Tyler Technologies, Inc. (TYL) Q4 2013 Earnings Report, Transcript and Summary

Hello, and welcome to today's Tyler Technologies Fourth Quarter and Fiscal Year 2013 Conference Call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. [Operator Instructions] As a reminder, today's conference call is being recorded today, February 6, 2014. I would like to turn the conference call over to Mr. Marr. Please go ahead.

Thank you, Jamie, and welcome to our fourth quarter 2013 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, and Brian will give the details of our fourth quarter operating results and 2014 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-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 fourth quarter represented a strong finish to a year of record performance by almost any measure. This was our 12th consecutive quarter of year-over-year revenue growth, as well as our 51st consecutive profitable quarter. Our recurring revenues from subscriptions and maintenance continue to be major drivers of our growth, as together, they grew 19% and represented approximately 62% of total revenue for the quarter. Our subscription revenue growth of 51% reflects a continued shift toward cloud-based Software-as-a-Service business, as well as strong growth in our e-file solutions for courts, including the first full quarter of revenue from our Texas e-file contract. We're particularly pleased to have software licenses and royalty revenues grow 27% over the year even as subscription revenues were strong. Our software license revenues of $11 million were our highest quarterly license revenues since the fourth quarter of 2009. The fact that we achieved greater than 20% growth in both software licenses and subscription revenues underscores how remarkably strong the quarter was. Gross margins improved 90 basis points to 47.7%, reflecting our operating leverage in incremental recurring revenue, including the Texas e-filing contract, as well as the higher level of software licenses. New contract signings continue to be very solid across all of our major products. Some of the notable contract signings in the quarter were an agreement with the city of Columbia, Missouri for our Munis ERP solution and our EnerGov planning, permitting and licensing solutions valued at approximately $4.8 million. This contract is a great example of the value added from the integration of our EnerGov acquisition in 2012, of those applications contributed meaningful amount of the total value in Columbia. We also signed significant contracts for our ERP solutions with El Paso County, Texas and Pasco County, Florida, each valued at more than $4 million. The Boston Public Schools signed a contract for Tyler Incident Management, an application that integrates with Tyler's Versatrans transportation software suite, providing the district with a complete school transportation management solution. Also, the state of Oklahoma Office of Management and Enterprise Services named Tyler as a preferred vendor for Tyler's student information systems. Oklahoma school districts can purchase Tyler SIS at a negotiated rate from the state contract without conducting their own request for proposal process. We also continue to have success in the courts market with our Odyssey case management solution. In California, we signed a contract with Fresno County Superior Court for Odyssey, which will also include e-filing. Also in California, 6 other Superior Courts collaborated an agreement to jointly implement our Odyssey case management solution as a single project rather than 6 individual projects. This unique initiative, officially known as the NorCal Collaboration Project, is a product of the Superior Courts of Alpine, Calaveras, Glenn, Lassen, Tehama and Yuba counties. The initiative is a 5-year SaaS arrangement and was signed under the Master Service Arrangement. The 6 courts will have a total of approximately 200 users on the Odyssey system. In addition, the New Hampshire Judicial Branch, which uses our Odyssey case management system statewide, selected our e-file solution and other additional Odyssey features for their statewide e-Court initiative. Now I'd like for Brian to provide more details on the results of the quarter and give our annual guidance for 2014.

