泰勒科技 (TYL) 2017 Q3 法說會逐字稿

Hello, and welcome to today's Tyler Technologies Third Quarter 2017 Conference Call.

Your host for today's call is John Marr, Chairman and CEO of Tyler Technologies.

(Operator Instructions) And as a reminder, this conference is being recorded today, October 26, 2017.

I would like to turn the call over to Mr. Marr.

Please go ahead.

Thank you, and welcome to our third 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.

Then Brian will review the details of our third 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 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.

Lynn?

Thanks, Brian.

Tyler executed well in the third quarter and delivered solid earnings that were in line with our expectations.

Even as we experienced a high level of subscriptions in our new business mix, we achieved the highest quarterly non-GAAP operating margin in our history at 29.2%.

Subscriptions was, once again, our fastest growing revenue line, up 22%.

Within subscription revenues, e-filing revenues rose 26%, including our first revenues from Research Illinois.

Going back to the beginning of 2010, our subscription revenues have grown more than 20% in 30 of the last 31 quarters.

Total recurring revenue from maintenance and subscriptions grew 14% and comprised 64% of total revenue.

Bookings for the quarter declined 8% on a difficult comparison to the third quarter of 2016.

Bookings in last year's third quarter included approximately $72 million from the 4-year extension of our e-filing contract with Texas.

Compared to bookings, excluding the Texas e-file renewal, bookings this quarter rose 24%.

Our quarter back end -- our quarter-end backlog grew 12% to nearly $1.1 billion.

Similar to the second quarter this year, our mix of new software contracts had a high proportion of subscription arrangements, with cloud contracts comprising about 1/2 of our new deal mix.

The total contract value of new software subscription contracts signed in the quarter doubled in value from last year's third quarter.

Our largest new subscription deal signed in Q3 included Clayton County Schools in Georgia for our Munis ERP and ExecuTime solutions, valued at approximately $7.5 million; contract with Pawtucket, Rhode Island and Independence, Missouri for our Munis ERP solution, each valued at approximately $5 million; contracts with Blount County, Tennessee, Carlsbad, New Mexico and Sumner County Schools in Tennessee for our Munis ERP solution, a multi-suite arrangement with Clovis, New Mexico for our Munis ERP, EnerGov and Tyler instant manager solutions; and Kyle, Texas for our Incode ERP solution.

Significant on-premise licenses deals signed during the quarter, each with a total contract value of $1 million or more included multi-suite arrangements with Gwinnett County, Georgia for our Odyssey court case management, Incode ERP and Eagle solutions; Dover, Delaware for our Munis ERP, ExecuTime and EnerGov solutions along with appraisal services; Lowndes County, Georgia for our New World Public Safety, Brazos and SoftCode solutions; and Craven County, North Carolina for our Munis ERP and EnerGov solutions.

We also signed significant on-premises license deals for our New World Public Safety solution with Lexington, Kentucky and Burlington County, New Jersey and license contracts for our Munis ERP solution with Richland, Washington, Odessa, Texas and Ascension Parish, Louisiana.

I mentioned earlier that our subscription revenues for the third quarter included our first revenues from Research, Illinois, which is an extension of our e-filing solution.

During the quarter, we signed an amendment with the administrative office of the Illinois Courts, a current state-wide, e-filing customer, for our first research portal.

Under the 4-year, $12 million contract, Tyler is providing a web-based portal that provides immediate and secure access to a consolidated database of case information.

The solution provides a simple, consistent way to view and obtain case records and documents from counties across the state.

It integrates with multiple-case management systems to share that information and provides an efficient way for attorneys, judges and other constituents to access important case records and documents at any time and on any device.

The contract also gives us the ability to offer additional value-added features and services, and we expect to offer additional attorney services on a subscription or transaction fee basis in the future.

We will look to expand our research offerings into other states where we provide e-filing solutions.

Research and our Modria online dispute resolution offering, both provide attractive, long-term opportunities for recurring revenue growth and margin expansion.

Finally, our bookings this quarter included extensions of our state-wide e-filing contracts with courts in Indiana and Minnesota, with Minnesota converting to a fixed fee arrangement.

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 third quarter ended September 30, 2017.

I'm going to provide some additional data on the quarter's performance and update our guidance for 2017 and then John will have some additional comments.

In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in 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 third quarter were $214.1 million, up 10.1%.

