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Tyler Technologies Inc
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Hello, and welcome to today's Tyler Technologies Second Quarter 2018 Conference Call and Webcast. Your host for today's call is Mr. John Marr, Chairman and CEO of Tyler Technologies. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded today, July 27, 2018.
I would now like to turn the conference over to Mr. Marr. Please go ahead.
Thank you, Steven, and welcome to our Second Quarter 2018 Earnings Call. With me on the call today are Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer.
First, I'd like for Brian to give the Safe Harbor statement. Next, Lynn will have some preliminary comments. Then Brian will review the details of our second quarter results and update our 2018 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 to our Form 10-K and other SEC filings for more information on those risks.
Effective January 1, 2018, we adopted the requirements of ASU No. 2014-09, Topic 606, Revenue from Contracts with Customers, utilizing the full retrospective method of transition. Prior year amounts have been restated from previously-reported amounts to reflect the impact of the full retrospective adoption of Topic 606. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.
Lynn?
Thank you, Brian.
Our second quarter results were strong in terms of revenues earnings and cash flows. Total GAAP revenues grew just over 13% and non-GAAP revenues grew almost 14%, of which 12% was organic and 2% was contributed by the Socrata and Sage acquisitions.
Both software licensing subscription revenues were particularly solid in the quarter. Software licenses and royalties were $22 million, up 16% and subscription revenues grew 31% to $53 million. Total recurring revenues from maintenance and subscriptions grew 15% and comprised 63% of total revenue.
From a new contract mix perspective, the number of subscription arrangements in our new business mix was once again greater than traditional license deals. However, the total contract value added for new license arrangements was higher than the value of SaaS deals.
Bookings this quarter were solid at $262 million. We had somewhat difficult comparison of a record bookings in the second quarter of last year, which included the $35 million Cook County, Odyssey deal. As such, bookings were down 8%. However, bookings grew 34% sequentially over the first quarter of 2018.
It was a particularly successful quarter for new business for our Public Safety division. Our largest new license deals for the quarter or contract with Summit County, Ohio for our New World Public Safety and Brazos Solutions and one with San Bernardino County, California for Eagle Recorder Solution each valued at approximately $3.3 million.
Summit County selected our Enterprise CAD, Enterprise Record Management System, mobile and other solutions to manage the complex consolidation of 14 law enforcement agencies, 12 fire departments and six public safety entering points in the county. This is the largest New World Public Safety contract signed this decade.
Other significant on-premises public safety deals signed during the quarter, each with a total contract valued at $1 million or more including contracts with the Wyoming Highway Petrol for the full suite of our New World Public Safety and Brazos Solutions and Elk County Pennsylvania for our New World Public Safety Solution.
Significant license contracts for our newest ERP solution included the city of Irving, Texas which is the 12th largest city in the state and among the 100 largest cities in the nation, as well as the Emerald Coast Utilities Authority, the largest water, wastewater and sanitation service utility in Northwest Florida.
Significant new SaaS contracts in the quarter included multi-suite deals for our newest [ph] solutions with Walton County and the City of Weston both located in Florida, as well as Glenwood Springs, Colorado; Ontario County, New York and Glynn County, Georgia for our newest ERP solution; the cities of Atlanta, Georgia and Coire Gabhail, Florida for our EnerGov solution and the Choctaw Nation in Oklahoma for our Odyssey Courts & Justice solution. Our Courts & Justice division also added the State of New Mexico as its third client for research as a complement to the existing e-filing arrangements.
We were also very pleased with bookings for Socrata, which had its best bookings quarter in two years. Socrata’s SaaS bookings came in well ahead of plan, reflecting that clients are adopting the new Socrata Connected Government Cloud and are signing longer contracts. Notable new Socrata clients include the State of Texas Department of Information Resources and Pinellas County, Florida, each of which signed five-year contracts. And the California Office of Emergency Services.
Now I’d Brian to provide more detail on the results for the quarter and update our annual guidance for 2018.
Thanks, Lynn. Yesterday Tyler Technologies reported its results for the second quarter ended June 30, 2018. I’m going to provide some additional data on the quarter’s performance and update our annual guidance for 2018 and then John will have some additional comments.
In the 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 -- exclude write-downs of acquisition-related deferred revenue and acquired leases, share-based compensation expense, employer portion of payroll taxes and employee stock transactions and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.
We’ve also posted on the Investor Relations section of our website under the Financials & Annual Report tab schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues.
