Tyler Technologies, Inc. (TYL) Q2 2017 Earnings Report, Transcript and Summary

Hello, and welcome to today's Tyler Technologies Second Quarter 2017 Conference Call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. [Operator Instructions] And as a reminder, this conference is being recorded today, July 27, 2017. I would now like to turn the call over to Mr. Marr. Please go ahead.

Thank you, Will, and welcome to our second quarter 2017 earnings call. With me on the call today are Lynn Moore, our President; and Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the safe harbor statement, next Lynn will have some preliminary comments and Brian will review the details of our second quarter results and 2017 guidance. Then I'll have some final comments and we'll take your questions. Brian?

Thanks John. During the course of this conference call, management may make statements that provide information other than historical information, 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 and are 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 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. Tyler performed at a high level in many respects in the second quarter and earnings were in line with our expectations. Total GAAP revenue growth was nearly 11%, all of which was organic, and non-GAAP revenue growth was just over 8%. Subscriptions was our fastest growing revenue line, up 21%. Total recurring revenue from maintenance and subscriptions grew 16% and comprised more than 62% of total revenue. Bookings for the quarter were strong, increasing 14%. For the first half of the year, bookings were up almost 18%. Our quarter-end backlog reaching new milestone at $1 billion, up 17% over last year's. Our largest contract for the quarter was a multi-suite deal with Cook County, Illinois for our Odyssey Court Case Manager and Brazos' e-Citation solutions valued at $36 million. Other significant multi-suite arrangements during the quarter included: SaaS contracts with Santa Fe, New Mexico for our Munis and EnerGov solutions; and Nampa, Idaho for our Munis, EnerGov, ExecuTime and Tyler Notify solutions; as well as a traditional license contract with Bartlesville, Oklahoma for our Munis and EnerGov solutions. We signed our 13th statewide Odyssey course contract with the state of Vermont. The deal is valued at over $6 million and includes e-filing under a transaction based arrangement. We also expanded our Odyssey footprint into 2 additional new states, with a SaaS contract for court case management with St. Tammany Parish in Louisiana and our first e-filing contract in the state of Alabama with Jefferson County. Notable new contracts for our New World Public Safety solution included: license arrangements with Lehigh County, Pennsylvania, Kendall County 911 in Illinois and Hamilton Township, New Jersey. We're pleased with the progress we've made with our competitive position in Public Safety. Through the first six months of 2017, we've added as many new clients for New World Public Safety as we did for the full-year of 2016. For our iasWorld Appraisal & Tax solution, notable contracts included: an $8 million SaaS arrangement with Philadelphia, Pennsylvania; as well as major SaaS contracts with Scott County, Minnesota; and the Massachusetts Office of Information Technology, as well as a traditional license contract with Augusta, Georgia. For our Munis ERP solution, we signed notable license contracts with: Berkeley, California; Harnett County, North Carolina; Kirkland, Washington and the Berkeley County school district in South Carolina. In addition, our Munis ERP solutions signed notable SaaS arrangements with Glendale, Arizona and Milford, Connecticut. For our EnerGov solution, major contracts included a license deal with Fort Myers, Florida and a SaaS agreement with New Hanover County, North Carolina. Now I'd like for Brian to provide more detail on the results for the quarter and our updated annual guidance for 2017.

