Q3 2019 Earnings Call
Hello <unk>.
Gee third quarter 2019 conference call.
Your host for todays call <unk> chairman of Tyler technologies.
This time, all participants are in English only mode.
Later, we'll conduct a question answer session instructions will follow with that Todd.
As a reminder, this conference is being recorded today.
31st 2019.
I want to turn the call over to Mr. Mark. Please go ahead.
Thank you, Nick and welcome to our third quarter 2019 earnings call.
With me on the call today, Arlon Moore, our president and Chief Executive Officer.
And Brian Miller, our Chief Financial Officer, Chris.
First I'd like for Brian to get the Safe Harbor statement next when we'll have some preliminary comments.
Then Brian will review the details about third quarter results and update our 2019 guidance.
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 FCC filings for more information on those risks.
Not at all growth comparisons, we make him a call today will relate to the corresponding period of last year, unless we specify otherwise.
Thanks, Brian .
Before we get into the third quarter results I'd like to highlight two announcements we made this week.
First on Tuesday, we announced that we have entered into a strategic collaboration agreement with Amazon Web services.
As public sector clients continue to increasingly trend toward the cloud we continue to evolve our applications in response to their needs.
Disagreement allows us to leverage the AWB cloud to lay the groundwork for the future cloud services for the public sector.
It provides the framework for development training and collaboration in order to support next generation applications that have the scalability resiliency and security that NWS offers.
And we look forward to working closely together to bring the most advanced cloud data services to Tyler clients.
We also announced yesterday that we have acquired courthouse technologies, a leading provider of jury management systems based in Vancouver, British Columbia.
C. H T cell solutions serves courts of all states across the United States in Canada.
Putting five statewide agreements and their addition will complement and elevate our existing suite of court solutions.
Now turning back to Q3 results.
Our execution in third quarter was solid as we continue to build upon a strong first half the year.
Cash provided by operations and free cash flow, both reached new quarterly highs in the third quarter as did non-GAAP EPS.
This was our 32nd consecutive quarter of double digit revenue growth.
Both GAAP and non-GAAP revenues grew 16.7%.
All of our software related revenue lines grew by double digits and organic revenue growth accelerated from the second quarter.
Our core software revenues from licenses in subscriptions grew 26% on a non-GAAP basis with 20% organic growth.
Software license and royalty revenues in the third quarter, where the second highest in our history increasing 13.1%.
As expected the new contracts mix shifted somewhat compared to the second quarter as on premises license deals made up approximately 48% of the number and 49% of a third quarter total new contract value.
We signed 288, new software contracts in the quarter, a new quarterly high.
And through the first nine months of 2019, we have already surpassed the total number of new deals signed in the full year 2018.
Our new software subscription deals at a 10.6 million of new annual recurring revenue up 59%.
GAAP subscription revenues grew 28.2% and non-GAAP subscription revenues grew 26.1%.
Total recurring revenues from maintenance and subscriptions grew 19.5% and comprised 67% of total revenue.
While revenue and bookings in the third quarter were good. They were also affected by delays and the timing of several federal contracts at micro packed as an increasing amount of micro pack sales are coming through as partner channel.
Several significant deals were signed by partners at the end of the quarter, but the related contracts with micro packed we're not execute until October and will be recognized in the fourth quarter.
These include the largest deal a contract for the Veterans' administration bouquet vocational rehabilitation education for 3.2 million dollar license fee.
As a result micro pack achieved its largest ever license sales month in October .
Our strong sales for Odyssey Court case management solution continue this quarter as well.
Our largest deal the quarter was a SASSA range meant what the district of Columbia Superior Court for Odyssey case management as well as E filing well they total value of approximately $7.7 million.
We also added two new Odyssey clients in California, a license arrangement with Shasta County, and assess agreement with the Mendocino Superior Court.
Along with a new fixed fee E filing contract with Snohomish County, Washington.
New sales for our ERP solutions continue to be robust and far munis solution. The number of new deals in the quarter was an all time high.
Significant contracts included multi suite deals that includes some of our more recently acquired solutions.
Among those were contracts with North Richland Hills, Texas for a number of products, including munis and Energov secret of data and insights and mobilize.
Under contract with Longview, Texas for our munis and to create a data insights solutions.
We also signed a SAS agreement for our munis ERP solution right at 4.3 million with the Union County public schools in North Carolina.
