Q2 2020 Tyler Technologies Inc Earnings Call
At this time, all participants are in listen only mode.
Third we will conduct a question answer session and instructions will follow at that time.
And as a reminder, this conference is being recorded today July Thirtyth 2020.
I'd like to turn the call over to Mr. Moore. Please go ahead.
Thank you Danielle.
Welcome to our second quarter 2020 earnings call.
With me on the call today is Brian Miller, our Chief Financial Officer.
First I'd like for Brian to give the safe Harbor statement.
Next.
Some preliminary comments and Brian will review the details for second quarter results.
They don't have some additional comments and we'll take questions.
Thanks Lynn.
During the course of this conference call management May make statements that provide information other than historical information that 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.
Subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections.
We refer you to our form 10-K, and other STC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise slip.
Thanks, Brian.
We executed a high level during the second quarter as the effects of covert 19 pandemic continued.
Financial perspective, GAAP revenues declined 1.5%.
Non-GAAP revenues declined 2.4%.
Revenues for the quarter were approximately $35 million below our pre cobot plan.
Many procurement processes encountered delays as client focused on addressing cobot 19, resulting in several contracts being pushed out in the quarter, reducing license and to a lesser extent subscription revenues.
Also services revenue was negatively impacted during the quarter as bill will travel was essentially eliminated.
And fewer hours were delivered as we transition to providing those services remotely.
As I noted on our last earnings call due to concerns with Cobot 19, our annual connect user conference was cancelled.
Although the majority of the contact was delivered virtually we lost more than $6 million of revenue that would have been recognized in the second quarter.
Recurring revenues remained strong.
Yep subscription revenues grew 16.6%.
Non-GAAP subscription revenues grew 15.6%.
Together total recurring revenues from maintenance and subscriptions grew 12.3% on a GAAP basis and comprised approximately 75% of total revenues.
On the positive side operating expenses were also well below our original plan.
We experienced significant savings and commissions travel marketing health claims and other employee related expenses.
As a result, our operating margins expanded with our non-GAAP operating margin up 290 basis points to 27.5%.
Our cash flow was another high point in our results.
Free cash flow up 226% over last year's second quarter.
Bookings for the quarter were approximately 309 million Asics and as expected declined 31.6% due to the very difficult comparison to the second quarter of 2019, which included two very large SaaS deals.
One for the North Carolina administrative office of the courts and the other what their county, Texas. Excluding these two contracts bookings declined approximately 10.9%.
Although we have not seen meaningful cancellations, we are seeing delays in procurement processes and lengthening sales cycles due to the effects of covert 19, which impacted bookings this quarter.
As we've discussed in the past our new deal mix can be somewhat lumpy from quarter to quarter as was the case this quarter.
The number of new software deals was weighted towards SAS was 66% of the total however, the value of the new software deals way towards on premise license arrangement at 57% as more larger deals that signed this quarter chose on premises.
Our largest deal the quarter was a license arrangement with the state of West Virginia valued at approximately $9 million for I asked world appraisal solution, including appraisal services.
Perhaps the most significant contract signed the quarter was a public safety arrangement with Jacksonville, Florida for our New World Public Safety Records management, and Brazil Citation solutions, along with ours to credit data and insights seen dock and Softcode solutions valued at approximately $5 million.
Jacksonville, the 13th largest city in the nation represents our largest public safety client today.
This is what is important because it not only validates the significant investments we've made in the new world suite to position, it's become competitive in tier one.
But also showcases the triptans strategic value of the acquisitions, we've made in recent years.
Other notable license deals during the quarter, including Odyssey Court case management contract with the Tempt you just support and Johnson County, Kansas, which completes our statewide presence in Kansas.
Along with contracts for our micro pack until a track solution with the Pennsylvania Turnpike Commission and the United States Department of Agriculture.
In fact, three of our seven largest license deal in the quarter were for our micro packed until attracts solutions.
We added two new counties in California for Odyssey, a license contract with Colusa County, and assess contract with Mariposa County.
We've now one sixth of six California Court deals that have been executed since the state provided new funding for case management system replacements last year.
Our largest asked deal the quarter was a 3 million dollar contract with Kate Clay County, Florida for Energov Civic certain services solution.
We also signed a SaaS deal for Energov with the city of Sunnyvale, California valued at approximately 1.3 million.
Other significant SAS arrangements signed this quarter with the Bellevue School district in the state of Washington, and the city of Lynn, Massachusetts for our Munis ERP solution.
With the Abu Dhabi Global markets for our Moudry online dispute resolution solution.
With the Kansas Supreme Court for our Caseload Pro solution.
With Clermont County, Ohio for Us to CRADA data and insights solution.
In addition, 42 existing on premises clients signed contracts to move to the cloud, including the waste County, Texas with Odyssey courts, Franklin County, Ohio, and the Cab County, Georgia, which is world appraisal and tax.
And Alamito, <unk>, Alameda County, California, with Caseload pro supervision.
We also delivered the initial version of our he wants system to the state of North Carolina under the contract we signed late in Q1.
We also have trial programs underway for E warrants with two counties in Texas.
Now I'd like for Brian to provide more detail on the results for the quarter.
Thanks Glenn.
Yesterday, Tyler technologies reported its results for the second quarter ended June Thirtyth 2020.
Bookings backlog and recurring revenues.
This was the first time, we've had a year over year decline in quarterly revenues since the fourth quarter of 2010, just before we emerged from the effects of the great recession and ended the streak of 34 quarters of double digit revenue growth.
Gap revenues for the quarter with $271 $1 million down one 5% on a non gap basis revenues were 271 $3 million down to 4%.
Organic revenue growth was down one 9% on the gap basis, and two 8% on a non gap basis.
Our core software and license.
Where license and subscription revenues combined grew eight 4% on a non gap basis with seven 7% organic growth.
Total revenues were about $35 million below our pre Covid plan.
Of that approximately $11 million was attributed to delayed license and percentage of completion revenues.