Thanks Lynn. Yesterday Tyler Technologies reported its results for the second quarter ended June 30, 2017. I'm going to provide some additional data on the quarter's performance and update our guidance for 2017, then John will have some additional comments. In our earnings release, we've included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. These measures exclude write-downs of acquisition-related deferred revenue and acquired leases, share-based compensation expense, the employer portion of payroll taxes on employee-stock transactions and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. GAAP revenues for the second quarter were $209.1 million, up 10.7%, all of which was organic. On a non-GAAP basis, revenues were $209.4 million, up 8.1%. Software license and royalty revenues decreased 2.5%, as we saw a high level of SaaS deals signed in the current quarter bookings' mix. Subscription revenues increased 20.5%. We added 105 new subscription-based arrangements and converted 37 existing on-premises clients, representing approximately $49.8 million in total contract value. In Q2 of last year, we added 74 new subscription-based arrangements and had 18 on-premises conversions, representing approximately $31.3 million in total contract value. SaaS clients represented approximately 51% of our software contracts in the quarter compared to 34% in the prior year quarter. This is the first time the number of new SaaS deals was greater than the number of traditional license deals. SaaS contract value comprised 39% of the total new software contract value signed this quarter, compared to 26% in Q2 last year. The value-weighted average-term of new SaaS contracts this quarter was 5.2 years compared to 5.6 years in last year's second quarter. Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 18.6% to $14 million from $11.8 million last year. That amount includes e-filing revenue of $10.6 million this quarter, up 18.8% over last year. Cash flow from operations was $1.4 million compared to $19.5 million last year. The decline is primarily due to the timing of payroll and income tax payments. This year, we had one more payday in Q2 than we did last year. Also last year, we had lower-cash-estimated tax payments in Q2, as we carried a large prepaid tax balance in 2016 from the prior year. Free cash flow, which is calculated as cash from operations less capital expenditures, was negative $8.9 million compared to $14.3 million in last year's second quarter. Our CapEx for the quarter was $10.3 million, including $4.7 million related to real estate, compared to total CapEx of $5.2 million in Q2 last year. We ended the quarter with a total of $92.6 million in cash and investments and no outstanding debt. Days sales outstanding and accounts receivables was 101 days at June 30, 2017, compared to 100 days of June 30, 2016. Our backlog at the end of the quarter was $1 billion, up 17.3%. Software-related backlog, which excludes backlog from appraisal services contracts was $988.7 million, a 19.6% increase. Backlog included $266.7 million of maintenance compared to $235.1 million a year ago. Subscription backlog was $382.4 million compared to $258.9 million last year, and includes approximately $101 million related to fixed-fee e-filing contracts. Our bookings for the quarter, which are calculated from the change in backlog plus non-GAAP revenues, were approximately $288 million, an increase of 13.8% from Q2 of 2016. For the trailing 12 months, bookings were approximately $952 million, a 24.1% increase. Note that we've posted a spreadsheet, detailing our quarterly bookings calculations on the Investor Relations section of our website at www.tylertech.com/investors under the Financials and Annual report tab. We signed 25 new contracts in the second quarter that included software licenses greater than $100,000, and those contracts had an average license of $842,000, compared to 38 new contracts with an average license value of $573,000 in the second quarter of 2016. Our guidance for the full year of 2017 is unchanged from our previous guidance. We currently expect 2017 GAAP revenues will be between $844 million and $854 million, and our non-GAAP revenues will be between $845 million and $855 million. We expect 2017 GAAP diluted EPS will be approximately $3.26 to $3.34 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate under ASU 2016-09. We expect 2017 non-GAAP diluted EPS will be approximately $3.83 to $3.91. We expect that, as in most years, earnings will be stronger in the second half of the year than in the first half, with the greatest sequential increase in earnings coming from the second quarter to the third quarter. For the year, estimated pretax noncash share-based compensation expense is expected to be approximately $37 million. We expect R&D expense for the year will be approximately $48 million to $50 million. Fully diluted shares for the year are expected to be between 39 million and 40 million shares. GAAP earnings per share assumes an estimated annual effective tax rate of 20% after discrete tax items, it includes approximately $29 million of discrete tax benefits related to share-based compensation. We estimate the non-GAAP annual effective tax rate for 2017 to be approximately 35.5%. Beginning in 2017, Tyler is adjusting its non-GAAP financial income using a tax rate equal to Tyler's annual estimated tax rate on non-GAAP income. This rate is based on Tyler's estimated annual GAAP income tax rate forecast, adjusted to account for items excluded from GAAP income in calculating Tyler's non-GAAP income, as well as significant nonrecurring tax adjustments. The non-GAAP tax rate used in future periods will be reviewed annually to determine whether it remains appropriate in consideration of factors, including: Tyler's periodic effective tax calculated in accordance with GAAP, changes resulting from tax legislation, changes in the geographic mix of revenues and expenses and other factors deemed significant. We expect our total CapEx will be approximately $53 million to $55 million for the year, including approximately $24 million related to real estate. Approximately $16 million of our 2017 CapEx is related to our cloud business, which includes hosted SaaS solutions and e-filing, including assets to accommodate future growth. Total depreciation and amortization is expected to be approximately $50 million, including approximately $35 million of the amortization of acquired intangibles. Now I'd like to turn the call back to John for his further comments.

