Hello, and welcome to today's Tyler Technologies 4th Quarter and Year End 2015 Conference Call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. And as a reminder, this conference is being recorded today, February 18, 2016.
I would like to turn the conference call over to Mr. Marr. Please go ahead.
Thank you, Zilda, and welcome to our Q4 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, I'll have some preliminary comments. Then Brian will review the details of our 4th quarter operating results and 2016 guidance.
Then I'll have some final comments and we'll take your questions. Brian?
Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections 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 ks 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?
Thanks, Brian. The Q4 was certainly eventful with our acquisition of New World Systems Corporation completed on November 16. New World is a leading provider of public safety and financial solutions for local governments and brings an important element to our portfolio of solutions. Founded in 1981 and based in Troy, Michigan, New World has over 2,000 public sector customers and more than 470 employees. New World Systems is highly complementary to Tyler and the combination supports our strategy of being an industry leader in all major enterprise applications essential to local government.
The purchase price was $360,000,000 in cash, which was funded from cash on hand and proceeds from a new revolving credit facility and 2,100,000 shares of Tyler's common stock, making this the largest acquisition in Tyler's history by a wide margin. The integration of New World's operations and products with Tyler is well underway. And as you can imagine, is a major epic and will continue through this year. Our combined employee and client groups are enthusiastic about the addition of New World to Tyler, to the Tyler family and the opportunities that the combination provides. The acquisition also introduces a certain amount of noise to our 4th quarter results as well as to our outlook for 2016.
With acquisition related expenses and adjustments as well as accounting changes to conform New World to Tyler's policies and practices. We'll try to identify and quantify those items as we discuss our results. Although our guidance for 2016 assumes revenues from New World of approximately $124,000,000 which is a lower 1st year contribution than we projected when the acquisition was announced. Since the deal closed, we have become more excited about the acquisition and the long term opportunities it brings. Excluding New World, the midpoint of our revenue guidance infers organic growth of approximately 12% for 2016, and the high end would have organic growth of approximately 13%.
We are pleased with our solid performance in the 4th quarter with organic revenue growth of 15.3%, our 9th straight quarter of revenue growth greater than 15% and total non GAAP revenue growth of 27.2%. Not surprisingly, we have seen some decisions delayed as prospects get comfortable with the acquisition. Tyler has a strong commitment to New World clients to support and enhance their products for the long term as we have with previous acquisitions and they should be confident that Tyler will be a strong partner for them. Continued strong growth in our e filing revenues from Quartz as well as a gradual shift from to cloud based software as a service business led to 29% growth in our recurring revenues from subscriptions. The addition of New World, year end backlog grew 20% over last year.
Bookings for the quarter rose 13.5% and including approximately $23,000,000 from New World. For the trailing 12 months, bookings were up 3.3%. The comparison to last year is a difficult one because in Q2 of 2014, it included $64,000,000 related to contract signings with California Courts. Excluding the California Courts contracts, the trailing 12 month bookings rose 15%. Q4 was another very strong quarter for SaaS contracts with total contract value of $32,400,000 the highest quarter ever.
Our largest new contract signed in the Q4 was a 10 year SaaS agreement valued at approximately $8,400,000 with the City of Raleigh for our EnerGov solutions, which continues to have success in the marketplace. The City of Burnaby in British Columbia, Canada also signed an on premise agreement with EnerGov valued at approximately $3,400,000 We signed 2 significant SaaS contracts in Texas for our ODiSI solution. The first was a 5 year SaaS arrangement with Wichita County valued at approximately $4,700,000 and the second with Hunt County valued at approximately $3,400,000 In addition, we signed new e file agreements with the state of Idaho and Orange County, California Superior Courts. For our New World Public Safety solution, we signed significant license arrangements with the City of Casa Grande, Arizona, Indiana County Emergency Management in Pennsylvania and Statesville, North Carolina. Also for our New World ERP solution, we signed license agreements with Gerald R.
Ford International Airport in Michigan in Fayetteville, Georgia. We signed several notable SaaS contracts for our Munis ERP solution, including San Juan County, New Mexico, Knox County Schools in Tennessee, and Marietta City Schools in Georgia. We also signed significant new on premise contracts for Munis with the cities of Glendale, Santa Monica and Simi Valley, California Manassas, Virginia Greenville County, South Carolina and Las Cruces, New Mexico. Finally, for our appraisal and tax IAS World solution, we signed a notable license agreement with Sussex County, Delaware. Now I'd like for Brian to provide more detail on the results for the quarter and provide our annual guidance for 2016.
Thanks, John. Yesterday, Tyler Technologies reported its results for the Q4 ended December 31, 2015. I'm going to provide some additional data on the quarter's performance and review our guidance for 2016, and then John will have some additional comments on the quarter and our outlook for 2016. 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 include write downs of acquisition related deferred revenue and acquired leases, share based compensation expense, employer portion of payroll taxes on employee stock transactions, acquisition related costs and amortization of acquired intangibles.
A reconciliation of GAAP to non GAAP measures is provided in our earnings release. Revenues for the Q4 were $158,900,000 up 24.7% with 15.3 percent organic growth. Software license and royalty revenues increased 15.2%. This was our 12th consecutive quarter of double digit growth in licenses. Organic license growth was approximately 1.1%.