GAAP revenues for the quarter were $236.1 million, up 13.1%. Organic GAAP revenue growth was 11.2%. On a non-GAAP basis, revenues were $237.7 million, up 13.7% with 11.8% organic growth. Subscription revenues for the quarter increased 30.8%. We added 126 new subscription-based arrangements and converted 32 existing on-premises clients, representing approximately $31.5 million in total contract value. In Q2 of last we added 105 new subscription-based arrangements and have 37 on-premises conversions, representing approximately $49.8 million in total contract value.
Subscription clients represented approximately 58% of the number of new software contracts in the quarter compared to 51% in the prior quarter, while subscription contract value comprised 47% of the total new software contract value signed this quarter compared to 39% in Q2 last year. The value weighted average term of new SaaS contracts this quarter was 4.2 years compared to 5.2 years in Q2 of last year.
Transaction-based revenues from the e-filing and online payments which are included in subscriptions increased 19.5% to $16.7 million from $14 million last year. That amount includes e-filing revenue of $12.7 million, up 20.1% over last year. Annualized total non-GAAP recurring revenues for Q2 were approximately $603 million, up 16.3%.
Cash flow from operations was $22.6 million compared to $1.4 million last year. Free cash flow, which is calculated as cash from operations less capital expenditures was $16.5 million compared to a negative $8.9 million for the same period last year. Capital expenditures declined 41% due to the completion of our Yarmouth office expansion.
Our CapEx for the quarter was $6.1 million including approximately $690,000 related to real estate compared to total CapEx of $10.3 million in Q2 of last year, which included $4.7 million related to real estate. We ended the quarter with a $192.4 million in cash and investments and no outstanding debt.
Day sales outstanding and accounts receivable was 114 days at June 30, 2018 compared to 108 days at June 30, 2017. Excluding unbilled receivables, DSOs were 89 days at both quarter ends, which was unchanged from last year.
Our backlog at the end of the quarter was $1.2 billion, up 10.9%. Backlog included $356 million of maintenance compared to $332 million a year ago. Subscription backlog was $480 million compared to $395 million last year and includes approximately $131 million related to fixed-fee e-filing contracts.
Our bookings for the quarter, which are calculated from the change in backlog plus non-GAAP revenues were approximately $2602 million. A decrease of 8.3% as Q2 of last year included the $35 million Cook County Odyssey contract. For the trailing 12 months bookings were approximately $1 billion.
Our software subscription bookings in the quarter added $6.6 million in new annual recurring revenue down 14% from $7.6 million last year. Q2 of last year included three large subscription deals, each with a contract value of over $5 million. For comparison, if all of our new subscription contracts had been under license arrangements, we estimate that they would have represented additional license bookings of approximately $9.2 million.
We signed 25 new contracts in the quarter that included software licenses greater than $100,000 and those contracts at an average license of $459,000 compared to 25 new contracts with an average license value of $842,000 in the second quarter of 2017, which included the $35 million contract with Cook County.
Our guidance for the full year 2018 is as follows, we expect 2018 GAAP revenues will be between $934 million and $948 million and non-GAAP revenues will be between $940 million in $954 million.
We expect the 2018 GAAP diluted EPS will be between $3.50 and $3.58 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate. We expect 2018 non-GAAP dividend EPS will be between $4.76 and $4.84.
For the year estimated pre-tax non-cash share-based compensation expense is expected to be approximately $54 million. We expect R&D expense for the year will be between $62 million and $64 million. Fully diluted shares for the year are expected to be between $40 million and $40.5 million shares.
GAAP earnings per share assumes an estimated annual effective tax rate of 10% after discrete text items and it includes approximately $26 million of discrete tax benefits related to share based compensation, which may vary significantly based on the timing and volume of stock option exercises. Our estimated non-GAAP effective annual tax rate for 2018 is 24%. This rate was reduced from 35% for 2017 to reflect enactment of the Tax Cuts and Jobs Actually.
We expect our total capital expenditures will be between $23 million and $26 million for the year. Total depreciation and amortization is expected to be approximately $62 million, including approximately $40 million of amortization of acquired intangibles.
Now, I'd like to turn the call back over to John for his further comments.
Thanks, Brian.
Our second quarter results again met or exceeded our expectations by most measures. We again achieved solid double-digit revenue growth, even in subscriptions made up a higher percentage of new software contracts. And this was our 27th consecutive quarter of double-digit revenue growth. We're pleased that we've been able to grow earnings significantly while we're funded major incremental, R&D initiatives and absorbed in acquisition that is dilutive in the short-term.
As we previously discussed, we significantly increased our R&D spend over the last two years with the number of projects across the company. We continue to be pleased with the progress on these initiatives and while there is near-term pressure on margins from the higher spend, we're confident that these investments are smart, and we'll produce solid returns and further strengthen our competitive position.