$8 million to professional services.
Six $6 million to the cancellation of connect.
Four $5 million to billable travel.
And one $4 million to lower E filing volumes.
Subscription revenues for the quarter increased 16, 6%, we added a 125, new subscription based arrangements and converted 42 existing on premises clients, representing approximately $39 million total contract value.
Q2 of last year, we added a 154, new subscription based arrangements and had 27 on premises conversions, representing approximately $128 million in total contract value.
Subscription contract value comprised approximately 43% of.
The total new software contract value signed this quarter compared to 80% in Q2 of last year.
The value weighted average term of new staff contracts. This quarter was three seven years compared to six one years last year. When the average term was skewed by the 10 year $85 million contract with North Carolina.
Revenues from E filing an online payments, which are included in subscriptions.
We're relatively flat with Q2 of last year at 21 $3 million that amount includes E. Finding revenues of 14 $2 million down one 8% over last year and eat payments revenue of seven $1 million up 5%.
Volumes as a result of closed court operations and some jurisdictions reduced our transaction based E filing revenues by an estimated one $4 million in the quarter.
For the second quarter are annualized non gap total recurring revenue or a R. R was approximately $810 million up 10, 7%.
Non gap <unk> for SaaS arrangements for Q2 was approximately $258 million up 21, 7%.
[noise] transaction based <unk> was approximately $85 million up 3%.
And non gap maintenance they are was approximately $467 million up seven 4%.
Our backlog at the end of the quarter reached a new high of $154 billion up seven 4%.
Is Lynne noted are bookings declined by 31, 6% to approximately 309 million.
Against the very difficult comparison with Q2 of 2019.
Last year second quarter bookings, where record $452 million and included the largest contract in our history. The 85 million SaaS contract for the North Carolina courts, as well as of $20 million contract with the bare County, Texas courts.
Excluding those contracts from last year the decline in bookings was 10, 9%.
However for the trailing 12 months bookings, where approximately one 2 billion up 3%.
Our software subscription bookings in the quarter added nine $2 million in new annual recurring revenue.
As in the first quarter cash flows we're very robust during the second quarter.
Cash flows from operations increased 62, 5% to 39 $8 million and free cash flow more than tripled to 31 and a half million dollars are gap effective tax rate for the quarter was negative as a result of discreet tax benefits related to stock compensation and lower cash taxes contributed to the cash flow growth we ended the.
Quarter with $473 million in cash in divestments and no outstanding debt.
Our guidance for the full year of 2020 is as follows we expect 2020 gap revenues will be between 112 $4 billion and 114 $4 billion and non gap revenues will be between 112 5 billion and 114 5 billion.
We expect 2020 gap diluted EPS will be between $4 71, and $4 91.
And may vary significantly due to the impact of stock incentive awards on the gap effective tax rate.
We expect 2020 non gap diluted EPS will be between $5 30, and $5 50.
For the year estimated pretax non-cash sure based compensation expenses expected to be approximately $79 million.
We expect R&D expense for the year will be between $90 million and $92 million fully diluted chairs for the year are expected to be between 41, and a half million dollars and 42 million chairs.
Gap earnings per share assumes an estimated annual effective tax rate of negative 23%. After discrete tax items includes approximately $82 million of estimated discrete tax benefits related to share based compensation, which may very based on the timing and volume of stock option exercises.
Are estimated non gap annual effective tax rate for 2020, 24%.
We expect our total capital expenditures will be between $34 million and $35 million for the year, including approximately $10 million related to real estate and approximately 6 million.
Of capitalized software development costs.
Total depreciation and amortization is expected to be approximately $81 million, including approximately $54 million a amortization of acquired intangibles.
And I'd like to turn the call back to lend for some additional comments.
Thanks, Brian.
I want to provide an update on how Tyler technologies is approaching the challenge a coven 19, and it's effects on our business and our clients.
First or operational response.
Tyler is 5500 professionals continue to provide a high standard a client service with minimal disruption.
Our primary focus continues to be on ensuring that our employees and their families are safe and healthy.
While supporting clients, who provide essential services to the public.
Since mid March almost all of our staff have work from home with all but the most crucial travel eliminated.
Our clients a face disruption of their operations as they deal with the effects of the pandemic on their communities and in some places civil unrest and focus on providing vital services to their citizens.
Since March we have seen delays and some procurement processes. Although most late stage processes are moving forward.
Implementation appraisal service projects have also encountered delays as clients grapple with balancing social distancing orders with conducting daily operations.
<unk> imposed travel restrictions on our employees, which is all that eliminate our ability to provide services on site and to visit prospective clients for sales calls and demos.
Virtually every tradeshow has been cancelled as well as our Tyler connect user conference scheduled for late April.
We are addressing the challenges imposed by the coven 19 pandemic by adapting the way, we do business, including using web and video conferencing extensively for collaboration conducting sales demos, providing client support and delivering professional services such as training remotely and even executing complex go lives virtually.
With the spread of Coven 19, our clients need for digital connectedness, both within their organizations and directly with the public is rapidly shifting from a vision to an urgent requirement.
And the last few months, we have seen numerous examples of our team members working to help our clients adapt to the current environment and truly amazing ways.
I'd like to highlight a few examples.
Following the cancellation of connect we offered much of a valuable content to all of our clients throw a program called still connected.
A series of live in recorded online sessions, we've delivered more than 320 sessions of content with 17000 views of recorded Webinars.
Enabling us to read even more client personnel then would've attended connect in person.
We accelerated launch of our new virtual court solution, which provides a turnkey platform built on AWS for conducting face to face course face to face court sessions with remote defendants over the web.
<unk> offered it without charged for 90 days in order to help client serve their constituents without interruption.
46 courts are now live using the solution to handle cases remotely will also broadening access to justice for disadvantaged or displaced defendants and 18 additional courts are in the process of Onboarding.
And just yesterday AWS AWS recognized virtual court is the best remote work solution and the AWS 2020 public sector partner Awards.
