Good day, and welcome to Tyler Technologies' third quarter 2016 earnings call. All participants will be in listen-only mode, and 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 and then one on a touch-tone phone. To withdraw your question, please press star and then two. Please also note that this event 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'd like for Brian to give the safe harbor statement. I'll have some preliminary comments. Brian will review the details of our third quarter results and the 2016 guidance. I'll have some final comments, and we'll take your questions. Brian?
Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. John?
Our third quarter operating results were once again 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 as 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 the Texas Office of Court Administration for our Odyssey File and Serve platform for eFileTexas. The initial contract runs through August 31st, 2017, and this agreement, which is valued at approximately $72 million, extends that through August 31st, 2021.
For our Odyssey File & 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 approximately $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 City of Chula Vista, California, the City of Oswego, Illinois, and Bonneville County, Idaho.
For our New World ERP solution, significant contracts included the City of Delray Beach, Florida, which also included our EnerGov solution in Jefferson Parish, Louisiana. Other significant contracts for our EnerGov solution included a license deal with the City of Alexandria, Virginia, and a SaaS contract with Hawaii County, Hawaii. For our iasWorld Appraisal and Tax solutions, 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 Calhoun 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 Doña Ana County, New Mexico, which also included our SoftCode solution, Athens-Clarke County, Georgia, which also included our Brazos solution, and Deschutes County, Oregon. I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2016.
Thanks, John. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30th, 2016. I'm going to provide some additional data on the quarter's performance and update our guidance for 2016. 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 revenues of $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 new 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% 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.
Day sales outstanding and accounts receivable was 87 days at September 30th, 2016, compared to 77 days at September 30th, 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 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. 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 pre-tax 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%-39%. The non-GAAP effective tax rate is expected to be in the range of 35.5%-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 31st, 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 CapEx 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, and including approximately $36 million of amortization of acquired intangibles.
I'd 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 strengths and win rates continue to be high across our product lines. As Brian detailed earlier, our 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 Chiefs 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 offerings. Yesterday, we also announced several executive transitions and promotions. Effective January 1st, 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 a Director until his current term ends in May of 2017, when he will retire. I'd 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 it 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 1st, 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 & 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 the 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 look back with a sense of pride in 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, sir. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we'll pause a moment to signal the roster. Our first question is 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. 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. That's a market, as you know, where 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's certainly not reflective of the competitive position. We continue to win virtually all of the larger, more meaningful deals. We do expect the pipeline shows that in the fourth quarter and into next year that things become more active again. Australia, there are two active deals on the street. 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.
Great. Thank you.
Thank you. The next question is from Pete Heckmann of Avondale Partners. Please go ahead.
Good morning. Thanks for taking my questions. I had a question on the Texas renewal. Were there any notable changes in terms or conditions? Just in terms of the run rate that I was looking at, it seemed like the four-year renewals may be just a little bit less than the current run rate.
Yeah, I guess 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 modestly lighter. 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. 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 a possibility of some of the states that allow transaction fees to convert to fixed?
They're really not that different. We are committed to our e-filing solution being more of a SaaS type arrangement and not offering it as a license event with ongoing support. The courts like to have some certainty in what that's going to be. 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. It really is looking at what are mature transaction levels, right? There isn't tremendous fluctuation in those levels. Looking at what those levels are and really backing into an annual fee, that would be very similar to a transaction fee. I think it's just really reflective of us obviously being a flexible partner in structuring the contract the way it works for them.
The revenue that's generated from the arrangement is very similar, regardless of the way it's contracted.
That's fair. Just one last question, I'll get back in the queue. Brian, I may have missed it. Did you provide Microsoft royalties for the period?
No. Microsoft royalties this quarter were $1.4 million.
Great. Thanks much.
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're rolling them out more slowly, or was the actual awarding of the deal getting pushed out? I'm just trying to get a sense on if you guys have already been awarded the deal and it's just a matter of rev rec, or are you seeing more of a pause and people actually being able to award deals as well?
It'd be both. Tyler-wide would've mentioned this. We'd kind of rather not get into tracking it. Over the last year, there has been more awarded business that hasn't contracted at quarter ends than is typical. That certainly has been the case with C&J. There are a couple notable deals that have been awarded that have not yet been contracted, therefore aren't in bookings and backlog. They're literally at the very end. That has impacted the very marginal adjustment on revenues is somewhat attributable to that. These deals that we've had good visibility on for some time, in some cases, we thought 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. That is the case.