We believe the investments we're making in our New World Public Safety solutions are starting to affect decisions in the marketplace. And we're factor in new business this quarter. Including meaningful wins in Summit County, Ohio, in the Wyoming highway patrol
In Q2, we also launched our Tyler EAM product. This enterprise asset maintenance solution provides a complete view of an organization's assets from procurement to maintenance to retirement, as well as citizen engagement and represents a major R&D effort to expand our product offering.
As we approach the 90-day mark since the acquisition of Socrata and Sage on April 30th. We remain enthusiastic about these most recent additions and continue to be impressed with the talent and passion of their teams that now part of Tyler.
Integration of their operations as well as their products and services is well underway and the results in Q2 met or exceeded our expectations.
Just a few weeks ago, Tyler announced the launch of Socrata Connected Government Cloud, a revolutionary approach to internal data sharing. This solution will empower government workers to access a single source of data and securely share analysis, visualizations and performance measures across multiple departments and programs.
Considering our year-to-date performance together with our current positive outlook for the second half of the year we revised upward our full year earnings guidance. We’re pleased that our outlook has strengthened even after considering the dilutive impact of our second quarter acquisitions.
Steven, we’ll take questions.
Thank you, sir. We will now begin the question and answer session. [Operator Instructions] And our first question comes from Peter Heckmann with D.A. Davidson. Please go ahead.
Good morning everyone thanks for taking my questions. Brian on e-filing we kind of seen the revenue plateau there in the last few quarters can you remind us about the go live schedule where you’re going to see some relatively larger projects go live here before year end?
Yeah, we talked broadly over the next couple of years that we expect e-filing revenues to move from so the current $50 million level to the $75 million annual wise range and that takes place over as I said over the course of next couple of years. There are some go live schedule throughout the remainder of this year and onto next year particularly in some of the California counties where we’ve been doing implementations of the underlying Cage Management Systems in those e-filing implementations follow that.
I don't really have the specifics of exactly how those falls of the timing become somewhat fluid in the short-term, but again over the next couple of years we expect e-filing revenues to grow by approximately 50% from where they are today.
Okay, that’s helpful. And then as a follow-up, just the non-subscription backlog, if my math is right was up about 4% year-over-year I would have thought maybe the growth have been a little bit higher given the mix, but as the mix continues to move towards that subscription, how do you feel like if affects kind of your organic growth rate over the next four to six quarters?
Well, in the short term, an increased mix of subscriptions obviously puts pressure on organic growth because we don’t get the upfront license revenue recognition. So, that does gives us a little bit of headwind there. We do expect that overtime that subscriptions were increase as a percentage of our revenue mix, but as you see in the past they can be very lumpy from quarter-to-quarter. So, we’re pleased that we continue to grow both sides of the business both the license and the subscription side and we’re happy to acquire new customers whichever way they want to come to us and we certainly manage the ups and downs in the short-term organic growth as we continue to build that overall backlog.
Okay, thanks. I’ll get back in the queue.
Our next question comes from Alex Zukin with Piper Jaffray. Please go ahead.
Yeah hey thanks guys for taking just a couple of questions here and congrats on another solid quarter. so, I want to start maybe on Socrata I guess I wanted to ask given the strength of the bookings I think Lynn you mentioned strongest bookings in two years. how much of that is due to the product being kind of brought to the broader Tyler salesforce versus just the Socrata salesforce and how should we think about the opportunity to potentially significantly accelerate the books of growth of that business as well as leverage Socrata to actually improve some of the sales cycles on other product lines given kind of some of the higher level selling that happens with that product?
Yeah, sure Alex, I think the high bookings is a function as much of the strategic pivot that they did a couple of years ago and really the release of the Socrata Connected Government Cloud that pivot, they -- originally Socrata was more of an open data company. The pivot to move and internal data sharing, the release of that. Certainly, joining Tyler brought some enthusiasm, I think brought some stability.
And so, I think that was helpful, but these were deals that were likely somewhat in the queue ahead of time, I don’t know that we had a major impact on them other than like I said bringing the stability, the Tyler name and the vision for what they had already created and what we’re going to do together.
You’re right on integration with Tyler products. It’s something we’re focused on right now. In the near-term, we’re really focused on probably some of the what I would call more low-hanging fruits, some of the connectors to our products. In July, we released a product called Open Finance, which was in conjunction with Munis and that’s already been well received. I’d expect a few more of those products to come out probably in the next quarter.
But Alex, in Q2 there were really no Socrata sales through the Tyler channel.
