Q2 2019 Earnings Call
Hello, and welcome to todays Tyler technologies second quarter 2019 conference call.
Your host for today's call is John Marr, Chairman of Tyler technologies at this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference today is being recorded.
I would like to turn the call over to Mr. Moore. Please go ahead.
Thank you.
Welcome to our second quarter 2019 earnings call.
With me on the call today are Lynn Moore, our President and Chief Executive Officer.
And Brian Miller, our Chief Financial Officer.
First I'd like for Brian to give the safe Harbor statement.
Next well have some preliminary comments and Brian will review the details of our second quarter results and update our 2019 guidance.
Then I'll have some final comments and we'll take your questions Ron.
Thanks, John .
During the course of this conference call management May make statements that provide information other than historical information. It 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 90, 95 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K , and other SEC filings for more information on those risks.
Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise Lynn.
Thanks, Brian .
Our second quarter results were strong as both revenue and bookings growth accelerated from the first quarter.
Of course bookings were the highlight of the quarter as we sign the two largest SaaS contracts in our history, one of which is our largest single contract of any type.
We're gratified that new clients Trust Tyler to execute at a high level on crucial and complex projects such as these.
And well, it's great to set a new quarterly bookings record this quarter illustrates albeit in a positive way the lumpiness in our contract signings, particularly with respect to large deals.
This was our 30 onest consecutive quarter of double digit revenue growth as total GAAP revenues grew 16.5%.
And non-GAAP revenues grew 16.9%.
Our core software revenues from licenses and subscriptions grew 23% on a non-GAAP basis.
With 16% organic growth.
Software license and royalty revenues declined 7.7%.
As the mix of new business was more heavily weighted towards subscription arrangements.
Approximately 80% of the value of new software deals came from subscription arrangements and 20% from on premises license arrangements.
The mix was especially skewed by the two very large Odyssey SaaS contract signed in the quarter.
GAAP subscription revenues grew 38.6% and non-GAAP subscription revenues grew 36.5%.
Total recurring revenues from maintenance and subscriptions grew 20.8% and comprised 65% of total revenue.
Quarterly bookings where were the highest in company history at $452 million.
As I mentioned previously we signed the two largest SaaS deals in our history, both for Odyssey Court suite.
The largest was a 10 year contract with the North Carolina administrative office of the courts, and North Carolina Judicial branch valued at approximately $85 million for several products from our Odyssey suite, including statewide E filing.
This marks our 15th statewide agreement for Odyssey, with North Carolina being the largest of those states.
The second contract was a five year arrangement with Bayer County, Texas, The nations 17th largest county.
Valued at approximately $20 million.
The contract includes a broad set of products from the Odyssey suite to create a single integrated solution to advance Cort prosecutor jail and juvenile probation operations.
We also signed a new SaaS contract with the Yellow County, California Superior Court for Odyssey, including E filing and Moudry online dispute resolution.
This is the 26, California, Kemper County Court to adopt Odyssey and is the first new County in California, Weve added since mid 2016.
New business for our ERP solutions continues to be robust during the second quarter.
The largest deals of the quarter, where SAS arrangements with Stockton, California, multi suite deal for our munis, it's a crowded data insights solutions valued at approximately $10 million.
Pembroke Pines, Florida for munis, and Energov valued at approximately 6.5 million.
And the Savannah, Chatham County School District in Georgia for Munis valued at approximately 3.6 million.
We also signed notable on premises license arrangements for our ERP solutions with Campbell County, Wyoming, and the cities of AK, Bill, California, Ken a quick Washington, and Redlands, California.
And an on premises license deal with Newport Beach, California valued at $1.2 million.
We also signed notable license contracts for our public safety in Brazil. He citation solutions, each valued over $1 million with colonial Heights, Virginia, and Owensboro, Kentucky.
For our success to date and insight solution significant new signings included the agency for healthcare research and quality, which is a federal agency and the US Department of health and human services.
And the city of Grand Rapids, Michigan.
In addition, notable customers upgrading to our psychotic connected government cloud solution, including the cities of Fort Worth, Texas, and Richmond, California.