Thanks Brian. The strength in our bookings again this quarter reflects, both an active local government software market and our competitive strength within that market. As we noted earlier, second quarter bookings rose 14% over last year. Bookings included the $36 million Odyssey Contract with Cook County, as well as the one other license contract and three SaaS contracts that were each valued at over $5 million. As we noted earlier, the business mix included an historical high level of new SaaS contracts. The total contract value for new SaaS contracts of $45 million was 45% greater than our previous high quarter. The contract mix put pressure on our recognized revenues and margins. And we're gratified that we were still able to achieve earnings in line with our expectations, and that our guidance for the full year is unchanged from that we issued in April. As we've discussed previously, we are investing at a high level in product development initiatives, including major projects that will enhance our Public Safety products and increase their addressable market. We're pleased with our progress on these projects. Some of the new features were included in releases this quarter, and we believe that these initiatives are beginning to affect decisions in the marketplace. Now we'll take your questions.

[Operator Instructions] And our first questioner of today is going to be Alex Zukin with Piper Jaffray.

I wanted to ask the first question, just can you talk about what drove some of that cloud deal strength in the quarter? And do you see this as a new trend that you feel you have start taking into greater account, when you do annual guidance at the beginning of the year? And then I have 1 follow-up.

At this point it's probably anecdotal and hard to know if it's a shift or a trend. It's certainly certain significantly elevated from our historical run rates. As we have said, about 50% of the names compared to historically, or for a number of years now, in the 30%, 35% range and about 40% on the dollar. So it's a significant jump. Looking at the pipeline, it's somewhat elevated, but that's probably not going to be sustainable, we'll have to see over time. As you probably know, we don't really put a lot of bias in the way we market our products. So we offer most of our products, hosted as well as traditionally deployed, nonpremise. And we are happy to capture the clients either way. So this is a market-driven preference that we experienced in this quarter, but it's a little early to know if it's a big shift.

I guess John, just a follow-up on that question. Given there could be a greater ROI for your customers as they are able to take some of their on-premise spend away when they purchase a cloud solution from you. But you guys don't price it any differently. Is there then, room for you guys to think about different pricing structures and dynamics, if this trend does incrementally increase?

You could, and I know a lot of companies do. We really have chosen not to and don't have plans to change that. Again, we just think the long-term value of a client, traditionally deployed or hosted, is significant enough that we're very happy to capture the new clients either way. And by showing preference towards one, you could be adding a little bit of the hurdle to the other. You want to remember that - a much higher percent than what we realize in terms of the mix, go out to bid for traditional on-premise solutions. A lot of our wins for hosted solutions, started with our fees for traditionally deployed, and as they went through the process and learned more about our cloud offering, they actually switched. In fact, it's not at all uncommon for someone to select Tyler in the procurement process and yet, not have decided if they're going to keep it at their site or put it in our facility and then make that decision subsequently. So again, our focus is on putting the software forward, our reference abilities forward, our presence in the marketplace - the Tyler brand - and we're happy to get the client either way.

And Alex, this is Brian. Just to be clear, while we don't have a particular bias in how we sell it, there is a difference in the pricing between a traditional on-premises and the cloud model. And the cloud-model pricing does take into account our - the hosting component of that. So it is a different pricing model.

And Brian, may be just on that - sticking on that same point. Can you walk through maybe the implications to cash flow, when a customer does go with the cloud product in terms of the way that you bill, collect and how you see that flowing through this year?

Sure. Well with the traditional on-premise license deal, we typically collect a bill, a significant portion of the license upfront and the rest of the license may be billed on various terms, either milestone-based or time-based. But there's a significant upfront collection on the license and then, the services are paid over the periods that the services are provided. And then there's a maintenance stream that's typically annually in advance and the revenue recognition maybe a little different there, in some cases it's percentage of completion accounting where that license revenue recognition is spread over an implementation period. In most deals, the license revenue recognition follows the billing under the current rev rec rules. In a SaaS deal, typically the payments are either annually or quarterly in advance. Most deals are, the whole contract amount is recognized and billed pro rata over the term of the agreement. Some clients pay their services separately and those are over the implementation period. So generally, the cash flow is much more front-end loaded on the license deal and with a smaller recurring fee and the subscription deal is spread pro rata over a - on an average of about 5 years today, but can be anywhere from 4 to as much as in some cases, 7 or 10 years. I don't think - I think the shift this quarter will affect cash flow a bit this year, if not terribly dramatic, but it'll have a few million dollar impact on our free cash flow this year, a bit on cash flow. And $200 million range is not going to be a sort of a game changing situation.

