Q3 2020 Tyler Technologies Inc Earnings Call
Hello, and welcome to today's Tyler Technologies third quarter 2020 conference call.
Your host for today's call is Glyndebourne, President and CEO of Tyler technologies.
It's time, all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions will follow at that time.
As a reminder, this conference is being recorded as of today November 15 2020.
I would now like to turn the conference over to Mr. Moore. Please go ahead Sir.
Thank you, Eric and welcome to our third 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 I'll have some preliminary comments and Brian will review the details of our third quarter results.
Then I'll have some additional comments and we'll take questions right. Thanks.
Thanks Lynn during.
During the course of this conference call management May make statements that provide information other than historical information and may include projections concerning the companys 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.
They are subject to certain risks and uncertainties, which could cause the actual results to differ materially from these projections.
We refer you to our form K and other S. T SEC filings for more information on those risks please.
Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise Lynn.
Thanks, Brian.
We were pleased with our third quarter results as we continued to execute at a high level, particularly in light of the continuing impact of the COVID-19 pandemic.
After we experienced our first year over year decline in quarterly revenues in almost a decade, we returned to revenue growth this quarter driven by strength in recurring revenue.
We have not experienced any meaningful cancellations, but longer sales cycles and delays in projects as clients deal with the effects of the pandemic.
Along with the near elimination of billable travel led to declines in software license professional services and appraisal service revenues.
However, GAAP subscription revenues grew a robust 18.6%.
Non-GAAP subscription revenues grew 18%.
We continue to experience significant savings in operating expenses in the third quarter.
In part driven by the successful deployment of more efficient service delivery and operating models.
As a result operating margins expanded significantly with our non-GAAP operating margin up 300 basis points to 28.6%.
And our adjusted EBITDA was a new quarterly record at $89 million.
Cash flow has also been very robust throughout the year and both cash from operations and free cash flow reached new quarterly highs in the third quarter.
He was also a strong quarter for bookings, which rose almost 13%.
Well the number of new deals was down.
Average deal size and total new contract value both were up compared to last year.
It was a strong quarter for new business for our Justice solutions as we close some large contracts after extended sales processes.
Our largest deal in the quarter was a license arrangement with the Washington State courts have limited jurisdiction.
Valued at approximately $15 million for Odyssey Court case management, and caseload pro probation solutions, including E filing.
With the city of tie guard, Oregon, and the portrait excuse me in the Portland Metropolitan area for our munis, ERP and enter Gov Civic services solutions.
We also sign notable SaaS deals for our munis ERP solution with the city of Fairfield, California, Champaign County, Illinois, The Virginia Railway Express the city of Thomasville, Georgia, and a license arrangement with city of Christian Berg, Virginia.
Other significant SaaS deals for our <unk> Civic services solution, where the cities of Palm Beach Gardens, Florida in Yonkers, New York.
Finally, he was also a strong quarter for new business in our federal space with several new contracts, most notably with the D. C Department of consumer regulatory affairs.
The countertrade products and the fish and Wildlife service both departments within the Department of Justice and the Department of Health and human services.
As we reported in a form 8-K filed on September 29th.
We discovered early on September 23rd that an unauthorized third party intruder had disrupted access to some of our internal phone and it systems.
As soon as we discovered this we shut down points of access to external systems out of out of an abundance of caution.
We immediately activated our internal instant incident response plan, which included taking impacted systems offline to further contain the spread.
We confirm that the malicious software the intruder used was ransomware.
We are following strict protocols laid out by industry standard incident response directives.
Because of this we are being careful not to share certain details around the incident until the investigation is finished.
However, there is some information I can share with you today.
Given where we're at in this stage of our investigation and the recovery process.
We will not be addressing the incident further on today's call and we will not take questions on the incident itself or our investigation.
I would however, like to express my gratitude to all Tyler employees, who once again displayed the heart of Tyler and their response and handling of the security incident, especially our internal it teams that worked around the clock with an aggressive in coordinated response to recover and remediate our internal systems.
<unk>.
As with our response to the COVID-19 pandemic Tyler demonstrated the resiliency that comes from strong and well design business processes and corporate governance practices.
Now I'd like for Brian to provide more detail in the results for the quarter.
Thanks Lynn yes.
Yesterday, Tyler technologies reported it's results for the third quarter ended September 30th 2020.
Our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry.
A reconciliation of gap to non-GAAP measures as 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 and recurring revenues.
After 2.5% over last year, and the payments revenues of $8.1 million up 23.6%.
Transaction based revenues were negatively impacted by reduced operations at some clients as a result of the pandemic.
For the third quarter, our annualized non-GAAP total recurring revenue or a our AR was approximately $830 million up 11%.
Non-GAAP are for SaaS arrangements for Q3 was approximately $265 million up 21.6%.