Finally for our recently acquired Microtech solution, we signed a notable federal arrangement for until a track with the export import bank of the United States.
Now I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2019.
Thanks, Lynn yesterday, Tyler technologies reported its results for the second quarter ended June Thirtyth 2019, I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2019, and then John will have some additional comments.
In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in our soft in the software industry.
Amortization of acquired intangibles and acquisition related expenses.
A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.
We have 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.
GAAP revenues for the quarter were $275.1 million up 16.5%.
On a non-GAAP basis revenues were $278 million up 16.9%.
Organic revenue growth rose from the first quarter of 2019% to 8.1% on a GAAP basis, and 7.4% on a non-GAAP basis.
As Len mentioned earlier, the mix of new software business continued to trend.
Continued the trend of being weighted towards subscription arrangements, which puts pressure on our organic growth rate for the second quarter.
Our core software license and subscription revenues combined.
Grew organically approximately 16%.
Subscription revenues for the quarter increased 38.6%.
We added 154, new subscription based arrangements and converted 27 existing on premises clients, representing approximately $128 million in total contract value.
In Q2 of last year, we added 126, new subscription based arrangements and had 32 on premises conversions, representing approximately $32 million in total contract value.
Subscription contract value comprised 80% of the total new software contract value signed this quarter compared to 47% in Q2 last year.
The value weighted average term of new SaaS contracts. This quarter was 6.1 years compared to 3.5 years in Q2 last year.
However, the average term of 6.1 years.
With the 10 year, North Carolina Odyssey agreement.
Excluding this agreement the average term of new SaaS agreements was 4.1 years.
Transaction based revenues from E filing and online payments, which are included in subscriptions increased 26.7% to $21.2 million from $16.7 million last year.
That amount includes E filing revenue of 14, and a half million dollars up 13.8% over last year.
Annualized GAAP recurring revenues for Q2, which are comprised of subscription and maintenance revenue.
Were approximately $721 million up 20.8% and on a non-GAAP basis were approximately $732 million up 21.4%.
Our backlog at the end of the quarter reached a new high of $1.4 billion up 17%.
Backlog included $395 million of maintenance compared to $356 million a year ago.
Subscription backlog was $599 million compared to $480 million last year and includes approximately $138 million related to fixed fee E filing contract.
Our bookings for the quarter were approximately $452 million, an increase of 72.3% from Q2 of last year.
For the trailing 12 months bookings were approximately $1.2 billion up 16.9%.
Excluding the North Carolina Odyssey contract bookings growth was 40% for the quarter and 8.5% for the trailing 12 months.
Our software subscription bookings in the quarter added $18.5 million in new annual recurring revenue up 153% over last years $7.3 million.
For comparison, if all of our new subscription contracts had been under license arrangements. We estimated that they would have represented an additional license bookings of approximately $23 million.
We signed 34, new on premises contracts in the quarter that included software licenses greater than $100000 and those contracts had an average license of $297000.
Compared to 25, new contracts with an average license value of $459000 in the second quarter of 2018.
We ended the quarter with $79 million in cash and investments and $15 million of debt outstanding under our revolving credit facility, which has subsequently been paid off in July .
The increase in Dsos is primarily related to the timing of milestone billings under several large percentage of completion contracts.
Resulting in a $31 million year over year increase in Unbilled receivables.
Excluding current Unbilled receivables Dsos were 93 days at June Thirtyth 2019, compared to 89 days at June Thirtyth 2018.
Our guidance for the full year of 2019 is as follows we expect 2019 GAAP revenues will be between one dollar eight I'm, sorry, $1.8 billion and one point 10 billion.
non-GAAP revenues will be between 1.09 billion and $1.11 billion.
We expect 2019, GAAP diluted EPS will be between $3.50 and $3.63.
And may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate as well as the final valuation of acquired intangibles.
We expect 2019, non-GAAP diluted EPS will be between $5.22 and $5.35.
For the year estimated pretax noncash share based compensation expense is expected to be approximately $62 million.
We expect R&D expense for the year will be between $81 million and $83 million.
