the on-prem? I guess I'm trying to get a sense on what you guys are thinking that might look like in 2017, and does that have any sort of impact? Obviously, it would be positive for bookings, but does that have any impact on sort of your revenue guidance for next year? Thanks.
Yeah, the answer would be no. No major change. It bounces around. If you look at an individual quarter, you can see changes, but if you're tracking kind of trailing 12-month rates, we remain in this kind of 30%, low 30% adoption in the new market, both in terms of names and dollars. Yeah, it shows up heavier in the bookings and the backlog and yeah, it puts pressure on short term. Being somewhat stable, and I've said this for years, that Tyler kind of has the best of both worlds. We haven't taken a big hit on margins or earnings in order to support our cloud business. They've been growing in parallel, and the adoption works well for us. Our strategy doesn't have bias. If you're on-prem only or cloud only, then you're missing a significant segment of the marketplace.
We're a comprehensive vertical player and want to have strong offerings in both of those channels, and we do. As you can see, we're looking at a little better than 20% growth in both perpetual licenses as well as cloud. I think there really aren't a lot of companies that can not cannibalize their perpetual licenses and even grow them as they grow a nice cloud business. We're pleased with that.
Okay. Brian, maybe for you, just the e-filing business in 2017 versus 2016. Are you still expecting a little bit of a step-up on that? Give us a reminder, sir, what the assumption is for that for this year. Thanks.
Yeah, I think for 2017 in e-filing, our expectation is sort of mid-teens growth. Pretty similar to the kind of growth we saw in e-filing in 2016. I think we grew at roughly 15% in 2016, and it's growing somewhere around that same rate in 2017. As you know, we have somewhat long lead times on some of these. We have a number of e-filing arrangements that we have a lot of visibility over jurisdictions that are either already committed to doing e-filing with us but won't start until some point in the future, perhaps when their an existing case management implementation goes live. There are a number of those in California, for example. Others where they are currently doing e-filing, but we're rolling out it across the state in a phased manner, or in places that are doing e-filing today, but it's not mandatory.
As they move to mandatory somewhere down the road, the volumes and the revenues will increase. We've talked about, over the next three to five years, expecting to grow that business from. We finished with e-filing revenues in 2016 of just shy of $37 million. To grow that, with the visibility we have today, over that going to roughly double to around $75 million over the next four to five years. To get there, we would look for that then to accelerate a bit from that level and grow more in the 20% range in sort of the 2018, 2019, 2020 timeframe. We do expect with some of the visibility we have for that growth rate to accelerate as some of these go lives happen in 2018 and 2019.
Great. Thanks a lot.
Our next questioner today is Tim Klasell with Northland Securities. Please go ahead.
Just two quick questions. One from a high level. On the international, particularly in Australia, obviously Courts and Justice is sort of a kickoff there. Have you thought of some of your other products, like Public Safety? Is that something you would want to bring international to, just given that that might have a broader reach besides countries that have the same language and legal or similar legal systems, I should say, as the U.S.? I.e., could Public Safety or others expand into other international markets as well?
Yes. I would say our strategy, again, this is something you just want to put on the list of these incremental growth drivers over a long period of time. Nothing explosive in the short term, kind of leading with Courts and Justice. We look at our products, everything's vertical, some things are more vertical than others, those would be applications that kind of exclusively work in the public sector. Courts and Justice, Public Safety, Tax and Appraisal, some of these kinds of applications. Those kind of hyper-vertical applications that are exclusive to the public sector versus, say, the enterprise apps like Financials and Human Resources and others, are likely the products we would move internationally with first.
Public Safety, for both of those reasons, being sub-vertical as well as being related to our Courts and Justice offering, if it becomes established in certain markets, would be a candidate for that. Right now, we're obviously very focused on the things we've been discussing on the call in terms of the current investments in those products and achieving higher market share and a broader footprint here in the U.S. It certainly is a candidate down the road for international expansion.