Transaction based A.R.R. was approximately $93 million up 9% and non-GAAP maintenance ARR was approximately $472 million up 6.2%.
Our backlog at the end of the quarter reached a new high of $1.55 billion up 9.2%.
As Lynn noted our bookings in the quarter were strong at $292 million up 12.9%.
For the trailing 12 months bookings were approximately $1.3 billion up 5.4% against a tough comparison that includes the two large north Carolina courts deals totaling approximately $105 million in the prior trailing 12 months.
Our software subscription bookings in the third quarter added $9.9 million in new annual recurring revenue.
Cash flow from operations increased 30.5% to $169.8 million and free cash flow grew 34.8% to $165.4 million, both new quarterly highs.
In fact year to date, our free cash flow has already surpassed our best full year free cash flow by more than 9%.
We ended the quarter with approximately $650 million in cash and investments and no outstanding debt.
Our guidance for the full year of 2020 is as follows we expect 2020, GAAP revenues will be between $1.117 billion and $1.1 billion to $9 billion and non-GAAP revenues will be between $1.118 billion and 1.130 billion.
Dollars.
We expect 2020, GAAP diluted EPS will be between $4.53 and $4.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate weeks.
We expect 2020, non-GAAP diluted EPS will be between $5.48 and $5.58.
For the year estimated pretax noncash share based compensation expenses.
Adjusted to be approximately $77 million.
We expect R&D expense for the year will be between 88 and $90 million fully diluted shares for the year are expected to be between 41, and a half and 42 million shares.
GAAP earnings per share assumes an estimated annual effective tax rate of negative 12%. After discrete tax items and includes approximately $65 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 2020 is 24%.
We expect our total capital expenditures will be between 30 and $31 million for the year, including approximately $10 million related to real estate and approximately $6 million of capitalized software development costs totaled.
Total depreciation and amortization is expected to be approximately $81 million, including approximately $54 million of amortization of acquired intangibles.
Now I'd like to turn the call back to Lynn for some additional comments.
Thanks, Brian.
With the challenges our clients face as a result of the spread of COVID-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.
We are gratified by the accolades Tyler is receiving for our innovations to help our clients address the challenges of the current environment.
During the third quarter, our virtual court solution, which has been selected by approximately 60 courts nationwide reach.
Received the AAMC best remote work solution award in conjunction with its use in the city of Alvin Texas.
We also won the coolest overall technology Innovation Award from School Technology News for our New bus attendance application, which works with Tyler's bus routing solutions to provide schools a tool for limiting bus capacity contact tracing and social distancing on the school bus.
[music].
On the product development front, we're continuing all of our strategic initiatives, including product R&D projects and accelerating our move to the cloud and still expect that R&D expense will grow at more than 9% for the year.
While some of our competitors are laying off staff, we continue to add new employees to support long term growth opportunities and we added 27 net new hedge during the third quarter, mostly in product development.
We also continue to adapt our operations, providing client support and delivering professional services such as training remotely and executing complex go lives virtually improving utilization and eliminating most travel costs.
Many administrative and sales and marketing activities, including sales demos trade shows and user group meetings are also being conducted virtually with reductions and associated expenses.
We continue to explore the possibility of greater numbers of employees working remotely even after our offices fully reopened.
Lower expenses have more than offset revenue reductions relative to our pre covert plan, resulting in margin expansion.
Some of these expense reductions such as sales commissions and health claims are short term in nature.
But we do expect that some savings will be sustainable.
As a result, we expect to continue to see year over year margin expansion in the fourth quarter.
We expect that revenue growth for the fourth quarter will continue to be significantly impacted by the pandemic and to a much lesser extent the security incident.
Although our variable revenue streams will continue to be affected by the current environment, we anticipate that recurring revenues, which comprise more than 70% of our total revenues will continue to to be relatively unaffected.
While we remain confident in our long term outlook there are uncertainties around the continuously evolving COVID-19 pandemic and its impact on our operations and those of our clients.
For example.
Government response of the pandemic continued 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.
Many public sector entities are facing near term budget pressures that could cause them to delay spending in the coming year.
The COVID-19 pandemic has not changed our view of the underlying fundamentals and long term demand for our software.
If anything the current crisis is highlighting the unsustainable reliance on outdated technology by much of the public sector.
Technology is an increasingly critical factor in helping government function effectively especially in difficult times.
While it is too soon to fully assess the impact of the elections, we expect that additional federal stimulus will be forthcoming to provide further economic aid to state and local governments.
We are confident that new long term opportunities will emerge from this crisis as both Tyler and our clients re examine historical business practices.
Tyler is better positioned than our competitors to provide innovative solutions to help our clients meet new challenges.
Our balance sheet is stronger than ever with 650 million in cash and investments and no debt.