Got it. That’s helpful. And then maybe on New World, another I guess product where you had a particularly strong quarter with that extremely large deal. Can you speak to maybe what’s driving that success, how does the pipeline look given that this is a 4Q weighted business and maybe talk about your confidence in that pipeline and those deals and how it’s changed maybe over the last quarter?
Yeah, sure Alex. We had -- some accounting was the largest deal as I mentioned earlier, largest deal in certainly, probably last 10 years for New World Public Safety. I think it’s really response to our investments and all the work that we’ve been doing in the last 2.5 years since we’ve acquired them.
We’ve made significant investments in their CAD, in their RMS, Mobility just got released this year. All of those were key in some accounting deal, as well as the Wyoming Highway Patrol deal that I mentioned earlier. Those were big license deals, some accounting was about a $2 million license, Wyoming Highway was about a $750,000 license.
So, I think it’s just the reception to what we’ve been doing and what we -- what I think we do really well which is develop our own products, get out there and we’re doing a really good job selling. The pipeline for the rest of the year looks good. You are correct, there is -- it tends to be more heavily weighted in Q4. There is a number of deals that we’re chasing that we’re going to have to close and it’s always a little bit of herding cats at the end of the year, but we like what we see in the pipeline for New World Public Safety.
Got it. And then if I could just squeeze one more. With SaaS becoming a greater proportion of the mix, you guys have made changes on contract durations for new customers. Can you talk about maybe a, why you’ve made those changes, what does that do for you guys in terms of being able to maybe increase some of the price points earlier in the contracts and what impact that’s going to have on bookings? Thanks.
Yeah. Over the last year or so, we have changed sort of our standard terms for new SaaS deals, generally those are now initial three-year contracts. In the past five years it was more of the standard and sometime back seven years was we even frequently had. We prefer to have a little bit shorter initial term contracts to give us flexibility with pricing down the road to respond to potential changes in costs and changes in the customers’ operations. And you see that in this quarter where the average term of a new SaaS deal moved down from I think 5.2 years last year to 4.2 years, this year.
So, that does have some optical effect on total bookings in backlog because you’ve got a smaller initial total agreement coming into the backlog. But because we continue to see very, very high customer attention, the same or if not higher in our SaaS customers is our on-prem customers, we don’t believe we need to push for very long initial terms but prefer to keep those three-year standards on new deals.
Great. Thank you, guys.
Our next question comes from Jonathan Ho with William Blair & Company. Please go ahead.
Hi, good morning. And let me echo the congratulations as well. Just wanted to maybe start out with -- and maybe some of the investments that you’re making, can you give us an update of sort of where we are in terms of that and how much of that is maybe contributing to the strong organic growth so far?
Well, these are kind of ongoing projects, they don’t necessarily have beginnings and ends. Some of them are new products, but most of them are incremental investments or I guess elevated investments in some of our core products.
So, even something like an EAM that we spoke of, obviously is a new product that the teams created, but the team will largely stay in place and we'll continue to invest in the technology and the functionality of that application going forward. The early release is kind of probably the first three releases will take that to independently competitive position.
Elevated investments and things like GAO, and New World Public Safety research are kind of significant projects that are at a high level and maybe back off at some point in the future. But there is a lot of just small incremental investments and things like executive time and the core products, technology and functionality certainly Sage and Socrata will have incremental investments in their integration and into our broader systems.
So, basically, we look at it as having added a lot of heads to different products that we felt could be impactful to our competitive position and catalyst of future growth and we’re starting to see that. We had even marginal bends upward in our growth rate are encouraging to us and we feel are sustainable and that we can grow on those incrementally.
But, you won’t see a reduction in these heads, these are not a temporary thing. This is really probably pulling forwards heads from two or three years out into the current spend to take advantage of those opportunities in the marketplace and we'll go into them and then we will see our R&D grow at a lower rate than our overall spend and kind of grow back into it is the way I'd encourage you to think about it.
Got it. That’s helpful. And then, just from a win rate perspective, you've anecdotally talked about New World improving here, but is there anything that you can quantify for us in terms of how that win rate may be picks up from here or hasn’t evidenced in the most recent set of wins.
Win rates, it improves quickly as you know and probably quicker than we could have expected, and our real focus was on, this is sustainable, and it has been - so their win rates are pretty good.
They can pick up further, But, I think the broader growth for them, they had a leadership position. I don't know I am not sure it's a narrow segment of the marketplace, but certainly not, the entire marketplace or as a significant size.
So, geographically and more importantly the size of the clients is, broadening that addressable markets base and applying what is now a good win rate against a broader marketplace. I think we will see the growth over the coming few years.
Got it. Thank you.