Developers on our versa Trans team fast track development of a new bus attendants App that works with our school bus routing solutions to provide schools with a tool for limiting bust capacity and managing social distancing as well as facilitating contact tracing.
Our appraisal on tax division worked with clients with active revaluation projects underway, including Delaware County, Pennsylvania, and Franklin County, Ohio to move to remote property valuation hearings.
<unk> also pivoted from infield data collection work teasing remote data to achieve equitable unrepeatable property assessments that support vital property tax revenue streams for our clients.
We successfully completed more than 180 go lives across our product groups during the quarter, most with very few or no Tyler personnel on site.
The port of long Beach, California, the second busiest seaport in the U S became our third public safety client to go live with our new enterprise record solution, along with our full sweet a CAD mobile field reporting and shield forest applications.
With a contract to go live timeline that represented 833% improvement over traditional timelines.
And our data and insights division is working and innovative ways. These are so crowded platform to respond to cope with 19 with data.
Are open data platform was rapidly established as a one stop shop for information and services for citizens in Buffalo, New York during the pandemic.
Tyler also published on this crowd platform or nursing home Cobot tracker.
<unk> dashboard displaying detailed national nursing home data Oncovin 19 at the county and state levels.
I couldn't be prouder of how are 5500 dedicated professionals are supporting each other delivering exceptional client service and displaying the spirit of innovation that has long been a hallmark of Tyler success.
We've already discussed the financial impact of Coven 19 on our second quarter with significant reductions to both revenues and cost.
I'd like to add some comments on our current outlet for the rest of 2020 as well as provide some thoughts on the long term outlook and prospects for Tyler.
We believe the revenue impact on the second quarter was approximately $35 million and we expect that revenue growth for the rest of the year will continue to be significantly impacted.
While we have not seen meaningful cancellations, we continue to see delays and procurement processes and longer sales cycles as public sector entities continue to focus on issues relating to the pandemic and remote work.
Which will delay the timing of license and to a lesser extent subscription revenues.
We have proven that we can deliver the majority of our professional services remotely, but we expect to see lower software an appraisal services revenues of some projects or delayed by client availability or travel restrictions.
Billable travel was impacted significantly in the second quarter as most travel ceased and we know expect to see very little travel and the second half of the year.
In addition, a number of course have clothes or limited operations during the pandemic, which will continue to impact transaction based E filing revenues during this period.
While our variable revenue streams will continue to be affected by the current environment, we anticipate that recurring revenues, which now comprised 75% of our total revenues will continue to be generally unaffected.
Our July one maintenance renewals went into place with normal pricing.
And we do not expect to see any changes in client retention.
Lower expenses have more than offset revenue reductions relative to our pre cove at 19 plan, resulting in margin expansion.
Many of these expense reductions such a sales commissions and health claims are short term in nature.
We do expect that some savings will be sustainable.
For example, I expect that post Covid, we will continue to deliver a significant amount of services remotely improving utilization of our professional services teams and reducing travel expense.
I expect that more of our administrative and sales and marketing activities, including Tradeshows will also be conducted virtually in the future with a reduction in associated expenses.
We also will continue to explore the possibility of greater numbers employees working remotely even after our offices are fully open.
On the product development front, we're continuing all of our strategic initiatives, including product R&D projects and accelerating I moved to the cloud and still expect that Rd expense will grow it more than 11% for the year.
We have not laid off any personnel and do not expect to do so and in fact, we added 46, new heads during the second quarter, mostly in R&D.
Because we remain confident in our longterm outlook.
Uncertainties around the continuously evolving coven 19 pandemic and its impact on our operations and those are our clients.
For example.
Response to the pandemic continues to vary significantly from state to state and even from jurisdiction to jurisdiction within a state.
Thereby making the duration and scope of business restrictions within the public sector difficult to predict.
Although the cares act provided approximately $424 billion, an economic aid the state and local governments.
An additional stemming.
Additional stimulus stimulus packages will likely provide more assistance many of our clients face near term budget pressures that could cause them to defer purchases.
After suspending are guidance last quarter, we have reinstituted annual guidance for 2020 based on our high percentage of occurring revenues and visibility in the pipeline for the second half.
[noise] tempered by ongoing uncertainties around Covid 19.
The midpoint are are non gap revenue guidance implies growth of about 4% for the full year, along with operating margin expansion.
As I said last quarter I remain as confident as ever and Tyler's long term outlook and prospects our company's fundamentals have never been stronger.
And just as we did following the challenges of the dotcom bust 911 in the great recession, we expect to emerge as a stronger company with an improved competitive position.
The pandemic has not changed the underlying fundamentals and long term demand for our software and services.
Tyler exclusively serve the public sector and our clients will not go out of business. The solutions. We provide are essential whether managing revenue that keeps communities operating ensuring public safety to help the most vulnerable or providing transparency and access to government for the residents of jurisdictions we serve.
Our software manages mission critical functions, such as 911 courts property taxes utilities and payroll.
Our clients generally require new solutions to replace aging systems at our end of life, and maybe unreliable or unsupported.
Usually a high priority regardless of the economic environment.
If anything the current crisis is highlighting the unsustainable reliance on outdated technology by much of the public sector.
[noise] technologies and increasingly critical factor in helping government function effectively especially in difficult times.
Long-term opportunities will emerge from this crisis is both Tyler and our clients reexamine historical business practices.
For example work from home postures further highlight the need and benefits of connectivity and cloud services something we have been actively investing in are continuing with our strategic collaborations with AWS.
Clients will continue to appreciate the value of data and being connected with others other departments and jurisdictions as well as citizens.
This is our connected communities vision envision that only Tyler can execute.
Our ability to deliver uninterrupted high quality services and support during these difficult times, only further strengthens or bonds with clients and reinforced tyler's messages, both agility and stability.
As I mentioned earlier Tyler's endure challenging times in the past and emerged stronger than before.
Today, we believe we are even better positioned to whether the economic slowdown.