We plan to continue to invest at a high level in R&D and actively pursue M&A opportunities to broaden our total addressable market and build on our strong competitive position.
I continue to be extremely proud and inspired by how the entire Tyler team has risen to face the challenges of this year head on supporting our clients as well as each other.
We are confident in the fundamental strengths of the public sector market and our ability to grow and invest in strategic initiatives in a difficult environment.
And we look forward to executing our long term strategies until conditions allow us to return to higher growth market.
Now we'll take questions.
Thank you Sir we will now begin the question and answer session.
The enter the question queue you May Press Star then one on your Touchtone phone if.
If you are using a speakerphone. Please pick up your handset and press the star key and the number one.
So what's driving your question press the Star key and then number two.
Please limit your question to one and one follow up you may place yourself back in the question queue for additional questions by pressing star and then once we will pause one moment to assemble our roster.
And your first question today will come from Peter Heckmann with D.A. Davidson. Please proceed with your question.
Good morning, gentlemen, thanks for taking the questions as regards additional federal government stimulus that there were some.
There is a bill floated earlier in the year just focused on.
Technology modernization can you talk about the different types of programs that it might be pending and where you expect.
Both broad stimulus funds to help municipal budgets, but as well.
Any directed programs that you're watching here that you think could be relatively near term.
Yes sure Pete.
And you're right I think generally speaking there's a there's an expectation that there's going to be another round of stimulus.
I think both political parties agree on that.
I think for certain that the the last month or so maybe two months, it's become a little bit more of a politicized issue that I think we'll get behind US now that the election is behind us in fact, I read an article this morning more.
More Mitch Mcconnell in the Senate said that getting set a stimulus passed by the end of the year was as new top priority as well as any many made a comment specifically as well as state and local government stimulus. So I think thats lets coming I think thats the expectation.
It's hard to know exactly where things going to shake out, but I do think it can become a priority.
Following this election once things settle out a little bit more I think I talked about last time at the last call that.
Prior fed chairman Bernanke key.
I made a comment coming out of the great recession that one of the things that they I think sort of missed the boat on was it not devote enough money to state and local governments when they when they were doing their stimulus then I think thats a significant priority.
We've also talked about the fed has specific bond buying programs four counties and cities and I think thats going to continue so.
The expectation is there I think the expectations for our clients I think theres as part of the hesitancy is going on right now but I.
I see that coming on the horizon.
I'd add one other thing I think what you were alluding to there is a there does seem to be bipartisan efforts to provide more funding specifically for state local government upgrades.
There was an act the state and local it modernization and cyber Security Act that was proposed back in August.
And that act would provide $28 billion over the next five years, specifically to upgrade government it systems.
So its of the upgrading of systems is certainly something that.
The federal government recognizes is important.
Got it got it that's helpful. And then just in terms of where where budgets are right now typically the fourth quarter is strong for public safety public safety seems didnt have a fair amount of momentum and.
And encouraging to hear you.
Bigger solution sets and bigger deal sizes and public safety, but.
Do you think based on where we are you are on track with with public safety bookings for the fourth quarter or are you already I guess, what's your level of comfort that youll hit your targets there on the public safety side.
Yes, I think Thats a good question and the short answer is yes, and what we've seen generally is we've seen a little bit of difference in terms of different market segments, but public safety. The demand is still there we.
We still expect some some significant deals to still come through in the fourth quarter I think one of the things that's encouraging about public safety is as Weve.
As we continue to invest in and we've added more ports portfolio of products to their to their bag is that.
Historically, the fourth quarter was was one that was I think a little more skewed towards their license deals and it still is but but as that business grows and as it gains traction we are starting to sort of level that out a bit on we've had as we noted we had for the first time ever to license deals over $1 million in Q3.
Which is pretty incredible in fact now I think it's now three of the last four quarters. We've had license deals in excess of a million and a half dollars. So the momentum is there in public safety. It's funny I think 10 days from now will be our five year anniversary of acquiring that and.
I think it's a testament to the work that those people put in and the investments we put in and we talk about how it takes a little bit of time with some of these investments these acquisitions and and they are really starting to hit their stride, they're doing they're doing a great job.
Good good to hear I'll get back in the queue. Thank you.
Our next question comes from Matt Van delay, Matt Vanvliet BTI Ji. Please proceed with your question.
Hi, Thanks for taking the question.
Really appreciate it I guess.
On on the front of the the services disruption from the rents more attack maybe another question directly from that but.
As how it impacted you during the quarter, maybe talked about inability or I guess, a disruption in delivering some some of your projects was that a reallocation of resources or were you forced to kind of dig a little deeper with with some of those customers and assess.
Sort of what happened in sort of give them.
Some additional information to make sure they were comfortable moving forward and then on the same profit sort of how that might have impacted overall pipeline.