Our next question comes from Scott Berg with Needham & Co. Please go ahead.
Hi, everyone, Thanks for taking my questions. I guess, I have two, they both can generically around Socrata, when this is probably for yourselves since you made the comments. Best bookings in the quarter, just wanted to if you can help us impact that a little bit, was it ASP driven, just large area ASP, may be a number of deals relative to what they've seen recently or your certain types of products or GAO, just want to try to maybe understand what that best quarter kind of looks like for them?
Yes, sure. I think it's a little bit of both. I don’t think it was targeted in a one specific geographic area. It was also a combination of a couple of the deals signing out for a longer time. I think I have mentioned that there were some couple of five-year terms involved. It's really a function of the work they have been putting in the last couple of years into this Socrata -- it’s across the board, it was both number of deals, size of deals, term of deals, nothing one think specifics, Scott.
Got it. Helpful. And then question for you Brian on the impact of Socrata in the quarter, I can do the math on the revenue side, that’s pretty easy and obviously only acquisition of the quarter. But, can you help us to understand maybe from a bookings perspective, what was organic versus inorganic in that number.
Yes. Bookings were in the $7.5 million range from Socrata. So, that would be the inorganic part. I’m sorry 5.7.
Thanks, Lynn. Helpful. Thanks for taking my questions.
Our next question comes from Kirk Materne with Evercore ISI. Please go ahead.
Yes, good morning everyone. Congrats on the quarter. I guess my question, I was actually just curious around some of the contracts that you guys have been selling on a subscription basis. Is there any commonality just around why people are moving in that direction, whether it’s the size of the constituency, whether either some regions that are more comfortable or sort of moving to a subscription model. I was just kind of curious, I am guessing it more idiosyncratic than that on a customer-by-customer basis. But just curious if you are seeing a trend on that front.
I think it’s just government market, local government markets slower to embrace these changes. So, for years we were – our migration was slower than the commercial market you might fall. The comfort level with this is growing, the awareness of it has grown and they are just embracing.
The question earlier on the impact on growth really it’s been if we could design the migration by from a timing standpoint this has been a really good one, right we had pretty good reception 10 years ago, 12 years ago when we launch this, it's slowly and incrementally build therefore the cannibalization of licenses in the profitable business model we have has been slow enough to not overly impact that and seeing this continue to slow grow is really work well for our model and that’s what we see going forward.
Geographic or even across products, I don’t think there is anything – it’s pretty consistent. I think in recent quarters maybe over the last year we have reported that we have seen more larger contracts in this area, early on it was more of a mid-range kind of play and we have seen more of the large clients move to a SaaS model, so that seems to be if there is any change it’s on the high end.
Okay and...
Just add to that. I think the other thing is in the increased bookings and subscription model is that we have added more pure SaaS solutions like Socrata and in the Courts and Justice area, Modria and research and e-file of those growth – the growth of those offerings has also been high and that’s helped caused that mix to go up.
Okay. And you guys obviously noted that your win rates are up in the public safety area. I was just interested when you look at the pipeline at the RFP so do you see coming is there any real change in the broader market, I guess from your view John, Lynn. Just in terms of what you would have expected, I am just wondering whether or not the broader sort of economic lift we are seeing is sort of helping or encouraging some of your customers to make faster decisions or decision maybe they are waiting on for a year from now? Thanks.
I don’t think – we have talked in the past that the 08, 09 economic issues were deep enough to affect us, but it’s rare, I don’t know that economic issues we could say are – to much of what’s going on with us. The market is good, it’s a little lumpy right now a couple segments were a little late on RFPs and in that kind of leading indicators, but others were very strong and so across the board it's pretty good and our general outlook is positive there was some lumpiness on the internal numbers inside, but again generally, it’s pretty strong, but probably not impacted by economic issues at this point.
Okay, great. That’s it for me. Thanks guys.
Our next question comes from Tim Klasell, with Northland Securities. Please go ahead.
Yes, hi. My questions are around the Socrata acquisition. First, the large deal you mentioned. Is that common in the pipeline, or is that sort of look forward - should we expect to see more of those or is that a little bit of an abnormality if you will? Thank you.
Yes, Tim, I think Socrata historically has been focused on what they call the go 500 which is the sort of the larger tier local governments and state and fed. I think you’re going to continue to see some of that, I think some of what Tyler brings is our client base, so you’re going to see a little bit more mix as we push this out throughout our client base, but I think you’re going to continue to see a good mix of that, this quarter not only did they have the Texas DIR which I mentioned the City of California emergency services, they also did a smaller dealer with the U.S. Department of Agriculture. They are playing in all kinds of different markets, and we're excited about are the markets that we're going to bring to them.