Fully diluted shares for the year are expected to be between 40 million and 41 million shares.
GAAP earnings per share assumes an estimated annual effective tax rate of 10% after discrete tax items and includes approximately $27 million of estimated discrete tax benefits related to share based compensation, which may vary significantly based on the timing and volume of stock incentive awards.
Our estimated non-GAAP annual effective tax rate for 2019 is 24%.
We expect our total capital expenditures will be between $48 million and $50 million for the year, including approximately $23 million related to real estate and approximately $6 million of capitalized software development.
Total depreciation and amortization expense is expected to be approximately $77 million, including approximately $51 million of amortization of acquired intangibles.
Now I'd like to turn the call back to John for his comments.
Thanks, Brian .
We're very pleased with our strong second quarter results and our positive outlook for the rest of the year. We again achieved double digit revenue growth and have now achieved subscription revenue growth of greater than 20%.
49 over the last 54 quarters.
Our new business pipeline remains active and win rates are strong and our outlook for the second half of the year as positive with an expectation of accelerating growth.
We're also pleased with the progress of Microport and my civic during the first full quarter as part of Tyler.
Work is well underway with the integration of their products and operations into Tyler.
And the opportunities in micro Pacs pipeline are exciting.
Now we'll take your questions.
We will now begin the question and answer session.
To answer your question into the question queue. Please press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset and then press the star key and the number one.
To withdraw your question press the Star key and then number two.
As a reminder, please limit your questions to one and then one follow up and then place yourself back in the queue for additional questions.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Rob Oliver of Baird. Please proceed.
Okay, great. Thank you guys for taking my question.
Lynn one for you and then one follow up.
Recognizing that there is.
Significant lumpiness in these types of large SaaS deals.
You guys have now strung together.
A bunch of quarters of.
Really strong subscription.
Bookings.
And I'm, just curious I know, you're not moving your customers one way or another but.
Whether there is anything you are doing within your salesforce to incentivize or otherwise could Joel your customers to move this way whether it be ROI case studies or value or anything else you might be doing in the go to market motion.
To move those sorts of deals along thanks.
Yes sure Rob It's a good question I think what you are seeing too is a recognition of what we've talked about over the last several years.
Is how the market is has been moving towards the SaaS environment.
And have been adopting it seemingly more recently at a quicker pace is so I've said before the adoptions today versus five years ago or significantly different and where we expect to go in the future.
I think one of the things we've talked about generally before perhaps on the last earnings call or two is we are we are taking a hard look at that internally.
One of our strategic initiatives for this year is really been looking at this and really focusing on a company wide cloud strategy.
But the significant focus across the entire senior leadership team.
It's a broad effort as you says it involves looking at things that sales and sales incentives.
Looking at our products.
Trying to determine their the best cloud optimization.
Looking at pricing financial modeling.
Potential opportunity to cloud providers. So all that we're taking a look at it and we are recognizing this shift we see it.
Historically weve I think you've heard US say, we've had mostly at cloud agnostic approach and I think that's something we're taking a look at going forward and.
Probably not going to get into it too much more detailed this time, but I think that's something you'll continue to see and hear from us in the in the coming quarters.
That's really helpful. I appreciate that and then Brian just one quick follow up for you I know there was a lot of focus on the expense side.
Last year in this year and I knew I heard John in his closing comments talk about how you guys are.
Integrating some of the newer acquisitions in the large deals that you mentioned on the call.
I heard mention of juvenile probation, I think that that sounds like that could be caseload pro also heard mode. Yes.
In terms of those that are already integrated.
Is this a question have you guys are better positioned now to cross sell or is it that these products give you the ability to come in and sort of platform and go after a much larger type of deal like we're seeing here.
Thanks, guys very much.
I'd say, it's a little bit of both clearly.
After the acquisitions that we've talked about in the past, we typically make investments in those acquired companies.
Some of those investments are organizational.
To position them to be able to scale.
Some of those are integrations of the products with other Tyler products and I think with Maria to some extent caseload pro and some of those acquisitions that we've made in the last two or three years, you're now seeing.
US be at a point, where we are integrating them into.