Thanks, John. Yesterday, Tyler Technologies reported its preliminary results for the fourth quarter ended December 31, 2013. These results are considered unaudited until our Form 10-K is filed, which is expected to be on February 20. I'm going to provide some additional data on this quarter's performance and our guidance, and then I'll turn the call back over to John for his 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. Our non-GAAP earnings exclude 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. Revenues for the fourth quarter were $110.7 million, a new quarterly high, up 16.1%. Organic revenue growth was 14.0%, and EnerGov, acquired in November 2012, accounted for 2.1 percentage points of growth. Software license and royalty revenues increased 27.4%. Excluding the impact of acquisitions, software licenses and royalties grew 20.3%, which is attributable to the increase in Tyler proprietary license sales to new customers, as well as growth in Microsoft Dynamics royalties. Software licenses grew more than 25% to $11 million. In Q4, we received $473,000 of royalties on public sector sales of Microsoft Dynamics AX 2012 by other Microsoft partners, almost double the $238,000 in royalties a year ago. In addition, we had approximately $1.1 million of revenues related to Tyler's direct sales of Dynamics, which are included in software license services, maintenance and subscription revenues. Subscriptions continue to be our fastest-growing revenue line and grew 51.3%, all of which -- all of -- of which all but 0.8% was organic. We added 26 new subscription-based arrangements and converted 15 existing installed clients compared to a total of 29 new arrangements and 15 conversions in the fourth quarter of 2012. The average contract value of the new subscription contracts in Q4 was significantly higher than last year, and the total value of the new subscription contracts in Q4 was 27% higher than last year. Approximately 26% of our new software clients opted for one of our cloud-based solutions compared to 45% of the new clients in the fourth quarter of 2012. The subscription line also includes a growing revenue stream from e-filing for courts and online payments. These revenues rose approximately 121% to $6.7 million from $3.0 million last year. Included in subscription revenues this quarter was approximately $3.1 million related to our Texas e-filing contract. Excluding the revenue from the Texas e-filing contract, subscriptions rose approximately 27%. We expect to continue to see long-term growth in these revenues as both current and new clients adopt our Odyssey File & Serve solution and more of them move towards mandatory e-filing. Software services revenues increased 13.4% with 10.0% organic and 3.4% from acquisitions. Maintenance revenue growth was 9.3%, of which 8.2% was organic. Our maintenance revenue growth continues to be reduced somewhat by the increasing percentage of new SaaS clients, as well as the effect of existing installed clients converting to our hosted offerings, which results in a loss of maintenance revenue offset by a larger increase in subscription revenue. Our blended gross margin for the quarter was 47.7% compared to 46.8%. The increase reflects the higher level of license and royalty revenues, as well as improved margins in our subscription revenues with the leverage from e-filing growth. SG&A expense increased 14.6% in the quarter, with the majority of the increase from higher noncash share-based compensation expense. SG&A expense was 23.6% of total revenues, a decrease of 30 basis points from last year's fourth quarter. Noncash share-based compensation expense was $3.1 million compared to $1.9 million. $422,000 was included in the cost of revenues and $2.7 million was included in the SG&A expense. Excluding noncash share-based compensation expense and the employer portion of payroll taxes on employee stock transactions, SG&A expense was 20.7% of revenues compared to 22.0% last year. Operating income was $19.5 million compared to $15.4 million, an increase of 26.2%. Non-GAAP operating income was $24.7 million, up 28.9%. The non-GAAP operating margin improved 220 basis points to 22.3%. Net income was $10.5 million or $0.30 per diluted share compared to $9.4 million or $0.28 per diluted share. The fully diluted share count increased by approximately 1.9 million shares as a result of stock option exercises and our higher stock price. Our effective tax rate in Q4 was 44.9% as we cumulatively adjusted the annual rate to 40.6% from the 38.9% rate we were estimating through Q3. The increase in the effective tax rate is primarily because of the tax implications of the high level of stock option exercises by employees in the quarter, as those have a negative impact on certain tax deductions and therefore, our rate. This factor is difficult to predict and can result in some volatility in our tax rate, as we saw this quarter. Non-GAAP net income was $14.0 million or $0.39 per diluted share compared to $11.9 million or $0.36 per diluted share in the fourth quarter of 2012. Adjusted EBITDA, which is EBITDA plus noncash share-based compensation expense, was $26 million or $0.74 per diluted share, an increase of 27.9% compared to $20.3 million or $0.61 per diluted share in the fourth quarter of 2012. Free cash flow was $793,000 compared to $13.7 million. Excluding real estate CapEx, our free cash flow was $5.9 million versus $14.9 million. The decrease is primarily attributable to the timing of billings related to contract milestones. Days sales outstanding and accounts receivable was 87 days at December 31, 2013, compared to 95 days a year ago. DSOs increased sequentially from 76 days at September 30, which is our normal trend, as we bill a significant portion of our maintenance in Q4 resulting in an increase in receivables with the related revenue deferred over the next 12 months. Our backlog at the end of the quarter reached a new high at $551.7 million, up 45%. Backlog related to our Software business, which excludes backlog from appraisal services contracts, was $531.8 million, a 51.7% increase. Backlog included $136.7 million of maintenance compared to $125.5 million a year ago. Subscription backlog was $188.7 million compared to $82.1 million last year and included approximately $68.3 million related to the Texas e-filing contract. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were up 2.9% to $121 million. For the 12 months ended December 31, bookings were up approximately 45% over the prior 12-month period, including the Texas e-filing contract, which contributed $71.5 million of bookings in the third quarter. We signed 34 new contracts in the fourth quarter that included software licenses greater than $100,000, and those contracts had an average license of $531,000, compared to 18 new contracts with an average license value of $493,000 in the fourth quarter of 2012. Our total headcount grew by 91 to 2,573 employees at the end of the fourth quarter compared to 2,482 at the end of the third quarter, mainly professional services people and development staff to ensure that we are well positioned to deliver our current backlog and anticipated new business. Turning to 2014, our initial annual guidance is as follows. We currently expect 2014 revenues to be between $467 million and $475 million. We expect 2014 diluted GAAP EPS to be approximately $1.31 to $1.37, and fully diluted shares for the year are expected to be approximately 36 million to 37 million shares. We expect 2014 non-GAAP diluted EPS to be approximately $1.76 to $1.85. For the year, estimated noncash share-based compensation expense is expected to be approximately $15 million. We expect an effective tax rate for 2014 of approximately 39% to 41% based on the timing and volume of stock option transactions throughout the year. We expect our total capital expenditures will be approximately $12 million to $13 million for the year. Total depreciation and amortization is expected to be between $15 million and $15.5 million, including approximately $6.5 million of amortization of acquired intangibles. And now I'd like to turn the call back over to John for his further comments.