This agreement is one of eight new saying SaaS contracts this quarter with North Carolina School districts under the Master Service agreement, we signed with the state Department of public construction earlier this year.
For our public safety solutions, we signed significant contracts with Nassau County, New York.
The metropolitan computer aided dispatch and Champaign County, Illinois.
And County, New York and grow City, Ohio.
For our appraisal and tax solutions, we signed a significant SASSA granite with the city of Minneapolis, Minnesota.
And license deals with Santa Clara County, California, and Mcmullen County, Michigan.
First the crowd of data insights solution, we had a key win for there's a chronic connected government cloud with a new Mexico administrative office of the courts, a long time Odyssey client.
Other significant new signings included the Virginia Department of rail and public transportation and the U.S. Department of Veterans Affairs.
For our recently acquired micro pack solution, we signed notable arrangements for until a track with Utah Department of Health. The office personnel management with Inspector Generals office, and the Illinois Department of Agriculture.
Now I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2019.
Thanks Lynn.
Yesterday, Tyler technologies reported its results for the third quarter ended September Thirtyth 2019.
I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2019, and then John will have some additional comments.
Our earnings release, we've included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry.
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 financial reports tab schedules with supplemental information provided on this call, including information about quarterly bookings backlog in recurring revenues.
GAAP revenues for the quarter were 275.4 million up 16.7%.
On a non-GAAP basis revenues were 277.2 million up 16.7%.
Organic revenue growth rose from the second quarter of 29 team to 8.9% on a GAAP basis, and 8.3% on a non-GAAP basis.
Our core software license and subscription revenues combined grew organically approximately 20%.
Subscription revenues for the quarter increased 28.2%.
We added 150, new subscription based arrangements and converted 20 existing on premises clients, representing approximately $47 million in total contract value.
In Q3 of last year, we added 81, new subscription based arrangements and had 31 on premises conversions, representing approximately $29 million and total contract value.
Subscription contract value comprise 51% of the total new software contract value signed this quarter compared to 37% in Q3 of last year.
The value weighted average term of new SaaS contracts. This quarter was 2.7 years.
Compared to 3.6 years in Q3 of last year.
Revenues from E filing an online payments, which are included in subscriptions increased 19% to 21.3 million from $17.9 million.
That amount includes E filing revenue of 14.7 million up 10.5% over last year.
Annualized GAAP recurring revenues for Q3 were approximately 740 million up 19 in the half percent.
And on a non-GAAP basis were approximately 747 million also up 19.5%.
Our non-GAAP operating margin increased sequentially 100 basis points from 24.6% in the second quarter to 25.6% in the third quarter, but declined to 150 basis points from last year's third quarter.
The year over year decline reflects two major factors are increased investment in R&D and the lower operating margins from acquisitions completed in the last two years, which also are receiving significant investments that affect their near term profitability as they are integrated into Tyler.
Our R&D expense in the third quarter increased almost 24% from last year.
If our R&D expense were flat with last year and the results of our 2018 in 2019 acquisitions were excluded our Q3 non-GAAP operating margin would've been 28% up 90 basis points and on a year to date basis, 27.9% up 130 basis points.
Our backlog at the end of the quarter was $1.41 billion up 13.9%.
Backlog included $393 million of maintenance compared to 355 million a year ago.
Subscription backlog was $592 million compared to 488 million last year and includes approximately a $129 million related to fix the E filing contract.
Our bookings for the quarter, where approximately $259 million, an increase of 1.6% from Q3 of last year.
For the trailing 12 months bookings were approximately 1.2 billion.
Up 18.9%.
The intentional reduction in the term of new subscription contracts also impacted bookings growth.
At the average term of subscription bookings in the quarter been the same as last year bookings growth would've been approximately 4.3%.
Our software subscription bookings in the quarter added $10.6 million in new annual recurring revenue up 58.9% over last year 6.7 million.
For comparison, if all of our new subscription contracts had been under license arrangements. We estimate that they would have represented additional license revenue of approximately $14 million.
We signed 49, new on premises contracts in the quarter that included software licenses greater than $100000 and those contracts had an average license of 293000.
Compared to 29, new contracts with an average license value of $465000 in the third quarter 2018.
Cash flow from operations rose, 16% to $130.1 million and free cash flow rose almost 21% to $125.3 million, both new quarterly highs.
We ended the quarter with $230 million in cash and investments and no outstanding debt.