On a non-GAAP basis, revenues were $214.4 million, up 8.4%.

Software license and royalties revenues were essentially flat as our new software contract mix had a high proportion of subscription deals for the second consecutive quarter.

Subscription revenues increased 21.6%.

We added 94 new, subscription-based arrangements and converted 15 existing on-premises clients, representing approximately $42.5 million in total contract value.

In Q3 of last year, we added 50 new subscription-based arrangements and had 18 on-premises conversions, representing approximately $22.7 million in total contract value.

SaaS clients represented approximately 49% of our new software contracts in the quarter compared to 28% in the prior year quarter.

This is the second consecutive quarter that the number of new SaaS deals was essentially a 50-50 split with traditional license deals.

SaaS contract value comprised 51% of the total new software contract value signed this quarter compared to 29% in Q3 last year.

The value-weighted average term of new SaaS contracts this quarter was 5.8 years compared to 5.6 years in last year's third quarter.

Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 22.9% to $15.4 million from $12.5 million last year.

That amount includes e-filing revenue of $11.9 million this quarter, up 25.8% over last year.

Cash flow from operations was $92.8 million compared to $79.2 million last year, up 17.2%.

Free cash flow, which is calculated as cash from operations less capital expenditures, was $85.2 million compared to $71.6 million.

Our CapEx for the quarter was $7.6 million, including $3.6 million related to real estate compared to total CapEx of $7.6 million in Q3 of last year.

We ended the quarter with a $186.3 million in cash and investments and no outstanding debt.

Day sales outstanding and accounts receivable was 87 days at both September 30, 2017 and 2016.

Our backlog at the end of the quarter was $1.1 billion, up 12.2%.

Software-related backlog, which excludes backlog from appraisal services contracts, was $1 billion, a 14.2% increase.

Backlog included $260.5 million of maintenance compared to $236.2 million a year ago.

Subscription backlog was $419.1 million compared to $337.5 million last year and includes approximately $130 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 $246 million, a decrease of 7.5% from Q3 of 2016.

We had a difficult comparison to last year's third quarter, which included the e-file Texas renewal of approximately $72 million.

Excluding the e-file Texas renewal from Q3 of 2016, bookings grew 23.6%.

We also saw a handful of deals push out of the third quarter because processes were delayed in areas affected by hurricanes, Harvey and Irma.

For the trailing 12 months, bookings were approximately $932 million, a 10% increase.

Note that we have 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 32 new contracts in the third quarter that included software licenses greater than $100,000, and those contracts had an average license of $381,000 compared to 58 new contracts with an average license value of $362,000 in the third quarter of 2016.

As noted earlier, significant increases in our clients-choosing-subscription arrangements versus on-premises license contracts resulted in the decrease.

Our revised guidance for the full year of 2017 is as follows.

We currently expect 2017 GAAP revenues will be between $840 million and $848 million, and non-GAAP revenues will be between $841 million and $849 million.

We expect 2017 GAAP diluted EPS will be approximately $3.46 to $3.52 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 $3.86 to $3.92.

For the year, estimated pretax noncash share-based compensation expense is expected to be approximately $38 million.

We expect R&D expense for the year will be approximately $48 million to $49 million.

Fully diluted shares for the year are expected to be between 39.3 million and 39.6 million shares.

GAAP earnings per share assumes an effective -- an estimated annual effective tax rate of 14% after discrete tax items and includes approximately $38 million of discrete tax benefits related to share-based compensation.

We estimate the non-GAAP, annual effective tax rate for 2017 to be approximately 35.0%.

This rate was lowered from 35.5% to reflect the estimated benefit of the R&D tax credit not expected at the beginning of the year.

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 periodically to determine whether it remains appropriate in consideration of factors, including Tyler's periodic effective tax rate calculated in accordance with GAAP, changes resulting from tax legislation, changes in geographic mix of revenues and expenses and other factors deemed significant.

We expect our total capital expenditures 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 $36 million of amortization of acquired intangibles.

Now I'd to turn the call back over to John for his further comments.

Thanks, Brian.

This was another strong quarter for Tyler, and we're pleased that we met our earnings expectations with our highest quarterly non-GAAP operating margin ever.

We achieved these results even while facing a revenue headwind from a second consecutive quarter in which we've had a high level of subscription contracts in our new contract mix.