Recurring revenues made up 75% of our total this quarter.
A competitive position and when rates remains strong and we have significantly expanded are total addressable market through investments in a combination of M&A and R&D.
Our financial position today is also the strongest it's ever been with zero that approximately $530 million in cash in investments and substantial additional liquidity available through our $400 million Undrawn credit facility.
As a result, we were able to continue to invest at a high level and all of our long term strategic initiatives something that many of our competitors may not be able to do.
Our ability to actively invest during the great recession was a key differentiator that strengthened our overall market position when demand inevitably returned.
We will continue to the same through this crisis.
Finally, we achieve an important milestone last month, when Tyler was added to the S&P 500.
It's an honor to be listed among other innovative and highly regarded companies and the S&P 500 index.
This recognition as the result of a lot of hard work by numerous employees over many years.
Today, we have an incredibly talented team of 5500 professionals with unmatched public sector experience and deep domain expertise.
I'm proud to call them, my colleagues and I'm confident of our ability to together realize the opportunities ahead of us.
Now, we'll take questions Daniel.
We will now begin the question and answer session.
So anyway.
Into the question can you. Please press star one on your touch soon.
You're using a speaker phone please pick up your handset and then Preston Snarky and then the number one.
So let's all your questions. Please pencil snarky then the number two meal. Please let me your questions from one and one follow ups and then place yourself back into Q for additional questions.
We will pause momentarily.
Right.
My first question comes from Peter Heckman SDA Davidson. Please go ahead.
Hey, good morning, Thanks for taking my questions on on customer budgets can you talk a little bit more about.
Based on your analysis who's being relatively more effected as it is it states cities counties.
And how that's affecting some of their priorities for IP spending.
Yeah sure.
It's.
It's a good question, what we see as you know about 80% of our businesses at the local level City County about 15% is at the state level in about 5% the federal level.
Going backwards from there.
The federal level, we're not really seeing any meaningful impact right now we may see some delays, but but those budget seem to be intact.
We are seeing we're seeing some impact at the state level.
When you look at our Tyler Federal Division, which is really are micro pack division.
Their business.
Mixed pretty even mix between federal and stay in and what we're seeing there is is when you were seeing some delays and rfps.
They are predominantly overwhelming at the state level not the federal.
At the city and county, it's still it's still a little bit of a mixed bag.
I think I think our clients are still.
<unk> with the new budget. So I think there's still grappling with what type of stimulus funds may be available.
And it's varying actually a little bit across our product suites.
When you look at for example.
Some of the leading indicators.
<unk> and demos and execution of contracts.
When you say things on our Justice Sweet right now our courts and Justice solutions are are public safety solutions.
Those are those are fairly on track right now for this year, we're expecting some pretty good sales. We've had obviously, we talked about Jacksonville, a public safety. We expect some some significant deals there we're seeing a little bit more delays right now I think on the ERP side.
But again, it's a little bit of a mixed bag right now.
Okay and that's helpful.
Have you seen any indication that some of the smaller municipalities are looking at it options of.
And.
Jointly bidding out.
The vendors trying to get a volume discount across a number of smaller municipalities or or is it still just.
You're basically I negotiate with each municipality individually.
Yeah, No we're not we're not really things.
Small jurisdictions band together in that manner. So, it's still kind of business as usual and that front.
Got it okay, I will get back into Q I appreciate it.
The next question comes from correct Mckern of Evercore. Please go ahead.
Yeah, Thanks very much.
I want to follow up on comedy me at the end obviously you all are in a good position.
Relative to 10 years Goin' relative to a lot of your competition. Both in terms of it's just the breath of your portfolio and your and your financial.
Your balance sheet right now what are you is there anything you can do in this kind of environment to help your clients out from like is pricing something that you can help him out with to try to take sure in this kind of environment.
Are you all going to remain maybe more on the offensive round M&A, if something kind of falls into your lap I'm just trying to get a sense on is this an opportunity for you all to take market sure I've just given your position in the market and if there's anything you can really do to accelerate that potentially.
Well I think.
I think the investments we've been making across the board, particularly in cloud but.
Modernizing our products I think we're going to see that's becoming more and more important.
We're not right now doing anything significantly with pricing.
I think you're right.
And a strong position I would argue that today sitting here today, where even a much stronger position than we were three months ago with the last earnings call, even with even with our topline revenues off a little bit I mean are balance sheet is that much more stronger than it was three months ago, probably about another $200 million or so.
Three months further along and all of our R&D initiatives, including Modernising, all our core apps and sort of as I mentioned or comments, we've learned a lot. We're learning a lot of things about ourselves and how we do business and so we know too and we emerge we're going to be even more efficient.
So I think those are all opportunities.
Looking at M&A.
And do you remember really last year, we had talked about we done so many acquisitions and 18 and wrapping in early 19, we'd sort of taken a bit of a deliberate pause I'd say right now we're we're back in the same mode that <unk> historically been.
I've actually we've looked at a handful of deals over the last six eight weeks and anticipate that will continue to look at deals and I think those are some opportunities out there.
Do have a balance sheet that we can we can use.
To our favorite to our competitive advantage both internally with these investments, but also looking at potential M&A deals throughout the rest of the year and into next year, Okay, and I realized visibility is challenging right now, but and not to get to nuanced in this but.
The challenge really just understanding what's at the top of the funnel are how things are progressing surf through the final meaning.
Are the discussions out there is still happening and it's just difficult to see how they're going to serve translated from your opportunities into bookings.
No it's a little bit of nuanced question, but I'm, just kind of like the opportunity for you all seems to be pretty massive I just want to make sure I understand whether or not is that are people not even talking anymore or is it more like hey, we need to do this.
I don't know what I'm going to get the funding actually.
Bye Bye your technology.
Yeah, I'd say I'd say my answer is that it's mostly sort of as is working through the final right now.
I think I would I would sort of remind you back to the comments of last quarter.
If you recall before Cove it hit.