During the quarter. We also entered into a new five year 400 million dollar unsecured revolving credit facility. The new credit facility replaces our previous $300 million secured credit facility, which was scheduled to mature in November of next year.
The new credit facility also provides a minimum of $250 million additional uncommitted funding through an accordion feature.
In addition to expanding the size and moving to unsecured credit facility also contains improved pricing compared to our previous facility.
Day sales outstanding in accounts receivable was 114 days at September Thirtyth 2019, compared to 107 days at September Thirtyth 2018.
The increase in Dsos is primarily related to the timing of milestone billings under several large percentage of completion contracts, resulting in a 32 million dollar year over year increase in Unbilled receivables.
Excluding current Unbilled receivables Dsos were unchanged from last September at 79 days.
Our guidance for the full year of 2019 is as follows we expect 2019 GAAP revenues will be between 1.082 billion and $1.095 billion and non-GAAP revenues will be between 1.090 billion and 1.103 billion.
We expect 2019, GAAP diluted EPS will be between $3 from 50 cents and $3.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate as well as the final valuation of acquired intangibles.
We expect 2019, non-GAAP diluted EPS will be between $5.22 and $5.35.
For the year estimated pretax noncash share based compensation expense is expected to be approximately $62 million.
We expect R&D expense for the year will be between 81 million and $83 million.
Fully diluted shares for the year are expected to be between 40 million and 40 and a half million shares.
GAAP earnings per share assumes an estimated annual effective tax rate of 10%. After discrete tax items includes approximately $27 million of estimated 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 effective tax rate for 2019 is 24%.
We expect our total capital expenditures will be between 45 million and $47 million for the year, including approximately $20 million related to real estate and approximately 6 million of capitalized software development costs related to micro packed.
Total depreciation and amortization is expected to be approximately $76 million, including approximately $52 million of amortization of acquired intangibles.
Now I'd like to turn the call back over to John for his comments.
Thanks, Brian .
We're pleased to continue to build on the strong first half the year with very solid third quarter.
We again achieved double digit revenue growth as well as achieving the highest quarterly non-GAAP EPS and free cash flow in history.
Our competitive position remains high.
Part, reflecting our increased investment in R&D over the last two years.
We signed a record number of new deals in the quarter.
We can continue to be active in the integration of our 2018 in 2019 acquisitions into Tyler.
We are encouraged by the progress.
Starting to see benefits from the investments, we've made an acquired products, including integration Tyler's core products.
For example, 22, new ERP in public safety deals. This quarter included the crowd as data as a service platform and we had seven wins with caseload Pro now branded Tyler supervision.
As Glenn noted we're also very excited about our new strategic collaboration agreement with Amazon Amazon Web services.
There is multifaceted agreement brings together, Taiwan, the nations largest software company focused exclusively on the public sector.
In a ws the broadest and deepest cloud platform.
We look forward to working together to accelerate innovation in the development of these strategic initiatives.
As we continue to evolve our applications in response to the public sector needs. This collaboration will enable high was clones to deliver better experiences for citizens.
Further enable governments to use data as a strategic asset in the design management and delivery of their programs.
Now Nick will take your questions.
We will now begin the question answer session.
John a question into the question could you. Please press star one on your Touchtone phone.
For using the speakerphone. Please pick up your handset and then press the star key and the number one.
Well to withdraw your question. Please press the Star key and then the number two.
Please limit your questions the one and one follow up.
In place yourself back in the queue for additional questions.
We will pose mom momentarily to somewhere roster.
First question comes from Kirk.
Attorney Hyperscore ISI go ahead.
Hi, Thanks, Thanks very much.
I guess, maybe just to start I guess lennar, John can you talk a little bit more about the any of us deal.
Just in terms of white, maybe you're hoping to accomplish with that in the immediate certain near term or clients asking about avionics and having the flexibility moving over to move over to it. How do you think about that is that development platform for your own applications, maybe just a little bit more color on that kind of what's in the near term goals are and then maybe longer longer term.
Bowls.
Yes sure Kirk.
I think that's this is kind of something I've been talking about for the last several quarters I've been talking about and initiative within Tyler.
Really long term strategic initiative.
About really coming up with a comprehensive companywide cloud strategy.
We've talked about its involves a lot of different things and involves evaluating our current products our potential roadmaps.
Trying to figure out how to get them on the right path to become more cloud efficient and hopefully cloud optimized.
Looking at our historic approach of cloud agnostic.