Processes going on.
Yes so.
And your I don't want to go into too much more detail, but on the short answer is as we as we talked about.
The incident was really all about our internal systems that was about our phone systems, our website and things of that nature. However out of abundance of caution we will as I mentioned in my comments. What we did was we immediately shut down all external points of entry.
So that that disrupted things like being able to conduct and when we do a lot of services.
Support was disrupted we weren't able to send send emails with attachments for a while and really that again that was yes out of abundance of caution so.
It was really short term.
And to your second question as it relates to pipeline. It has not had any impact really in our pipeline.
You know there was there was obviously a little short term disruption, but we haven't seen anything meaningful in terms of future impact of sales or anything like that.
And then looking at your overall sort of the K through 12 schools.
Customer base and potential customers out there how much of a disruption to their overall typical operational processes.
The the limited maybe it's in person schooling or government hybrid situations out there are either changing that narrative or accelerating some of those deals that they now feel like they need to have more more technology in place more ability to work remotely and have more digital services in place.
Yes, I would say.
I think two things as it relates to schools in particular, I'd say, that's one area right now where budget impacts is sort of constraint.
Some deals were moving forward is pushing some things out at the same time, you're right. It's absolutely highlighting and this goes beyond schools, it's highlighting the need for technology.
I think when I look at the business overall as a public sector.
I think the shift that we're starting to see that part of its due to covance, but just didn't knew more online.
Mobile public access.
Things that are interaction with.
The parents with the schools, but even more just citizens engaging with with their communities. That's something that's going to continue and I think that was the future anyway.
But I think covance has really sort of accelerated that.
So I and and I think what's what's encouraging about that to me Matt is that Tyler.
Tyler really is out in the forefront on this we're the best positioned for this is this brings in our whole connected communities visions and things that we're already doing and so.
It really puts us in a great position when things when we sort of get on the other side of this.
Alright, thank you.
Our next question comes from Charlie Strauzer of CJS Securities. Please proceed with your question.
Hi, Good morning can you talk a little bit maybe just give it.
Early view of next year, I know usually give more guidance on the next call, but just given that use you saw a return to growth in Q3.
Maybe just some maybe some early thoughts on next year.
Yes, sure Charlie and.
I guess I'd start off by saying you know when we talk about on the last call as well.
We don't see any real meaningful change in our pipeline, we know the demand for our services don't go away.
We remember how we started the year in the first quarter before it hit we were off to a really great start until we sort of expect that to continue at the same time.
We also talked about where we are in the middle of the June 30 July one budget cycles right now so.
So my expectation is that there will be some hangover I will still be some delays in some deals still some clients that are reluctant to open up and do some remote delivery services.
You know, we're still waiting to see the court's opening backup source or transaction volumes kick up I'd say stepping back on a high side just sort of generally you are right. We we are in the budget process right. Now is it is a little bit early I'd say.
On the revenue side I would I would expect revenue growth to be higher than what has been in 2020, but probably not a full return to sort of our pre cobot expectations of you know.
High single days 910, 11% growth.
But I do expect it to be better than this year, but.
But but that's kind of where we are in the revenue side.
That's very helpful. Thanks, Linda and secondly, just you're generating a ton of cash.
Really just one just get a better sense of you know now that you've got so much cash on the balance sheet any change of priorities for the use of the cash as M&A something thats more of a priority and are you seeing.
And the pipeline activity in the M&A front.
Yeah, sure Charlie and yeah, we.
We're always you know Weve talked before we are always looking at deals.
And Thats continue that has not slowed down during cove and in fact, one of the things that we've done over the last six months you probably remember us talking about over the last couple of years as our white space initiative, we've actually taken the time dive a little deeper refine that and.
And really making that forefront, we're continuing going to continue to be opportunistic on those deals, but we're out there. We're looking I would like to see us do some deals.
And so we're out there looking.
Great. Thanks for taking my questions.
Our next question comes from Rob Oliver with Baird. Please proceed with your question.
Great. Thank you guys for taking my question. Good morning, Lynn One for you and then I had a follow up for Brian I'm going to I think it was around this time last year that you.
You guys started to see that cross sell traction in.
Newer pump new world public safety into some of your existing Tyler accounts I think you know it started on your home turf in taxes and and I'm curious you mentioned that you know the federation approach starting to take hold curious this quarter would that strength that you saw in public safety, it's getting a bit more linear and less.
Backend loaded are you seeing that trend continue where you're seeing pull through from Tyler customers that are also committing on the public safety side as well on how that's progressing.
We are well we've gotten as you mentioned, we I think some initial traction was in Texas we're.
We're seeing some good things on the West Coast in California, I think what's particularly encouraging is is this continued move up market, which is also part of the fact that we're you know we're the Tyler Alliance story. The total Tyler story is really starting to resonate in or the largest deal. They did this quarter was Cedric County, Kansas.