Thanks, Brian. As we indicated, Q4 was a solid quarter financially, generally in line with our expectations and capping a very good year. We're extremely pleased with the level of bookings in the quarter, which have been at a consistently high level for the last 3 quarters. The dollar value of new contracts, including both traditional license deals and cloud deals, increased significantly over last year and, as a result, backlog continued to expand. I believe this performance is reflective of both the broader market recovery to pre-recession activity levels and Tyler's very strong competitive position. Our consistent investment in our products and our track record of successfully executing complex projects are important factors in our success in the new business market and enhance our ability to continue to gain market share and build on our leadership position. As we noted earlier on the call, although our average deal size for both license and cloud contracts increased over last year, our new business success this quarter was not driven by extremely large contracts but by higher win rates, especially in the mid and the upper-mid market opportunities. Our wins were also very geographically dispersed and spread across all our major product groups. While revenue growth in the mid-teens for 2013, and the same forecasted for 2014, is an increase over recent history, it doesn't fully reflect the improvement we are experiencing in the new business market. As you know, roughly 2/3 of our revenues are recurring. It takes a multiple of that overall growth rate in the mid-teens and new business to drive those results. We're encouraged by the demand we have seen for our products in 2013, and we believe we are bringing more activity into the new year than was the case last year. The courts market is a sub-vertical in which we have become a pretty clear leader. We further expanded our early success in the California market with new contracts this quarter in Fresno County and with a group of 6 counties known as the NorCal Collaboration Project. To date, we have been selected in 12 of the 14 California courts that have signed contracts for new court case management systems. The losses were to 2 different companies, so no other company has won more than a single deal. We have a number of very active ongoing sales processes in the state and are confident of our ability to continue to win new business while successfully executing on those implementations. We achieved a major milestone in early January when our first California Odyssey implementation in San Luis Obispo County went live, just 13 months after the project was kicked off. In our courts e-filing business, it was also a very busy quarter. We had a full quarter of revenue from the e-file Texas contract, which was converted from a per-transaction model to a fixed-price arrangement in October. Operationally, we consider this start-up to be an unqualified success. On January 1, 2014, e-filing became mandatory in courts in the state's 10 largest counties, with a significant jump in the volume of users and filings. The planning and effort leading up to January 1 by a very large team of Tyler professionals, as well as client personnel, was incredibly challenging, but I'm pleased to report that the team rose to the challenge and executed very well. As of today, e-file Texas has more than 51,000 registered users in the legal community and is processing more than 11,000 daily filings compared to approximately 4,400 filings in December. Last Friday, we hosted a joint press briefing on e-file Texas with representatives of the Texas Administrative Office of the Courts and the state Supreme Court, including Chief Justice Nathan Hecht, and it's fair to say that they are pleased with the performance of the first month of operation. We are continuing to bring new counties live on the system. E-filing will become mandatory in 12 additional Texas counties on July 1. We are also pursuing a number of additional e-filing opportunities with current Odyssey clients, as well as with courts that do not use Odyssey. While we incur costs ahead of revenues with each of these new e-filing contracts, which may put short-term pressure on margins, we believe that these recurring e-filing revenue streams will contribute significantly to long-term revenue and margin expansion in the coming years. With respect to the Microsoft Dynamics AX, as we mentioned earlier in the call, our royalty revenues from Microsoft this quarter were approximately doubled from last year's fourth quarter but declined sequentially from the third quarter. For the full year, our royalties from Microsoft totaled $3.1 million, more than quadruple the 2012 royalties of $756,000. The 2013 royalties were generated by sales of Dynamics AX to approximately 114 public sector entities in 38 different countries. This was also -- this was only our eighth quarter of royalties and we have almost no visibility into the reseller pipeline. We are encouraged that the progress is across a very broad marketplace and is reflected by the diversity of the wins geographically and the types of entities. We expect that the royalty revenues may be somewhat lumpy from quarter-to-quarter, which represents both a risk and an opportunity in our short-term results. In our direct sales channel for Dynamics, we announced one new contract during the quarter, which was signed late in the third quarter with the Capital Metropolitan Transportation Authority of Austin, Texas. Capital Metropolitan Authority of Austin is a regional public transportation provider since 1985, with 3,000 bus stops throughout Central Texas. The contract is valued at approximately $1.9 million. Brian discussed our specific guidance for 2014 earlier in the call. With our high level of backlog and more than 60% from recurring revenues, we clearly have a high level of visibility as we build our plan for next year. Having said that, our initial guidance for revenues and earnings typically encompass a fairly wide range, which is intended to account for, among other things, uncertainties in the mix of new business between our license and cloud models, as well as uncertainties over the timing of revenue recognition based on the terms in the new contracts. In addition, as we mentioned earlier, our tax rate may be somewhat more volatile than usual this year, and our diluted share count depends on both the level and timing of option exercises, as well as our stock price, which is not in our control. So I'm pleased with our results for 2013, clearly the best year we have had since before our market was impacted by the broader economic conditions in late 2008. And I'm particularly pleased that the higher end of our guidance for 2014 represents even stronger organic revenue growth. Tyler continues to grow revenues and expand margins even as we invest in our products and service offerings, as well as transition from a traditional on-premise software company to more of a subscription-based SaaS or cloud company. It's a lot to juggle, and I want to express my appreciation to the more than 2,500 Tyler professionals who continue to execute at a high level that separates our results from others in the marketplace. Now, Jamie, we'd be happy to take questions.

[Operator Instructions] And our first question comes from Charlie Strauzer from CJS Securities.

Quick question for you. When you look at the guidance versus backlog, your backlog is up pretty nicely here, and when you look at your guidance, can you talk just more about how much of the guidance you have kind of in-hand versus the backlog? And then also, what assumption should we bake in for R&D for this year?

Charlie, backlog, obviously, is up significantly, but there clearly is more long-term backlog, things from subscription-based arrangements, which can go out as long as 7 years. TexFile was a 4-year arrangement that went into backlog and will come out over a 4-year period. So the current portion of backlog, while the absolute dollars is higher, the percentage is quite a bit lower than in prior years. So I think that the percentage of our backlog expected to be delivered in the next 12 months this year is around 56% versus last year, closer to 70%. So longer-term in nature, but obviously, all the recurring revenues are pretty well set in the backlog, and a meaningful portion of our software and services backlog, particularly the courts and tax business, which is almost all percentage of completion accounting, for the most part, is in backlog as well. So fairly high visibility in terms of what's coming out of backlog, but as John mentioned, some uncertainty over the timing and the revenue recognition on -- and the model in which new contracts will be delivered helps lead to that wider range of initial guidance. With respect to R&D, I think R&D will be up in the mid- to high-single digits in 2014 compared to 2013. So we started to see leverage there. Although the absolute dollar spend is up as a percentage of revenue, it's coming down. As you know, we've significantly increased our spend in R&D over the last few years, part of that related to the Dynamics project and part of it related to other Tyler products, and we do believe that we'll see leverage in that line going forward and hold the growth in R&D below our overall revenue growth.