Okay, good. And then on Socrata, has their win rates picked up, and is this giving you as part of Tyler. Is this giving you comfort around maybe doing more of these - I'm going to call for Tyler that the non-traditional acquisition of more of a technology and paying the bill, but higher multiple for a younger company. has it gives you more confidence that maybe this should be in your acquisition quiver if you will or in your acquisition pipeline. Thank you.
Yeah, I guess I would say, we're going to continue to be focused on the things that we do well. What we really liked about Socrata was the complementary nature to Tyler's business.
As you say, a little bit out of our wheelhouse, but at the same time really a glove and hand compliment. The vision that we have and where we're taking the company towards the connected communities vision is something that Socrata fit just perfectly with.
We look at acquisitions regularly, we look at all types of acquisitions. I don't know that I would expect us to do something significantly outside of our current wheelhouse. And again, I would consider Socrata a little bit different. It really it was a good complement and part of our overall strategic growth.
Okay good. And did the win rate, did that get affected or have you noticed any change with the Socrata being part of the Tyler family?
Socrata, their products not really sold through RFP. They do a good job selling, that's what we're going to do. We've only had them 60-90 days now. What we expect to do is we expect to be able to push this through our customer base and then they're going to continue with their sales force and continue to do things that they have been doing. So, I'm not sure win rates are as appropriate as more as just there is just going to be continuing to add on sales.
Good enough. Thank you very much for that insight. Thank you.
Our next question comes from Rob Oliver with Baird. Please go ahead.
Thanks. This is Matt [ph] on for Rob this morning. I had one follow up on Alex Zukin's question earlier on New World Public Safety, the nice deal wins sited in the prepared remarks Summit County Ohio and Wyoming. Were those deals competitive, and maybe who you ultimately went up and won against there?
Yeah, sure. Both of those deals were highly competitive. Summit County had been out for a long time, it's a deal we have been chasing, certainly a larger deal as I mentioned earlier, large contracts that ever signed. I think to John's comments, it's an example of them also expanding their addressable market. TriTech was involved in the Wyoming deal that we won recently. Off the top of my head I'm not sure who the players were in the Summit County, but it was very competitive.
Okay, that's helpful. And then on Socrata, it sounds like the contract links are increasing there the one in the state of Texas CRR. I think you said contract length of five years. I don't know if we've heard this, what is the average contract length for a typical Socrata deal more of the average not the longer one.
I think generally, their portfolio is made up of one-year contracts. I think it's still little bit early, we're actually encouraged by some people winning longer-term. I think it helps proved the stability of the product and what it can do strategically for our clients. But typically, they're one-year contracts.
Okay. Thank you.
Our next question comes from Brent Bracelin with KeyBanc Capital Markets. Please go ahead.
Thank you for taking the question here. I wanted to do one more question on Socrata and that was specifically given you said that there were no Socrata deals or sales through the -- channel win. Do you expect Socrata to be sold more broadly through this type of channel? And maybe just touch on the sales cycle. Is it different than your sales cycle.
Sure Brent. I'd expect Tyler sales to start occurring this quarter like I mentioned earlier. We've released a product called Open Finance, which was in conjunction with Socrata and that released July 1. We're currently working on those integration plans, we're both on a product standpoint and a sales standpoint. It's going to take a little work internally. But I believe those sales will start coming in this quarter and certainly in Q4 and continue to build as we get into next year.
In the sale cycle of Socrata is it different than your other products?
Yeah, it's a big segment here so I think their high end direct sales some of those maybe longer, it’s a newer product, it’s a newer concept, it’s typically not something that replacing are done, it’s a new initiative, so they could be longer, but I think as we go into and move into the traditional Tyler clients, a lot of that will be true, our insight sales channel and into our existing customer base and I think those will generally be non-competitive, non-RFP deals that will go through our insight sales channel and I would think that'd be shorter processes.
And the same is true for Sage that these will differentiate us and help us in the new business, new name market, but I think the volume over the next two or three years will be into our install base and they’ll tend to be to a relationship that it exists in a non-competitive, non-RFP process.
Very helpful. My last question is really around the industry. I know you touched on it a little bit, but just personally property tax is certainly paying a lot more today than that was one, two, three years ago. You know how the Supreme Court ruling, where Nexus changes and so you now are going to see online sales taxes, all of that should help the budgets of local government. So, walk me through just how you look of the health of the budgets of local government and is the appetite to modernize higher now than it was in the last one or two years or not, it’s just - this is just a slow-moving kind of market any color there would be helpful.