The market was really pretty robust we were off to a really great start which was a sign of what the entire pipeline was and it actually we were on pace to be our internal plan for Q1, which is usually pretty good indicator of how will do for the rest of the year.
Pipeline. It doesn't go away as you know I mean, everything we do is essential that demands there and so you got to kind of think back Okay, where was the market ahead of time that market is going to stay and then also in the interim.
The normal pipeline is going to continue to grow it's just going to be pushed out a little bit and and I do think our clients are still wrestling with that question a little bit there is a little uncertainty there's a little apprehension.
Anecdotally, we're hearing some things from from some of our salespeople clients were saying celanese see what budgets are looking like.
We feel pretty confident the feds are going to provide some more stimulus funding but.
Just hasn't happened yet.
England and climbed within jurisdictions.
<unk> there.
Obviously are maintenance and subscriptions or not being canceled those are still there, but but the moving forward with new projects.
Little politics going on as who's going to get what funds and when and so just a little apprehension and uncertainty right now okay. That's helpful alternative over to others. Thanks for taking my questions.
The next question comes from Matt and Lee.
<unk>. Please go ahead.
Yeah. Thanks, guys. Good morning, appreciate you taking my questions.
I guess digging in a little bit more you talked about ERP being a little bit slower, but some of the other areas that there may be viewed as more critical but need to have some sort of upgraded and technology like courts and justice.
Let me think and then a little bit more on on some of the other areas, whether that's a little bit more on the civic planning side are you seeing.
Any traction in.
Municipalities wanting to get some of those revenue generating capabilities back. It's construction can pick up and people are a little bit more back at work.
And then also on the school systems as they are all planning on what it might look like are taking a dual track process in terms of what the fall might look like.
Are you, having more conversations around potential to make purchases there.
Yeah. That's a good question and I would say right now that.
We're only a couple of it's just a couple of months and so I would take some of my comments as much anecdotal is anything I don't know that there's anything that's established.
A firm trend right now we're just seeing what deals we believe we're going to continue to go forward and clothes and we're certainly seeing that out with some public safety and courts deals.
As we saw back in the great recession.
Which I think we kind of lean on for a little bit of experience.
We talk about how we're replacing end of life, we talk about how this is essential in and in some cases. It's okay. We're exactly are the end on end of life and and Kennedy squeezed one more year out of this financial system or Kennedy squeeze one one more year two more years and they may be in positions sort of doing some of that.
I think your comments astute about civic.
Civic services and permitting licensing planning a couple of the deals I mentioned in my comments, where some of our larger larger deals and the quarter and I think the pipeline in outlook, they're still looks pretty good.
With respect to school, that's certainly an area of some uncertainty right now and a lot of assets right I mean.
A lot of schools haven't made up the decision as to how they're going to operate next year, whether or not they're going to bring kids back or not.
Obviously creates ripple effects not just in our business, but if they're all our kids lives in our employees lives in those around the country.
So I'd say, there's a little bit a little bit of uncertainty still there around schools.
The things that we've done to your comment about civic services in recovery is our data and insights division is really working closely with.
Munich, ERP solution and with our inner Gov Civic services solution and coming out with coming out with some products. They come out this quarter. We've got a few few clients.
Who are piloting them right now I'm on the ERP side, we call them executive insights and on the <unk> side Civic services were kind of community development insights and it's.
This is data and insights into Russia crowd of platform. It's it's built on top of munis for the executive insights, providing real time financial physical health metrics like budgets cash balances HR metrics.
Payroll revenue versus budget certain areas property property revenues versus budget and and certainly on the community development insights, it's helping them sort of understand the economic health and recovery of what's going on as it's it's pulling up real time data on permits issued permit applications inspections the value permitted construction that's going on so.
I think I'm pretty valuable tools.
I said, we've got four early adopters right now the a lot of positive feedback and I think once we sort of get get those solidified you're going to see us rule role that out and that's just an example of us leveraging somebody investments, we made before and data and insights where it where I think there's a big future here and applying it right now to specific needs of our clients.
Okay. That's very helpful and then following up on.
Some of the free cash flow strength in particular around.
Oh, I can travel and maybe brought her to any type of expenses.
And even commissions, but are you guys, taking a look at what.
Where you're at in terms of on plan or meeting quotas for salespeople are you looking to reset those at all to to bring down those numbers.
Try to hit a certain percentage on quota.
Should we expect maybe a little bit more of a pay out in the back half if bookings can pick up a little bit.
Just curious overall kind of what the planning is around that keep your salespeople happy but understanding that maybe original numbers might not get hit.
Yeah.
A fair question I think it abroad level, when you're looking at expenses and our operating margins for the rest of the year I mean, we kind of outline that on our guidance and we're expecting a lot of the things that are that we've seen over the last few months to continue on.
We're evaluating.
And we've done some things with our salespeople and we will continue to evaluate that.
It's interesting when we had this conversation three months ago, I think everybody, including US thought the world would probably be a little bit different place right. Now I think that's one reason, we pulled down or guidance. There was so much uncertainty and.
Around travel and things like that and and so is we're starting to see that this is going to continue on a little bit longer than probably even my expectation certainly to the degree a few months ago and we're going to continue to look at that stuff internally.
Great. Thanks for taking my questions.
The next question comes from Alex Lincoln RBC capital market. Please go ahead.
Yes, Hi, Hi, Brian Scott.
Three hours today.
I guess first question just the level put the guide last quarter. The message was that you were confident in mid single-digit growth reinstated guy guys. Now, it's 4%, which is a little bit below where we were modeling I guess with that in mind, when you're kind of hit on some of these things, but just to kind of be clear what are the things that you are more confident in relative to 90 days ago and.
What are the areas where you're at west.
Relative 90 days ago.
Well I'll I'll start Brian and why don't why don't you jump in I think 90 days ago.
Generally under the assumption that.
That look local jurisdictions I mean, just just in general your daily lives, but also what's going on with our clients that really as we got into the third quarter, we'd start seeing a little bit more returned to normal.