As I indicated earlier, the fourth quarter and into next year, the pipeline starts to become more active again.
Great. Just, Brian, obviously 26% organic growth is really strong. Is there any way for us to think about it, either on this quarter or on more of a trailing 12-month basis, what kind of annualized bookings growth looks like? I know a lot of people have questions about sort of what more of an ACV figure would be relative to your guys' longer term growth outlook in sort of the low to mid-teens.
Yeah. On a trailing 12-month basis, our organic bookings growth is just shy of 12.5%. 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 sort of an annualized figure too?
Yeah, I would say so.
As we get to the longer-term deals. Okay.
Yeah.
Okay, great. Thanks, guys. 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. I'm just wondering if you're seeing more of a trend towards larger deals that maybe are incorporating multiple systems.
Yeah, I think we are. EnerGov would 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. You then look to, okay, how do we expand the addressable market space? EnerGov's a great example of it, where you used to have a little 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, in a proposal and drive incremental value in that engagement. There are several other opportunities like that we're focused on.
ExecuTime is a little bit of that to some extent. There are others that can be acquired. There are others that can be built. 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. Then, with the $8 million Illinois deal that you referenced on the eFile side, what is the potential for that opportunity? Is this 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 contract starts out, it's a statewide arrangement, but the 15 larger counties are not initially included in it. They have the ability to opt in. We would expect that over time that, and some of those starting relatively soon, that some of those larger counties will opt in. It starts out at an $8 million total contract value, 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.
Great. Thank you.
Thank you. Next question is from Scott Berg of Needham & Company. Please go ahead.
Great, 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?
Yeah. 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 will continue that momentum into at least the first 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, we're really pleased with that performance. They don't tend to be the statewide C&J type deals or the large multi-year eFile 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 that performance.
Question on the New World side. I believe the initial pipeline dynamics had deal signings that were going to be, I guess, somewhat back-end loaded. Are you seeing evidence of that in the quarter? Just trying to better understand the seasonality of the bookings from New World.
Yeah. Well, the back end is really all the way back to the fourth quarter. No, the Q3 results were pretty much a continuation of the first half of the year. Obviously, their pipelines are newer to us, 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. That pipe has built, as we said before, and was our expectation. We're encouraged by that. We had a great show, as I mentioned, in San Diego a couple of weeks ago. We continue to be convinced that the opportunity that we saw when we did this acquisition remains and is a great opportunity for us.
Great. Final one here. You had a nice earnings beat. I think it was $0.04 or $0.05 to the midpoint, if I'm correct. 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?
It's no one major driver. The biggest thing is headcount. 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. If they're able to get the work done, we don't eliminate those heads out of the plan, but a lot of it's just timing that different divisions end the quarter. These are divisions with hundreds and hundreds of employees that end the quarter 23 heads light or something. That would be the biggest driver, that company-wide, we're able to manage the timing of headcount, and that drives some savings. There are a number of other variables as well. The other contributor is basically the mix of revenues.
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. You can see the recurrings being very strong, which is a strong margin part of the business. A combination of all those contributors.
Great. Thank you very much. Appreciate it.
I'd 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 on board.
Thank you very much, sir. Our next question is from Alex Zukin of Piper Jaffray. Please go ahead.
Hey, guys. Thanks for taking my 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? How are you thinking about New World's organic top-line growth maybe next year as it compares to that low double-digit growth rate for Tyler?
Yeah. As we said, the plan 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 headcount 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 is a leader in the business, but it doesn't have the market share that, say, Odyssey and Munis and some of our very strong products have. That's our objective.
Expenses are elevated from their 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 their 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. 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'll 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. If you look at the organic growth rates for the quarter and for this year, how much do you think that some of these push outs 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?
Yeah. We pay a lot of attention on the organic growth rate, much more than inorganic. At around 11%, it's a little lighter. It's a fair amount lighter than the last couple of 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 end of this year as being healthy and strong. I see us with a broader breadth of applications, as I discussed with EnerGov and other opportunities. We mentioned the potential of a couple of deals in Australia, beginning to do a little bit of international type business. You have cycles.