Great. Just a detailed question for you, Brian. On the effect of ASU 2016-09, as we look at share count growth going forward, even past 2017, does that affect that at all, is that just a one-time step up we can keep the same sort of share counts growth going forward? 100%.
We'll kind of see how it shakes out. I think it's primarily a one-time sort of step up. We think in 2016 and 2017, it increases our shares by about 1.3%. To the extent that we have a much larger stock option exercise gain, it could increase that slightly, I think it's going to be right around that rate. I don't think it moves as much as it moves the tax rate.
Okay, great. Thank you. Very helpful.
Our next questioner today is Jonathan Ho with William Blair & Company. Please go ahead.
Hey, guys. Let me echo my congratulations as well. I just wanted to start out with a question around your comment around the Public Safety market expanding by potentially four times. Can you give us a little bit more color on maybe where the will come from and maybe how quickly investments can open up that much of a market expansion?
Sure. I guess there's two different things. We've talked about expanding the breadth of the product, so to include incremental products that are either part of the core sale or add-on sales over time. The larger driver would be the size of the jurisdictions that we're competitive in. As Brian indicated earlier, New World has been mostly a mid-range player. Not to say they haven't done smaller and larger deals, but that's been their sweet spot. The most significant growth in the addressable market would be from being able to move up into tier 0, tier 1 opportunities, and down as well, and broaden the size of that addressable market. This is a long-term initiative, but making progress on win rates and market share and a growing and larger footprint is our strategy.
Got it. Just as a follow-up, I know there was some noise during the quarter that was related to court case implementations. I think you guys have put out several press releases tied to that. I just want to sort of verify that there was no real long-term impact to your business or win rates or to the backlog.
Yeah, no, there hasn't been. Obviously, it's a distraction. We've got a lot of customers. We have hundreds of implementations underway at any given time and, depending on how you measure it, 15,000 clients. It's a challenging business, and there will be issues. Normally, Tyler does an exceptional job on execution and in getting through the challenges of implementations and customer issues. These two have gotten a little hotter than what we normally experience and unfortunately, a little more public. We don't like to resolve customer issues publicly, I think what we've said, you can go out and read, which really is that these are issues specifically associated with those particular accounts. We don't believe we're the direct cause of those things. We can be the solution to those issues with those accounts if they want us to be.
We're working with them to achieve those things. No, it has not manifested itself in any effect on our new business that we can see in any meaningful way. Obviously, there's a number of dynamics that affect every new business decision or customer situation, it has not become a meaningful problem for us outside of those specific accounts.
Thank you.
Our next questioner today is Kevin Liu with B. Riley & Company. Please go ahead.
Hi, good morning. I guess first question here, just regarding the 70% increase in the New World Systems pipeline, could you just elaborate a little bit on some of the factors driving that, whether it's just cross-selling into your customer base, a better field coverage, or maybe just larger transactions in general?
Yeah, it sounds like a big number. I don't know that it is that kind of enormous change in that market space other than to say it's healthy and it's growing. We may be more aggressive in identifying opportunities. We're broadening that footprint, probably even ahead of our capabilities to be competitive in some of those spaces. I think the data point is to establish that it's a large and growing marketplace, that we have a broader look at that market than we had in the past, or they had in the past. So there's a substantial opportunity there.
Got it. I think in recent years, John, you've characterized the market for Munis and other financial products as being pretty robust. How would you characterize it at present? What sort of factor, how does that play into the guidance for the current year?
It's probably modestly higher. It has been steady, robust to some degree, not explosive. Leading indicators would suggest that that's at least stable, if not modestly growing. They've done a great job in improving their win rates and the competitive position. The challenge is, obviously, to sustain the growth rates they've had historically. Again, win rates have allowed them to continue to do that, and we'll continue to work with those products aggressively to try to sustain that.
Great. Thanks for taking the question.
Our next questioner today is Shane Stoddard with Adante Partners. Please go ahead.