The yellow county deal, we talked about that include mode Ria.
That include Caseload pro for juvenile probation in bare county.
So yes, we are at a point with some of those acquisitions looking back a ways that that now we have a cross selling opportunity and we have an ability to include them.
In new deals as well as going back to our existing customer base. So.
That's part of our strategy and I expect you'll you'll see that contribute to future growth.
Thanks again guys.
The next question comes from Jonathan Ho of William Blair and company. Please proceed.
Hi, congratulations on the strong bookings quarter I just wanted to start out with your commentary around the lumpiness in some of the pipeline and just wanted to make sure were there any deals that maybe came in a little bit early or pulled forward relative to your expectations and just how should we generally think about the pipeline of opportunity.
Yeah, Jonathan I'll start and maybe Brian pipe in it.
I think we've talked about this for a number of years I think the way it the way I kind of look at it is our core.
Bread and butter business remains very strong.
Our competitive position is good the market is robust and then from time to time, we get some of these rather large deals and and traditionally we are talking about the lumpiness when we're coming off a maybe a difficult bookings quarter in and wanted to point out that this quarter. There is a little bit of Lumpiness that that served served us well and.
Thats just part that's also part of our business you've seen that over time, we continue to execute on on on really good mid and upper mid opportunities and and then periodically we sprinkle in these larger deals so.
I think you'll continue to see that as we move forward I don't know that the deals where anything that we're necessarily pulled forward or back. These the North Carolina deal. For example was has been on our horizon for some period of time.
The exact timing of it would have been cute Q2 Q3.
There's always some movement there, but we have visibility on some of those deals and I think you can always expect some of those deals to come down the road.
As you can see we didnt change our revenue guidance.
And so these are the timing of these deals generally in line with our expectation.
So no big change there.
I would say the pipeline continues to have.
A normal mix of.
Some large deals in it.
And.
Normal mix of our.
More traditional mid size deals.
And Jonathan Q2, 2020, I'm going to go into the state is going to be a tough comparison quarter.
Absolutely absolutely.
And just in terms of the micro packed acquisition I mean should we expect in the third quarter to have a little bit more contribution from us federal government.
I just want understand if theres any sort of seasonality shift that we should be thinking about on that side as well. Thank you, yes, absolutely Jonathan so stepping back I mean, we've owned them micro pack now for what we started March 1st so maybe five months or so.
We're pleased with the acquisition.
Corporate integrations are going well, we have been doing some product integrations.
They're generally on on plan as we'd expect but as you point out there is a little bit of Lumpiness in their business Q3 is the federal businesses generally they are bigger bigger quarter.
They've got a lot of number of good deals we got pretty good visibility. We feel confident is the first first time, there under our wing, so, but but we like where they said we believe they are on plan, but you are correct that Q3 tends to be a little bit bigger quarter for micro back.
The next question comes from Kirk Materne of Evercore.
Please proceed.
Well.
Peter Thats. Good question, So I think originally.
This probably first started hitting our our windshield back in 2017.
It's a 10 year deal and in part, it's which is obviously a longer term for our SaaS deals in part because the statewide implementation.
You know north Carolina's got over we've got about a 100 counties.
I will point out we've talked in the past about.
Our move to try to shorten some of these terms.
Primarily because the marketplace has been has been successful in sort of dictating a fixed fee or lift over the initial term. This contract is as you move into the outer years. Your six through 10 is after we get them up and running those those escalations already are built in there. So that's a positive.
So it's a significantly large deal.
Your point about what we can expect in the future I think it's I think it's representative of of as you say.
Customers moving the digital age our ability to do multi product deals and really part of our connected community visions, which really spanning across.
Thanks, and then.
Yes, just in terms of the subscription mix during the quarter. If you looked at the composition of the pipeline when you entered.
Yes, I guess that the matter would ask that question is.
If ever to kind of go to so.
I believe the number is roughly around a third of our deal Theres a consultant involved.
Often it's not.
One of your better known consultants like Gartner or Forrester, but.
Consultants, who specialize in the public sector or the local government arena.
So.