In Q4, we received $319,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs, down 63.8% from $881,000 a year ago. For the full year, we received $3,400,000 an increase of 12 point 4% compared to $3,000,000 in 2014. Subscription revenues increased 29.3% with 26.6 percent organic growth. We added 33 new subscription based arrangements and converted 9 existing on premises clients, representing approximately $32,400,000 in total contract value. This represented our highest quarter ever for SaaS bookings.
In Q4 of last year, we added 24 new subscription based arrangements and had 12 on premises conversions, representing approximately $31,000,000 in total contract value. SaaS clients represented approximately 22% of our new software clients in the quarter compared to 17% in the prior year quarter. SaaS contract value represented 49% of total new software contract value signed this quarter, compared to 39% in Q4 of 2014. The value weighted average term of new SaaS contracts this quarter was 6.6 years, compared to 6.4 years in last year's Q4. Subscription based revenues from e filing for courts and online payments increased 28.3 percent to $11,300,000 from $8,800,000 last year.
Total e filing revenue of $8,600,000 this quarter increased 28% over last year. Our GAAP blended gross margin for the quarter declined 140 basis points to 46.1%, mainly due to the impact of acquisition related write downs of deferred revenue and increased amortization of acquired software. Our non GAAP gross margin rose by 130 basis points to 49.6%. SG and A expense increased 51.1 percent and was 26.7 percent of total revenues, an increase of 4 60 basis points from last year's Q4. Excluding non cash share based compensation and related expenses and acquisition related costs, SG and A expense increased 27.3% and was 19.6% of total revenues.
For the full year, SG and A expense, excluding non cash share based compensation and related expenses and acquisition related costs, increased 14.8% and was 18.5% of total revenues, an improvement of 80 basis points over 2014. GAAP operating income was $19,800,000 a decrease of 19.6%. Non GAAP operating income was $40,700,000 up 33.5%. Non GAAP operating margin improved 120 basis points to 25.1%. GAAP net income declined 43.7 percent to $8,600,000 or $0.23 per diluted share.
Non GAAP net income was $22,400,000 or $0.59 per diluted share, up 16.3% compared to $19,300,000 dollars or $0.54 per diluted share in Q4 of last year. The fully diluted share count for the quarter increased by approximately 2,200,000 shares, primarily from stock issued and acquisitions and to a lesser extent stock option exercises. Our effective tax rate for Q4 was 55.9 percent as we cumulatively adjusted the annual rate to 40.2% from the 36.7 percent tax rate we were estimating through Q3. This obviously represents a significant increase from our expectations at the beginning of the quarter. The increase in the effective tax rate primarily reflects the tax implications of the very high level of stock option exercises by employees in the quarter, as those create a limitation on certain tax deductions and therefore negatively impact our effective tax rate.
When options are exercised and sold, the employee recognizes ordinary income for which we receive a cash tax benefit. However, this gain creates a limitation on certain deductions that in turn increases our book tax rate. The timing and the amount of stock option exercises is difficult to predict and can result in some volatility in our rate as we saw this quarter. The effective tax rate was also negatively impacted by certain non deductible acquisition related costs. Had our annual effective tax rate stayed at the 36.7% we were estimating at the end of the 3rd quarter, non GAAP EPS would have been $2.64 for the year or $0.10 higher.
Free cash flow was $20,700,000 compared to $27,000,000 in last year's 4th quarter. Cash flow for the quarter was impacted by approximately 5 point 5 $1,000,000 in acquisition related costs. Also a significant amount of New World's maintenance billings take place in the 4th quarter with more than $15,000,000 build post acquisition, which increased our receivables balance at year end, but should enhance Q1 cash flow. We also ended the year with a $21,000,000 federal tax receivable as a result of tax payments made early in the year before we knew the extent of excess benefits from option exercises. This will reduce our cash tax payments in 2016.
Days sales outstanding and accounts receivable were 101 days at December 31, compared to 80 days at December 31, 2014. DSOs increased sequentially from 77 days at September 30, mainly due to the impact on the DSO calculation of only including 7 weeks of post acquisition revenues from New World, but including all of their outstanding accounts receivable at December 30 1. Excluding New World, DSOs were 80 days at December 31, unchanged from last year. Our backlog at the end of the quarter was 844 point $5,000,000 a new high and was up 20.3% from last year's Q4, including approximately $83,200,000 of New World backlog. Software related backlog, which excludes backlog from appraisal services contracts, was $797,000,000 a 21.2% increase.
Backlog included $216,600,000 of maintenance compared to $157,800,000 a year ago. Subscription backlog was $242,000,000 compared to $205,500,000 last year. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were approximately $176,000,000 an increase of 13.5 percent from Q4 of 2014. For the trailing 12 months, bookings were approximately 664,000,000 dollars a 3.3% increase from 2014. Q4 includes New World's estimated bookings from the date of acquisition to December 31 of approximately $23,000,000 As John mentioned earlier, the full year comparison to 2014 is a difficult one because Q2 of 2014 included bookings of approximately $64,000,000 related to contract signings with California Courts.
