泰勒科技 (TYL) 2015 Q2 法說會逐字稿

Hello and welcome to today's Tyler Technologies second-quarter 2015 conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. (Operator Instructions). As a reminder, this conference is being recorded today, July 23, 2015.

I would like to turn the call over to Mr. Marr. Please go ahead.

Thank you, Robert, and welcome to our second-quarter 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First I would like for Brian to give the Safe Harbor statement. Next I will have some preliminary comments. Brian will review the details of the second-quarter operating results and 2015 guidance. Then I will have some final comments and we will take your questions. Brian?

Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the Company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We 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. John?

Our second-quarter financial performance was outstanding with revenues and earnings exceeding our internal expectations. From an historical perspective, this was our seventh straight quarter of revenue growth greater than 15% and in five of the last six quarters, revenue growth exceeded 17.5%.

Software license and royalty revenues were up 21% and at $14.6 million were the highest in Company history. Our 29% growth in recurring revenues from subscriptions reflects continued strong growth in our e-filing revenues from courts as well as a continuing gradual shift to a cloud-based software as a service businesses.

As we have previously discussed, we had a very difficult comparison from bookings this quarter as last year's second quarter included approximately $64 million in new contracts in California for our Odyssey court solutions. On an absolute basis, bookings this quarter declined 25%. Excluding the California courts deals from last year's second quarter, bookings rose 3% for the quarter and 12% for the trailing 12 months.

While there are a lot of moving parts in the bookings comparisons, the key takeaway is that our bookings especially with respect to large contracts are often very lumpy.

Significant new contracts during the second quarter included a five-year SaaS agreement with Denver, Colorado for our iasWorld appraisal and tax solution valued at approximately $7.9 million. Denver has been a long-time client and chose to upgrade to our current iasWorld Solution using the cloud.

Other significant agreements this quarter included contracts for our MUNIS Solution with the Stafford County Public Schools in Virginia and Leander Independent School District in Texas as well as the city of Pleasanton, California; a five-year SaaS agreement for MUNIS with Carroll County, Georgia and a contract for infinite visions with the Mesa Unified School District, Arizona's second largest school district by enrollment.

We also signed significant multi-suite contracts including MUNIS and EnerGov with the cities of Waco, Texas and Surprise, Arizona.

New clients for our EnerGov planning, regulatory and maintenance solution included Maui County, Hawaii; Miami-Dade County, Florida, and the city of Overland Park, Kansas.

In courts and justice, we signed a follow-on agreement valued at $5 million with Kern County, California for our Odyssey integrated criminal justice solution. The county's ICJ agreement allows it to join the Kern County Superior Court's current Odyssey case management and implementation project for criminal case processing.

With the additional Odyssey application such as jails and probation, Kern's Superior Court and County justice agencies will operate on a single platform that will significantly streamline criminal justice processes and allow agencies to more effectively share information with one another.

Two other California Odyssey clients in the San Bernardino and San Diego counties signed contracts to add additional case types including civil to their implementations.

Finally, our bookings for the quarter included a new agreement with the Indiana Supreme Court to provide e-filing for courts statewide. This five-year $20 million contract is a fixed-price arrangement similar to our e-filing contract in Texas. Indiana also uses our Odyssey case management system in courts statewide. Indiana represents our 11th statewide e-filing arrangement. Several of these are still ramping up and we are confident they will continue to build upon our position as a leader in the emerging space.

At the end of May, we acquired Brazos Technologies Corporation for $6.1 million in cash and 12,500 shares of Tyler stock valued at $1.5 million. Brazos is a provider of mobile-held solutions used primarily by law enforcement agencies for field accident reporting and electronically issuing citations. The Brazos product line is a significant addition to our public safety suite. Brazos had revenues of approximately $10 million last year.

Lastly in May we hosted approximately 2800 clients in Atlanta at Tyler Connect, our annual user conference. At Connect, we announced a new Tyler-wide continuous improvement initiative called EverGuide which builds on our evergreen approach to software licensing. EverGuide will provide the focus and structure to help public sector clients maximize, protect and get the most of their software investment by ensuring they receive maximum benefits from the enhancements released through our evergreen approach to releases and updates.

Now I would like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2015.

Yesterday Tyler Technologies reported its results for the second quarter ended June 30, 2015. I'm going to provide some additional data on the quarter's performance and review our guidance for 2015. Then John will have some additional comments on the quarter and our outlook for the remainder of the year.

In our earnings release we have included non-GAAP measures that we believe facilitate understanding of our results in comparisons with peers in the software industry. Our non-GAAP earnings exclude 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.

Revenues for the second quarter were $146.3 million, up 17.6% with 16.8% organic growth. Software license and royalty revenues increased 20.7% and at $14.6 million were the highest level in the Company's history. This was our 10th consecutive quarter of double-digit growth in licenses and in three of the last four quarters, license and royalty revenues have grown by more than 20%.