As we noted earlier, approximately 1/2 of our new software contracts this quarter, both in terms of the number of deals and the total contract value, were cloud-based subscription arrangements.

The total contract value for new SaaS software contracts of $36 million was double that of last year's third quarter and included 8 new SaaS contracts valued at more than $1 million each.

Although the increase in Cloud sales over the last 2 quarters is a headwind to short-term revenue and earnings growth, these new cloud contracts will drive higher recurring revenues going forward.

We're pleased that so many of our new clients are selecting Tyler's solutions, whether they choose to run on-premise or in the Tyler Cloud.

Our win rates and bookings remain good, reflecting an active market in our strong competitive position.

There are variety of factors that influence an individual client's decision on whether to purchase a license and run on-premise or enter into a subscription arrangements with us.

And we believe that most -- in most cases, we have a limited ability to direct that decision.

We're certainly happy to win new clients regardless of which model they choose, and we clearly have the strength to manage any short-term pressures on revenues and earnings that come with a shift toward more Subscription business.

While this is a second consecutive quarter with a meaningful shift in the mix of new business towards Subscription, we do not expect the mix -- we do expect the mix to vary significantly from quarter to quarter.

We're also pleased with the continued momentum in our subscription revenues from e-filing and other transaction-based offerings.

We've continue to add new e-file clients and are extending our relationships with courts and attorneys by adding new capabilities and services such as Research and Online Dispute Resolution.

We're gratified that our e-filing clients continue to renew and extend those arrangements, often well before the expiration of the initial terms as Minnesota and Indiana have recently done.

As we've discussed previously, we are investing at a high level in product development initiatives, particularly in respect to enhancing our Public Safety products to improve our competitiveness and broaden our addressable market.

These projects continue to progress on-schedule, and the marketplace is reacting favorably to our vision for public safety in the Tyler Alliance.

Finally, our thoughts and best wishes for a speedy recovery are with more than 800 Tyler client sites that were affected by hurricanes, Harvey, Irma and Maria.

I'd also like to express my appreciation to the many Tyler professionals who've gone the extra mile to support these clients.

Prior to each storm, our disaster recovery team proactively reached out to the 269 Tyler clients with contracted disaster recovery services that were in the path of a storm, including sites like Aransas Pass and Port Arthur Independent School Districts in Texas and the Government of the United States Virgin Islands.

Our teams continue to work with the affected clients to make sure they can continue to manage their critical business processes.

Lynn and I have heard from a number of clients who have complemented Tyler on our dedication and performance to these disasters and our performance in situations like these are what make Tyler a trusted partner for local governments.

Now we'll be happy to take questions.

(Operator Instructions) Our first question will come from Kirk Materne with Evercore ISI.

John, wanted to follow up on that last comment you made to serve on the split or the decisions of clients going either for SaaS or license, and I'm sure Brian has some thoughts on this.

But is -- I guess 2 questions around that.

When you guys think about the lifetime value of the client, does it change if they go SaaS, meaning, are you gaining not only more revenue dollars, but more gross profit dollars over say, a 5, 10-year period than if they go with the license option?

And then Brian for you.

When you're contemplating guidance in the fourth quarter and as we think out to 2018, is 50% sort of the new baseline that you're going to use just to, I guess potentially be a little bit more, I guess, conservative around that?

I realize -- I think we all understand it will bounce around, but I guess I'm just trying to get your thoughts on how you're thinking about integrating that into your guidance process?

Sure.

Well, we certainly think that the long-term value of our clients is very significant regardless of how they become a Tyler client.

Our maintenance agreements are substantial in dollars and probably the highest margin revenue that we have as a company.

So maybe unlike some industries or companies, that the delta between on-premise and cloud is probably narrower with us than again, in some other places, given the attrition is incredibly low, that the annual dollar volume's pretty high and the incremental cost to support new clients is not that significant.

So long-term value of On-premise, traditional clients is very high and certainly approaches Cloud clients.

There is short-term pressure obviously on revenues as was seen in the second half of this year, and that adoption seems to be higher.

There's no question if revenues are higher going forward, the incremental revenues are mostly attributable to the Cloud itself, our facilities and the people that manage those facilities and the investment in those.

There are high capital investments in hosting these clients and there are incremental headcounts to support those clients as well.

So revenues are significantly higher after the initial engagement between 50% and 100% higher depending on the arrangement.