Excluding the California Courts contracts, bookings for the trailing 12 months rose 14.9%. We signed 30 new contracts in the 4th quarter that included software licenses greater than $100,000 and those contracts had an average license of $349,000 compared to 35 new contracts with an average license value of $469,000 in the Q4 of 2014. Our guidance for the full year of 2016 is as follows. We currently expect 2016 GAAP revenues will be between $750,000,000 7 $65,000,000 and non GAAP revenues will be between $765,000,000 $780,000,000 We expect 2016 GAAP diluted EPS will be approximately $1.90 to $2.02 We expect 2016 non GAAP diluted EPS will be approximately $3.33 to $3.45 For the year, estimated pre tax non cash share based compensation expense is expected to be approximately $30,000,000 to $31,000,000 We expect R and D expense for the year will be approximately $46,000,000 to $48,000,000 Fully diluted shares for the year are expected to be between 38,500,000 16 will be between 38% 39.5%. The tax rate and share count each are affected by the timing and volume of stock option exercises.
We expect our total capital expenditures will be approximately $31,000,000 to $33,000,000 for the year, including approximately $10,000,000 related to real estate. Total depreciation and amortization is expected to be approximately $49,000,000 to $50,000,000 including approximately 30 $6,000,000 of amortization of acquired intangibles. Now I'd like to turn the call back to John for his further comments.
Thank you, Brian. At a macro level, activity in our market remains good and our competitive position continues to be very strong. The pipeline is generally at a very high level, local governments budgets are healthy and we are not seeing any signs of broad spending slowdown in our space. As you can see, our guidance for 2016 is below consensus and with respect to both revenues and EPS. When the acquisition was announced last fall, our 2016 revenue expectation for New World was around $134,000,000 We now expect that their 2016 revenue contribution will be about $124,000,000 $10,000,000 reduction in revenue reduces our EPS expectations by about $0.10 There are two main reasons for the differences.
First, changes to conform New World's revenue recognition to Tyler's practices are expected to result in slower revenue recognition for both licenses and services, reducing 2016 revenue by $3,000,000 to $4,000,000 This is just a difference in timing of revenues. 2nd, we now expect that we'll be a little slower getting out of the blocks with New World's growth and therefore have lowered our expectations for 2016. We carried a somewhat lighter pipeline into the year in the process of strengthening the sales channel, integrating products and ramping up cross selling all are underway, but unlikely to drive significant revenue growth in 2016. We are putting in place the foundation with our organization and products to enable New World to grow at a rate consistent with Tyler's overall growth rates. We consider any revenues from business acquired within the last year to Therefore, about half of New World's revenues in Q4 of next year will be considered organic, as well some of the amount of Brazos revenues in the first half of the year.
Using the midpoint of our guidance range and our current expectations for New World's revenues, our 2016 non GAAP organic revenue growth rate would be around 12% at the midpoint of our guidance range and a little over 13% at the high end. We've consistently talked about our target organic growth rate in the 12% to 14% range, and we've achieved that as an average over more than a decade. In the last couple of years, we have grown above that target rate. A variety of factors have contributed to that higher growth rate, including our success in California courts and some large e file opportunities. There will be other catalysts to elevated growth at times, but not every year.
Our core business is strong, the market is active, and our long term growth expectations have not changed. We expect our 2016 R and D expense will be approximately $47,000,000 compared to Tyler's R and D expense of about $30,000,000 in 20.15. After offsetting an expected reduction in Microsoft Dynamics R and D spend, 2016 includes about $12,000,000 of incremental R and D expense. Investment in New World Public Safety will account for a significant portion of the increase, but the investment is across Tyler's products, including a newly created corporate R and D group. In total, we expect to increase our R and D staff by about 65 heads compared to last year's level.
We continuously evaluate opportunities to put our capital to work, including M and A activity and investment in our products. While we expect to continue to evaluate acquisitions, it is unlikely we'll do another large acquisition while we're digesting New World. As we have studied our near term opportunities, we believe that investing in Tyler through accelerated R and D spend will provide a compelling long term return. We have made the decision to fund more development projects this year than previously planned, which we believe will strengthen our competitive position across our product lines, allow us to widen the moat between ourselves and competitors and in particular expand our position in the public safety market. As you know, we expense all of our R and D, so increasing the spend directly affects EPS.
We look at this as an investment, somewhat like making a $12,000,000 acquisition but doing it internally. In some ways, making the investment internally is more certain than M and A. Again, this is not to say we won't do additional acquisitions, but in the near term, we intend to focus on investing more directly in Tyler organically. Now we'll take your questions.
Thanks, sir. We will now begin the question and answer Our first question comes from Patrick Townsend with Evercore ISI. Please go
ahead. Hi.
It's actually Kirk Materne with Evercore. Thanks for the additional commentary on the New World acquisition, John. I guess maybe the first question I have is just on the change in the revenue expectations. I think you mentioned about half of it was just sort of rev rec timing. The other half, I think you mentioned earlier in your prepared remarks, there are some pauses as people sort of get their arms or customers get their arms around this sort of what this means for them.