In Q2 we received $1.2 million of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs, more than double the royalties of $576,000 a year ago. One contract with a US Federal Agency accounted for more than half of the royalties this quarter.

Subscription revenues increased 28.7%. We added 34 new subscription-based arrangements and converted 20 existing on-premises clients representing approximately $16.9 million in total contract value. In Q2 of last year, we added 44 new subscription-based arrangements and had 21 on-premises conversions representing approximately $17.8 million in total contract value.

SaaS clients represented approximately 24% of our new software clients in the quarter compared to 28% in the prior year quarter. SaaS contract value represented 30% of the total new software contract value signed this quarter compared to 12% in Q2 of 2014. The value weighted average term of new SaaS contracts this quarter was 5 years compared to 5.6 years in last year's second quarter.

The fastest-growing subscription-based revenue stream is from the e-filing for courts and online payments. These revenues increased 30.7% to $10 million from $7.7 million last year. Total e-filing revenue of $7.6 million this quarter grew 32.7% over last year with 45% of that increase related to our Texas e-filing contract which contributed $4.8 million of revenues this quarter.

Our blended gross margin for the quarter declined 40 basis points to 46.7% mainly due to accelerated hiring and on-boarding of professional services and development staff to support our current backlog and anticipated new business. Our non-GAAP gross margin also declined by 40 basis points to 47.5%.

We have added a net of 333 people in the last 12 months with 86% of those included in cost of sales. Our total headcount grew by 134 in the second quarter to 3068 employees including 41 employees added through the Brazos acquisition.

SG&A expense increased 10.9% in the quarter and was 20.8% of total revenues, a decrease of 120 basis points from last year's second quarter. Excluding non-cash share-based compensation expense, SG&A expense increased only 8.8%, only half the rate at which our revenues grew.

Operating income was $29.6 million, an increase of 25.3%. Non-GAAP operating income was $36 million, up 25.3%. Despite slightly lower gross margins, our non-GAAP operating margin improved 150 basis points to 24.6% as we [sustained] substantial leverage from the SG&A and R&D expenses.

Net income rose 27.8% to $18.8 million or $0.52 per diluted share. The fully diluted share count increased by approximately 936,000 shares primarily from stock option exercises and to a lesser extent stock issued in acquisitions.

During the second quarter, we repurchased approximately 5400 shares of our common stock for a total of $645,000 or about $119.50 per share.

Our effective tax rate was 36.8% and benefited from a higher qualified manufacturing activities deduction. Our effective tax rate may increase during the second half of the year if stock option exercises increase and generate significant excess tax benefits that limit this deduction.

Free cash flow was $12.7 million compared to $9.4 million in last year's second quarter. Note that free cash flow was reduced by cash tax payments of $16.8 million in the second quarter compared to $8.6 million last year.

Days sales outstanding and accounts receivables were 94 days at June 30, 2015, compared to 104 days at June 30, 2014. DSOs increased sequentially from 71 days at March 31 which is our normal seasonal trend related to the timing of maintenance billings.

Our backlog at the end of the quarter was $723 million, up 10.4% from last year's second quarter. Software related backlog which excludes backlog from appraisal services contracts was $672.4 million, an 8.6% increase. Backlog included $165 million of maintenance compared to $154.4 million a year ago. Subscription backlog was $229 million compared to $185.7 million last year.

Our bookings for the quarter which are calculated from the change in backlog plus revenues, were $179 million, down 25.1% from last year's second quarter. Q2 of last year included bookings of approximately $64 million related to the California court signings. Excluding the California courts deals, bookings for this quarter rose 2.8%. For the 12 months ended June 30, bookings declined 10.8% over the prior 12-month period as the prior 12-month comparison included the California courts deal signing in Q2 of 2014 and the contract for statewide e-filing in Texas which was signed in the third quarter of 2013. Excluding these two items, the trailing 12-month bookings rose 11.6%.

Digging a little deeper into this quarter's bookings, there are a couple of factors to point out. First, as we mentioned earlier, we signed a new fixed-price e-filing contract with the state of Indiana which contributed about $20 million of bookings this quarter. As a reminder, our e-filing contracts other than Texas and now Indiana, are transaction-based generally with a fee per filing and future revenue streams from those arrangements are not included in bookings and backlog.

Second, maintenance bookings declined slightly this quarter from the second quarter of last year. This is not the result of attrition but rather it is because last year's second quarter maintenance bookings included more than $7 million of maintenance agreements which extend beyond the normal one year term, several of which were related to the new California courts projects.

As a result, they contributed unusually large bookings in Q2 last year but did not renew or contribute to bookings this quarter. Some of those will renew and show up in bookiings in the fourth quarter of this year and some are multiyear agreements that will renew in 2016 or 2017.