Our next question comes from Scott Berg from Northland Capital Markets.

First, housekeeping, Brian. What was the percentage of deals in the quarter that went cloud or subscription versus license? I didn't catch it.

In terms of the number of deals, I believe it was 26%.

Great. That's a little bit lower than the last couple, which is fine, obviously reflective in the strong license numbers, but what are your expectations on how that could kind of fare it out in 2014? Do you think that changes meaningfully from the 25% to 30% range that we've been in '13, or does it stay consistent?

It doesn't seem to be changing rapidly. I think it kind of doubled from 12%, 15% up into the range it's now. And I think some of that was reflective of the economics in local government, that it wasn't always so much a technical decision as signing up for a subscription rather than having a capital event. And it seems to have stabilized there. So at the moment, it seems to be stable in that range.

Great. On the -- then on the Microsoft royalties, we went into the year thinking $3 million would be a good, strong year for that business, and that's what you ended up reporting, which is a great year-over-year, obviously, increase. But can you talk about expectations moving into next year? Obviously, we're expecting something more, but does that get comprised of maybe more existing customers upgrading to the platform, or is that delta more a reflection of, say, new customers that Microsoft ends up selling to?

Well, I guess there's 2 reasons we have the least amount of visibility around that. One is that, obviously, we don't -- it's not a mature business so virtually none of it is recurring in nature the way our more mature units are. So we start with very little and rely mostly on the new business market, so it's hard to know that. And then secondly, obviously, other than our direct sales, it's coming from their channel, which we don't control and again, get very little visibility. So I agree with you. We have obviously put some increases in our plan for it. This particular quarter wasn't particularly strong, and we'll kind of see how it rolls out. The product shows well. It's well received. Probably most importantly, our projects that we're implementing are going well and are referenceable, and so we remain enthusiastic about it being a catalyst for growth and contribution down the road. But in the short term, as we said in our remarks, it's really hard to tell. If we were to get some big deals directly or the reports from them are favorable, then it could be upside, and it could be some exposure on the downside, although I think we've been cautious in what we put in our plan.

Great. And then lastly, for me, John, can you comment on overall product demand relative to pipelines that you're seeing today versus maybe early in January or February of 2013? You've added some sales headcount over the last year to add distribution capacity. Any, maybe, sense on directionally, percentage-wise, where you're seeing an increase, I guess, in pipelines?

Yes. I mean, the reality is, as I said as well, the market today is better. Our backlog's better. Awards that are being negotiated toward contracts is better. All of those indications are better today than they were going into last year. Now last year, things accelerated pretty significantly in the summer, if you remember, and we didn't know. Was that deferred decisions? Was it kind of a catch-up? And the good news is that activity seemed to continue right through the fall and into the holidays, and so it seems to be sustaining itself. So the demand in the end market has stayed relatively strong since last summer. It's not stronger than it was in the summer and through the rest of the year, but it's staying in that range, which means that it is considerably stronger right now as we sit here in January than it was last year. Last year, awards in the first quarter were not particularly strong, and revenues recognized on licenses were not particularly strong, and they improved throughout the year. So we're starting the year in a better position. And obviously, we'll see, as the year progresses, if that sustains itself.

Our next question comes from Brian Kinstlinger from Sidoti & Company. Brian Kinstlinger - Sidoti & Company, LLC: The -- can you remind us for the large Odyssey implementations, say, the potentially large ones that are coming down the pike in California, how long will it take from signing until it's implemented? And what I'm trying to get at is, how long before it drives the maintenance revenues up, and therefore, profitability in that division would be stronger?

Well, maintenance generally starts before they're fully implemented. So whether the customer pays it or whether it's carved out of a license fee, generally, we will start to recognize maintenance revenues ahead of a, say, go-live or something -- some later event. So we'll see maintenance shortly after, not necessarily award of a contract, but the original implementation on those. A lot of the deals so far have been small or mid-size courts. It seemed to be where there was urgency, as well as the projects are simply -- the scope of them are smaller and they can act more quickly. There certainly are larger counties that we're talking to that certainly could become projects. As we move forward, they'll be multi-year engagements. Some of the biggest counties would be more analogous to some of the statewide deals that we've done. So they'd be multi-year, long-term contracts, but again, generally, maintenance will be recognized earlier in the project and not necessarily when they go live. Brian Kinstlinger - Sidoti & Company, LLC: Great. And my follow-up. You mentioned single-digit R&D increases in total dollars and with the development of Dynamics behind, and I'm not sure that you have -- other than upgrading and doing the maintenance internally for yourself to upgrade products, where is the increased R&D dollars being deployed right now?

Well, it would not be in Dynamics, that's right. So Dynamics basically is a spend or a headcount that is stable. And until something changed in the marketplace, there was a broader opportunity, we would expect that our investment, from an R&D standpoint, in Dynamics has kind of peaked or actually slid back a little bit from its peak, once released, but we will maintain it at that level. So the R&D spend increase is in our own proprietary products and it's somewhat across the board. Certainly, we're investing in the EnerGov products that we acquired. We believe there's a lot of potential there. So that would be maybe higher than other areas. The LGD [ph] products, we're investing in those products to really broaden the market footprint into schools and in areas where they didn't have as much a presence historically, and certainly in the Munis and Odyssey products as well.