To be fair, we can't have it both ways. So, we’ve always said, we are not very economically sensitive in our market place. I mentioned earlier the 08-09 issue was deep enough that it did affect us. I really think that’s the only time in the last 30 years that something got to that point where there was a meaningful impact on our marketplace. So, right now we’re in kind of modest wins in the marketplace and as we said everything we do is essential, everything has to be done.
There is an appetite to do it well in the used technology to enhance productivity and cost and we benefit from that but it’s the healthy market, it’s better when the economy is good but it’s not a big dramatic shift really in that demand. We expect it to be steady. Everything we do again is essential and there is a lot of older systems that need to be replaced and they’ll be replaced really regardless of the economic conditions.
When the economy is good obviously they can move those forward or at least do them on time and really what we saw in 08-09 was that weakness pushed some things out but still occurred so if you look back at us historically we had a flat year at that time a couple of lower growth years and then we had some higher than trend level years as the catch up occurred.
Property values are a primary funder of local government and therefore our solutions in most cases, there are some obviously distressed cities and counties around the country, but in most cases almost every year there are more parcels than there were in the previous year, and in most cases, the values over the long-term continue to go up, so your taxes due and their budgets due and their ability to afford our systems benefits from that.
Sales taxes generally in cities sometimes large cities, sometimes we have sales tax, but generally sales tax are a state revenue thing and then so as we've said, we can’t have both ways but our revenues that directly fund local government property tax as utilities , fees, fines, these sorts of things tend to be very steady and not as influenced by economic swings, state being income in sales and federal being predominantly income, those are the things that obviously swing and have greater variances based on economic conditions.
Local government does get revenue sharing generally one of the last things that’s touched because it goes to education and sewer and public safety and things that are not politically nobody wants to touch politically, so generally they are one of the last things to get touched but the direct revenues are a property tax as utilities and those things that we all pay regardless of what kind of year we had.
Very clear. Thank you.
Our next question comes from Pat Walravens with JMP Securities. Please go ahead.
Hi. This is Matthew Spencer [ph] on for Pat. Thank you for taking our question. Just big picture, what’s the biggest challenge facing the IT departments of state and local governments today?
Probably transition of resources, a lot of brain drain going on that -- probably the biggest impact of that on us of what we call a flip, so conversions from on premise to SaaS. So, there's a lot of resources that are reaching retirement.
And as they move out, it's a catalyst for people to say, hey, we don't have the experts that we've relied on all these years, employment market is difficult, limited and the compensation they can provide for what is really a broad set of skills. And so that would be maybe the biggest thing.
Obviously, security is a big deal for everybody right now. And if you just Google it, and you can see, a lot of different hacks, number of ransom situations. And I think our timing on Sage is really, really good. And again, through our installed sales channel, where we have an established relationship, we're trusted partner, we think that's a need that we can help serve for our clients and will further enhance the stickiness of our relationship with our clients.
Great. Thank you very much.
Our next question comes from Mark Schappel with Benchmark. Please go ahead.
Hi, thank you for taking my question. I do have a question on Modria, the solution was initially thought to be a potential 2019 revenue event and I was -- John, I was just wanting based on your early experience with the product in Nevada, whether you believe we'll be hearing a lot more of that solution with respect to new deals around that time frame?
Around what time frame sorry?
2019?
Yes. No, I think the direct channel and what they would have been doing on their own, which will continue as strong as Lynn said, we're not a direct impact on that those are the resources that have been there and will continue to be there.
The evolution of the product and what's been released recently are things that obviously we're underway, I think they were small venture back company, that some uncertainty around that and the Tyler brand and presence in the marketplace, along with that financial stability enhances that, and I think we'll continue to see them do well there and probably do better than they would have with the benefit of those things.
The real incremental revenue will come as we start to drive that through our install channel and into our customer base, which as Lynn said, is beginning at this point in time, we'll start slowly and build from there. So certainly, we hope and expect that 2019 would see higher revenues and we'll watch the run rates, it's all occurring, it's all SaaS. And I think you'll see those recurring revenue run rate certainly grow in 2017 and beyond.
Okay.
And Mark as it as it relates to Modria. There is a lot of excitement in the market about that. I kind of view similar to e-filing in that, in the sense that e-filing was something that came along and started fundamentally transforming the way courts operate. And I think Modria has that potential down the road.
But you mentioned Clark County, that's one of our greatest partners with C&J, they are initially filing client. They did just finish a pilot project out there in three courts. It was a parenting plan contract and parenting plan courts where they that's really divorces children.