As John noted earlier and as we have frequently discussed in the past, these puts and takes all illustrate that it is simply the nature of our business that bookings are often lumpy. This is especially true with respect to large contracts for which revenue recognition often takes place over several quarters or even years.

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 $484,000 compared to 43 new contracts with an average license value of $867,000 in the second quarter of 2014. Again, last year's comparison includes 12 contracts with courts in California.

Based on our performance through the first half of 2015 and our outlook for the balance of the year, we have raised our earnings guidance for 2015 from our revised guidance in April. We are currently expecting 2015 revenues will be between $575 million and $581 million. We expect 2015 diluted GAAP EPS will be approximately $1.97 to $2.05. We expect 2015 non-GAAP diluted EPS will be approximately $2.50 to $2.58.

For the year estimated non-cash share-based compensation expense is expected to be approximately $20 million to $20.5 million. Fully diluted shares for the year are expected to be between 36 million and 36.5 million shares. We estimate an effective tax rate for 2015 between 37% and 38%. The tax rate and share count each are affected by the timing and volume of stock option exercises.

We expect our total capital expenditures will be approximately $13.5 million to $14.5 million for the year. Total depreciation and amortization is expected to be between $15.5 million and $16 million including approximately $6.7 million of amortization of acquired intangibles.

I would like to turn the call back over to John for further comments.

Okay, thanks, Brian. Market conditions in the second quarter generally continued the trends we have seen for the last several quarters and activity in local government market is good. Our bookings and revenue growth for the last several quarters are clearly well in excess of the market as we continue to gain share and expand our market leadership position.

Our competitive position remains very strong across all our major product lines and win rates are high reflecting both the long-term commitment to product development and the consistently high level of execution on our engagements.

While there are obviously a lot of moving parts with respect to our bookings and a number of factors that contribute to lumpiness in contract signings, we remain very confident that the combination of our existing backlog, the pipeline and new business opportunities and our market-leading competitive position continue to support our growth objectives.

As mentioned earlier, we benefited from a significant deal on the dynamic side of our business and fortunately this was incremental to a broader set of business that was experienced in the quarter. The direction of Microsoft royalties continues to trend upward and as we have discussed previously, our renegotiations with Microsoft suggests that we will have a significantly lower expense level in the future as well and the net results will be positive.

Now we will take your questions.

Charlie Strauzer, CJS Securities.

Good morning. John, if you could talk a little bit more on the Microsoft Dynamics subject that you just mentioned. I know it is tough to kind of predict kind of visibility looking out beyond maybe a quarter or two. But when you look at the pipeline of proposals that you are tracking out there and kind of the RFPs that are out there, are you encouraged by what you are seeing on your side of the business? Obviously you can't tell from your VAR partners out there but give us a little bit more color if you can on the pipeline.

Okay, sure. I think as we know over the last couple of years, this certainly hasn't been explosive. It has been a little slower ramp maybe than Microsoft expected and to some degree what we may have even expected. But I think our sales channel is maturing, the product is settling into really what I would call kind of subsegments of the marketplace where it may have advantages and be particularly strong. And we've got a pretty good pipe around that. And as part of this kind of reorganization where we are really transitioning from a predominantly R&D role in terms of our relationship with Microsoft, that initial product is well built out, it exists, it is actually relatively mature. And so our role will shift where we will have a kind of lighter presence on the R&D side. They still have a significant R&D staff and will continue to invest significantly in the product.

But I think our experience on the sales, marketing and even service side is now where we add value to this arrangement. So we have a pretty good pipeline. We would expect not to have a tremendously broad footprint with this product. I think that our direct sales will be again in the sub verticals where we think it is particularly competitive. And I think a lot of our focus will be supporting their partners and building out their sales channels and targeting the sub verticals that each of them are focused on and helping them become more productive.

Ultimately our objective is that the revenue stream from Microsoft is largely complementary meaning international, the significant deal in this quarter was a Federal DOD department that we would not have pursued with our proprietary products. So much of our sales focus will be in addition to our direct sales will begin supporting their partners build a strong presence in that market place.

That is helpful, thank you. And then shifting just for my follow-up to the guidance if you could give a little bit more granularity on the segment level in the back half of the year. And also just looking at particularly an appraisal that looks like you are at historically high levels in terms of revenue, how should we expect that to ramp also?

It is really across the board. In our courts and justice division, results year to date are ahead of plan and none of that is being given back in the second half. It is not timing, it is just outperformance so they are ahead of plan.

Our ERP group which is led by MUNIS with other subdivisions under it has been ahead of plan especially on earnings. And again it is not timing, it is expected to continue throughout the balance of the year.

Most of our local government division is. There is a couple kind of smaller growth areas there that are small enough that they are still a little lumpy so if there is any areas that aren't ahead of plan, it is simply those. And that is again smaller units that are going to be a little lumpier. And as you indicated, appraisal services is cyclically strong at this point in time.