And, Brian, half of that, if you assume, say, something like an 8% increase in R&D spend, half of that is just going to be the same headcount but salary increases and the fringes that go with that, so you get a 3% or 4% increase just with the same people.

Our next question comes from Jonathan Ho from William Blair & Company. Jonathan Ho - William Blair & Company L.L.C., Research Division: My first question is around the bookings activity. I mean it seems like the fourth quarter is typically very strong in terms of maintenance renewals, were there any large deals that slipped from Q4 to Q1 or any sort of surprises around the deal closure activity around the quarter or did things sort of come in the way you expected?

There aren't, as we said, any kind of megadeals, these very, very large deals. So that's where, I think, the increase, at all, is a good sign, when you don't have some statewide Odyssey deal or a very, very large deal, but we see a strong number there and an increase that's really made up of a lot of just good solid deals. There also isn't any megadeal that we're carrying into Q1 that was awarded but not contracted, but as I indicated earlier, the awards, in general, that we carry into the year that aren't contracted and aren't in backlog, is a considerably higher level than what we brought into this year. So there's pretty good activity, quite a few awards but they're -- as we indicated, we have -- there are no megadeals, but we're doing more in kind of, I guess, what Gartner refers to as the Tier 2 space. So not the biggest cities and counties in the country, but that next tier down, that are $1 million to $5 million deals for us. That's really where we've seen the most growth. So if you look at the number of names compared to the increases in the dollars, that's coming from that segment. Jonathan Ho - William Blair & Company L.L.C., Research Division: Yes, just building on that, could you talk a little bit about -- I know you said that the win rate has continued to improve but I just wanted to get a sense for, maybe, segment-by-segment what you're seeing from the high end to the low end of the market and just whether there's further separation from competitors in each of those areas.

Well, kind of -- we've been referring to -- we're obviously a vertical market software company. So everything we're doing is public sector, predominantly domestic and it all has a vertical orientation. However, parts of that market, we see crossover vendors, right, so financial systems, human capital management, we're going to see companies that play in other verticals, as well as in the horizontal commercial markets. And in there, you're always going to have stronger competitors, even though we've improved our competitive position. And what we refer to as the sub-verticals, nobody crosses over into a court system, you're only going to compete with software that's been very specifically developed for courts. The same is true with tax and appraisal, maybe even our transportation offering in schools. And those are areas where our leadership position has been extended because, quite frankly, Tyler is a bigger, stronger company that can consistently invest in those products at a level that these smaller independent companies have struggled to do through the volatility in the marketplace. So I think our separation is greater or more pronounced in the sub-verticals than the segment of the market that we can see crossover players on and that would be I think up and down the scale. In the broader market where we see crossover vendors and more consistent competition, I think the improvement, as I indicated a moment ago, is in that Tier 2, maybe Tier 3 space somewhat. So the number of deals that are $600,000 to $800,000 in licenses, $1.5 million, $2 million total contract value, a couple hundred thousand dollars of recurring revenue, post-implementation, really good business for us, that's the space where we have seen the most improvement in the competitive position and the best level of growth. Jonathan Ho - William Blair & Company L.L.C., Research Division: Got it. And just one final question. As you look at TexFile and e-filing, in general, become a larger portion of the mix, could you maybe talk about how this impacts the model? It seems like a lot of the investments in spending were made upfront for TexFile. Just wanted to understand the leverage components a little bit and how you think about that.

Yes, e-file Texas. Yes, that's right. This past year we've, obviously, had the revenues in the fourth quarter, which was nice to see. But we invested not only in the product but in the service channel that we had to build to manage the calls and the activity. As we indicated, there's over 50,000 users registered on the system now, virtually all of them are relatively new users. So the service deliverable, we wanted to be very well prepared for and, if anything, over-prepared for. So the staffing to be responsive to that was significant and those costs are in our structure. As we indicated as well in the prepared comments, these other deals we're pursuing and preparing for all have requirements, sales requirements, service requirements and product requirements that we'll be investing in ahead of revenues. But I think to some degree, we do have a critical mass structure in place on the dev team and, as these users, registered users, become more experienced, those call volumes will stabilize and eventually fall, and some of that infrastructure can be redeployed or reused on the other deals that we're working. So there'll be new headcount but we feel that, that division, even though it's our fastest growing division, headcount, actually, will start to stabilize and grow at a rate well below its revenue growth.

Our next question comes from Raghavan Sarathy from Dougherty & Company. Raghavan Sarathy - Dougherty & Company LLC, Research Division: I want to get some specifics around this Texas e-filing project. So I think, Brian, you mentioned there was $3.1 million of revenue from Texas e-filing in the fourth quarter. Can you update us on the rollout of the project, what is your expectation in revenue and margin for this year and next year?

Yes, from a revenue standpoint, it's a fixed-price contract, so we know what the revenues will be. For the full year of 2014, it's about just under $17 million and it starts ramping up from where we were in Q4 to roughly $3.9 million in the first quarter, a little less than $4 million in the second and then up to $4.3 million and $4.8 million. So those are the revenue expectations. And then, looking out even a year further for the year 2015, that the revenues from that contract are just a little over $19 million. We haven't specifically talked about margins on that individual contract and we typically don't. We would expect to see, obviously, better margins and contribution this year that's built into our plan, as we generate this higher level of revenues and a lot of the upfront costs are behind us. But in this year, 2014, we do have -- as we said, we went live with the 10 largest counties on a mandatory basis January 1, as far as e-filing, but there are many more counties than that, that are actually already using this system, just not on a mandatory basis, and we will continue to bring new counties on to the system, implement them, do the setup efforts and support them, and then, I think there's another 12 counties that become mandatory July 1, and there's another group at the end of the year. So there are additional start-up costs, if you will, associated with bringing these additional counties online throughout the year, not at the same level as the push we had last year to do the initial start-up. So we will see -- we would expect on that contract to have further improvement in margins next year, over 2014, but certainly, margins that are above our blended margins on this contract in '14. Raghavan Sarathy - Dougherty & Company LLC, Research Division: All right. And then, my second question is around this California court case management system opportunities. I know that now you've become the largest vendor, you closed a number of smaller deals, any thoughts on some of the bigger counties, where they are in terms sort of looking at the replacement opportunities, and I have a follow-up.