And by all accounts at 8 was very well received, we had certain out or over 50% of litigants use the Modria solution and the numbers are used the Modria solution for a full outcome was high for approximately almost half. The other ones that used it to certainly will down the issues to where a quarter, a mediator only had to decide on a few issues that was also high approaching that same number.
So, the excitement still seems to be there. But it is a change in the way course to business. So, it will probably start slow, but momentum is starting to build, and I would expect to see continued revenue growth at a Modria in 2019.
Thank you.
Our next question comes from Kevin Liu with B. Riley FBR. Please go ahead.
Hi. Good morning. I was just wondering how much of a revenue uplift do you expect from your New Mexico e-file business with the adoption of research. And could you talk about what sort of interest levels you're seeing from your existing e-file customers for that product?
Yeah. Research is in New Mexico about $250,000 a year initial contract. We have -- as I mentioned, that’s our third state to adopt Research behind Illinois and Texas. We have active discussions with a number of other states and counties throughout the country that use our e-filing solutions and our Odyssey customers. And we do expect to see additional adoption of that over the coming year.
Those contracts really are the fee that the state is paying us, or the courts are paying us for their research capability. We have additional opportunities from adding value-added services that we contract directly with the attorneys for that are on top of those amounts, there would be more transaction or subscription-based numbers.
Those are in the early stages of getting into place. And because those are also sort of new offerings that haven’t existed in the market before, it’s a little hard to predict exactly what those are. But we expect over the next couple of quarters to start to see some history on the added, value-added attorney services and start to see how that revenue stream would build as well.
Got it. And just one quick question on the margin side of things. Your services and recurring gross margin expanded nicely from the first quarter. Should we think about this as kind of more gradual expansion overtime or is it similar to kind of your R&D investment where there is a fair amount of investment going on right now given the opportunity you see in the market?
I expect that to be an overtime thing. Margins in the long run will continue. We believe we have significant margin expansion opportunity. And the subscription side of the business, particularly as it grows, and we get passed the initial implementations and get into the out years with these incremental subscription customers, they become more and more profitable. So, we do expect over the long run to see expansion in margins in the short-term obviously impacted by the increased investment in R&D and the lumpiness of license revenues.
Okay. Thanks for taking the questions.
[Operator Instructions] And our next question comes from Charlie Strauzer with CJS Securities. Please go ahead.
Hi, good morning. Just one quick question 0:03:01.3 on the SaaS subscription comments that you guys have had. If you look at the kind of the RFPs that are coming out today versus maybe five years ago, are you seeing a much greater amount of kind of requirement for SaaS-based offering or cloud-based offering going forward on these RFPs?
It’s still very few pure SaaS RFPs come out. Occasionally that occurs and when it does, sometimes SaaS companies have been in there pre-selling and driving it. But that’s still a limited bit of the market.
Generally, they are looking for a solution and they almost assume that it would be an on-premises solution and through the process, through Tyler and maybe through other exposure, other vendors they learn more and more about the SaaS offering and migrate in that direction.
So, initially that’s not necessarily their intention and they kind of move in that direction. As we’ve said before and it continues to be the case, it’s not an all unusual that we’re selected as a vendor and they then look deeper into SaaS versus on-prem and it’s a subsequent decision as to which way they’re going to procure the system.
And as Brian said earlier, we know SaaS was higher, we like to model ourselves, we’re successful with it. But really the long-term value of these clients is significant to us either way and we’re really glad for the business in a relatively non-biased way and have to get the business either way.
And John, when you think about the turning existing customers from license to SaaS, how much of that is driven by some of the kind of the user conferences year-over-year versus kind of just traditional self-guide knock on the door showing it to them?
Well, their awareness is enhanced by both the participating. They use a conference or connect. User groups. There is a lot of user action in groups that that use the current [indiscernible], but our significant inside sales channel and their job is to have a relationship with that client and as I said earlier, whether they have got a big infrastructure investment that’s on the horizon, whether there is going to be significant turnover in that talent, through these relationships we’re very aware of when those catalysts will flip or coming and where they are making the more, what their options are. That’s really what that relationship is and what drives what we refer to what these flips and it’s a pretty steady business.
The relationship with clients buy our solution, use it, get comfortable with us, we become a trusted partner, we have the benefit of licensee and then some number later they flip the SaaS that’s just a great customer relationship for us over the long-term and that something we see a lot of.
Great, thank you very much.
Sure
At this time, there appears to be no more questions, Mr. Marr I’ll turn the call back over to you for closing remarks.
Great, Steven. Thank you. Appreciate everybody participating in the call today. If there are any further questions, feel free to reach out to Lynn, Brian and myself. Thanks again for your interest and have a great day.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.