Looking at the long term strategy of the Tyler cloud.
Evaluating opportunities with public cloud providers and on and on and so this really is an extension of that it's a it's a piece of that overall puzzle that we've been we've been working on for the past year.
As we continue to focus more on delivering more of our solutions in the cloud and building next gen applications.
Wondering what they WCS.
Helps with that helps monitoring our modernizing our portfolio.
Short term. It also helps with some training to for our staff to help then get the skills necessary to build some of these next gen apps.
It helps with our long term strategy eventually moving away from the Tyler cloud.
It's really just a continuation of stuff that we've been talking about I don't know that worse or in a position sale to sort of outline you can expect this and this quarter and that in that quarter.
But it's a part of an overall movement that we've been working on for the past year I want to be careful in a couple of things I want to make sure that it's clear about what it's not.
We're not it's not an immediate radical shift in our business model.
Away from on premise.
We certainly recognize increasing market shift in the public sector. We believe that's going to continue in the future. We've talked about where rates were five years ago versus today, and where we think there will be in the future.
But we're going to continue to be responsive, where there's still significant demand in the market for on premise and we're going be responsive to that man, even as we are evolving and moving this strategy more to the cloud.
It's also not an immediate move away from our existing Tyler cloud, we've got existing customer commitments, we've got financial commitments and again as I mentioned.
Some of our products will come to day move more easily into a public cloud at a more cost efficient manner and some suddenly did some more activity come a little more callout efficient and hopefully over time cloud optimized.
So.
At a high level, that's where it is in the near term.
We're going to continue to solidify our relationship. It's a it's an overarching framework for us to work on various initiatives.
We're really focusing on on future development on training on collaboration migrating customers, where it makes sense.
But really recognizing the marketing, where it's going and again an extension of the work we've been doing inside of Tyler for the past year.
Thats helpful. Maybe just one follow up for Brian Brian .
Well I apologize if I missed this but any impact from courthouse on the fourth quarter guidance or maybe how to think about it for fiscal 2000.
No it's at a relatively small.
The less than five main and annual revenues so.
The impact will be material and in Q4.
Okay Super Thank you all.
Our next question comes from Scott Berg Needham and company go ahead.
Hi, everyone. Thanks for taking my questions.
I guess, let's start with.
With when we were at the CP event here earlier this week and that's been great discussions on the public safety side of your business and how that business is positioning better out market. We could you maybe talk about the companys overall efforts to move more into those tier one.
Type customers historically, it hasn't been big focus I know you're doing more are there more recently, but maybe an update on some successes and opportunities there would be great.
Yes, you're absolutely so yeah, we've talked about a little bit Scott over the last really last couple of years.
Made a lot of investments part of the purpose those investments was one to get the product more competitive but also position that to move.
Move upscale market.
Those investments have been paying off in our in our core Mark in terms of number of Rps were extended we're responding to shortlisting, but I think you've also seen this year. The number of new names were getting is up significantly year over year and as example to your tier direct question is the larger deals are starting to starting to be on our horizon.
We expect to close.
By the end of the year approximately twice as many deals that were in the $1 million plus range is last year.
So a good example, those investments I think stepping back when you look at the quarter.
For public safety there there were really two big operational milestones, which are really key to fueling that growth up market I mean, we've done the work when the product.
And we don't talk a lot about it but we had we had to really big go lives. This quarter. Scott one was in Orlando, Florida and that was really our first tier one CAD go live and by that I mean, it's a it's a it's a jurisdiction that has over a million million plus calls a year.
So that's the first time, we've been able to do that.
Burlington County, New Jersey, another successful go live and there were a tier one client for both CAD and records, we talking about this stuff occasionally but again this kind of the secret sauce of Tyler. This is the hard stuff getting clients up and running on time on budget. As you know, it's a really it's a reference business getting them happy is going to help help play as we as we continue to.
Move up market and get more more opportunities having these tier one.
Sites up and running and Referenceable.
In Orlando's case for example, our team got multiple personal handwritten notes from the clients just.
<unk>.
All right about the success of the implementation. So that's really good stuff, we don't put out press releases about it but to your point about moving upstream you got to get those references in place and as it really good quarter for public safety to do that.
Got it how Paul and then from a follow up perspective, you had a couple of micro pack deals that kind of.
Moved out of Q3 into Q4 in certainly understand the.
The rationale there, but as you moved into new segments, Federals, obviously, new with micro pack.