It was about a $1.6 million license deal and that was a full suite of CAD Enterprise records, but also pulling through things.
Softcode, our field reporting Tyler corrections Brazos across mobility, all these things and.
That's part of that strategy as well.
And I think the key selling point there was really the whole Tyler Alliance story.
And that's what we that's the feedback we've gotten from the field and the client.
And that's what's also encouraging because as we know there is anybody else out there that can that can compete on that level and in fact.
Competitor, we had and that was was Motorola. So it is particularly gratifying to see these strategies start to play out and start to win these bigger deals which include going up market as you, but also as you say leveraging other Tyler relationships other Tyler products to get these deals.
Great. Thanks, Glenn appreciate that and then Brian just for you.
You guys executing really well on the margin front with the strong margin growth year over year, and just curious I know some of those benefits.
Likely come from Cove, it, but if we could just get some color on how that breaks <unk> breakdown might be to think about what was the cobot benefited what might be something that's more sustainable in terms of oh of margin benefit. Thanks, guys.
Yeah, and as we work through our planning for next year, we'll have a better idea of how those how much of it is actually sustainable you know coming into the year.
Recall that we had.
Had a goal of kind of holding margins flat with last year. After a couple of of down years as a result of our significant increases in R&D we.
We've continued to spend R&D pretty close to what we expected for the year, but we're now up this quarter up 300 basis points.
I don't expect that the margin growth will be as high in Q4.
Or that we'll see 300 basis points next year, but.
But we do expect that we'll be back on a margin expansion opportunity in that.
You know a significant part of the the gains although they've come about because of Cove. It weve been able to change business practices, particularly remote delivery of services.
Changing the way we approach some things like trade shows.
Eliminating a lot of administrative travel, but I think we'll be permanent gain so.
If you look at the 300 basis points, we picked up.
This quarter.
Maybe as much as half of that would be a.
Sustainable kind of again.
Thanks again.
Your next question comes from Jonathan Ho with William Blair and company. Please proceed with your question.
Hi, Good morning, just wanted to just start out with on maybe getting a little bit more clarity around sort of the reduction in the full year revenue guidance, which is mainly due to.
I guess the issue space just wanted to get maybe just the main factors behind that.
Sure.
Yes, we if you look at the the change in our full year revenue guidance believed the midpoint of our guidance came down by about $11 million compared to where that was when we re initiated guidance after Q2.
About 4 million of that is.
What we talked about earlier on the call related to the IP security incident, where we.
Loss, primarily services revenue some license revenues.
As a result of.
A lack of ability to interface with clients, while our systems were were compromised.
There's about $1 million related to lower E filing volumes.
As courts and.
And have not reopened as fast as we.
We anticipated at the end of Q2.
A lot of E filing volume is around even.
Evictions and debt collections and.
You know there's a the CDC has now put in place a broader.
Moratorium on evictions and so those volumes are lower than we expected and then there's about a roughly $8 million of effect on licenses, which are primarily sales delays.
Processes being pushed out and that's a combination really of cove, it and its impact on our clients' ability to to work remotely and.
And budget records as well.
So those are our and then lastly.
Instances are also being affected by a greater shift toward hsas.
In our pipeline than even we anticipated at the end of the second quarter.
And for the reasons, we talked about when I talked about earlier on the call.
Got it and just to build on that on you know with entrepreneur on state and local governments are you starting to see I guess.
A greater desirability towards moving to cloud and cloud solutions and frankly.
Frankly for the cost saving side.
Turning to accelerate thanks.
Yes, Jonathan I think that's a that's a good observation and you know I think going into pre co bid we were already starting to see the shift in the market.
And I think that was going to continue on its own anyway.
I think secondly.
You know as we've talked about over the last year, plus or two years as Tyler has shifted its approach from from more of a <unk> cloud agnostic to more cloud server preferred or cloud first we're doing things with how we how we do.
Do our sales and how we inform clients and so I think thats been part of it but absolutely Cove. It has played a player that played a role there and we're seeing that really across all of our divisions I mean, we're seeing it.
Our munis ERP, it's they're all they're all coming in right now at rates subscription rates that were higher than their original 2020 plan.
And so that's that's definitely occurring and again the good news is that we have been preparing for it and ready for it and we've been investing towards there. So it's a it is a short term headwind continues to be but that trend is going to continue I believe.
Thank you.
Your next question comes from Keith Housum of Northcoast Research. Please proceed with your question Greg.
Great. Thanks, Good morning, guys.
Yeah.
Back to the transaction costs and some of the delays you're seeing an addiction and.
And recovery of debt.
This perhaps creating a pent up demand as we look into next year, assuming that some of these restrictions, let up and the course open up over perhaps looking at an opportunity for significant revenue growth from that area next year.