That people would be traveling are pro services team would be onsite delivering services.
Appraisal services would be up ramping up.
That would just starting to seem more sales more in person sales demos.
And I think we just sort of.
So we missed the boat, but it's things things of continue to evolve.
So I think that's an area that I think we sort of.
Didn't get a good feel for.
I'm not sure three months ago, we had a really good feel for some of the the operating expense savings that we would have for the rest of the year.
It's certainly been a learning experience.
One of the things we talk about as a management team constantly is.
Successful companies do as they're constantly looking internally, they're constantly living in ways to improve constantly striving to do better in and what we've been able to do over the last few months is really take a hard look at some of our historical business practices, whether I sat on site delivery of services, whether it's internal Tyler travel whether it's the number of trade shows we do as well the way we position some of our products.
So we talked about virtual court. So this as a learning experience. It's a good one and I think I think it's gotta be something that's going to help us emerge on the back in Brian.
Yeah, I think so I think if you look just that the change.
From basically our soft guidance of mid single digit growth.
The biggest changes to what we've actually implemented in the current guidance is.
Around on the revenue side around billable travel that we did expect we'd see more of that come back.
As we got into the third quarter into the fourth quarter and now we've.
Eliminated most of that from the plan for for the remainder of the year. So the midpoint of our guidance now is 4% growth.
And so it's still kind of in that mid single digits, but that's the biggest.
Downside now those revenues are basically no margin revenues so.
The effective positive on our margins.
Probably the things were more more confident in as well.
Would be somewhere around the pipeline for the second half of the year, obviously, we're three months closer to that the deal of that.
Our in our plans are pretty far along in the pipeline, we have better visibility into them better information around that and is Lynne mentioned the.
Expense savings, we now with a quarter full quarter behind us in this environment we have.
A better feel for.
Where those.
Savings are happening and.
The volume of those.
That makes sense and then just a follow up.
When looking at kind of your staff <unk>, specifically in this quarter and actually look pretty strong to me.
8% sequentially, 22% year on year not that different than this time last year. So I guess with that in mind contrasting your license revenues down, 18%, where you're a little surprise strengthening the quarter and then like with that and mine is kobe potentially accelerating the ship this athodyd greater eight and even your strategy.
Kind of with focus on pricing and sales incentives to kind of been sent that shift.
Is that does that happening.
Yeah.
I do think that Covid.
Is.
Partially responsible for accelerating.
Clients desire to shift at the cloud notwithstanding that are larger deals this quarter were mostly on the license side, but.
We did see some license deals.
And some SaaS deals, but more license deals flight out of the quarter, which resulted in that that bigger decline in our license revenues.
Yes.
But the ER growth this quarter and the revenue side a lot of that represents deals we signed in Pryor quarters that are now.
Coming on line for example, we've started recognizing revenues even in the North Carolina.
E warrants contract resigned last quarter, we're continuing to ramp up with the North Carolina Court system and expand revenues there.
So those prior bookings.
Feed into.
The actual revenue recognition growth overtime, and so we're benefiting from that.
But we do think that this environment.
Will continue to accelerate clients desired.
To be in Mccloud.
Which certainly long term is a good thing and consistent with with our desire to move more of our business to the cloud.
And where a lot of our investments are coming in today.
Okay. Thank you.
The next question comes from Rob Oliver a bird. Please go ahead.
Great. Thank you guys follow up to that last question.
<unk>.
Since you took over you've been kind of moving I think your sales team more towards.
Cloud subscription focus and that's bearing fruit and I guess when you look back at previous downturns.
Customers were faced with.
Oh really expensive perpetual license renewal and I'm just wondering I know you said you're prepared remarks that subscription was also impacted this quarter and that makes sense, but wondering to what extent as you guys work with your customers.
You are leading more would that subscription side as it seems like it might be much more palatable entry point for for customers looking to do to do things with you guys and then I had a follow up.
Yeah, I think that's right.
Rob I think.
Is there a budget pressures.
In public sector people are going to be looked into things that are more and more efficient and investing in large infrastructure and large ice tea shops. I think is is not going to be the way, it's going to go and we have been moving more what I would call right now and to what we call. It cloud preferred approach historically was cloud agnostic.
And so we're we're doing things with our salespeople, we're trying to get out that message of of Roy trying to get the message of security of to cloud and I think you are starting to see that in our new sales I think also what's interesting is.
We talk about it I talked about Illinois prepared remarks, but is is the SaaS flips that are going on within Tyler those are continuing to gain traction and I'd say historically, if you'd looked back.
A few years ago, most of the SaaS flips, we're really occurring on the ERP side.
Really beginning last year, we started putting more internal focus for example in our appraisal and tax division on SaaS flip we started to get the message out to our customers that the cloud is going to be the future and that message as being well received.
We're also starting to see it really unfortunate justice side, it's a focus of there's this year.
Done some things really looked at their pricing as you know they've got some very small clients up to some very large statewide clients and.
They've done some things with some tiered pricing and stuff. So they can start rolling that out and it's showing in the numbers I think we talked about 42 sash flipped for some of the more significant SaaS flips we had this year.
Praise Lynn tax it was Franklin County, Ohio is to cab, Georgia.
<unk> It was noises counting, Texas, which is corpus Christi and in Alameda County in California, which is our caseload pro solution. So focused not only just on new sales, but also going back into our installed base with SaaS flips is something that's continuing to gain traction with us and it's going to be a focus in the near future.
It's really helpful. Thank you and I just had one follow up on the new World public safety side.
Nice wins this quarter and I know when rates have continued to approve for you guys. There and it may be early to tell I I know, it's sort of Q for heavy.
And anything.
Do you guys are hearing from your customers relative to budgets and I guess I'm, particularly interested in.
What.
Municipalities or thinking relative to their ability to spend what midst.
Current protests and and the environment that we're in considering please funding and things like that thanks, guys very much.
Yeah sure I think.