Kratos brought some state opportunities in international maybe that you didn't have before is how do you feel that view the predictability of the business today around deal flow and on the business has always had some quarters where deals get awarded but maybe not get invoiced and there'll be some movement there, but it seems like the last couple of quarters. There's been some more movements. There is this.
And I have a short term trend as you have these assets kind of for the first time and your per view or.
Maybe is pretty predictability, a little bit less certain versus what's been historically very easy to two to guide to with the smalls small local.
Customers.
Yes, Scott I think it's a couple things I think you're right, we're still learning a little bit about these markets and and then as it relates to micro packed worst we're still learning and they're still learning.
You know really about this the partner channels.
They have spent some time in may two investments over the last couple of years, but this is really the year that it's really starting to see fruition and I think that was just sort of a little bit of an internal miss.
That is you know some of the federal deals, which is a significant part of their business certainly not all their business.
Has a lot of business that comes in at September 30, while the partners were getting that business, but didnt turnaround and sometimes that business comes in literally at the sroka midnight on September Thirtyth, well Theres no time for us to get that contract.
I think part of it too is is and as you see this in a couple of our lines is when you. When you don't have the as that as the business is growing and you don't have the deal flow and you have some some little bit more larger deals you tend to have some deals that will slip that may impact performance, a little bit more as opposed to say our ERP side of the business, where there is a more continuous in constant.
Deal flow so deals slip in deals slip out it's kinda that's just the nature of the business than we normally don't talk about it but some of these these lines where there is little bit larger deals. We see this it with Odyssey, sometimes even our core business.
The predictability just gets a little bit off internally, but for the year and generally like like I told the guys. It micro pack the good news as you've won the business.
We'll take the business when we get it.
We don't put out quarterly guidance.
Perhaps this is part of the reason, but the good news is the all the business trends are there, but but you're right. We're still learning a little bit of the space.
Great. Thanks for taking.
Our next question comes from Keith Housum Northcoast Research. Please go ahead.
Morning, guys in terms of courthouse acquisition, and just trying to understand it just took all of your I guess your common pattern, making acquisitions do you foresee us and need to spend some significant amount of R&D in terms of opt in their portfolio are integrating with yours.
Yeah, Keith I'd say, it's a it's it's in line with a lot of our recent acquisitions, which are have been more strategic and primarily product acquisitions, we've talked in the past about our white space initiative and looking for things that are Voyager deficiencies in our current offerings and I think Thats Court house technology sort of fits that bill.
I'd say, it's very similar rationale and thought processes as our caseload pro.
Which is now Tyler supervision acquisition last year Courthouse technologies as a company going ahead to really a leading jury management solution.
We had our own existing jury management solution. It was probably not an a. as and certainly not a strength of ours. Its something that we see in a lot of deals I think about half of our oddest Odyssey deals requesting jury as well as other other products. We had some outstanding customer acquired requirements. So it had been on our list our R&D listed.
To put in some more investment and yet we were able to find a company with a solid product to bring in.
To your question about R&D like almost every investment we do we don't just put them in and let them run we make some investments we make some integrations.
We usually end up spending a year too.
Sort of getting them on Tyler I was getting them on track and our history has generally been as you look at a couple of years and you really see that growth start to take off so I do expect some investment there, but the products in pretty good shape and as a lot of that'll be integration integration related.
Great. Appreciate it and then just personal thereby drilling down deeper into the evolving business I know you're up about 10% year over year, but at some point over the next year or two should we expect even acceleration of the growth as you sorry, guys signup more customers or is this a pretty good cadence to think about that side growth quarter over quarter year over year.
I think generally.
Kind of.
Mid teens is probably the right way to think about it.
We have some.
Sort of backlog of E filing.
In that we've got commitments from some clients that are in the process of implementing a case management solutions that will go live on E filing month. It systems in place we have others that are.
Still not fully mandatory.
So theres additional volumes to come and and then we expect to continue to win new business. As we did this quarter I think Snohomish County, Washington was in a new E filing customer.
So I think generally it it can be a bit lumpy too, especially a larger.
Solutions are lot larger systems come online or jurisdictions, but I think kind of mid teens is the right way to think about that.
On average as growth.
Great. Thank you.
Our next question comes from Rob all over from Baird. Please go ahead.
Great. Thanks for taking my question guys. First question is for land land I just wanted to ask it sounds like you guys.