And the next questioner today is going to be Brian Kinstlinger with Maxim Group.

On NWS, the increased number of customers, I think, is a clear evidence of the impact of the investments you're making, but I'm curious how long do you think it will be before NWS can move upstream and compete on larger deals effectively?

That's a good question. I'd say that we're very pleased that we're already impacting win rates. And the difference between what they were and what they are is significant enough to attribute that, certainly, to the investments we're making. So we're pleased with that. But it's a good observation that we're still focused on, generally, the same addressable market that they have been traditionally and it would really be, kind of, Phase II of that, which is an important part of their growth strategy to broaden that addressable market including moving upstream. The full impact of these investments is a 2, 2.5 year process that we're, maybe, approaching the first year of right now. So again, it's probably another year to 18 months before we fully realize that. And that'll be a gradual ramp up, right? You'll win some deals. You'll install them. Some people want to see the product. Some people want to be able to go to a number of sites that are up and running, so they will be early adopters and then they will be a process before we're probably looked at as a regular contender in that marketplace. So I suspect, again, it's a ramp-up one year from now to three years from now.

Follow-up, kind of a number of questions, kind of longer term thinking. I think you're putting about $6 million annually into the upgrades and you're almost entering your second year of that. What happens once those two years are done, the $12 million have been put in, are you going to reallocate those resources? Are you going to slow spending? Is it going to drop? We had a similar situation a while back with Dynamics, where there were some confusion about what would happen after those investments were made as well.

Yes, well Dynamics would be an exception to my answer basically, which would be that, historically, when this project was planned, there is the option to redeploy or reduce headcount. My expectation would be and my experience would tell me that, that's probably not what will happen. Preferably, we'll get the impact that we're starting to see on win rates broadening the market presence and we'll be a bigger, busier company and we'll chose to keep those heads where they are and continue to invest. And our revenues will grow, certainly, at a much accelerated rate over our growth and R&D spend. So we'll effectively catch up with it. We'll see leverage in that. We'll benefit from that. But if we're successful, and we're capturing significant wins in the marketplace, I doubt we'll reduce headcount. I think it will just grow at a significantly lower rate than overall revenue growth.

And the next questioner is going to be Scott Berg with Needham & Company.

I have got two quick ones. John, the first one is, maybe, it's for Brian. Just wanted to go back to the SaaS, the subscription mix for the quarter relative to your guidance 3 months ago. Was the SaaS mix in the second quarter in line with your expectation? Because you're maintaining guidance for the full year might suggest that, just want to kind of understand how you viewed the second quarter a few months ago?

I'd say the mix is marginally more heavy this quarter towards SaaS then we would've probably included in our plan. Certainly, we make adjustments along the way. There're a lot of puts and takes. And as you see, we have historically done a pretty job of managing cost to keep in line with the revenues. But yes, I'd say that this is a higher level than we would have expected. And as John said, a lot of times, even in the current quarter, we have deals that we've been awarded that we're not sure which model they'll go with. So that's why we set a range at the beginning of the year on the revenue side that's fairly broad and, typically, narrow that as we get later in the year when there's a little more certainty around it. But I said, the mix is a little more heavy toward SaaS. And as a result, while we've kept the same revenue range for the year's guidance, I'd say as we sit here half way through the year, I'd expect, it would be challenging to hit the high end of that range, that we're - again, there's a lot of business to be won in the second half of the year. But I'd say, it would be a challenge to get to the top end of that range today.

And then my follow-up would be around the Public Safety business in the quarter. Your win rates in Q1 were very high for that business relative to what they were last year. Wanted to see what you guys are seeing in trends in the second quarter, don't expect 71% win rates in the first quarter to be sustained in the second quarter, necessarily. But any commentary on what that business look like? And maybe what your pipeline strength looks like going into the second half of the year?