I guess two questions around that. 1, do you feel comfortable that after a pause and sort of the first half of the year things will start to accelerate? And then I guess 2, does the New World acquisition have any impact on sort of the organic Tyler sort of sales motion, meaning, I understand sort of the positive from a New World customer perspective, New World customer perspective. But from a core Tyler technology customer,
probably to start with your their reduction, it's probably almost 3rd. So, a 3rd maybe rev rec, maybe a little more than a third. And we had some of that built in, but it turns out to be more than we thought. A third ish is probably slowing down some sales processes and people getting more comfortable with this. And then a third, I would say, this is new to us, but they would be telling us that their pipe is a little lighter than the last few years.
So again, it's no one significant issue, but a few different things putting some pressure on their revenues. We did, as we indicate and just asked, we feel better about the long term potential of certainly the public safety side of New World now than we did at the time we did the acquisition. We're very impressed with the team. They're very easily blending into Tyler, very similar cultures and ways of operating. They're enthusiastic to be part of Tyler.
We feel with these investments that we're keying up now that we can improve this product competitively and we think the combined story of New World and Tyler will be more compelling than New World was on its own. So we're very enthusiastic about that long term. But as we indicated, it's going to be a little bit slower out of the blocks for those three different reasons. In terms of Tyler, no, there's no impact on Tyler's decisions because we did a large acquisition or if there's any confusion in the product strategies. I don't know of any indication or any instance where one of our own organic deals was affected by the acquisition.
Okay. And just a really quick one on sort of the increase in R and D sort of investment, I think makes a ton of sense. I guess after we get through sort of the step function up this year, does the opportunity for EBITDA growth of sort of, I guess, 20% where it's been over the last few years, does that come back into play? Or is this something where you just need to you may be investing a little bit not as much as you should be. I'm just I guess I'm trying to get a sense on what sort of the EBITDA growth trend should be after we sort of normalize this uptick in spending this year?
Thanks.
Yes, fair enough. And I have to be a little careful, right, answering that question because we clearly want to remain in a position to have the flexibility to make good investments that we feel are compelling. And I could tell you, don't worry, next year they rebound and we find a great opportunity that we want to invest in and we'll do that. And I know you'd want us to do that. So you have to be a little careful about how you answer that question.
But I guess I'd say it this way. We definitely expect that as our company grows, that the benefits of the scale that we realize will drive margins higher. I don't have any question about that in the long term, but I actually will be pleased to find other opportunities where we feel if we make an R and D investment, it will give us a great return in the future and we'll literally look for those and make those investments. But in the long term, yes, we expect those investments to drive revenues higher in the typical model and scale benefits will kick in and then margins will expand. As we said, we expense all of this, but we look at this as important as investment as building a new data center, which is capitalized or doing a major acquisition.
But it obviously runs through the P and L. I would estimate, if we look at it this way, that of the $47,000,000 R and D spend, about half of that, maybe a little more is what I would call discretionary competitive investment. So if you were trying to run the company right now to maximize its current earnings, taking care of all of the deliverables you need for your contracts and customer work and even doing the core maintenance to the product that you need to do. I think there's a $25,000,000 spend on top of that, that is a great investment to Tyler, but is discretionary and really is to be the catalyst for growth down the road. And you guys can kind of look at that and model it as you'd like.
Thanks, John. Appreciate it.
Sure.
The next question comes from Alex Zukin with Stephens. Please go ahead.
Hey, guys. So two questions for me. The first around the software and services backlog. On an organic basis, it looks like it's basically flat with the prior year and it hasn't been that way since 2012, I believe. So I'm just wondering if you could shed some light on that around the puts and takes there?
Well, I think it is relatively flat this quarter. I think most we have seen more of an increase on the subscription side in the last couple of quarters, it's been very strong on the subscription booking side. So I think some of that is offset by an increase in the subscription bookings and backlog. So that's probably the major impact there. There's probably also a little bit of an impact from the how the New World acquisition fits into that, but I'd say biggest changes through the subscription side to growth there.
Got it. And then what about just if you look at it on a total backlog nature, it's up about on organic basis, up about 8%. Any was there any kind of puts and takes in terms of the quarter volatility in that metric that put it at that level? Was that a level that you came in happy with? Maybe just that one.
I don't think there's anything particularly unusual in there. This quarter, as we've talked about frequently, the timing of large deals affects that this quarter. There weren't any sort of mega deals. So this seemed to be a pretty normal quarter in terms of bookings. I think, as I said, a very strong quarter on the SaaS side, like kind of an average quarter, actually down a little bit from last year's quarter on the license side, but all in all, nothing remarkable about just kind of a normal bookings quarter, activity and pipeline remains strong.
And as John noted, we have seen some delays in new signings on the New World side, particularly in the Q1 after the acquisition and that's not surprising. So, and I think if it were a normalized quarter for New World bookings, we would have seen more growth there.
Got it. That's helpful. And then, John, how would you characterize the core RFP pipeline for Tyler going into 2016 versus maybe going into the last 2 years? And then can you just also talk about is there a little bit of a heightened level of conservatism in the guidance?