Got some nice traction with new world in some some wins on the public safety side this quarter and just wanted to get a sense for you both near term tactically, how obviously more of a Q4 back end loaded type of land. So how how you feel kind of had it in Q4 and then.
The nature of some of those wins and if you're starting to see that kind of federation effect from your Tyler installed base, it's starting to.
Cross pollinate in terms of wins on the public safety side. Thanks.
Yes.
I think going back to my comments before I'm pleased with where public safety sits today like a lot of our and we just talked on the question before about acquisitions and investments and.
We've invested a lot over the years and sometimes it takes a little bit even longer than we think that sort of get that momentum going but the momentum is there.
I mentioned some of the metrics, where we're shortlisted now and more than 90% of RFP is our our new names through three quarters are up 75% from last year. The size of deals is going up.
Q4 is setting up for a big quarter.
Still tends to be a little bit seasonal that way.
And they have a lot of lot of good lot of big deals in the pipeline. It's a lot of operational execution to try to get all those closed on that it's a difficult difficult thing to do but but sort of stepping back at the 20000 foot level.
All the metrics are trending in the right direction. The competitiveness is trending in the right because.
Direction, our products are there we're getting the references I mentioned from Orlando in Burlington, which are key for to move up market and and overall customer sat is in such a different place than it was a couple of years ago.
And you just can't overlook that making sure that.
Clients are happy and feel like they're getting value.
As we've talked before you guys know it's everything we do is out in the public.
Our customers are not competitors they share everything so being successful with your existing base is such a big part of getting the new business and they're just doing a great job.
And I just would add one thing and your question about cross pollination and how public safety is working with.
Other Tyler products, we're certainly seeing that.
Public safety solution had not had a much success in Texas Historically and then the last year. So they've had a number of deals.
Texas I think all of those win in jurisdictions that use our Odyssey case management solution on the court side.
Many of our public safety deals include Breza, sorry citation product.
Mentioned earlier in the remarks that.
A crowded data and insights as being included in a lot of public safety deals and we expect to go back to our public safety basin and adds a CRADA.
To a lot of those clients. So clearly we're seeing impact of.
Tyler on the public safety business.
That's great. Thanks, and then just a quick follow up a Brian .
While I've got yourself.
Yes, 51% mix on subscriptions this quarter, you've got micro pack deals that are going to hit this quarter, assuming some of them are going to be perpetual license since it tends to be more perpetual and then you've got kind of you know public safety yearend kind of skewing perpetual how should we think about that.
Mix into Q4, thanks, a lot guys.
Well, there's still uncertainty theres still lot of deals that are in the pipeline.
Particularly the ERP side, where we have.
We're either a finalist or in some cases have been awarded but the client is still deciding whether they're going to go to the cloud or be on premises.
But generally I think there's two factors micro packed.
As a number of license deals that will be in Q4.
Like safety tends to be much more heavily weighted towards license deals.
Today, and so there's seasonality in Q4, both of those tend to.
Trend Q4, more heavily towards licenses in the cloud.
But having said that in Q3, and we did see a bigger mix in the ERP in the cloud so.
I don't think it's going to be.
Heavily cloud like Q2 was but.
We still have a.
Fairly wide range on the revenue side and the biggest factor there is how some of those deals that are uncertain today fallout.
Great. Thanks again guys.
Our next question comes from Pat Walravens JMP Securities. Please go ahead.
Oh, great. Thank you so looking out sort of there's a long time at 35 to seven years right, let's assume we're going to be a lot more in the cloud and and everybody has got asked for Hannah and they're doing a public cloud version and Oracle got fusion, but they bought net suite.
For your core ERP, what's the plan I mean are you going to rewrite it so that we have a sort of a multi tenant true SAP solution.
Well pad, we're like I said earlier, where we're currently in the process of evaluating all of our core products and trying to trying to get them on the right roadmap to.
To be able to be more responsive in the cloud and be more first cloud efficient and then cloud optimized.
Our our near term you look out over the next couple of years I.
I think we're looking to just to evolve away from our approach of historical Progen being cloud agnostic as a business model, perhaps cloud first.
As a business model, but again, recognizing that there's still going to be significant demand for on premises. It's a it's a.
It's a it's a technical strategic question that I'm not sure I'm ready to give me that that product road map right now.
But it's something that we're working on intently, we see where the market is going we know the efficiencies of the cloud.