The margins on the incremental revenue would be lower than on the base maintenance agreement because of those capital investments and the additional headcount.

But the incremental value probably after say, the fourth year or so is greater for Cloud customers.

And on your question regarding guidance.

Certainly, in the short term, it's a little bit more of a specific identification buildup of that guidance.

So as we look out over the next quarter, most of the deals are pretty far along in the pipeline and fall either in the SaaS category or in the license category, and we know where that is.

There are always some that decide pretty late in the process and even a handful that will have selected Tyler very late in the quarter, but have -- and -- but haven't decided yet, which model they're going to adopt the software under, so that kind of accounts for the range of revenues and earnings in the guidance.

It's a little clearer looking out to the next quarter than what it would be for the year and so that's why we start out the year with a fairly broad range.

And I think that given our experience both -- with recent quarters and looking at the pipeline, I do believe we'd expect a higher percentage of SaaS in next year's number, but our range of guidance will take into -- take that into account that the underlying assumption, I would expect would have a higher percentage of SaaS in it.

Our next question will come from Ken Wong of Citigroup.

Maybe to put a finer point on Kirk's question in terms of guidance in the subscription mix.

I know that's -- can be a fairly broad range, but should we expect that kind of those deals that are on the fence going forward?

You guys'll perhaps maybe put those in the Cloud camp versus the perpetual camp?

Just maybe help us kind of think through what you guys are seeing there?

I think those deals that we don't know which way they're going to go probably, we'd put a higher proportion of those in the Cloud category given more recent experience.

So I don't know that 50-50 is the new norm, but it's probably a little bit above where the norm will be.

But, yes, we would expect that the trend would continue towards more Cloud business.

And I guess...

And I think Ken -- this is Lynn Moore.

I think what's important to note too is that a lot of times, it's not so much they're on the fence.

They may go out with an RFP.

And throughout the process, it's geared towards on-premises, and it's oftentimes not until the very last minute during contracting that, that decision is made.

And I think to echo Brian's comments, I don't think 50-50 is something we can -- will be the new norm.

I do think over the last, if you look -- sort of look at a trend line over the last, I don't know, few years, it's -- certainly is ticking up, but there will be variations from quarter-to-quarter, but it does make it a little difficult for us to predict some of these deals.

Got it.

Lynn, and then maybe a follow up on New World.

You guys talked about being able to compete for kind of higher tier deals once you get some added functionality and kind of build out capacity on that product.

Are we still on track for that to be a fiscal '18 type of an event in terms of kind of getting all that capability into the product?

It's a -- long processes, so there's no kind of switch in terms of when all of a sudden we play in larger sites.

The win rates have already elevated, which is pretty impressive that in a short period of time, both what we've delivered and I think the expectation and the credibility of what's under development is already affecting decisions pretty significantly.

The win rates are meaningfully elevated from where they were.

And it will be a creep up more than splash into a new tier of sizes.

And so to answer your question, yes, I would expect we'd have some deals that are in the higher range than what we would have had next year, but it won't be as if all at once we become a leader in that particular space.

That could be a multiyear process to achieve that.

Our next question will come from Brian Kinstlinger of Maxim Group.

I wanted to dig into the Illinois contract just announced this morning.

It seems like the value to customers is pretty high and it differentiates you from your peers.

So what's the process now for selling this offering into other states?

And are you already talking to other state customers and what does sales cycle look like?

And then I have a 1 follow up.

Yes, Brian.

I think this is -- I think 1 thing that's important to note about this Research Illinois is that it's really a -- it's a new recurring revenue stream, both in delivering the portal itself, but also in the Attorney Services.

It's an investment that we've been making for some time.

We talk a lot over the years about making discretionary investments, either internal expensed R&D or new acquisitions.

And this is one of those areas that we're certainly happy to see start seeing the benefits.

It was originally sort of constructed for the County-by-County states, which as you know, there's 10 County-by-County states throughout the country, but we are also seeing some interest in some of the more consolidated unified states.

I think the value proposition for the unified states is not as high, but there is interest there.

We are talking with some other states right now and that's something that we're actively pursuing.

It's again -- it's a revenue stream that we're excited about.

We look forward to.

But just like as John mentioned in our New World Public Safety deals, everything -- you know the markets.

You've followed us for some time.

Things take some time, but it is something that we look to expand throughout other states where we have a presence.