They were very close in the second quarter to what they were in the first quarter. So win rates are very elevated now over a six-month period of time over what the previous run rates were. The pipeline is good. So those are definitely leading indicators, they don't convert to revenues overnight. And certainly, our investment in those products, and in the organization in general, it is not a significant contributor to margin and revenue and earnings growth but we certainly have confidence that, that will accelerate as these sites come online so probably next year.

And our next questioner of today is going to be Tim Klasell with Northland Securities.

Just a quick follow-up on Scott's question. You've mentioned that might be a little hard to or challenging to hit the high end of guidance for the year. Is that just solely because of some of the shift towards SaaS or is there anything else out there we should be aware of that might be contributing to the challenges in hitting the high end of the guidance?

I don't think SaaS, by itself, but the mix is responsible for everything in our numbers. No question, it's a very elevated adoption rate and certainly affects revenues and margins in the quarter and we'll see how it goes forward. It's certainly a meaningful part of the story. But no, it's not the whole thing. I think in some of our businesses that experienced very high growth rates over the last three years, namely Courts & Justice, there's a little bit of a digestion period going on, executing on those contracts, addressing certainly the success of those sites and the customer satisfaction. So there's a little opportunity cost to digesting those sites, investing in our relationships with those, in terms of opportunity cost, in terms of current revenues and earnings. All of these divisions have strong outlooks. Their pipelines look good. Their competitive positions look good and while there's a pause in some of the growth right now, that isn't mix-related. All of them have expectations for accelerated growth in the second half and into '18.

And then from both you guys, maybe John, the - I hear the - in User Conference you dove a lot into creating, sort of call it the common look and feel across as much as of your product line as you can. And I'd certainly see how that can provide leverage over time. What sort of feedback are you getting from customers? Is that entering into the conversations yet of, sort of the future of where you're taking this and how you can leverage it? Or would that be a little bit too early to start hearing that feedback from the customers yet?

Probably a little early. It's a vision, it's a commitment and an investment that's going on. There are some early deliverables that support and add credibility to the strategy, and customers are excited about that. If you were at the conference, you saw that, it was very well received. There's always a trick when you're in this process. What we have, that's deliverable, referenceable, we can take people to sites and show them is winning. That's a leader in the marketplace and so while we'll talk about this vision and the strategy and we're anxious to share the early deliverables to lend that credibility to it, you also want to remain focused on what you have that you can touch and feel and see today that wins. So it's a little of both. But it is early and I think, over the next couple of years as more and more of the evidence is deliverable, it'll play a bigger role in the decision process.

And the next questioner is going to be Brent Bracelin with KeyBanc.

First for Brian here, is really on the guidance for the second half. Guidance does imply that you're going to see acceleration in growth. I guess the question here is, with not a lot of visibility into whether those awards are kind of perpetual or a SaaS cloud, but what's the confidence you can see in growth? What's baked into your assumption, relative to the second half acceleration relative to mix of kind of SaaS, do you expect it to stay the same, decline? Help us understand, in order to see an acceleration, what are you assuming on the mix side for subscription SaaS?

Well, I'd say that the range of guidance is still fairly wide and that takes into account a wide range of SaaS cloud versus traditional mix. We expect that, that mix will fall within range but within the range on the margin is where there's a little less visibility. Certainly, we have a lot of visibility, there are a lot of deals in the pipeline that are very clearly going to be license deals or very clearly going to be SaaS deals. So I'd say we have a strong confidence as we - the same level of confidence that we normally do, going into the second half of the year in being within that range. But we have chosen not to narrow the range, at this point.

The visibility on the growth is pretty clear. So a majority of the growth comes from maintenance and subscriptions. So those are highly visible and under contract. You have got growth, we've had good license sales. We've got growth from new customers. We've got increases. Our biggest renewals are right now, at the end of June and early July, so we get increases in those. And then the good SaaS sales over the last several quarters support that. So that's highly visible growth and I think the variance that could occur on new licenses is pretty narrow. So I think the visibility for the second half, which is set through our quarterly meetings is pretty strong. There's always some risk and there's always some upside. But I think we've got pretty good visibility on what'll occur in the second half.