Well, we obviously won't be commenting on specific opportunities that are competitive at this point in time. But as I said earlier, I think that the fact that a lot of the early deals are smaller to mid-sized counties is reflective of the fact that there's more urgency there. It's harder for them to solve their own problems, they don't have the resources to do that, so they're going to look to a partner more quickly. And the scope of the projects themselves are more limited and so their ability to organize a project, make a decision and move forward can happen more quickly. It is not reflective of the fact that there isn't demand in the higher end of the market; there is. So we believe that and we're engaged in discussions with a number of the larger counties that would resemble other large county deals we've done around the country and, in some cases, those deals could resemble some of the statewide deals we've done. And you know the cities and counties that are large in the state, and they're big courts and they'll be big projects. But their ability to define the scope of the project, issue a document, and us to be responsive and work on statements of work and plan the project appropriately, it's a big project. So it'll take time before they can hit go, and even when they do, it'll take time, obviously, to get started and execute the project and, eventually, recognize maintenance and e-file revenues. But it's certainly a significant long-term opportunity. The fundamentals of those deals are good and that we'd expect most of them would have healthy recurring revenues both from maintenance and e-file, and the dual recurring revenue model is an improvement over our other businesses that are less mature that rely on a single recurring revenue model. So again, it's not something that'll explode over the next quarter or 2, but we do expect that the larger counties will participate in what we're seeing currently in the lower end now. Raghavan Sarathy - Dougherty & Company LLC, Research Division: All right. And then, one final question on sort of the deal mix in the last quarter. So, John, you mentioned that the new business was strong across mid-market, not very many large contracts. But I looked at the metrics, seems like the metrics are better year-over-year, 34 new contracts, ASP was $531,000, versus 18 and roughly $500,000. So try to reconcile the metrics with the commentary you provided.

Yes. Again, it's happening in what we kind of call the Tier 2 space, so lots of what are on the higher end of the range for us, but not the outsized deals. So that's all we're saying. Obviously, to have a good quarter, to have growth in the bookings and to expand backlog without a megadeal is encouraging. We will see large deals, as I just indicated, in courts and in other areas, but they don't happen every quarter. So you're exactly right, that doing quite a few deals in that Tier 2 space, which are $1 million, $3 million, $5 million kind of deals is encouraging. That's a very good spot for us in the marketplace and, obviously, in quarters where we have that experience, as well as a statewide deal or a very large county deal, then that's where you'll see the bookings and the backlog spike a little bit. But to have a quarter where you didn't have an outsized deal and to make that progress, to us, is actually encouraging.

Our next question comes from Mark Schappel from Benchmark.

John, with respect to your New Hampshire court deal. Does the State of New Hampshire have a mandatory e-filing initiative?

I do not believe it's mandatory at this point.

And with respect to your courts business, I mean, who are you competing with these days, there? I mean, is MCAD getting active in this space yet or Justice Systems?

Well, MCAD has not won either of the deals in California, and I don't believe has won a significant deal that we'd consider a loss in a large county or statewide deal in a number of years. We certainly don't want to take the market for granted, but right now, we really haven't been losing meaningful deals, large counties, statewide or otherwise types of deals. So as we said, the 2 deals we lost in California were to 2 different players, we believe both on price, and there's 3 or 4 people we're competing with, but no one of them, in our view, has been successful in multiple deals over the last few years. So we don't want to take that for granted, but we're investing in the product, continuing to try to put some space between us and the competition and, quite frankly, very focused on executing on the higher level of business we've been awarded.

Our next question comes from Matt Williams from Evercore.

Just have one in particular on the NorCal Courts & Justice, their court case management deal, was that a situation where the counties themselves sort of got together ahead of time and said, "Why don't we go ahead and work together on this?" Or is that -- was that something where you guys sort of helped facilitate that? And I guess, longer-term, in the absence of megadeals in that state, is there other opportunities, either for you guys to lead that process or for other counties to really sort of try and follow the same lead there?

Yes, kind of all of the above, it was kind of an evolution. I think one of these counties has 3 judges, maybe. Some of them are very small and it would have been a challenge to implement Odyssey and scale it down to that level. So hosting it and having the ability to not implement it 6 different times made us more efficient in collaborating on business practices and sharing services and the like, was a mutual thing that I think we pursued together. I think it has been watched by other counties. I'm not sure there'll be a 6-county collaboration but it is possible that other counties, whether we host an instance that supports multiple counties or whether we just collaborate on business practices and shared services, that has been watched and that is being considered or investigated in other counties as well.

Okay. That's helpful. And then just a follow-up on sort of the other side of the Courts & Justice business, but now that Texas and e-filing is up and running, especially in the top 10 counties there, I would assume there are other states that are starting to, I guess, maybe, look at Texas as a reference point. Has that helped in terms of trying to go out to other states or other large counties and say, "This is what we've done here, this is kind of how it's gone." I'm just trying to get a sense of what the level of interest is now that Texas is actually live, to some degree.