Yeah, Keith that's a that's a good observation I think thats right.
Let's check certainly our expectation I mean each.
Even though courts have have been starting to reopen some as Brian mentioned there has been this moratorium and really about almost two thirds of court filings are either debt related or a landlord tenant addiction type thing. So our expectation is that that will go up even.
Even when you look at sort on the more municipal side or traffic side.
You don't have a lot of citations out there you don't have a lot of you know.
You know people paying court fines and things like that on the on the municipal side, but we wouldnt expect that those will return to normal but in terms of the backlog on the civil side, Yeah. I think that's that's our current expectation.
Great Brian just a follow up for you like gross margins came in probably the best I remember them being I mean is more just a geography geography question more than anything else, but is that more due to lower travel costs or were there other items going in gross margins that perhaps are sustainable going forward.
Well, a big piece of that both at the gross and operating margin is the absence of billable travel.
Which has.
Essentially no margin on it.
And so that continues to.
The loss of that revenue continues to be have a positive impact that's probably the biggest point.
The other thing is we are seeing.
As we move to the remote delivery of services.
We actually gained utilization inefficiencies there because we're not putting people on airplanes every Monday in every Friday.
And were able to use that time.
To to deliver services and so that.
That shift is having a positive impact as well and that that is something that we expect to be sustainable. Although there certainly in the future there will be some billable travel and some return to onsite services. We believe that in the long term, we will continue to deliver.
A significant amount of services remotely as our experience over the last two or three quarters is proving that that can be done.
Very effectively and clients are increasingly.
Accepting of that model.
Great. Thank you.
Your next question comes from Scott Berg with Needham and company. Please proceed with your question.
[noise] Heartland, Hi, Brian Congrats on the good quarter and thanks for taking my questions.
I guess two questions, let's start off with.
Lynn on the on the public safety side, you talked about how I think it is through the last four quarters, you've had billion dollar plus transactions. Obviously your sales traction has been very strong there with how you've been able to.
Add some new.
The renovation of the product you pushed up market, but as you look at those deals today versus maybe three or four years from now is it simply just your ability to just take steam potty can move up market or has that product involved at all I mean, you've had maybe better success, selling maybe little more or different modules within that suite thats relatively broad.
Thanks.
Yes got its actually its quite a number of factors and and let me I want to be clear is through the last four quarters. We've had license deals in excess of a million and a half which is you know that even even better.
And and you're right. It's it's you know we've we've done a lot over the last several years after the last several years both.
Both in terms of expanding our functionality, we're now responding to more RFP than we could before were more compliant than we were before so we've made the product a much more robust and.
In addition, it is hard to underestimate really what weve done on the service and service side as well I'm really shoring up client references as as Weve introduced these new products you know CAD any records. The number of go lives that have been successful in getting those references that's the stuff we don't spend a lot of time talking about but one.
One of the biggest initiatives. This year was are you records, which was going you know.
At the same as the CAD. They had they had I think 15 Big go lives for scheduled for this year and and you know a number of those it's Ed pushed back a little bit just because of cove, it but but we're on track to get all those done we've had 11 of them successful and and that's the hard stuff and it's that Referenceability, but then when you talk about you know again moving up market and it's all.
These tuck in acquisitions and integrating them. It's since these things like seeing dock Softcode Brazos, a CRADA and what you don't ever know is you know in these big deals you never know exactly what's the tipping point, but are you know our what we can deliver the full suite of products is so high.
More competitive and then it's so much more broader than what other people are offering that its just becomes very compelling.
Yes.
Got a quite helpful and then filler.
<unk> perspective.
And one of your other questions here shortly.
A few minutes ago Lynn you talked about how public safety transactions and what's usually are seasonally stronger fourth quarter. It looks like you're generally on track.
With with the prior with the earlier comments about pipelines kind of slipping and some deals will be into maybe the first half of 21, one of the product areas that are seeing the most the laser public safety.
So you know I would say yes.
The area, where we're seeing probably more delays is really on the higher end of the ERP space you know more of our munis line.
Interesting the lower end is not seeing the same right now, but then again stepping back you know it was it was that in that high end ERP space that really get out of the gate fast in Q1, and Thats whats still so encouraging you know weve talked about how the demand doesn't go away what seems to be happening there as opposed to say in our in our justice.
Solutions.
Or even the lower end space is that is that some counties or there's there's that uncertainty out there, but they just seem to be a little bit more willing to push it out a little bit farther or well I'd say hang on another year I'd I'd almost analogize it to you've got a car and old car you've had since college in and you've got a couple of kids and a spouse and that car starting.
Spend more time in the shop and on the road and you know it's time to get that thing fixed, but galley your kids or have prices coming up this year or something to have more on your job you see I'm going hang on one more year before I do I do and I think we're seeing that they're more.