So it is really across the board and as I mentioned in the prepared remarks, it isn't really a reflection of the marketplace. The market is healthy, I think since the post-2008, 2009 dip, as we have said has recovered to somewhat normal levels. But we really do continue to make meaningful gains in our competitive position, our win rates are strong and to some degree what were meaningful competitors are not that involved in the new business market at this point in time.

I would be cautious in saying that. While it is very encouraging because there certainly are some individually strong competitors out in the marketplace that have improved as well but again on balance, there are fewer competitors in the space. There certainly are traditional competitors we have had that maybe have become a little more legacy oriented or in some cases left the new business market completely. So for us those are really the big wins.

Obviously winning a deal is important but the big wins are when you really do put some distance between you and what were our previously strong direct competitors and the level of investment that we are able to make at this point in time in relation to the smaller players in this space.

Excellent. Thank you.

Alex Zukin, Stephens.

Congratulations on the quarter. A couple of questions from me. First one just a clarifying question. Brian, that $7 million in maintenance renewal bookings that you called out, was that part of the $64 million California bookings from last year or is that incremental to that?

Some of it was included in that so that included some California bookings. I don't know exactly how much of it but I would say on the order of -- probably more than half of it was from those California deals.

Got it. And then on Brazos, can you guys talk about how much is expected to contribute to revenues this year?

It is somewhere around $3.5 million in the second half of the year. Because Brazos' revenues last year were around $10 million but because we were a partner of theirs and some of their revenues actually flowed through us and were included in our revenues as third-party sales. So all of that $10 million isn't incremental to revenues we already had in the plan. So a net increase of around $3.5 million in the second half of the year.

Got it. And then could you maybe walk through some of the puts and takes on cash flow performance in the quarter? I realize you don't guide to the number. It was a little bit below our numbers and consensus so just wanted to see if you could just talk about the puts and takes?

I think the biggest difference this quarter was the cash tax payments. The last year in the second quarter and clearly our cash flow was better this year in Q2 than it was last year in Q2. But in the first half of the year, we paid about $10 million more, most of that in the second quarter in cash tax payments than last year. Last year we had more of a benefit in the first half of the year from offsetting cash payments from stock option exercises. This year we didn't realize that same benefit in the first half and we will see what happens in the second half depending on the level of option exercises that could benefit our cash flow more in the second half.

I guess to some extent although most of those wouldn't be collected yet, the maintenance billings that we talked about also will affect cash flow and they pushed it a little higher last year, some of that second quarter, more of that is third quarter. But the taxes are the biggest piece.

Got it. That is helpful. John, maybe you can you just talk a little bit -- I know you touched on this on the comments but if I put the 3% bookings growth and I realize lumpiness in bookings in context with the raise in the guidance, what gives you that confidence as you look at your pipeline, as you look at your business to raise the numbers here?

Obviously we are talking about the second half of the year that we are in. The sales processes are long so certainly almost all the business we expect to see this quarter is relatively certain. It is a matter of execution which isn't to be taken for granted but good visibility. And at this point, it is some deals that it is a matter of timing in the fourth quarter but you know these things pretty well.

I know it is important for us to report bookings and backlog and I think over a longer period of time, it is important for you folks to focus on those trends directionally. But I wouldn't read too much into a single quarter. Largely big deals and there was one in Indiana in the quarter. Big deals can drive it up as well as multiyear SaaS deals.

So if we do a traditional on-premise account, the only thing that goes into backlog is the initial implementation. We don't sign seven-year maintenance agreements even though they are near certain to occur whereas if we sign a seven-year SaaS deal, seven years of revenue goes into the backlog.

So there are a number big deals, multiyear SaaS deals, a number of other things that can kind of sway that number around. And again over a long period of time that all gets normalized. But I would just be cautious about over focusing on it in a quarter. And as I said, we have got very good visibility as to the deal mix in the balance of the year and there are some bigger deals in it and there are also while the second quarter was a little light on SaaS deals, again, it is just deal mix and timing. We know that there will be a strong number of SaaS deals in the second half of the year that are multiyear and we will raise the bookings in the backlog.

So again we feel that the trends that have been established over the last couple of years are largely in place and I think the beat in the second quarter was not timing and with the visibility we have in that -- in the books at this point, we think the direction will continue.

That is helpful. Just a last one for me. John, just wanted to ask you which one of your newer initiatives are you guys most excited about? You clearly have a lot of growth irons in the fire with record holdings in criminal justice and the new Brazos stuff. So just wondering what is top of mind for you right now strategically?