Well, I think okay, in terms of the RFP activity, as I kind of said, there's nothing here unusual. All the leading indicators are pretty consistent with the last 2 or 3 years since the recovery from the bumps in 'nine, 'ten, 'eleven, whatever. Nothing different there, really nothing different in our core business. I think the activity toward the end of the year in some divisions, particularly Munis, for example, the amount of business they're kind of uncontracted, not in backlog. So if backlog is a little flat, a lot of that's timing and there were a lot of awards that weren't contracted in the quarter that will get contracted in the Q1.
So that core flow is very normal and something we're pretty satisfied with. I think our growth will come from continuing to improve our competitive position in that situation.
Got it. And then just maybe the conservatism around the guide?
Well, maybe a little. I think over the years, you learn most of the things that happen that are surprising affect you in a downward way during the year, right? They drive some expenses you didn't see or some revenue slips. And most of the good things that happen, it takes a little longer to recognize that revenue and get the upside. So I think, sure, over the year management has learned that and probably deliver more in the mid or low end of the range.
And I think in recent years, we've delivered there's no certainty, but delivered on the high or on the outside the high end of the range. And so that's been an evolution at Tyler, I think is accurate. In terms of New World, I just think there's an awful lot of moving parts. There's a lot of noise. And so we're taking a little more conservative position there, which I think is appropriate.
And the net of it is, what we've tried to do is give you guys an accurate impression of what we see, but it's probably got a little broader range given the moving parts that we're digesting this year.
Okay, great. Thanks guys. I'll see the floor. Sure.
The next question comes from Jonathan Ho with William Blair and Company. Please go ahead.
Hey, guys. I just wanted to start out with just maybe going back to the $12,000,000 in investment. I just want understand sort of why the decision now to increase those investments? And did you guys see sort of a number of opportunities or key product gaps in the portfolio or opportunities to displace competitors? I'm just trying to understand sort of why the decision to make those investments this year?
Sure. It really isn't just this year. I'd say that $12,000,000 as I indicated earlier is incremental to heads we've been adding to on a discretionary basis and invest in things we thought were important. And probably our run rate now, as I said, is maybe around $25,000,000 in annual spend that are resources that we can target what we think are important timely investments that will give us a good return. So it's the extension of a process that I think we've been working on for the last few years.
I think in the last few years, M and A activity and the cost of those assets are higher. Cost of owned stock in terms of deploying capital has been higher. And the company executes well on building and investing in existing products, getting them to market, improving their competitive position and being in a very good position to opportunistically take advantage of opportunities that come in front of us. And we think that's a very good investment for Tyler's shareholders. It's a company that knows how to execute.
And when you're in that position, you should invest in your own company and that's what we're doing. In terms of where those go, integration is a big thing. The unique thing about Tyler is we're the only company, as we say over and over, applications that are essential to local government. And as those products become further integrated, they add value to each other and that's something that our competition really can't do. So we have good competitors in each of those sub verticals, but the people we compete with in courts don't have financial systems.
And the people we compete with in financial systems generally don't have tax systems or public safety systems. So one of the major themes and we mentioned the corporate R and D team is to better integrate these different products that on their own are all very competitive, but as they become more seamlessly integrated and actually add value to each other's application, really create something for Tyler that's going to be hard to match by the rest of the market. So that would be an example of something we're integrating. Technology drives the need for new functionality. Mobility right now, obviously, a very big deal.
User experiences get tired and have to be refreshed. That's a big investment for us. That's a big determining factor in the sales process. And then extending functionality. So some of our applications really have been come along with our core and strong applications, but maybe on their own, we're not industry leading.
So enterprise asset management, for example, would be an area where we had an application, probably was an industry leading. It was added expertise and subject matter experts in headcount. And the objective is to make that by itself industry leading as we go forward. So it's across the applications. In our view, it will continually drive a stronger competitive position and it will position us to be very competitive when new opportunities come online.
An example would be e file. We didn't just kind of go bid and win the Texas efile deal that kind of catapulted us as a leader in that space across the country. We've done an acquisition. We've consciously invested in that product and brought it up to be industry leading and we were in a great position to take advantage of an opportunity when it came out. And we're right now consciously doing that across our product suites.
Got it. And then just relative to your comments about some new world customers or potential customers slowing down their evaluation process. In your experience when you've made acquisitions of other companies, how long has it taken for the customers to get comfortable? And is this a situation where they start to evaluate other competitors or reopen bids? Or is this more of a get to know you type of a scenario?
I don't think they usually go backward in the process. It's always hard to know whether a deal was lost that might not have been. I'd say if that has happened, it's been 3 or 4. And again, you'll never know for certain, but it's not 12 or 15, it's a few. And some deals, again, were delayed and have been awarded subsequently.
So I do not think it will be a long term impactful effect, certainly not on public safety because the answer, when they say, hey, what's this mean to us? And we tell them what our objective is, we talk about these investments we're making, makes this an even better investment for them. And I really think that's an easy story to tell and that most people in the marketplace would see that as an improvement. So I think it really is, hey, we need someone to come out, we need them to explain what's going on, we need to get comfortable with that, we might need to talk to some Tyler folks or customers. And again, I think on the public safety side that it's going to improve our win rates and I think it will be a non issue certainly by mid year this year.