There's some really we've talked about a lot over the last several last coupla years, I mean, we've made a lot of investments in public safety.
They are really starting to pay off.
Those investments we're done to modernize the app's, but really to expand the Tam in Jacksonville contract is really a strategic win for them as I mentioned, it's a full sweet, including a records field reporting soft code Brasso's <unk>.
That when validates not only our investments we've been making in public safety and moving up market.
But it also validates the acquisitions that we've been doing over the last several years is a note.
As a real those off soft code Brasow seem Doctor go out on those are all recent acquisitions and things that we've done to enhance our offerings and and you never quite sure.
What is the tipping point in the deal, but certainly those helped round out a deal and help us move upstream.
So those are continuing to pay off as you look at budgets and public safety.
As I mentioned earlier.
That was a very large contract for us we've got some significant opportunities that.
That we think are still going to close this year.
There's a lot of attention right now on quote defunding, the police and and what does that mean and what does not mean in.
Concepts kind of been around for a long time, probably going back to the.
Civil rights days of the <unk> and I think.
Not quite clear what that means for some is it are you talking about defunding are you talking about reforming.
Really talked about it some of the tier one cities, but at the end of the day public safety is going to be funded public safety is very important.
I'm not sure that across the nation. Despite what you see on television that there's some overwhelming push that there's going to be a defunding a police departments across the country I think if anything it probably puts a greater emphasis on technology. It puts a greater emphasis on some of the investments that we've been making things like mobility.
And things I think a greater emphasis on data and insights and transparency and the things we're doing with <unk> integrating with.
Our public safety solution in so.
At the end of the day I, just I think that public safety is funding is going to be there is what we see in near term in the pipeline is there and and I think we're in a great position given all the investments we've been making the last couple of years.
Great. Thanks, Thanks, guys.
The next question comes from Scott Burger a medium that company. Please go ahead.
Hi, everyone. Congrats on your good corner couple.
Quick quick ones for me.
First of all Brian next mentioned and operating margins new kind of highlighted.
The reasons for them, obviously and the quarter must travel et cetera.
Sales commissions, but operating margins compressed a little bit over the last two to three years, mainly as you've been best more on Friday, you, obviously, maybe a couple of acquisitions I had some lower margin structures, but is this new level.
Over the operating margins and the second quarter is this kind of a sustainable level do you think going forward with some of the changes you inland highlighted too maybe service delivery et cetera, or do you think that operating margins could maybe rubert back to where they've been over the last 12 to 18 months as when it comes with us.
Think it would probably somewhere in between.
Some of these things that are affecting our margins are barely one time or temporary situations. For example are lower health claims costs.
Around because people haven't been having elective procedures are going in for their physicals.
And that'll come back.
Some of the.
Some of the trade shows likely will come back but in the long term I think we're learning we can do virtual trade shows and.
And learning something about the value of some of those things.
Done in the past and that some of them won't.
Company.
<unk>.
Just had.
Very effective.
Quarterly management meeting virtually and we probably won't go back to having four of those in person afterwards.
And you multiply those across the company I think a lot of those.
We'll have permanent positive impacts on margins and efficiency and and there will be some of those that will come back.
Think.
The biggest thing, it's probably around how we deliver services.
And.
That's something we've talked about <unk>.
<unk> is doing that much more effectively we have little to no margin on a lot of our professional services, we do them too.
Control the quality of our engagements and and have successful implementations that we can control, but don't make much money on that and so.
This is certainly proven that we can do that effectively a large portion of that remotely and that our clients.
It might have previously resisted that are willing to accept that and so I think that will be one of the permanent changes so.
I think there are some long term margin.
Improvements that will come out of this and that that's clearly a positive for us.
So so net I do expect our margins will be better.
I think there's some reversion.
Some things come back.
We do.
Have an office <unk> said, we've really can't continue with our R&D. So.
A little bit of delays in hiring some people and.
But generally we added quite a few R&D.
This quarter and generally where we're going full full steam ahead with our existing investment plans and our R&D for the full year will be very close to what our plan was so.
Margin expansion is even in the light of of.
What was sort of our original plan for R&D.
Got it if I can amplify on that too I agree with Brian about remote delivery of services and that's something that we.
Clients are becoming more accepted <unk> of that but.
It's not like next year or two years from now will be 100% virtual delivery of services. That's just not that's probably not feasible, we'll do some things to help that it's good to see clients accepting it in the fact that we're being successful with our go lives is very important we may do some thing pricing.
Either <unk> versus remote that will help and and then stepping back I mean, we talks that we talked earlier about is a tough quarter for bookings because of last year.
Setting up a tough margin year for next year and coming into the ER expectation you're right. We had been investing heavily for a coupla years and our expectation originally coming year was little more flat flattish margins from the year before and with margin pick up and start coming in 2021. So I wouldn't expect really going back to that baseline that we will have to pick up and for.
A little bit more than we might have expected because if somebody sustainable savings.
But still a little too over to tell exactly what that is.
Great Super helpful than a quick follow up on.
When you prior comment on.
Customers that are moving towards your subscription solutions outside of your ERP customers, whether it's public safety quote suggested et cetera.
Those customers, making the initial purchase decision still on.
On a perpetual basis, and you're seeing more of those conversions to the crowd or are you actually seeing customers kind of net new upfronts Lucky clouds can we get go.
We're saying we're seeing net new.
It's been it's been taking a course just space, we've we've been seeing more in the cloud.
Seeing it more in AT&T side.
Sandwich with.
<unk> and things like that but we're also really disappointed my comment was to focus was.
Outline our focus on internally on on flips across a broader spectrum of our products.
So it's just part of our overall long term initiative of moving the cloud.
It's starting to get some traction.
Okay. Thanks for taking my questions.
The next question comes from Tommy Sadler S. M. S. I'm, sorry C. J S take care of it. Please go ahead.
Hi, Good morning, just Brian for you would probably the best for you is on the guidance for the year just some additional commentary on how to think about the split between two three Q for just to help us.