More so than say on the other other sides of the business.
Great. Thanks for taking my questions and congrats on the good quarter guys.
Your next question comes from Kirk maturity of Evercore. Please proceed with your question.
Yes, thanks, Thanks, very much and congrats on a good quarter in a tough environment No Lynn maybe I was curious about just sort of your philosophy. These days on using pricing maybe more as a weapon given that you're much bigger today than you were back in the economic recession here 10 years ago, and and just whether or not that resonates with clients or not.
I mean are there things you all can do from an upfront pricing perspective that can help you maybe take share in this period of uncertainty and I.
I guess, how do you balance that because I think you are now at a point, where you guys and its customers are looking to consolidate vendors. If you can help them maybe get over the hump today yellen and hopefully their budgeting process problems resolve themselves in the next 12 18 months, yeah that could make some sense in terms of taking more market share, but just kind of can you just give me an idea.
How you're kind of thinking about that if at all.
Yeah sure I think you know, we're doing a little bit of that and we're doing a little of that with some of these products that we're really planning to try to introduce this year or that we really were expecting sort of jump start this year and I'm not talking about our major core apps, but some of our smaller.
Smaller products around that be it you know we talked before about it it's a CRADA data and insights our product called executive insights were doing things. There like you know offering a one year free you know pretty well up a premier executive insight.
We've talked about it with virtual courts.
We've done these pre trial periods, we're doing things like that around our Tyler Ditech, which is our cyber security or our research Texas thing.
Things like that so we are seeing some of that right now.
In terms of quote gaining market share I think the things that we're doing right now by like keeping our investments you know at the level and accelerating some of them being in that position to really capitalize knowing that we went into this.
Already in probably the strongest position in the market and you know.
The way I view, it really Kirk is that.
As we're as we're dealing with the the effects of this pandemic and and we know it's going to end and we know the demand is going to be there, but every quarter that goes by Tyler itself is getting stronger and stronger you know our balance sheet is getting stronger.
We're investing we're not every quarter goes by when other quarter down in our R&D and further along in our investments. We don't believe our competitors are doing the same and so you know I really like our position right now and and yeah. We're looking at things like that on some of these products were trying to jump start, but we're not really doing that really across our core apps right now.
Okay. That's helpful.
And then I guess for you or maybe Brian just you've mentioned M&A a couple of times.
Has the environment for doing deals gotten better perhaps over the last six months is smaller vendors, obviously, probably feeling more pressure.
From our balance sheet or growth revenue growth perspective, and obviously valuations across software had been fairly robust over the last six months. So just kind of curious I know you're always looking but have the I guess has the bid ask spread maybe started to narrow a little bit on things that you find attractive.
Maybe relative to six to nine months ago.
Yeah, I'd say that the in terms of the sort of the number of deals we look at it probably kind of consistent with what we were before I haven't seen any really increased activity. There I think my expectation. If you go back to the Q1 call my expectation might have been a you might have seen more on the valuation front I think some of them may have come down a little bit.
But in the broader market.
It's still doing pretty well I'm talking about the public markets and sometimes people tend to point to that when they when they shouldn't but we haven't seen a meaningful meaning.
[laughter].
Right.
Right.
Not the same for.
Okay, Great. That's it for me thanks, guys.
Your next question comes from Brent Bracelin of Piper Sandler. Please proceed with your question.
Thanks, and good afternoon, I guess land I wanted to go back to this concept of this digital weakening that we're clearly seeing across other enterprises other segments of the market.
On one hand totally appreciate a greater level of uncertainty with state and local budgets, but another hand, you do have kind of a new reality and the new digital reality.
What are you seeing just from a.
State local engagement activity metric, yet you talked a little bit about seeing larger deals materialize because of maybe this digital shift but is the engagement activity picking up as well too I I get there will be budget uncertainty, but is the is there anything you can see that gives.
You have more confidence that that shift to digital could also accelerate and that government vertical.
Yeah, I think that's right I mean.
I do believe the shift to.
How government is going to operate how they're going to deliver services to their citizens I believe that was going to change pretty cove. It I think it is going to change accelerate past that and one of things I talk about is you look at your end and you look at how they think about technology and how they use technology will they're going to grow up there the citizens of the future when their citizens.
But they're they're the ones that are you know they are going to demand more they're gonna demand that government works the way everything else and their lives work earlier. This week I was I did an interview for the National League of cities, we've talked with Clarence Anthony the CEO, there and and you know this is for their for their upcoming user conference. We spent a lot of time talking about the cloud and.
And the local government shift and move to the cloud and and you know to me. It's it's it's it's something that's coming at it was coming anyway, I think coven is accelerating that and you talk about budget constraints I mean, that's one of the factors about that you know you've got as you move to the cloud you do create some budget certainty you take away.