Their ERP side, it's a little harder because obviously Tyler has very strong products already in that space, so people can be concerned. But we can point to our Infinite Vision solutions, which have done very well for 3 or 4 years now since we bought those companies and having an ENCODE and a Munis. So we already have multiple suites of financial systems that all have important addressable market spaces that are not much overlapping at all. And there's certainly room for new world in that and we're carefully targeting those markets and identifying them. And I think as we demonstrate that we continue to invest, there's been no headcount reduction that people will see that and get more comfortable with it.
Thank you.
The next question comes from Brian Kinstlinger with Maxim Group. Please go ahead.
Great, thanks. Wondering if you guys can talk about the pipeline of large Odyssey and e file contracts. It sounds like there's a number of RFPs in the U. S. And Australia and maybe expected timelines of awards as you see it?
Yes, a little bit. It's hard to know exactly, but there are a few deals, statewide kind of deals that we're engaged in that we feel good about in some large counties. Obviously, we've got the 26 or 7 counties, so we're going to count them in California, which we have virtually no e file revenue, a little bit right now. And that would be the biggest market. And some of those had e file as part of their initial engagement.
Some of them contracted subsequently, a few are mandatory, but certainly in the next few years as those sites go online, that's a major growth opportunity. So there's still a lot of runway left for EVA.
And then in terms of bookings, clearly this was a difficult year for comps compared to last year given California. What's your reasonable goal for bookings growth going forward? Is it 10% or is it 15% I know you've done even more than that in the past or your larger size, maybe give us a sense of what's
reasonable? Well, it's an important number I appreciate, but by itself, it's hard to say that, Brian, because like we mentioned, a 10 year deal with Raleigh is $8,500,000 and it might have been a $2,000,000 deal if it was on premise. So the mix of SaaS versus traditional, the length of the term, if it's 10 years or 4 years. So I'd be careful to focus on that exclusively. It really has to be looked at within a number of different things.
So if you do normalize that for the Californias or if you had a spike in SaaS versus traditional, then I do think it would be at least 10% and probably should grow a little north of our overall revenue growth rate because the SaaS contracts add more revenue add more backlog than they will revenue.
Great. Thanks, John.
The
next question comes from Scott Berg with Needham and Company. Please go ahead.
Hi, John and Brian. Thanks for taking my questions. I had a couple of quick ones here. John, first of all, can you just clarify
your comments at the beginning with
regards to the delayed decisions? The way you made it sound like there were some Tyler maybe Tyler focused decisions that were also delayed, but your other comments would not suggest that. I just wanted you to clarify that really quick.
No, you're right. Sorry if I gave that impression, but I don't know of any Tyler decisions that were materially affected. It certainly could have been a call or something, but nothing material in Tyler decisions affected by the New World acquisition. Okay, great. Thanks.
Brian, I wanted to see if you could talk about the New World financials just a little bit relative to the 8 ks that was disclosed, their gross margins look abnormally high relative to other software companies I'm sure most of us cover. Is there going to be any changes to how they recognize expenses or revenue? I know there's some obviously moving parts on the revenue side that we've already been made aware of, but more thinking on the expense side as we model out 2016?
Well, when you look at those historic New World Financials that were filed with the 8 ks, there are a number of differences throughout those from both Tyler's accounting, they're so as you mentioned revenue recognition policies, although both in accordance with GAAP, theirs would be would have been in some cases, somewhat more accelerated than they are under Tyler policies. There's obviously the purchase accounting adjustments that affect the deferred revenue recognition. They were sub S corporations, so didn't have corporate taxes included there. The way they classified R and D in their historic statements would have been different from ours, where we have significant amount of our development expense in the up in cost of sales and then a portion of it on the R and D line, theirs would have been more on the R and D line, so that would have elevated their gross margin versus ours. So there's quite a number of changes through there.
But at a very high level, their gross margins and operating margins were higher than ours and should contribute to increasing our blended margins and part of that is just the nature of the business. They were a relatively simple business, had not done any acquisitions or been acquired. So they really have 2 core products, the ERP product and the public safety product, both of which have been developed organically, more than 50% maintenance revenues, which generates very high margins when you've got that level of scale and maintenance revenues from a couple of relatively mature products. So clearly, it's hard to infer a lot from those pro form a statements, but that's kind of a high level look at it.
Great. Thanks. John, it hasn't come up really at all on any of the other questions, but could you talk about the dynamics royalties just a little bit? Looks like it was the weakest quarter in at least 2 years. And wanted to see if you're understanding that those opportunities are either maybe less than or greater than kind of your understanding on how those that business has been trending in
the last couple of years?
Yes, it was a weak quarter. We've said we don't we literally open the file and they send it to us and we really don't we don't know what we're going to get. So we don't have a lot of visibility on it. I will say, we have gotten the file for the current quarter and it rebounded somewhat. We'll obviously announce that with next quarter.
So it's lumpy. And again, it rebounded to pretty much what was in our plan. So it's going to bounce around. They're not as robust as we'd like them to be, but we really don't have a lot of visibility.
Great. Last question for me. Brian, you've talked to the last couple of years about walking your EBITDA margins or operating margins, excuse me, up to that kind of 30% range. Obviously, you're making an investment this year, but is there any change to maybe how we think about those margin structures as we get to maybe 2018 or 2019?