As you know, we did a tremendous amount of business in California with courts. You have awards like Illinois. You have a lot of these different things that we've kind of been in a real strong execution mode this year, especially in courts. I think as those accounts 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, that all those things we would expect would contribute to a higher level of organic growth. We would think this is a year that's 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 allow us to drive that back up as we move forward.
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? I've got a couple questions for Brian on gross margins.
Well, until you said next year, my answer would be certainly. I certainly won't be surprised to see those revenue synergies materialize next year. I'm still cautious about people having expectations quarter-to-quarter on that. 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. 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.
I do want to be cautious in being back on this call in 90 days and not having three names or examples for you. We're really 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. We'll be patient to see how it materializes.
Got it. 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 100-150 basis 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?
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, a little bit lower level of professional services, typically, with mature products. They've lifted our overall Of that 400 basis point margin improvement, just the effect of New World being in there has added roughly half of that increase.
I would expect that going forward with that now in our base, that we'd 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 of be the annual average at that kind of growth rate.
Got it. 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 year. You like to use cash for M&A, but also stock repurchasing. Can you frame how you look at each of those cases right now and 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. You've seen that with elevated investment 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. Looking for good strategic fits, we would expect to continue to be active in the M&A market. As we've said, we don't see something of the size of New World on the near-term horizon. We would expect to continue to be active in evaluating and pursuing the kinds of acquisitions we've done in the past, certainly have the capability, both from a management standpoint and from a financial standpoint of being able to execute those.
With respect to stock buybacks, we've certainly been opportunistic over a decade plus, have created significant value through those buybacks, we would expect to continue to have that as a component of our uses of cash, probably third in priority, but certainly on an opportunistic look at those.
Thanks, guys.
Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and then one. 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 can expect in the coming quarters here with respect to the e-filing in California.
California e-filing actually picks up reasonably strongly next year. Right now, it's a pretty small contribution from California e-filing, as we're really just starting to see a number of counties go live on the system, and then the e-filing follows that. For example, right now, our run rate in California this quarter was just less than a quarter of a million dollars of e-filing revenue. That's expected to grow pretty meaningfully next year, I think, to the couple million-dollar run rate, and over the next couple of years, build pretty significantly off of that. Somewhere in the two and a half to three million-dollar range next year, and then expanding really potentially exponentially from there, to potentially somewhere in the $15 million-$20 million range, both with places that are committed to us or that already use our e-filing system.
That would be over the next, say, four-year time period.
Okay, thanks. Finally, John, growth in the appraisal business has trailed the core software business here and increased this year. I was just wondering if you could just run through where you think that growth rate should be in that business. Maybe just remind us some of the ties that it has to the broader software business.
Yeah. I think you're referring to appraisal services.
Yes.
The tax and appraisal software business has actually performed really well, and at growth rates higher than what we would've expected over the long term. Appraisal services are cyclical, and they're predictable. We are in a state-by-state kind of a slow period. We would expect that they would continue to be a little bit lighter through next year, then they'll accelerate into 2018. The long-term growth there, we don't look to be at a high level. I think it's more of a 5% grower over the long term, which again, could actually have negative growth one year and higher growth the next. 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 a little different than our software business. The other part of your question is, it's an essential service. 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. Over the years, and there was a time years ago, for those of you who've been around the story a long time, where actually appraisal services, I think one year was 27% of all Tyler revenues, which made us a little different kind of company. Now it's obviously down in the low single digits. It's a nice strategic touchpoint on relationships with these cities and counties. It's an appropriate percentage of our overall revenues, and we'll remain committed to it.
Okay, thank you.
Thank you very much. Our next question is from Kevin Liu of B. Riley & Co. Please go ahead.
Hi, good morning. Just in terms of the integration of your courts and justice products with New World's public safety systems, can you update us on the timing for when you think that you could go to market with a fully integrated suite? Related to that, just in terms of the conversations you're having at the trade shows and the like, are you actually expecting RFPs to start to come out, say, in the next year or so for an integrated solution? Is this something more that you guys are pioneering and you're just getting a favorable response to that?
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 workflow 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. I think as we indicated, even at the show a couple of 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'll 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 wouldn't expect that all of a sudden we'll see a big shift in RFPs will come out for fully integrated criminal justice offerings. Rather, we'll continue to see a case management RFP or a public safety RFP. We think these are always very competitive situations, and when you're a finalist with one or two other players and people are really reaching to try to find which 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're 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.
All right. Makes a lot of sense. Thanks for taking the question.
Thanks.