But just from a revenue standpoint, but what it can play can mean for the customer and continuous delivery continuous improvement what's a good part with your multi tenancy.
And what it can do operationally as we reduce versions out in the field and stuff like that so.
We're in the middle of all that I think you'll continue to hear us each quarter.
A little more specific or give a little more info as our as this strategy unfolds.
But we're going to take our our disciplined approach of the way we've done.
Tackled the rest of our business.
And I think I think the direct answer to the direct to answer your question, though no we won't be rewriting.
Any other major apps and they're all architected in ways that they can continue to evolve to be native cloud, certainly certainly multi tenant or whatever the specific objective is so it's really a matter of priorities that we have functional priorities quality priorities user experience priorities and then a the technical priorities.
Evolving toward a more cloud native solution and we look at the marketplace, we work with our sales and marketing people and we balance those things and make those decisions I think it lends been saying.
Over the last year or two there has been a little more focus and the pendulum has swung towards you know attributing more attention more resources toward cloud native solutions. So, we'll do that but all of our major applications can evolve to be entirely a cloud native without a rate right rewrites or.
Generally not part of the pilot strategy and not just disruptive to our business the very disruptive to the customer. So we generally take an approach where we continue to a ball for products without long that customers out of the water and delivering this on a non disruptive way to both our clients as well as that business strategies.
Okay, great. Thank you.
Our next question comes from marks a pound from benchmark. Please go ahead.
Hi, Thank you for taking my question.
Then a question for you on the competitive front you have a relatively new private equity backed a competitor that's out there that's basically been stitched together during the past year. So I was wondering if a given their larger size if they're starting if you're seeing them anymore. RF piece. If you are seeing any.
Major impact a competitively out there.
Yeah, Hey, Mark So I'm I'm, assuming you're I think I know you're talking about that tupi firms up got together and and acquired a number of assets of significant size.
More pretty familiar with all those assets. We've competed with them in the markets for years.
I think if you follow them closely you probably also know they've.
I've got a significant amount of debt or I think there debts recently been downgraded.
We're seeing them in the market I don't know generally the P. playbook is.
They look a little more the near term, we know that what they've been doing is has been a little bit disruptive in the market in terms of trying to consolidate product lines consolidate business biz apps. So it's been a little bit disruptive in the customer and their employee base.
Her that a little bit anecdotally.
But our competitive position with them as remained strong as it does with against all other competitors are when rates are when rates are good across the board.
Great. Thank you and then Brian a question for you. This has been in investment year from an R&D standpoint, which has impacted your operating margins I was wondering if you're just just addressing in kind of broad brush strokes the company's longer term view on on the margin fronts to over the next couple of years.
Yeah, I'd say broadly we expect to to a b.
Sort of growing into this new level of R&D.
We certainly have had elevated investments over the last couple of years I think R&D has been up more than 30%.
In each of the last two years that is starting to level out a bit I think art or total R&D expense, excluding acquired companies was pretty flat with last year's Q3.
So I expect that.
All else being equal in terms of.
Not having other large compelling opportunities to invest internally that will.
C.
R&D headcount.
Start to level out and that we won't see that.
Growth of R&D expense, that's way above our revenue growth and that if you look out over the next few years.
We'll see leverage again on that line and along with that that will be sort of back on a trajectory of long term operating margin improvement that's more consistent with what we've seen in in.
Over a longer period of Tyler's history.
So we do believe there's significant operating margin.
Opportunity ahead of us.
I'd say the other factor that we pointed out on the call as well as in generally around the acquired businesses, which really are the biggest reason.
For the fall off in margin improvement in the last year.
As when talked about generally we're making investments in the short term after we acquire some on.
Some of that's an R&D and some that's an operating expense but.
As investments are sometimes around the product sometimes around integration with other Tyler products, sometimes beefing up their organization to take advantages of the opportunities.
That they have ahead of them and so with the seven acquisitions. We've done in the last two years collectively those businesses are just about break even right now so that's.
But of a drag on our margin improvement, but again as we get through those initial investments, we expect to see profitability and contribution to margin where today they are not.
So yeah, if we look out over the next couple of years margin improvement is still a big part of our story and something that we.
Do have a focus and discipline on and we'd expect to be getting back to that.
Thank you.
Our next question comes from Tyler Wood from Northland. Please go ahead.
We are going back to the ADW asked partnership and.
The cloud native stuff when you look across.