It's not the majority of the deals.
And with respect to the mix this quarter.
I don't think it was it very significantly from what our expectations were going into the quarter, we expected it would be.
Even excluding North Carolina, and bear county, more heavily weighted towards subscription, but with a very strong.
License deal component in it.
For some time that both North Carolina, and Bear County, we're going to be SaaS deals. So.
Again that didnt hasn't changed our guidance outlook for the full year and.
Wasn't very different from what we expected.
Thank you for taking my questions.
Good morning, gentlemen, Brian could you give us the acquired revenue for the two larger deal.
Aggregate acquired revenue was somewhat lower than my forecast.
The aggregate so the revenue in the quarter four.
Which deals was that for micro packed and.
For product Okay.
Hang on just a second.
[noise].
[noise] [noise], while you're looking for that.
And another question maybe for land.
Are you seeing any shift in.
Hi Tech spending priorities given the uptick in.
Security breaches at municipalities with malware and Ransomware do you find that there are some clients who were tracking towards you know buying or make a decision on a product or from from Tyler or related product and then.
Yeah, I would say that I don't know that I would say there has been any any material short term uptick it's certainly an opportunity for us as you know the acquisition that we did last year stage data services.
If we see that as an opportunity.
We like where we sit with that.
It's an unfortunate reality of the of the business that's out there.
And surprisingly for for the number of things that you read in the paper I think they are even.
At least that many if not more than I've known actually hit the public windshield. So it's certainly a it's a higher awareness factor, we see that as an opportunity again and I think we're positioned with sage two.
To capitalize on that.
Yeah, and the CRADA and micro pack combined were a little north of $23 million in non-GAAP revenues this quarter.
A little more than 23 million okay.
Great I'll follow up with you I would that offline.
Like that math then.
7.4, so we can talk about that later I appreciate it.
The next question comes from Scott Berg of Needham and company. Please proceed.
[noise] hi, everyone. Congrats on a good quarter and thanks for taking my questions.
Michael package trying to evolve you keep strikes that little bit more federal governments state and they're obviously in some international items cookies Representatives at news UK contract opportunity, but how do you expand your sales force to properly address those or do you think you already have proper coverage today.
Yeah. Good question, Scott I think we've got pretty good coverage right now when you look it's a CRADA there their focus before we came in was really more as we've talked about the go 500, including federal they maintained their their salesforce.
And it's continuing to push that in the markets that they traditionally did what we're able to do is leverage our existing.
Sales capacity or with those products as we continue to build out more and more solutions that that dovetail with our division product. So it's added extra things are bags of our current salespeople while also.
Allowing them to continue in those and so crowded their more traditional markets as it relates to micro packed you're you're right. There's there's not the same level of crossover.
I think their sales coverage is pretty good right now one of the things that they that they've been working on for the last couple of years and was one of the strategic initiatives.
That we liked is that they really leverage a partner program.
And they've been developing that for a number of years, it's really starting to.
To bear fruit the number of our fees that are submitted by partners continues to grow the partner pipeline continues to grow that's something that they are really going to be leveraging is with respect to international sales and I would expect that sometime over the next 12 months you may see a international accounts or two that come in that are really the result of their partner program.
Got it helpful. Then a small follow up from Brian Brian Your online payments business had a nice jump over Q1 in the quarter.
I'd now those expectations I assume thats, all Missouri at least in those extra to expectations were brought in a little bit earlier was that all planned or was there something unique maybe that spike that in the twoq results.
We did plan for those to increase and they did we also had to some extent we had a.
Payment processor that.
Give us a little boost there, but but there was organic growth as well.
Got it very helpful. Thanks for taking my questions.
The next question comes from Tim classes of Northland Securities. Please proceed.
Hey, guys.
Great quarter, just first a quick housekeeping one I know you guys sort of keep track of.
Awarded but not signed contracts is that sort of in your normal range at the end of this quarter or was it sort of above or below that.
I'd say generally normal maybe a tick above normal, but I think that comes just with our size now normally is a bit higher than it used to be.
Nothing.
Particularly unusual there.