Yes. Well, obviously, it's still very early. So this has all occurred kind of in the last month. But you raise a very good point. Obviously, we've been awarded some good business, some colorful business and we focus on the financials and the effect it'll have on those. But the real important thing is here, that it was -- it's a significant project. We referred to 50,000 users, 11,000 daily filings and that's gone very, very well. So the customer's pleased, the customer's referenceable and I don't think there's any question that other states and large counties have watched that and seen how successful that it's gone. We've been awarded, as with New Hampshire and other places that are yet to come online, that are encouraged by that and there are other significant projects that are in the marketplace that I'm sure are watching that closely.

Our next question comes from Kevin Liu from B. Riley & Co.

I also had a follow-up on the NorCal collaboration deal. Just in terms of the 6 counties, how long does it take to get all 6 of them on board from an implementation timeframe? And when do you get to start recognizing those subscription revenues?

I'm not certain of what the timetable for that is, I think it's not years but it's certainly several quarters. And I'm not exactly certain when we'll start recognizing revenue, I think it'd be sometime during this year but not in the next couple of quarters.

Got it. And then, just as it relates to kind of the direct sales efforts around the Dynamics product. Was curious as to what sort of pipeline growth you've seen there and whether you plan -- and how much more resources you would plan to devote to that this year, relative to last?

Well, we do it in a few different ways. So our existing sales channels have the product available to them and have some activity in our traditional markets with that, and then we do have a dedicated sales channel, which currently has a headcount of 3 kind of number-carrying reps and some support staff as well, and there is a person in the plan to expand that to 4, so that's the current plan.

Our next question comes from Alex Zukin from Stephens.

I wanted to ask you a little bit about the SaaS pipelines, how do they look for the year? I mean, is there any reason that you think that this year less customers will select to go to SaaS deployments over last year? And kind of what rates do you use, as you look out for the whole year, as you set your guidance?

It's a good question and it's hard to know. And believe it or not, this is something that some of our marketplace is less familiar with when they enter a decision process. And they get educated and they see the traction that cloud and SaaS solutions have in the marketplace, and believe it or not, we actually get awarded business -- it's not that uncommon that we get awarded a deal and they still haven't decided whether they're going to be a SaaS or a self-hosted deal. So obviously, if they have that level of uncertainty, it's hard for us to project. I think I indicated earlier that it seems to be kind of stable around this 25% of new business number and that's pretty much what we've built our plan on as we indicated as well. That's a variable in our plan that causes us to have a wider range than we otherwise might have, as again, we really don't know sometimes until late in the process what they'll do. And while we like that business and we're particularly pleased that we're able to grow our SaaS and cloud business as significantly as we have and still have meaningful license contribution, we don't have a lot of bias in the way we sell the system. We still -- our number one objective is to win the deal and bring the client on board, and we think the clients have very high value in the long term to Tyler, regardless of which way they, basically, enter the relationship.

And you guys mentioned that, that was 75% last year or was that 75% last -- in the Q4 period of last year? I'm basically trying to get a sense for why would it be so much less this year, I mean, rather than just conservatism in the guidance, is there any kind of change in the market where, maybe, either from a competitive perspective, or any reason why people are saying, "You know what? We're not ready to go with a SaaS deployment this year." Maybe more people were ready last year, just trying to figure out if there's any kind of shift going on from a market perspective.

I don't think there's a meaningful shift, and I think we're, as I said, I don't think we're seeing a big drop. We're seeing it kind of stabilizing in maybe the 25% range. The only thing that might marginally contribute is, I think, that when we spiked up a little higher in the more difficult years for local government, that was maybe more a reflection of the economics than a technical choice on hosted versus self-hosted, and that's eased a little bit. Local government budgets are stronger, they've got more capital available to them. And so, someone who might have chosen that direction to avoid a capital investment isn't going to do that now. They're going to make it purely on a choice to go the direction of SaaS versus self-hosted.

And Alex, I think that comparison to last year, I think that fourth quarter of last year was 45% of the new deals, but it was significantly less -- I don't have the number in front of me, but I think it was more like 25% of the dollar volume of new deals. There were a lot of really small deals that went with the SaaS model, so whether you're looking at dollar volume or just the percentage of the names, it can vary. But I think that was somewhat random. One thing we have seen, as the year's gone along, is the average size of a SaaS customer has increased or the average contract value. So we're seeing a little bit more penetration in a little bit larger clients. Typically, the very largest ones still are self-hosted license deals but we are seeing some increase in the average size of a SaaS customer.

Got it. And so just for clarity, so when you said 25%, is that on a dollar value as well as on a customer value in the current quarter and planning process?

That was in terms of the number -- the names, the number of customers. The dollar value was still a bit smaller than that percentage.

Okay. And then, what about -- just how should we think about the way bookings should play out through the year? I mean should it follow kind of the typical historical pattern for seasonality? Or is there any other -- any kind of difference that we should be thinking about?

As I indicated, I think we're bringing more awards into the year than we did last year. So, again, the big change is the big awards. So if you have a large contract that -- either you have in the comparison quarter or in the current quarter, that can skew things. But in terms of broader activity, as I said, things picked up as the year went on last year. Q3 and 4 were busy, but we weren't that busy at this time last year. So it should be a little stronger earlier in the year.

Got it. And the last question is, how should we think about kind of improvements in gross margins? A lot of the business, incremental business opportunities you guys are seeing carry kind of higher incremental gross margins than some of the legacy business. And so should we continue to see kind of 100 basis point improvement? Or what should we be thinking about?