Different business line ERP in a public safety the courts, which do you see as the best fit for cloud delivered you think will be quickest to migrate and then what do you expect to be more gradual and stay on prem longer time. Thank you.
Well I think that question has two parts. One is you know what's the state of our current products to run more efficiently in a public cloud.
As you know all products running in the Tyler cloud today and the second thing is is what is the market, calling for and Where's the demand.
You know it's interesting it that the the shift in and move to to the cloud Msas, even tighter cloud or whatever it has been increasing we've seen it a lot on the ERP side, but we're also seeing and the other lines were seeing it kind of really across the board.
If you look at large.
Recently large court deals on the North Carolina deal, we announced last that we talked about last earnings call. The DC courts deal Bayer County, all the larger deals are starting to trend that way.
We talked a little bit about on the ERP side. This north Carolina statewide schools contract. That's it all those all those implementations Luis will be psas in the cloud.
In the public safety side, you're seeing more and more receptiveness from the public safety buyer and the public safety user to having their information up in the cloud, whereas I say four or five years ago that was probably an area that was more reluctant.
I don't know that Theres, a specific area, where the trend is as hotter than the other that's it's just the overall.
Market trend, that's moving that way.
Hi, Thanks, that's all from it.
Once again, if you have a question. Please press the star keys and the number one on your Touchtone phone.
Your next question comes from Jonathan I'll.
William bigger and company. Please go ahead.
Hi, Good morning, I, just wanted to maybe touch on the A.R.R. metric and just I guess better understand what your broader expectations for you know maybe what they are our should be growing and just given the duration shift in bookings. It was just sort of a more relevant metric. When we think about you know sort of the.
For booking performance of the company.
Yeah, Jonathan I'd say, certainly as we become more and more of our new business coming through the cloud that the A.R.R. metric becomes more important.
There are lot of nuances to it around Tyler the 10.6 million of new A.R.R.
That we talked about this quarter it was up 59% over the new way, our our last year's third quarter.
That is really around.
New software bookings, we certainly have we're now two thirds recurring revenue a big chunk of that as maintenance.
That's not included in that that they are our it also doesn't include things like E filing which are also recurring revenue streams. So it's really just new software deals from the cloud so it's a piece of it.
And you know, it's hard to predict that growth, but certainly our cloud business or.
Description business has been growing.
In that 20% to 30% range for I'm very very consistently over the last several years and we expect that to continue.
So I think we'll continue to refine that.
Ah that metric and put more emphasis on it but but definitely yet.
Hi growth a piece of our business.
Got it and then you can you talk a little bit about the reaction from clients and the sales force now that you're a few quarters into this initiative to pursue I guess shorter duration contracts has there been much pushback or.
Have you had to yeah, I guess change incentives in order to get this kept the sir.
I I don't believe there's been a push back I think it's more in line with with.
Most software companies you know we in the early days of our cloud business we were.
I think less we and this is going back 15 years ago, we and our clients were.
Were newer to it we felt like we needed to signed customers up to very long term agreements.
You know there there is certainly no more attrition in our cloud business and there isn't our on Prem I guess theres theres actually I'm somewhat less although it's on a bigger sample and we have pretty negligible attrition.
In general.
So I think it's those kinds of the three year term that we generally lead with is I think pretty consistent with.
What other vendors, providing and our customers are comfortable with that and.
So there haven't been really any changes in the sales process. It's just.
And evolution to these are our standard terms now.
Well I don't think your clubs ran our early cloud strategy often bundled the deployment services into the annual fee. So by doing that we went for extended.
Terms in order to keep the annual cost reasonable.
Over time as is the market matured and generally the de facto relationship had services paid for on the side and the annual fee typically with the subscription fee in the hosting see it became less necessary for us to require our clients to sign these longer term agreements so that was really and.
Evolution in the relationship we had and as professional services became a a line item that they pay for on the side. It wasn't necessary. So we felt there was no reason to have that hurdle out there in a in the new business market. So it's been well received by clients.
You know obviously gives us some flexibility if the market changes our cost changes to have some price.
Flexibility down the road, but the reality is that those increases are a very reasonable and have never been anything significant enough to hurt the client.
Thank you.
At this time, there would be no more questions Mr. Tomorrow, I'll turn the call back over to you for closing remarks.
Okay, well, thank you Nick and thank you all for joining us on our call today. If there are any further questions feel free to reach out to myself, Brian Olin. Thanks, again have a great.
[noise].