Great.

And then my follow up.

Is the $3 million price based on a volume mix because there is just really a list price for what essentially is a portal or a piece of software?

Yes.

It's a fixed price.

And it's really based on the size of the state and the volume of the e-filing.

I don't really want to go into more specifics there, but yes, it's just a fixed fee.

And then there would be potentially additional -- the value-added services to attorneys would be on a transaction or a subscription kind of a basis.

So those would be more volume driven.

Our next question will come from Brent Bracelin of KeyBanc Capital Markets.

Brian for you.

I wanted to go back to the subscription model impact here.

Two specific questions.

One is, as you think about the 2 segments, where a subscription headwind would have an impact, it looks like Software License revenue and Software Services are the 2 segments that were most impacted.

I think that's 31% of the business.

Is that the right way we should think about if a customer moves to Subscription, those 2 segments will be impacted going forward?

And then I have 1 follow-up.

Really, mostly just the License line.

The Services are really pretty much the same regardless of which model the customer implements under.

In the past, when we originally -- in the earlier days of the Subscription model, a lot of clients bundled the services into the subscription arrangement, but now virtually all of them contract for the services separately and pay those as they're incurred.

So there's not really a difference between the 2 models on the Services line.

It's really just lower license revenues [off than] higher subscription revenues.

And Maintenance would be a factor, too.

So Maintenance revenues are recognized in the first year.

They're generally carved out of the license fee, but you would see a modest reduction in Maintenance, a larger reduction in License fees and then an uptick in the recurring revenue on the Subscription side.

Completely make sense there.

And then just as a follow-up.

Typically, as you kind of see these transitions from Perpetual to kind of Subscription, we also see a buildup of a deferred revenue on the balance sheet.

And it looks like deferred revenue was actually down 2% sequentially.

It was up only 3% year-over-year.

Walk me through the components of the Subscription revenue and the potential buildup on the balance sheet?

Why did that decline sequentially this quarter even with the mix shift?

And how should we kind of think about the components there of what would -- I would normally think would be a tailwind of deferred revenue?

That's just seasonality.

So the -- by far, the largest renewal cycle for Maintenance is June, July.

They billed in June and pay in July usually.

That's a big fiscal year calendar event for local government in most states in the country.

So you get a huge renewal and that's a big spike in the deferred revenue and then you've had 3 months' runoff from that.

So that's the sequential decline, but year-over-year, you won't see that.

Just more maintenance timing related to those renewals than it has to do with subscription mix?

Yes.

Subscription renewals.

Right.

That's correct.

Our next question will come from Jonathan Ho with William Blair & Company.

I just wanted to start out with a question around Harvey and Irma, whether you could maybe give us a sense of the magnitude of the impact from some of the deals that were delayed there and perhaps the timing on when they could be potentially recognized?

Yes.

It was a handful of deals, maybe a half a dozen or so in specific sites that we were pretty far along in negotiations and would've expected them to've signed in Q3 and they've pushed into Q4.

So it really doesn't affect the year number.

It's just a little bit of an effect on Q3, and it's probably in the order of $5 million, $6 million of total contract value.

Got it.

And then on -- in terms of the SaaS headwind, I just wanted to maybe understand if you guys could give us some preliminary thoughts on how we should be thinking about 2018 revenue growth?

I know you guys don't really give guidance on this early on, but maybe that'd be helpful for us just to maybe understand how to think about that for next year?

That will be in the next call, Jonathan.

Yes.

We'll wait for the next call to give guidance for '18.

There's never, just because the new year comes in, it doesn't all of a sudden indicate some big pivot in growth rates.

We've talked about a number of different investments we're making to accelerate the growth rate.

We're happy with the Research Illinois deal as an indication of the new revenue stream that is 1 of many investments we're making that we believe will accelerate that growth rate over time.

All of these are long-term processes, so we'll have few of those things kick in, at least modestly next year and hopefully contribute to a trend in that direction.

But again, a new year won't bring any significant change in growth rates, but I think over the next several years, that the investments we're making and some of these acquisitions we've done that are more strategic of nature, we're convinced will contribute to an acceleration of the growth rate over time.

Our next question will come from Tim Klasell with Northland Securities.

First question.

On the hurricane side.

Clearly, that impacted a lot of your customers.