Yes, I think that's the way we look at our business that we'll continue to see that kind of margin expansion over the long term. The more mature units in our business have considerably higher margins than the broader business at this point. And as the parts of our business that are more in investment mode, they're less mature, grow and get to points of scale, that gap between our broader company margins and what we experience in the more mature units should narrow. I'd caution that it certainly can be lumpy and, usually, for good reason, as we had this year, certainly, there'd be a great -- there would have been a greater margin opportunity in 2013, if we hadn't had so many places that there was a compelling reason to invest. And so while we were investing in e-file Texas, we had -- in this division at Munis alone, we had over 40 on-boarding heads as we turned the year. So those are heads that have been hired that we're training and investing in that aren't yet billable. So there's a lot of investment going on in the company, service channels, products, et cetera that stifle a little bit the margin expansion. So it'll be a little bit lumpy. Hopefully, for those reasons, that there's compelling things to invest in, that we want to support, but certainly over the longer range, we still believe we have a long ways to go in terms of margin expansion.

And Alex, just to close the loop on the subscription versus -- the SaaS versus license deals. In Q4, it was 26% of the names and 20% of the dollar value of the new deals were subscription. Last year it was 43% of the names but 29% of the dollar value. So the absolute dollar value...

And that was for the quarter. And what -- do you know what those numbers are for fiscal '13 versus fiscal '12?

Hang on just a second. Yes. So for fiscal '13, it was 32% of the deals were SaaS and 68% license. And in terms of the dollar value, it was about 18% SaaS and 82% license. So it does bounce around from quarter-to-quarter, but -- and those would have been an increases over what we saw in '12 as well, in terms of the subscription mix.

And our next question comes from Josh Goldberg from G2 Investment Partners.

As [indiscernible] in your gross margin, your EBITDA, all were strong [indiscernible] expectations. The tax rate though came in pretty high at 42.5%. Can you just talk about what happened there? Was that an unexpectedly high tax rate? Was that something you kind of expected going in? And I have a follow-up.

It was unexpectedly high and it cost us pretty much a solid $0.01 in EPS in Q4 because of the catch-up effect. Without getting too technical about it, it really was the result in a roundabout way of a high level of stock option exercises. There's a tax deduction that we typically take for qualified manufacturing activities, called the Section 199 deduction, and that typically takes somewhere from 1.5 to 2 points off our tax rate. But that tax deduction is reduced by the level of income that employees recognize on stock option exercises. And that's a somewhat unpredictable number and, certainly, something that's out of our control. And we did have a high level of stock option exercises in the last half of the year, which, effectively, by the time we got to the fourth quarter, eliminated that deduction for us and raised our tax rate by that amount. The flip side of it, a high level of employee stock option activity, is that we get a cash tax benefit from that. So it has a negative effect on our rate but has a very positive effect on the amount of cash taxes we paid and, effectively, we paid almost no cash taxes for the year. So hopefully, that clarifies it a bit. And that's one of the reasons why the range of tax rate in our guidance is a bit broader this year. We think it'll be between 39% and 41%, but that's a fairly wide range because of the effect of that one deduction.

Okay. And I guess, obviously, your guidance of $1.76 to $1.85, just putting that in the midpoint of that range, if you take the increase in the taxes and your share count, on a pretax basis, it looks like you're growing your expectation originally, because the original expectation for '14 is that your pretax income should grow north of 30%, or exactly 30%, for the year. Just want to make sure I have that right, so your pretax income is growing 30% but because of the higher taxes and the higher share count, your earnings will only show about a 21% growth in '14.

Directionally, that would be correct. We don't give up specific pretax number but, as we said, at least at the high end of our range, 13% or 14%, 15% top line growth, low 20s earnings growth would be very much in line with our long-term expectations. And -- but, yes, the tax rate and the increased share count, both mostly because of stock option transactions, would be -- have an outsized impact on that.

Okay. Can you just talk a little bit of some of the smaller items like your appraisal services, your hardware business, obviously, those showed some decline here in the fourth quarter, what your expectations are for those segments here in 2014.

Well, hardware -- go ahead, Brian.

I was going to comment on appraisal services, it bounces around within a relatively narrow range but it's typically around a $20 million to low $20 million business, typically contracts there that last a number of quarters and it's somewhat cyclical with respect to appraisal cycles in different states where they're mandated by law. For 2013, it was a bit of a down year there. 2014, we expect to be a bit of an up year there and it's fairly visible. So I'd say we expect to see mid to -- yes, mid-single digit growth in the appraisal services business next year.

Okay. And obviously, the subscription business, showing 52% growth, really, very strong number, I know that was aided by the increase in the e-filing business. In spite of the e-filing business being a little bit of a drag on margins, your gross margin on that segment also showed some nice growth, it went to 43.8% for the quarter. I'm just wondering kind of as you're projecting out for '14, are we going to see some improvement even off of that level of 43.8% as you get more of the tax e-filing in line in Texas, as well as some of the other opportunities that you might have to grow your gross margin on that important segment?

Well, certainly, in the long run, e-filing margins are above our current blended margins and are fairly strong margins relative to other lines of business. So we do expect that as we see growth in that business that, that will be a meaningful contributor to long-term margin expansion. As John mentioned earlier in the call, we also have upfront costs associated with new projects, as new e-filing clients come online, and it takes sometimes a fairly long lead time from the time we start to initiate one of those projects to the time that it becomes really fully implemented and that it's fully mandatory where we get the volumes we need to fully realize margin opportunities. So with respect to any specific quarter, it may bounce around a bit, but on the long run, we do expect e-filing to be a meaningful contributor to margin expansion.

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

Well, thank you, Jamie. We appreciate all of you joining us on the call today. If there are any further questions, then please contact Brian or myself. Have a great day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.