And then my second question is tied to just the composition of backlog. Clearly, backlog is growing faster than revenue and really wanted to understand is the mix of backlog by product changing much, or is it relatively balanced across ERP, Court & Justice, Public Safety? Any color, relative to as you look at the backlog versus the revenue mix today, is there a shift relative to those buckets?

I don't think there's any fundamental shifts going on there. Courts & Justice, obviously, signed into some extent our Appraisal & Tax business on the software side, typically signed larger contracts that are executed over a number of quarters, in some cases a number of years. So there, backlog --the percentage of our total backlog that they make up typically is outsized related to their percentage of our revenues just because of the nature of their project. And then Courts & Justice also has the e-Filing backlog and we have several significant fixed price e-Filing arrangements including Texas, and Illinois and Indiana that are in the backlog as well. So to the extent that C&J has the larger projects, they have a bigger percentage. And then ERP, which is the biggest component of our revenues, has a similar sized backlog and their bookings have continued to grow at a nice pace and those 2 would be the pieces that make up the majority of the backlog.

And my last question is really around the Modria acquisition. Could you walk through logic there, the hole that it fills, and as you think about when that could start to contribute to some new RFP award momentum?

Sure, Brent. This is Lynn Moore. As a management team, we're always looking for ways to find areas for incremental growth and I think this is one of the things - one of the investments that we do. We make some internal investments. We look at some acquisitions, some that are more mature than others. Some that are a little more early stage, and I think that Modria sort of fits that bill, more on the early stage. I think courts right now, they're very interested in a couple of things. They are interested in really streamlining their processes, particularly, the smaller courts. There's a lot of clogs and logjams going on. They're also very interested in expanding further their access to justice programs. So the online dispute resolution is something that we've gotten a lot of interest from our clients already. We have a number of courts who are interested in looking at some pilot programs. I'd say those things will be in the more, again, the smaller courts - traffic, family law, small claims, it's probably where that stuff will initially rollout. Those types of arrangements will eventually be similar to e-Filing, in that they will be transaction-based or fixed-fee. But as of right now, I wouldn't count on any meaningful revenues in the near term. It's, again, it's something that we've made an investment in. We believe it will drive some incremental revenue growth and margin growth down the road and some early traction in the market, but it's still been unproven right now.

And the next questioner is going to be Kirk Materne with Evercore ISI.

First question is for Brian. Brian, just on - you've mentioned $200 million in operating cash flow this year and I know that's not necessarily a hard target, but it obviously infers some pretty steep acceleration in the back half of the year. Could you help us bridge how you get there? I know cash flow is always stronger in the second half of the year and maybe some of the working capital changes this quarter, reverse back in your favor. Could you just walk us through that or unpack that a little bit?

Yes, sure. And typically what we see is our cash from operations - the vast majority of that in the second half. Last year, we had $192 million of cash from operations and about $130 million of that was in the second half of the year. And the biggest factor there is the timing of our maintenance billings. We have a particularly high maintenance renewal cycle that happens with customers on July 1, tied to a lot of customers' fiscal years. We build that in Q2 and collect that in Q3, which drives really outsized cash flow in Q3 and on into the fourth quarter. So we expect that trend to continue this year and we don't give guidance on cash flow. But - so that $200-plus million of cash from operations is just a directional number. But we also expect that a couple of the factors that I mentioned earlier in the second quarter, the timing of payroll that worked its way out over the course of the year as well as the timing of the tax payments, those will sort out over the year, depending on how our stock option exercise has fallen, what extent we'll be able to take those credits against our future estimated tax payments. But we expect both of those will smooth out over the course of the second half.

And then my second question is for John, just on the customers deciding to move or take on a SaaS deal with you all. I'm just kind of curious if there's any commonalities on that front, meaning there are those clients that had skill shortages or they needed a shift more towards an OpEx model versus a CapEx model. I was just wondering if there's any commonality, and if so, do you think that's going to start to - is that something that is sort of permanent in nature, meaning skill shortages across same local governments that are going to help this trend accelerate potentially in the near term. It sounds like you don't think there's anything - sort of that's going to make this persist, but I'm just curious on your thought there.