Thank you. Next question is from Tim Klasell of Northland Securities. Please go ahead.
Yeah. 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 should we consider that to be maybe a one-off that we might only see every few years or several years?
Yeah. It was not just a little outsized from our historical acquisitions. 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. I can't sit here today and say there's no likelihood at all that we'll do another deal at that size. Again, there are very limited assets that we'd be interested in at that level. The probability's somewhat low, and yet we certainly wouldn't back off of one, so that 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. I certainly see kind of a mid-range there, the $30 million, $40 million to $100 million, $120 million, where we do look at companies from time to time that we would be anxious to do a deal on. We'll be disciplined as well. Valuations are high, and you don't know the deals we don't do, right? We've participated in a number of processes in that size range that, in some cases, we just were too disciplined to do the deal. I wouldn't consider it unlikely at all that you'd see deals in that range over the coming years.
Okay. Good. On 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, when you get into large deals, just the process from award to contract is longer. It's a more deliberate and extensive negotiating process. 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 may literally be a couple conference calls, and it's signed two or three weeks later. I think doing more large deals contributes to that. Obviously, those are big numbers. To have a big number in awarded, 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. 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, you start wondering whether this deal is a real deal that's going to happen, and there isn't much of that. I'd say 70% of it's in the current quarter, and another 15 or 20 is in the past quarter, and very little of that is stale or old or has any risk to it. 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 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.
Okay. Good enough. Thank you for taking my questions.
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 bus, single sign-on for the last year. Could you maybe just provide us an update on the federated strategy, where you're at from a 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 our customers?
Yeah. 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 then used by the different divisions. 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. It's a process that's changed organizationally. It's going very well, and there will be releases very late this year and early next year that'll reflect that. I've seen demonstrations and screenshots of products from different divisions that previously you would clearly say those come from different companies. Today it would take a pretty experienced eye to recognize the differences.
Very good. That's all I have. Thank you.
Sure.
Thank you. Our last question is from Frank Felice of Serenity Equity Ventures. Please go ahead.
Thank you for taking my call. A lot of the technical questions have been addressed by the group, so I appreciate it. Congratulations on the great quarter. In addition to, I guess, going back a little bit, strong dominance in the court space, a lot of Odyssey acquisitions really quick in the state of California. Pretty much dominating most of the counties very shortly, a couple-year timeframe. Congratulations on that and doing well and getting it moving. Also, commending you on the acquisition of New World from a technology stack perspective, in comparison to some recent consolidation in the public safety market space with Motorola Solutions purchasing Spillman Technologies recently, and then the TriTech consolidation that's occurred, which seems a little bit more of 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. 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 far as retaining both products, leading with one of the products over the others or continuing to push both? I think that's my only question.
No, those are good observations and appreciate the question. 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. You can't do a lot of big deals without some of that. We do have a Tyler public safety solution. It's certainly a fraction 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 the highest revenues and operating profit in the company. Yet New World has a very strong offering there as well. I think you can look at Tyler historically.
You look at the Infinite Visions products, you look at our Incode local government products, you look at a number of different products that had niches in the marketplace that while they may look somewhat conflicting, whether they Munis or with New World's 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 in. 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 time, 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 couple of really competitive, important wins in the quarter that continue to reinforce their competitive position and the segments of the marketplace where I think they'll continue to be very competitive and provide incremental business to Tyler that we wouldn't have had before. Reversely, the same is true of Tyler's public safety solution, where it has certain market spaces where it's strong. 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, make sure it serves those customers' needs, and in those segments of the market where they're strong, they'll continue to add customers.
Final item on that. I appreciate the response. Being in the business myself for the last 15, 20 years, the tagline you guys stated most recently at IACP, from dispatch to disposition, is strong, and it's absolutely, I 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 consolidate anything from dispatch to disposition. I think even respectfully disagreeing, I think states like Texas and California, I think Tyler will be greatly benefited by that 4 to 5-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 really no other vendor's really going to be able to pull off as one vendor solution.
That's what good majority of these counties really want. They want that single throat to choke essentially, rather than a piecemeal solution. I think it's going to benefit Tyler in that 4 to 5-year timeframe of putting thought into the integration. 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 put thought into the integration. 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 4 to 5 years.
Thanks. We agree with you.
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. If you do have any further questions, feel free to reach out to Brian and myself. Thanks again. 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.