No, I don't think so. I think our long term model is still consistent that as we grow revenues in that low to mid teens and as we talked about kind of 12% to 14% has been where our long term average has been, that over the long term we expect that that obviously lots of puts and takes with the mix of revenues between SaaS and license with the acquisition, with investments in products, But general, over the long term, we expect that that kind of growth will yield north of 100 basis points on average and it doesn't happen in a straight line every year, but on average in gross margin improvement and better than that on the operating margin and EBITDA margin lines. And even with these investments this year, I think our EBITDA margin, because the New World business overall gives us a lift in that, we will still see, I think relatively stable EBITDA margins and we'll see gross margin improvement.
Great. That's all I have. Thanks for taking my questions.
Sure.
The next question comes from Charlie Strauzer with CJS Securities. Please go ahead.
Good morning. This is actually Robert Majic in for Charlie.
Good morning.
Given the pullback in your recent acquisition of New World, what is your appetite for share buybacks currently?
Brian, did you announce that number?
Yes, we did announce. We have 1,400,000 shares left in our authorization. We have bought given the broader pullback in the market in the last few weeks, We've bought a modest amount of stock. I don't think we announced the number till year end, but we bought a modest amount. And then but as we said, we've got about 1,400,000 shares left in our authorization and John can comment on our appetite for that going forward.
Yes. So we have been active in the last 2 weeks since the tech sold off a little bit. Obviously, recovered a little bit the last few days and now we're back down to a level below where we have been active. So I guess from there you could infer that we would intend to be active at this level. I don't think we would be trying to do something that's too significant at this level.
It's still not a discounted stock, but it certainly get down to an area we will take a long term view. All of our long term objectives we think are strongly in place and we think buying at this level and looking out a couple of years as to what that means makes a lot of sense for us. So at the current level, we would not be overly aggressive, but we will be active.
All of my other questions have been answered. Thank you.
The next question comes from Kevin Liu with B. Riley and Company. Please go ahead.
Hi, good morning. Just in terms of the bookings metrics this quarter, it did seem like more of a shift towards SaaS business. I'm just wondering what you're seeing in the pipeline in terms of any potential shift away from on premise to license? And then also curious whether some of the larger opportunities you signed started off as SaaS deals or whether clients ultimately shifted over the course of the quarter?
It just hasn't changed that significantly in a number of years now. So high 20s, low 30s in terms of percentages of new names tend to be where it settles out in any individual quarter, it can bump around. But it really isn't changing. I know we hear so much about the cloud. We offer both.
We don't try to have a bias in directing them one direction or another. We believe the name has great value to us in the long term and we welcome them either way. But the numbers don't change too much. I think sometimes you see a higher percentage of bookings look like SaaS names are growing and sometimes that can be distorted as I indicated earlier, the Raleigh deal for example. It's a 10 year deal.
It's one name, but it's a 10 year deal. So it distorts a little bit how many dollars are going into backlog as SaaS dollars versus traditional dollars. But really not a material shift in a number of years at this point.
Got it. And just in terms of your e filing growth, obviously, another strong year in 'fifteen. As you look forward now between the state you have contracted and that could potentially come online versus the overall backlog of business there? What sort of growth do you expect for e filing this year?
This year is a little bit lighter because we literally are bringing a lot of clients, a lot of Odyssey clients online and implementing them in the e file revenues will follow after that. So I think there'll be a little bit of a pause this year, there'll be a little lighter growth. But if you just look we're not talking about names we're not working, we're just talking about California names, some of the other large counties and states we're working with where we know it's their clear intention to introduce e file and eventually go mandatory, I think you'll see that growth rate bounce back 2, 3 and 4 years out.
Okay. Thank you. It
grew about $9,000,000 in 2015, and I expect it will be the growth would be more in the $5,000,000 $6,000,000 range in 'sixteen. And then as some of the California stuff comes online, we probably see that accelerate in 'seventeen.
Got it. Thanks for taking the questions.
The next question comes from Tim Klasell with Northland Securities. Please go ahead.
Yes. Two quick questions here. First on the product side, the E91 initiatives are getting a lot more press here recently. And wondering what sort of synergies are you seeing with those initiatives, particularly as it relates to New World? Are those 2 products that's helping each other out?
So maybe a little bit of color there would be appreciated.
What two products?
With New World, with public safety and with your E91 initiatives around video and then some of the new next generation 911? Yes.
Our focus will be we have some title products in that area. They'll be maintained. They'll be invested in. But clearly, in terms of investing in next gen E911 solutions to handle texting and a lot of the things that traditionally haven't been handled, multimedia coming through there, that will be that is part of the significant increase in R and D in the New World side of our business.
Okay. That's helpful. And then finally on your tax rate, obviously that's up a little higher than what we had been modeling. Is that something permanent or is that something that maybe you can work down over the relative to what the expectations you laid out for 2016?
Generally, the tax rate is in a pretty tight range. It certainly moves around for a number of different reasons. The outside the box increase, which
you
say a little higher, 55%, obviously, I hope is way higher, is associated almost exclusively with the exceptionally high activity of options we had in the Q4 with a very high stock price, understandable. Our average hold for our employees is over 7 years, so there's a lot of options out there. That's a good thing. And there was a lot of activity, understandably. And that causes the elimination of deductions that we get.