Not to -- I will give you a short answer but they way we run the company is to try to do that across the board. Obviously courts and justices has had a great run and is a very strong leader and we are very excited about their opportunities going forward, turning case management into more of an integrated criminal justice suite, building out the e-filing opportunities that we have. But that same kind of focus it certainly isn't because we aren't having that success that we have relief in other areas of the business. We are a strong company financially as you know. We are looking for places to make investments and we are raising the level of investment we are making in products like MUNIS that are well-established and in strong leadership position. But we feel it is appropriate to reinvest a percentage of those incremental revenues back into the product and their experience is strong?

Probably the fastest-growing smaller unit but fastest-growing and a good catalyst for growth down the road is the EnerGov Department. We don't get too granular with those numbers but it is fair to say that company has far more than doubled in revenues in the two years it has been on board. And emerging as a real leader in that space as well so we are excited about that.

So again we try to look at the whole range of applications and really we are not looking at where we can tighten things up, we are exercising this with discipline but we really are looking at in each of those suites, what types of timely investments can we make to improve the competitive positions and ensure that they can sustain the growth they are on.

Perfect. Thank you, guys.

Brian Kinstlinger, Maxim Group.

This is actually Josh Seide in for Brian. Can you remind us about the court CMS market opportunity in Australia, how many RFPs may come out over the next six to nine months? And are there new competitors that you otherwise don't see in the US? Thanks.

There is only one as far as from what I know, there is one active engagement that we are involved in now and one of the reasons we entered the marketplace, we've got a strong partnership that we have invested in and we do believe that there isn't any Tyler so of speak in that marketplace, there is no clear leader with a complete offering like what we have. So there again isn't a single competitor that we would name to you is someone that we need to overcome. We feel it is a market that doesn't have a leader like that and it is ripe for someone to come in, make an investment and establish themselves. Obviously it is English-speaking. The courts operations are very similar to the US and the market opportunity there is a need for someone to come in and invest in that.

Currently there is just one active engagement but we believe that if we are able to get established that there will be a number of opportunities there.

Just as a follow-up, can you give us some sense of the deal sizes for Australian opportunities?

It is like here. There could be some deals that are less than $1 million and maybe some deals that are $5 million, $6 million, $8 million. I don't think there are $20 million deals. I think the entire market opportunity is in the area of the size of Texas so a larger US state is basically what we are adding incrementally to our addressable market space.

That is helpful. Thank you.

Peter Lowry, JMP Securities.

Nice quarter. Can you talk about how you think about your capital allocation strategy currently?

Obviously the balance sheet has built significantly over the last couple of years. We are very focused I think traditionally, meaning literally over the last 10 or 12 years Tyler has done a good job in having quality earnings backed up by their cash flow and we have had great opportunities to turn that cash into strong shareholder value through repurchase of our own shares and good acquisitions and ongoing investments in our products.

As you saw, we bought a little stock in the quarter. We would have bought more had we had more opportunity at that level. So we will continue to be opportunistic there and be aggressive. We are going to hit the numbers that we feel we should be investing at.

Our M&A strategy has evolved. We aren't as focused on smaller consolidation plays, the things that were important in the early years to get established as a leader, to broaden our addressable market place, to bring in subject matter experts, to increase our recurring revenue and customer base and all of those things. We feel we have to kind of hit the critical mass point there. And so I think you could say our standards have gone up which means we find deals less frequently but those deals that do meet our standards could be larger in size so I wouldn't look at our strong balance sheet at this point in any way as a negative thing. I think it positions us very, very well to act on what could be more meaningful opportunities when they present themselves.

That is a strategy that you need to be patient on but we certainly don't want to be here three, four, five years from now with the kind of cash in relation to our size that you see in some tech companies. We are very actively looking for in a disciplined fashion, ways to deploy capital that will create shareholder value.

Lastly, as I indicated I think on the prepared remarks or one of the earlier questions, we are investing at a higher level. I don't think that will necessarily put a lot of pressure on earnings because with the kind of growth that we have and the incremental margins that come in that growth, it is really just redeploying what we get out of these new revenues back into the products so it won't necessarily eat into our balance sheet or our cash position. But we are actively identifying and investing in incremental proprietary investment opportunities within our own product suites.

Okay, great. Thanks. How are we going to measure the success of EverGuide? Is it as simple as just customer retention or are there different metrics that you might look at and are there any early indications of success there?

It is really taking shape now so I don't think there is early indications but maybe one thing that the investment community takes a little bit for granted is that Tyler kind of chugs along nicely and that is not easy and I think to take for granted, that would be a mistake.

So yes, we have an incredibly high retention, literally less than 2%, probably at or under 1% in terms of names, so very, very low and you could say that is great and check that box. But what we see is we have many clients now that are 10, 15, 20 years with us which means they may have almost all of their staff having turned over in that period of time. Much of their staff never trained on the product. So the people have changed at those sites and the product every five, six, seven years is entirely different than it was five, six, seven years previously. So even if the same people are there, they have really never been trained and may not fully appreciate what is in the product they have.