Yes, I don't know that it'll persist at this level, but it does appear that there's a trend towards higher adoption of SaaS. So these are a few things, and I've said before, the catalyst to buy new software and the catalyst to go to cloud sometimes, they're 2 different things. And the timing of those aren't always aligned. So what you're pointing to is kind of a brain drain, which is significant. A lot of long tenured people on the IT side in local government reaching retirement, and as well as the capital investment and infrastructure. Those things drive conversion to the cloud. And we did 37 flips this quarter, which are our traditional clients that move to the cloud, and so that's being driven by that typically. And there seems to be more alignment of those needs along with software needs at the same time, which strives higher adoption. And again, whether that persists at this level or it's just marginally higher going forward, time will tell. The other thing that is driving certainly, the number and not so much the dollar, is a lot of our lower end solutions that may be traditionally weren't offered in a SaaS mode, are now. So far more of our solutions are SaaS and maybe even have benefits by maturing in the cloud and so that's driving higher adoption as well. And that's certainly why the number of accounts is higher, obviously, the dollars are more to attributable to Munis deals and courts deals and the higher ticket items that we sell.

And the next questioner is going to be Zach Cummins with B. Riley and Company.

So I guess, just kind of staying on the SaaS deals. Are they still typically smaller municipalities there choosing SaaS deployments or have you seen some of your larger counties begin to warm up to the idea of SaaS?

That's a mixture. On average, I would say they're smaller than the average deal. And as John said, we have a number of our smaller clients that we're able to now with SaaS solutions, offer a cost effective model for them to acquire the same level of technologies that some of those larger customers have. So for example in California on courts, we have LA County as in on-primes deployment, the largest county in the country. But the smallest county in the state, Alpine County, which I think it has something like 1500 residents is a SaaS deployment, so they are able to obtain the same basic technology under a cost-effective and manageable model. This quarter, our biggest SaaS deal was with the city of Philadelphia. So a large customer choosing our property and tax - our Appraisal & Tax solution on the SaaS model, but certainly I think 60 of our new SaaS clients were less than $10,000-a-year kind of clients. So we're seeing more of the larger wins, but on average, it's still smaller than the average traditional client.

And about a week ago, you've announced the statewide deployment of Odyssey and e-Filing solutions in the state of Vermont. Do you have any other statewide deals that are currently in your pipeline?

Yes. We don't typically talk about names of customers in the pipeline but there are I think at least 2 states that either formally have an RFP out or have done an RFI or kind of pre-RFP activities for our statewide court case management solutions.

Our next questioner is going to be Mark Schappel with Benchmark.

Just one question. John, I was wondering if you just comment on the level and the quality of the RFPs that you're seeing out there in the marketplace, more specifically, I was just curious if the RFP activity is still high, and that if you're still seeing larger RFPs than you have in the past?

Yes, the volume is very healthy. So both, the short term and the mid-term, which would be through early next year and further out, those are all healthy numbers. So if our win rates continue, which we expect them to, then it certainly supports the guidance we have and the accelerated growth we're looking for in '18 and '19.

And the next questioner of today is going to be Patrick Walravens with JMP Securities.

John, could I drill down just a little bit. You've mentioned spending some resources addressing success and customer satisfaction, can you just tell us a little bit more about that?

Yes. When you have pretty high growth, that's certainly Courts have in, very high growth over a three-year period of time, there's always a digesting period following that. And some of those things are not necessarily part of the contract and certainly, Tyler's practice would always be to go back and work with those clients and then identify what's gone well and what needs attention and work with those clients. And there's always - there are always things that you just choose to do, in the interest of customer sat and success and in having the referenceability we're looking for to continue to win in those areas. So some of that investment is unbillable and some of it has - and comes at the expense of the opportunity cost of deploying those resources and billable revenue earning things. So you have some of that, it's very typical. It's the right thing to do, it's a good investment. And so that's a piece of some of the slower growth, or earnings, at this point.

And then Brian, just sort of big picture for us here. So you had a strong bookings quarter. You guys feel good about the business, the RFPs are good. But now it's going to be harder to get to the high end of the range and the stock is down a little bit. So what metrics do you think that investors should be focused on to help see through the impact of this shift to subscription?