Okay. Good and then obviously a 10 year term is it you guys mentioned is pretty long is this a trend that you see happening in your customer base and importantly went when contracts come up for renewal are you seeing that renewals.
Begin to stretch out a little bit given you, maybe a little bit better visibility going forward. Thanks.
As I mentioned earlier part of the 10 year term is really because it's it's going to take about half of that to get fully up and running across all the counties in across all our product lines, including E filing and everything like that so on the back end of that as those revenues ramping it converts into more of a I would say more of a traditional SAS arrangement as I mentioned earlier, what's what's good about this arrangement is we do have built in escalators throughout the throughout the term.
I don't think its a I wouldn't consider that to be a norm or your question about renewals and I think our experience has been that renewals tend to be more on the annual basis.
Okay. Okay. Good. Thank you for that clarification, and then Michael pack obviously.
One of your competitors service now had a very strong federal quarter, you guys mentioned.
Yeah, maybe some expectations our visibility into that and this quarter, how but selling micro path into the state and local governments and now it's really.
Well, what's what are you seeing sort of early on maybe you do you have any expectations for next year. Thank you.
Well half of micro packs business at the time, we acquired them its state and local with a bit more of a tilt towards state within that side of the business and about half is federal.
The federal at least in the last year has been growing a bit faster, but that they already have a very healthy state and local business and we expect that to continue to grow, particularly as we look for opportunities to leverage our existing customer base and and and introduce a micro packed offerings.
Into that space. So on both sides of the business are our growth opportunities for us, but even though we we tend to talk about a little more on the federal side, because that's relatively new to us.
They do have already a strong state and local business.
Okay and will you be rolling that product set out.
Hi to the broader sales force and the next year or what what are the expectations or what are your plans there. Thank you.
Yeah, I think I think Tim the expectation is that as I mentioned earlier is they have a they have a sales force that that knows their their federal market knows their state market they've been working on their partner program I don't really see this is something necessarily going.
You know in over the next year.
Pushing into our more traditional salesforce.
What I do see is is the continued product integrations that we're doing and getting some leverage there. For example, so CRADA you talked about some of Micropulse competitors, that's something that I think is going to be a distinguishing factors, we had data and insights to them.
Okay very helpful. Thank you.
Once again, if you do have a question. Please press the star key then the number one on your Touchtone phone.
The next question comes from Keith Housum of Northcoast research.
Please proceed.
[noise] Mr. How some you are alive to the call. Please proceed.
Oh, thanks, sorry about that.
Good morning, guys.
With the new larger contracts have been signed on the Odyssey course in the E filing I'm, what do the E filing assumptions change for you guys going forward if I, if I think about what weve talked about in the past I believe it was visibility into like $75 million of revenue at three to four years from now do these contracts change that visibility at all and new year's assumption there.
I don't think it really changes the visibility that much as I said, the North Carolina.
Opportunity has been on our radar for a couple of years.
We have a general general sense of the overall market.
Just sense of our perception of our competitive position in that market.
Yes, I think you're going to continue to see more and more counties more and more states move to E filing and mandatory E filing so I'd say overall, our our assumptions are about the same.
Great. Appreciate it and then obviously was a good quarter for you guys. Just in general the bookings was there anything in particular with the market. They got some of these guys I guess over the hump to that they were well on us on the deals this quarter comparative perhaps a quarter or two ago.
I don't know that there is anything specific that lose it.
We talk from time to time about certain areas, our business and large deals slip and they come in.
We generally have pretty good visibility looking out for the timing is always a little bit.
I Wouldnt say suspect, but always moves a little bit from time to time, which is also why we often talk about the lumpiness of our business and some of these large deals.
Just if it's just a function of our market.
And as I mentioned in my earlier remarks, having that core underlying really strong business.
That keeps us going day in day out and then sprinkle. These large deals on top is it's a good mix.
Great. Thank you.
At this time there appears to be no more questions Mr. Marr I'll turn the call back over to you for closing remarks.
Great. Thank you for joining us today, if you do have any further questions. Please feel free to contact when more Brian Miller.
Or myself, thanks, again have a great that.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.