Good morning. With respect to e-filing opportunities, other than Michigan, are there any opportunities in the market right now that you're tracking?
We normally wouldn't comment on opportunities in the marketplace. We announced on this call, or we've talked about on this call, Maine, which includes a 10-year e-file arrangement on a fixed-fee basis. The numbers that Brian spoke of, doubling the e-filing revenues in the coming four or five years, really only includes things like Maine and things like other opportunities that we have high levels of visibility on. Generally, to answer your question, sure, there are opportunities out there. Our expectation is that the majority of the marketplace will have paperless courthouses and e-filing, and usually, with a mandate on that in the coming year. There is incremental opportunity beyond that, but generally, we wouldn't comment on specific opportunities in the new business market.
All right. Fair enough. Just a quick housekeeping item. What were Microsoft Dynamics royalties in the quarter?
Sure. Dynamics royalties were about $432,000, and that's compared to $319,000 last year's fourth quarter. Our direct royalties from our Dynamics deals sold by us were $1.3 million.
Thanks. Thank you.
Our next questioner today is Mark Schappel with Benchmark. Please go ahead.
Hi, good evening. Just one question here, John. In your prepared remarks, you mentioned that you were planning to invest in certain product areas where the company doesn't have a leadership position today. I was wondering if you'd just give us some indication what some of those areas would be outside of public safety.
Yeah, I guess leadership is a relative term. For example, Odyssey's position in case management and electronic filing would be very strong and by anybody's definition, a leadership position. Our presence in jail, while it could be strong in certain markets, may not be anywhere near that level of market share and leadership. That would be an example of. It really speaks to our overall growth strategy. We see a little lower growth rate this year. You could say that's a trend, that core growth on a bigger base, as we said, just naturally is going to decline over time. We're not accepting of that, and this would be one of many areas where we say, "Hey, can we have the presence in jail that we have in case management?
Can we have the presence in other areas?" An inorganic example would be ExecuTime, obviously EnerGov a few years ago. The whole whitespace initiative is to find these contiguous products and market spaces that we either have a smaller footprint or a smaller presence. Invest in those organically, or in the case of an EnerGov or an ExecuTime, acquire something that we can then invest in. Really even E-file was this way with Wiznet a number of years ago now, and have an incremental catalyst to growth that takes what may be a natural core growth rate of 10 or 11 and gets you back in that 13%, 14%, 15% growth range. That's what that whole strategy is about.
Thank you.
Our next question today is Pat Walravens with JMP Securities. Please go ahead.
Yeah. Hi there. This is Matt on for Pat. Thank you very much for taking my question. I just have two. I guess one, could you comment a little bit on the M&A pipeline? Two, have you seen any change in, I guess, the demand environment or the rate at which your prospects and customers are willing to adopt technology under the new presidential administration? Thank you.
Obviously wouldn't comment on a specific M&A opportunity, but generally, I think I said it earlier in the call, it's a rich environment right now. Some of these kind of white space initiatives that we're working on that we'd love to do an acquisition on, in a lot of cases, they're just richer than our taste. We'll always be opportunistic and disciplined. My expectations would be that it would not be a real hot market in 2017. That can change tomorrow with one deal, as you know. As a general observation, it's a pretty rich market, and I'd probably take the under if we were trying to put a historical number out there against that. The president, we get asked about this, we've seen some notes even that could suggest less investment or spending under a Trump administration.
I'd just remind everybody that everything we do is essential to local government, it's nondiscretionary. They have to do it. We don't see a lot of changes, even in timing at this point in time. The answer to that would be no, we haven't really seen any changes.
Great. Thank you very much.
Looks like we have no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Mr. John Marr Jr. for any closing remarks.
Great. Well, thank you all for joining us on the call today. Appreciate all your questions. If there are any further questions, feel free to reach out to Brian, Lynn, or myself, we'd be happy to work with you. Thanks again. Have a great day.
The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.