So evergreen for some time now has provided them with all of the updates. There is no relicensing, we never resell into an account and that is very well received but just because we provide them with new technology and new functionality and higher quality products doesn't mean that they are being well utilized at that site. And we can actually go to sites and they can think they need this or need that and maybe they have new leadership that just assumes they have had this system 15, 20 years they need to go out and get a product that has that and they don't even appreciate maybe that it is in that product.

EverGuide really takes evergreen to another level where there will be supplementary services, there will be online training devices, there will be a lot of things that we really continually try to add value into their core arrangement with us. And I think we are compensated well to do that and it is in our interest to do that and there will also be incremental services that they can contract for at incremental cost in order to do that.

So it is a recognition that just because we provide them with updated technology and functionality, it doesn't automatically get used and the site needs to be challenged to invest in that and we need to step up and support that process as well.

So I think we're trying to stay ahead of the atrophy that can occur in an implementation that gets stale over time.

Great, thank you.

Tim Klasell, Northland Securities.

Good morning everybody. Just you touched on briefly of the large-scale you did in the quarter. How big was that relative to let's say the Odyssey deal from this quarter last year?

The large deal in the quarter was Indiana's e-file deal was $20 million to be recognized over five years and the total contracts in Q2 of 2014 in California I think was $64 million, certainly right around that. Yes, $64 million.

That is helpful. And then Brazos, how did that do relative to expectations in the quarter?

It is just a little teeny bit and I think it closed in the remaining weeks so I think there is only a few hundred thousand dollars in the quarter so it is insignificant.

It was only in there, it closed in may 29, it was only in for a month of the quarter so didn't have any kind of a meaningful impact.

Great, great. That is all I had. Thank you.

Scott Berg, Needham.

Congrats on a good quarter. I have two questions. First of all, John, the state-wide DeKalb deal that was announced in the quarter, that is your second one with a fixed fee. I guess it is a two-part question. One, what is the likelihood of additional opportunities on that fixed fee nature going forward? And then two, does that contract, do you think it guarantees you more revenues or maybe reduces some of the upside of the transactional nature of the rest of the businesses?

Well, I guess both. So fundamentally, we look at this as a click business and we will continue to protect that. We will not license the product, it is a click software as a service kind of business.

Having said that, we recognize that our vertical likes to have certainty in their costs. So when we do go to a fixed fee basis, it is completely the result of projections on what those volumes will be and just converting it into fixed fee so that they have visibility on what their costs are. And I think if we are a vertical software company then we need to appreciate the market we are in and be responsive to what works for them.

I think in the short term, the answer is both meaning that if their actual volumes are a little higher, then we may come up a little short and of their actual volumes are a little lower, then we may come out on the good. But obviously all of these states have been established and have had courts for a very, very long time and the volatility is within a relatively tight range.

If their actual experience were outside that range for whatever reason, then I think the second generation of those contracts would reflect that. But I think it is a tight range. I don't think they are going to experience filings or case volumes that are dramatically different than what they have been experiencing for years.

Scott, Indiana is a little different in the way they approach it than most of our him e-filing clients. In most cases and that includes Texas where it is a fixed-price arrangement -- in most cases the users, the attorneys are actually paying a filing fee with each transaction or in the case of Texas case as a whole.

Indiana is actually funding an out-of-state fund so rather than charging the users, it is coming out of the state budget. So I believe drove them more toward wanting to have a fixed-price arrangement.

But if you look at the pricing on Indiana, what we are getting relative to the number of cases we expect it to generate very similar on a per case basis to what we see in other jurisdictions.

And then the one follow-up for me, Brian, is on the gross margins around professional services. Obviously you have hired a lot lately to service the contracts, the large uptick of the California courts and justice deals over the 12 months in particular along with some of the ERPs. But when do we start getting some leverage from that and when does that hiring slow a little bit? Is that a back half of 2015 opportunity or are you thinking about that more in the first half of 2016?

I think we start to see the leverage more in the first half of 2016. Our hiring does slow down in the last two quarters, at least the plans are for the second half of the year for us to add around 150 net heads and we added around 200 in the first half of the year so it slows a little bit particularly as you get into the fourth quarter.

But I think you really start to see that reflected in more of an uptick in margins as you get into the beginning of next year.

Jonathan Ho, William Blair and Company.

Congratulations on the strong quarter. I just wanted to understand a little bit more so just relative to the California contracts that you have won last year, can you maybe update us in terms of how far along you are in terms of completing those projects and maybe your thoughts around follow-on opportunities from counties that you have already won?

Yes, a number of them are live but I think all of them continue to have considerable work left and considerable dollars that remain in backlog. Some of these projects are bigger than others so again some go live in say eight to 12 months and some that could be a two- or three-year process. Certainly still in the relatively early stages of all of that business that was won.