Well, I think, you need to look at a longer period of time than just one quarter. As I've said, this isn't - a higher level of subscriptions is a good thing, a higher level of bookings in any - whichever method they come to us - in is a good thing. And we've had two strong booking quarters in a row. And the trailing 12 months is strong. We do have more larger deals that where that revenue is recognized over multiple years. We've got, again, the subscriptions that are recognized more slowly, but we'll come out of that backlog number and help accelerate revenue growth going forward. So I think you just need to look at the same metrics, but it's hard to isolate on one quarter and put sort of undue emphasis on what happened there. Still, as again, our look for the whole year really hasn't changed. The range - and I'm really talking more about revenues than earnings, when I talk about being challenging to reach the high end of the range. As I've said, we have cost levers and typically do a pretty good job of managing the cost to fit the revenues. So the challenge is more on the revenue side this year. But again, looking at the big picture, I think we feel good about the ability to accelerate that above the current level, as we move into the second half of the year and on into 2018.

[Operator Instructions] And our next question today is going to be a follow-up from Alex Zukin with Piper Jaffray.

So just some clarifying questions. John, I guess the first one for you. I'm trying to understand, where did bookings land versus your expectations? Because your commentary about strong bookings seems a bit at odds with the commentary about the digestion period in the slower growth. So I'm trying to understand the cloud - the customers deciding to go with cloud shouldn't really - outside of the mix shift question, where did - did the digestion period factor into your outlook, at the beginning of the year or in the first quarter? Help us understand the puts and takes on that.

Yes. Some of it's in the model and may be there's a little more of it going on than was in the model. Bookings in backlog will be affected and be elevated as a result of higher SaaS adoption. Those are multi-year arrangements. So more goes into backlog if the contract value is simply higher than in on-premise arrangement, where really it's just the initial engagement that goes into backlog. Multiyear maintenance arrangements are not - they don't exist contractually, so they don't go in. So that will raise the bookings in the backlog a little bit.

Our guidance at the beginning of the year, which is unchanged, was for a range of revenue growth that was modestly below what we have historically done. So it's just sort of pause in growth, some of which maybe, marginally related to the SaaS shift this quarter. But it was more bigger picture, in terms of as we make investments in things like Public Safety and position that for higher growth going forward, digest some of the growth, the ultra-high growth we've seen in areas like Courts & Justice over the last couple of years. So that was built into our model at the beginning of the year, so this one quarter sort of higher level SaaS adoption is a relatively minor tweak to that.

And maybe, Brian, just as another clarifying question. I realize you don't guide to cash flow, but when - I think when I was asking my question, I was specifically asking about free cash flow. So I'm curious, is that $200 million number that you're referencing, is that a free cash flow number or an operating cash flow number?

Well, I mean, I was referring to cash from operations being north of $200 million. I'm not any more specific than that. So we've said what our CapEx would be in low to mid-$50 million range. So it's a very general number and north of $200 million free cash flow - yes, we'll leave it at that. But I was talking about cash from operations. I didn't say how much north of $200 million.

And then just maybe a last follow-up. Given that pause in dynamics, does this give you more confidence at all, and I realize you are not - you have a range for this year, so you're not going to guide for next year. But maybe, just the confidence and the ability to accelerate growth, given the incremental higher bookings and visibility that you guys might have?

Yes. I think the combination of the bookings in backlog accelerating, as you'd expect they would, ahead of revenues accelerating is encouraging. The wins and pipeline questions: pipeline is very healthy; win rates remain strong. We're broadening the breadth of the product organically in - as well as some of the acquisitions we've done in recent years. And all of those things together contribute to an accelerated growth rate, which I think we'll begin to see in the second half of the year. As I've said, we've pretty good visibility on that and I think that'll continue into '17 and '18. So if you look at Tyler's growth rate, our current growth rate in this year is below our historical line and you're going to have years below it and years above it. And all indications are that this is simply a growth year that's a little bit on the lower end of the rage, not at reset of the range. And that we would expect it to accelerate in the second half of the year and then, into the next couple of years that we have some visibility on.

At this time, there appear to be no more questions. Mr. Marr, I'll turn the call back over to you for your closing remarks.

Okay. Thank you, Will, and thank you all for participating on the call today. If you do have any further questions, feel free to reach out to Brian, Lynn and myself. Have a great day. Thank you.

And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.