And that's what drove the rate higher. And being in the Q4, it's completely absorbed in that quarter. And so it really is a one off experience.
Okay. But even 20 16 guidance is a little bit higher than we modeled and an impact there. Is that sort of the steady state run rate that we should be expecting the you guided 38% to 30 9.5%. Is that the sort of the range we should be thinking about for the next few years?
Yes, I think that 38%, 39% is generally the range. We've widened where we've historically been and we put a little bit wider on the high end because of the uncertainty around the level of option exercises, But our rate is pretty close to statutory rates. We don't have significant international operations, so everything is pretty much fully taxed at full domestic rates as well as state taxes. So that 38%, 39% range is probably pretty good. Obviously, we work on tax planning, look for places where we can get marginal improvements, but absent more overseas business in jurisdictions with lower tax rates, we likely are going to be close to that range.
Okay. That's helpful. Thank you very much.
The next question comes from John Rizzuto with SunTrust Robinson Humphrey. Please go ahead.
Hi, this is Anupurmela sitting in for John. Just two questions. So the first one on when you look out to 2016 and given your guidance and what do you see as far as the revenue mix between, let's say, license and services versus maintenance versus, let's say, subscription? Like I guess that's the first question. And I guess implicit in that is like is there a change in pace of license revenue growth as we move to the cloud?
Thanks.
In a broad range, I think, the addition of New World probably shifts a little bit more into the licenses side, because New World didn't really or hasn't historically had as much of a a subscription offering. So, they're almost exclusively licenses. So, I think that the mix is a little bit more on licenses next year, a little bit lower on services, but really it may be only a point of the mix, something like that. They also had a higher proportion of maintenance, so that probably raises it a point, but I think generally our mix this year will be similar. 2015, it was about 10% licenses, that might be more like 11 percent in 'sixteen.
We are about a little less than 24% services. I think that might go down a point or 2 in the mix. Subscriptions were about 19%, that also might go down about a point, but stay pretty similar. Maintenance might go up a point or 2, it's around 41.5 15 might go up, again a point. And then appraisal is a relatively slow growing business, so it probably will modestly continue to be
a little bit smaller piece of
the mix, but no dramatic changes in the mix.
Okay. Okay. That's helpful. And I guess with R and D spending, it's rising, but overall, you pointed out like you still expect the gross margins, operating margins to rise. So just could you just talk about where do you really see the leverage?
There's some impact from New World, but New World and where do you see the leverage in New World and other than New World maybe in the core business?
Well, Tyler, like New World is a good example. So their margins are higher and they'll be affected a little bit as we go through this transition, but they'll settle out at a much higher level than Tyler's blended margins are. But they're a good example and they're very similar to a lot of our more mature business units. So I think the reason they're hired, they're not making a lot of investments outside of their core products. They maintained and invested in those well, but they really didn't have a lot of new initiatives around them.
When you look at Tyler, our core divisions that have reached a level of scale, Munis or Encode or Infinite Visions or C&J getting to that point, their margins are very similar to New World, which I think are the appropriate margins for a more mature business unit that's reached a certain level of scale where employees are well served, customers are well served, investments are being made in maintaining and extending products and improving their competitive position. At Tyler, we're consciously choosing to always be investing in new products and new initiatives that bring that core rate down. And so over time, as those investments in relation to the more mature business units are smaller, the dollars won't be smaller, but as a percentage of smaller, we'll see our blended rates move toward where they are for those mature units that exist, which really is in the 55% to 60% gross margin level and in the 35% operating margin level. So we know that that's attainable. We choose to be making these investments as we go, which brings the blended rate down, but we believe is a good investment for the company.
Perfectly clear. Thank you.
And just to be clear, the guidance for 2016 implies really a modest increase in gross margin, modest increase in EBITDA margin, a little bit bigger increase in EBITDA margin, but a decline in operating profit margin because of the elevated R and D that falls below gross margin business in the operating margin.
The next question comes from Peter Lorre with JMP Securities. Please go ahead.
Thanks. Hey, Brian, one quick question. Given the noise around the high level of stock option exercises in New World Systems, is there anything you can say in terms of guidance, in terms of how we should think about cash flows in 2016, anything you would highlight?
Well, cash flows, as I mentioned a couple of things that kind of brought down cash flow in 2015 a bit below our normal cash flow margin, the costs associated with the New World acquisition, the timing of some of the taxes where we paid taxes earlier in the year and then this excess tax benefit from the option exercise really was created the end of the year and so that will benefit our next year taxes. The and New World billings, the timing of their maintenance billings is favorable for us for 2016 cash flow. But I think we should, as I said, see some EBITDA expansion and cash flow should sort of grow normally in line with that. So nothing terribly unusual, but I think some of the things that maybe helped cash flow down a bit in 2015 will turn around and maybe put us a little bit above the curve in 20
16. At
this time, there appear to be no more questions,
Okay. Thank you. And we appreciate everybody joining us on the call today. If there are any further questions, then feel free to reach out to Brian or myself. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.