We mentioned as an example and we have said before that a lot of these deals, the $64 million that we booked in Q2 of 2014 doesn't take all those companies out of play in terms of opportunities. There are still significant opportunities in those counties, some of them were a single case type and have several other case types that are potential opportunities for us and other applications as well.

So I think most of these counties have an objective to have an integrated criminal justice solution in place but most of them started with something that is a subset of that. So the significant work that remains from the original engagements but probably more significantly, there are significant other opportunities like the one we mentioned with Kern County where they signed a $5 million follow-on to add other case types and other applications to the project.

At a very high level, we believe the total market opportunity for the integrated criminal justice all those other applications beyond case management, is roughly equal sized to the case management opportunity. So for example in Kern County I believe our initial deal there was around $4.5 million and this add-on was close to $5 million so it kind of illustrates that they are similar sized opportunities.

Got it. Just relative to sort of AMCAD's exit to the market, have you started to see now that we are pretty far along in that process more interest from their existing customer base in terms of switching over or at least early indications? I just want to get a sense of where that might be tracking in terms of competitive displacement?

Yes, one account we may have signed last quarter and others watching that and there were some kind of coalitions established of their clients to see if they could somehow sustain the product and we see chinks in that armor and who knows? But we just don't see that as a very long-term viable option for those accounts.

So we picked up a couple maybe, we watch the others closely and I think some of them are trying to see if there is a viable path for them and there is a lot that goes around maintaining these products and supporting them that will make that difficult and we will continue to watch it closely.

Got it. And then just one last one on my side. In terms of the Dynamics opportunity, you guys had talked in the past about maybe shifting some of these spending away from the R&D side and more to the go to market strategy side. Is that still sort of the current thinking or can you give us maybe an updated view on where the investments might go going forward? Thank you.

We continue to work on details kind of structuring a new arrangement that is more representative of our relationship once the product is now deployed versus when it was in pre-release R&D. And obviously in those early years we brought value in bringing our vertical expertise to the product. That is largely reflected in the product and so our involvement on the R&D side will be brought down significantly.

Some of those resources will be redeployed and are being redeployed on the sales side and that is not all direct sales, a reasonable of those resources -- we have a lot of experience in RPs and demos and managing these marketplaces and all of these things that some of their very capable partners may not have that vertically oriented expertise. And we will have a team that supports that and our interest for them to build out that channel.

So yes, at a high-level, our R&D spend will come down significantly. Our sales and sales support spend will go up. We will continue to build out to some degree a service business that we have established there. But the net net of it will be a reduction in total spend probably in the 50% range. So a significant reduction in total spend.

Thank you.

Matt Williams, Evercore ISI.

I am actually on for Kirk this morning. Most of our questions have been answered at this point but maybe just two for me.

I guess number one, just with the public safety offering that is in the Brazos acquisition, how should we think about how you are going to go after this public sector market? Is there a lot of integration with some of your existing product areas that we should expect or is this business going to be more of a standalone business that is maybe a little less integrated with some of your other offerings? Just trying to get a sense on that.

I will tell you it is a process and we have been in this process for some time but I would say this is an area that we can see accelerated growth and a stronger presence than what we have had traditionally. So Brazos -- mobile is a big leader, it is a lot of the color and decisions these days and having a very strong mobile first kind of approach is exciting to our public safety offering.

In terms of standalone, no, I think we see our public safety offering -- we enjoy a very strong leadership position in courts and justice and I think as we grow our public safety position that we have the opportunity to have a complete end-to-end criminal justice solution that doesn't exist.

The competitors for the most part that we compete with in courts are different than the competitors we compete with in public safety and if we are able to have an integrated leadership position in both of those areas, there is very meaningful information that can come from that that is more difficult to produce from disintegrated systems. So that is a big part of our strategy there.

Got it. That is helpful. And then maybe just one more on the e-filing. Obviously outside of the [tech file] arrangement, the other component of the e-filing revenue continues to sort of accelerate. I am just curious sort of what others states or locations are sort of driving some of the non-tech file e-filing growth? And I guess as a follow-on to the Indiana deal, when should we expect that to start to contribute going forward? I assume it will be somewhat of a gradual rollout similar to tech file but any color on timing there would be great.

Indiana actually started this quarter with a small amount of revenues, about $100,000. It ramps up over the next year. I think it is about $1.5 million this year and -- $1.5 million this year, $3.5 million next year and then $5 million a year in 2017, 2018 and 2019. And then second, it ramps up to I think it is $650,000 a quarter in the last two quarters of the year.

Most of the other revenues in the e-filing growth right now beyond Indiana is the big contributor in a second half of the year. We start to see some e-filing revenues in some of the California counties in the second half of the year. Most of those are smaller volume counties so it is not going to be as significant but it is going to be a gradual ramp up in those counties.