So to some of the uncertainties of these large capital spends you talking about security and today's world. We spent a lot of time talking about cyber security in the cloud is such a more secure environment and you're dealing with these players like Kws, who were aligned with you know they they they've got all kinds of resources to spend on that infrastructure and that's their business and that's not really.
That's not really local governments business, and so and I think they're starting to recognize that and so I do think this this is the shift is is real and I do think it's accelerating.
Great that's encouraging and just one quick follow up for Brian If I could we're seeing more talk of statewide deals and I think we kind of really saw that in the past.
As you look at the pipeline or is there a healthy amount of activity on on a more statewide deals just trying to understand that state wide deal trend that you've seen in Kansas, Washington State North Carolina, just love to hear the pipeline of activity around kind of state wide, what's driving that thanks.
Yeah, I'd say, it's a little bit of a mixed bag state is certainly an area that.
Today is is probably less than 15% of our revenue somewhere between 10, and 15% and I think it represents.
In the long term a big growth opportunity for us as we expand move some of our products up market.
Into the state and sell some of our products that are used locally sell them state wide. We've had some really good examples of that in the last couple of years, Our school bus transportation system Versatrans. It.
Great statewide.
Deal in the Carolinas North Carolina.
Adopting browse us.
And our new E warrants solutions statewide where those have typically been purchased at the local level and they did that in conjunction with implementing our Odyssey Court system statewide Jim.
Just this quarter.
We had a significant win.
With our probation system with the state of Nevada. The first time, we've had a state level contract for that product and that is a product we acquired about a year ago. So.
So.
And obviously with Odyssey, we've had a significant statewide presence where a lot of court systems, maybe 40 of the 50 State Court systems or support systems are operated at the state level and we've had great success. There over the years I do expect we will continue to build on that.
In our federal Division the micro pack business, we acquired.
Im a little over a year ago that I'd say right now probably the greatest pressure, they're seeing is in their state market.
But I think thats really a short term.
Phenomenon and that's really.
Around budget pressures, but but we do expect to grow our state business and certainly our federal business as we expand beyond.
You know our traditional focus just on local government.
Helpful color there. Thank you.
Our next question comes from Scott Wilson with RBC capital markets. Please proceed with your question.
Yes, Hey, guys. Thanks for taking my call, maybe first relating to better understand kind of what's informing your expectation for better revenue growth, but still kind of growth below your target 910, 11% make here can you comment on what you're seeing in your end market in terms of RFP activity are you starting to see that come back or is it still below.
Historical level and has there been any change in the types of aren't our fees that are coming to market maybe in terms of size or the products that are in demand in the current in the current environment.
Yeah. So you know again, we're still early in our process, what we're seeing in RFP activity again, it's it's sort of a mirrors, what we're seeing right now across Tyler there there are certain areas.
That we're not feeling the impact it's it's a little it's the delays are shorter the pipe is there. The RFP activity is still pretty good you know, it's a it's a little softer in a few areas and part of its recognizing that you know that the time from RFP to to getting a deal done you know it does take time, you're certainly aware of our sales cycle. So it's it is a key.
But as you know our it's very preliminary right now, but we do drill down we look we build bottoms up.
Budgets, we look at RFP, we look at all those leading indicators rps and demos and and things like that even orefice and so thats really what is based on right now, but again it's preliminary.
Got it understood and then maybe a quick one for Brian did put a finer point on kind of your margin expansion commentary I guess historically, you've talked about 50 to 100 Bips of margin expansion annually is that still in the cards for next year given the outsized expansion you've seen this year or should we be kind of thinking about maybe.
A more modest step back in terms of that type of expansion next year.
Again, we've got a a lot of work to do on our planning process that I would say.
You know, we and even a pre cobot, we expected the 2021 would be a year, where we would return to.
Margin expansion.
And so you know if I were getting I'd say, probably in that range, but probably on the lower end.
Makes sense thanks, guys.
Our next question comes from Joe Goodwin of JMP Securities. Please proceed with your question.
Hi, Good morning. Thank you for taking the question just curious on when you when you're doing a conversion from an on premise customer into the cloud or subscription.
I don't understand this might vary across across products across Tyler, but is there do customers need to be on a specific version before actually moving to cloud or the subscription is there any dynamics there or can they go from any version direct well. Thank you.
Yeah, no theres not a they don't need to be they don't need to be upgraded to the most current version to make that transition.
Understood. Thank you.
At this time there appears to be no further questions Mr. more I'll turn it back to you for any closing remarks, okay.
Okay. Thanks, Eric and thanks, everybody for joining us today I certainly appreciate the interest and we hope you stay safe and healthy if you have any further questions. Please feel free to contact Brian Miller or myself. Thanks, everybody.
The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect.
[music].