A little bit better thank you.
Yeah and on the.
The flip.
Certainly the timing.
Had some uncertainty and it is it always does.
Bookings can be lumpy, particularly on the license side.
We typically have a bigger license quarter in Q for around public safety.
So I would expect that.
We would see sequential revenue growth in.
Q3 Q for.
And.
I think.
Growth in each of those quarters is probably fairly consistent after.
The number you need to get to to get to that.
Over the annual guidance numbers, probably pretty consistent between Q3 Q for.
In terms of a growth rate.
And.
The earnings we would expect to grow sequentially.
Q3, and then again in Q for as well so sequential revenue growth sequential.
Earnings growth.
Exactly where that's footfalls out as.
Is a little hard to telling me I think the guidance implies.
Something around 5% growth for the second half of the year.
And.
Likely be fairly consistent in both Q3 Q for.
Got it that's helpful. Thank you and then just looking at the pipeline.
Let's talk about what about the pipeline so far but if you are seeing new rfps coming to the pipeline what areas of those coming in and are you seeing.
Hmm Rfps that it may be leaving you probably development ideas B R. A N D T.
Well.
There are still some new rfps, but I would say that's just the volume is across is not as robust in certain areas as others as I mentioned earlier.
And.
This is really sort of looking out over the next six nine months and like I said I mentioned earlier in my comments.
We're seeing things that the teller federal level it.
Just a solutions.
Leading indicators rfps are holding fairly Saturday same with our data inside solution.
They're off a little bit right now and some of our ERP solutions.
But again to my comments before.
This is all timing.
These these decisions don't go away they just get delayed.
Great. Thank you very much luck.
The next question comes from Jonathan Hill.
<unk> company please.
Hi, Good morning, just wanted to start out with the virtual courts opportunity opportunity that you talked about can you guys, maybe a sense of what that could look like I know you're offering it for free in the beginning but you can just be and add on module like can you talk a little bit about pricing are uplift.
And you kind of build up that capability.
Sure It is.
Once it gets out of the.
Free trial basis, it is and add on it's a cloud offering.
Hosted AWS so.
Subscription add on.
To the existing base. This is primarily today with our municipal courts customers, which.
R R.
Complex type of course traffic court's those sorts of things.
Many of them with smaller customers.
So.
The.
Individual uplift is.
Is sort of moderate I'd say.
Compared to their existing recurring revenues with us.
But it certainly something we think is very broad applicability across R. R. Municipal Court base and also we're looking at.
Expanding a similar offering into our.
Larger Odyssey customer base so.
Don't really.
I think not really a position to quantify the opportunity but it's.
It's a meaningful uplift from the existing recurring revenues.
With those customers.
Got it and then in terms of your ability to sell add on capabilities, an incremental offerings versus I guess, the larger system I mean, clearly you're seeing delays and the bigger procurement, but is there an opportunity to maples, maybe circle back to existing customers to upsell additional modules.
As you think about.
I guess pivoting in the current environment.
Yeah, I think it's.
Good point, Jonathan and answer a short answer is yes.
And.
We're actually seeing that are inside sales across the board is is holding fairly steady right now.
So I do think that's an opportunity.
Not just in this environment, but I actually think it's one of our larger opportunities.
As a company as we continue to move forward.
Great. Thank you.
Next question comes with cheese wholesome north.
Okay Sweetheart. Please go ahead.
Good morning, guys question for you on the guidance and how important is the I guess the federal relief if it comes through and.
What kind of impact would have on your guidance. If we do do not get federal guidance. The rest of the year I'm sorry, that's not our guys with some really from the government.
Yeah, I wouldn't expect it to have a meaningful impact for the rest of this year.
I think it will start having.
More of an impact as we get into 2021, and particularly is this budget cycle.
Sort of.
Run through this budget cycle.
It's one thing to for the for the Feds to go ahead and announced some significant stimulus.
Seeing that already with some of the things they've done in response to Cove and it's another thing for for the for the jurisdictions to get their applications and get the funding and all of that stuff. So.
It's it's an important pace I think it helps with some of their just general.
Uncertainty right now and anxiety, but I wouldn't expect it to have a meaningful impact in 2020, most deals that are going to.
Clothes in the next two quarters are pretty far along in the pipeline worked through linked the sales processes already and those generally are already funded and an existing budget.
And also generally are are very high.
Priorities in terms of the needs.
We expect to be largely unaffected.
That we see delays around those it's less around funding and more around just the.
Logistics and and the disruption that the clients are having that has slowed down some of the processes and might push them out of this quarter into next quarter.
More of a short term kinds of delays.
So it's helpful.
I think of it almost your business like E filings and appraisals is there an opportunity here for pent up demand and once hopefully we get to a code that issue you know by the end of the year. Soon after is there an opportunity for I guess more <unk> transactions to come through revenue to come through as that kind of demand as work through or is it is pretty much.
More just delay in Gibson keeps again being kicked down the road further.
No I think there's.
Well I don't know that we can say for certainty, but but we believe that there will be an opportunity potentially for a bump any filing.
He filing is obviously challenge right now.
Even though some courts have opened.
A significant percentage of current filings current sale filings are really that related there landlord eviction related and right now there's kind of theirs moratoriums on that even even courts are open.
Some of those cases, they won't go away. So we do think there's there's a possibility for pent up demand, but I don't know that we've got real certainty around that right now.
75% or are you filing is on a fixed fee basis and 25% is transactional.
And variables so.
A minority of our business.
On the voting side is affected today.
But some of those places where the courts are shut down we've seen seen that the.
Significant.
Great. Thank you.
At this time there appears to be near more question I'll turn the call back over to you Mister more for clothing remarked.
Thanks, Danielle and thanks, everyone for joining us today.
We certainly hope you all stay safe and healthy and if you have any further questions. Please feel free to contact Brian Miller or myself.
Thanks.
Okay.
Has now concluded. Please you may know disconnect.