The other statewide implementations where you get e-filing, places like Oregon, Rhode Island, Maryland are all still in a ramp up phase. So it is more gradual with respect to most of our clients right now other than Indiana.

Great. Thanks for taking the questions.

Kevin Liu, B. Riley & Co.

Good morning. Just one question for me. With respect to the Dynamics de4al in the Federal sector you secured this quarter, is it your sense that there are other large opportunities within either the DOD or other agencies and Federal that you are aware of or do you think this is more of a one-off opportunity?

The simple answer is we don't know. As we have said, we really have very little visibility to this marketplace and what comes to us indirectly through Microsoft. I think it is reasonable to think that winning a significant deal at the Federal level is the result of a concerted effort to secure business there and if they execute well on this project, you would certainly think and hope that it wouldn't be a one-off.

So the encouraging of this -- this has not been explosive but I think the encouraging thing is that the direction of the royalty largely is up and the footprint of the market that they have established even though it hasn't exploded is very broad internationally. I think there were 18 counties, 18 countries on our royalty report this past quarter. That is typical. The deals come from 12, 15, 18 countries, different levels of government, federal governments, state and local governments, complementary public sector businesses, universities, transit authorities, things like that.

Yes, we would hope and we would expect that if they have a successful significant engagement at the Federal level that they didn't establish that presence for a single deal, that that is something that they expect to be repeatable.

Actually if I could sneak one more in just with respect to the Microsoft negotiations going on now if you do shift more of your resources toward the sales and service side, is there an opportunity to also claim a higher royalty rate or would you expect that piece of the partnership to remain unchanged?

The royalty rates are pretty well-established for a very long period of time. We don't get too granular on the agreement but many, many, many years and the changes from the original arrangement we expect -- if there are -- will be very modest. So they can change very modestly based on our resource commitment, a number of other variables. But no, largely the royalty rates are established and will be relatively stable over a long period of time.

Okay. Thank you for taking the questions.

Mark Schappel, Benchmark.

Good morning and thanks for taking my question. Nice job on the quarter. Brian, just one question for you. I was just wondering if you could repeat your comments in your prepared remarks with respect to last year's maintenance bookings?

With respect to last year's maintenance bookings?

Yes, if I recall correctly, there were two main issues -- or not issues but two main things you addressed with respect to maintenance bookings. One had to do with Indiana e-filing contribution and the other had to do with I guess something that happened last year at this time with maintenance bookings.

Last year in Q2, we have about $7 million, more than $7 million of maintenance agreements that went into bookings that were longer than our normal one-year term. So with the normal one-year maintenance booking last year in Q2, that would have renewed and showed up for the same or greater amount this year in Q2. Because those extend for in some cases 18 months, some cases multiyear, you didn't get that renewal this year in Q2. Some of those will renew in the fourth quarter of this year so they were 18 month initial agreements, some of those are multiyear agreements that we won't see the renewal again until 2016 or 2017. So they will work off of that initial arrangement. So that creates a little bit of a mismatch in the comparison.

Thank you.

Robert Moses, RGM Capital.

Just a couple of questions and really a clarification on one. So I know we have talked a lot about the lumpiness of orders but just trying to put this in perspective. If you did around $179 million just going back over the last three or so years, it seems like it is kind of a second highest by a pretty wide margin. Am I thinking about this right because I think I have seen like a lot of $100 million to $150 million type of number so it is still relatively significant in terms of the total dollar value?

You are correct. If you go back over the last two years other than second quarter of last year, that is still the highest bookings quarter in the last two years. Yes, even though is down from last year's Q2 and there is some moving parts in there, it is still the second best bookings quarter in the last two years.

Okay, thanks. And then John, I know this is really tough to comment on but just M&A environment in general. You've been very disciplined historically, assume you are going to remain so. But just given what happened to the economy a few years ago and where we are at today and given the valuation of the stock market, would you say the M&A environment things you are looking at is about the same as it has been the last year or is it more aggressive, less aggressive? Just a sense.

It is probably about the same. As I said, our strategy has evolved and I think it actually is more selective, more likely to do strategics than consolidation opportunities which theoretically could put higher values on deals. If you look at EnerGov or if you look at our e-file, these acquisitions really while you want to be disciplined on value, they certainly can support a higher valuation given how they perform once in the Tyler Company.

So there's deals out there. You know the T markets flush with cash and there are cases where valuation I think gets out of the neighborhood that we are comfortable in. But it is reasonably active, it is just instead of doing a deal or two a quarter, we are probably more likely to do fewer deals that could be more significant in size.

Okay, great. Thanks for the color.

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

Thank you very much for joining us on the call today. If there are any further questions, feel free to reach out to Brian or myself. Have a great day.

This call is concluded. You may disconnect.