And has that caused maybe a more rapid change inside of what they're thinking of maybe going to a SaaS-type delivery given the more robust back-office nature of having it hosted?

Are you seeing more of your customers think about going to SaaS faster because of that -- because of those events?

I think it's too early to probably know that.

They're literally still recovering obviously.

I think your point makes sense that we have multiple Cloud facilities.

They have failovers from 1 to the other.

And I think the level of redundancy and availability that we can provide is elevated from what an individual site can do for itself.

So we may see that, but I think it's certainly too early to know that at this point in time.

We do offer disaster recovery services to on-premise clients and that's what we referred to in the prepared remarks, where we've had a number of sites declare disaster.

We have their databases and their applications.

We retrieve those regularly so that they're fresh, and we're able to spin those up rapidly and give them availability.

And so we did have a number of those occur.

So we do have services to make them or to provide them with higher availability.

But I would agree that the availability is greater in the Cloud, and we may see that influence some decisions, but it's too early to tell.

Okay.

Great, great.

And then sort of related question.

Your conversions from on-premise to SaaS have been occurring at a fairly steady rate recently.

Is there anything out there that you would see that might change that to either elevate it or to decrease it?

And is it normally sort of a -- continues to be a -- at the time of a big systems upgrade, is any of that changing?

And sort of for you Brian.

If that were to accelerate, what would that -- what would be the financial impact?

Can you sort of walk us through that?

I don't think there's a big change.

It's been pretty steady.

If there is a change, it might be a modest uptick.

I don't see it declining.

It is available or Tyler offers the Cloud basically on all of our enterprise apps now, whereas not too many years ago, it was on originally more with Munis and then, some of the others.

So the uptick could come from just more availability across our enterprise applications.

So it'll probably tick up somewhat, but I don't think that you'll see a real significant shift there.

But we've obviously still got a much larger On-premise customer base than Cloud base, and I think over time that'll happen.

In terms of the catalyst for it, obviously they're staying with our applications when they switch over to the Cloud.

There's 2 major catalysts.

One is often a turnover or usually retirement in their leadership on the IT side that's been maintaining the system.

We're now a trusted partner.

And as they bring in new professionals, they want us to play a larger role and reduce that exposure.

And the other catalyst would be often that it's time for a major investment in their hardware infrastructure, and they can minimize that and basically justify the higher spend with us by not having to basically reinvest in their own facility.

And the financial impacts.

What the new hosted or subscription rate is for a previous on-premises customer certainly vary depending upon how they've been a customer.

But typically, it's an uplift of anywhere from 50% to 100% over what they were paying in maintenance.

So it's a significant increase in the revenues to us.

But the customer would also find deep value in that, given that they would have jobs they wouldn't have to fill or hardware they wouldn't have to replace.

So it's a strong value proposition for both of us.

Our next question will come from Charlie Strauzer with CJS Securities.

Couple of questions for you.

I'll ask just 1 question really on some of the newer offerings like the Research portal and some of the e-filings as well as just in the competitive environment that you're seeing there, is it kind of a different competitor that you're going up against in those areas?

And are you seeing more competitors coming into the marketplace given your success there?

Yes, Charlie.

This is Lynn.

I don't know that the competitive landscape has changed significantly.

I think, too, when you look at the Research Illinois portal, that's a totally new offering.

That's a new offering that we, going back a couple years had thought about, had invested in.

You really need to have the strength and capability that we have with having our court systems in either in the state-wide deals or in the county-by-county as well as our e-filing system.

So that to me is a little bit of a unique opportunity right now.

Do you have like a proprietary advantage or like with the research portal just given that you said that they have the court system in place?

Are you basically hosting all the data or the documents, or is it something that's just layering your software on top of existing infrastructure there?

I think the competitive advantage is our competitive advantage throughout the entire courts sector and us being the trusted and preferred e-filing vendor and part of what we're trying to do with this, like we do with all our clients, is try to continue to provide more and more value to maintain that competitive advantage.

So that's not to say that there aren't competitors out there that could potentially get into this market.

Like everything else, we keep our eyes out for that.

But I think right now our competitive advantage is really our strength in the entire offering.

And what this does is it enhances our offering and makes it that much more comprehensive.

So we have a case management system and then we have the e-file.

Could they use someone for something like research?

Yes.

But we already have the partnership.

We have access to the information.

We certainly have an advantage.

The Online Dispute Resolution, which will be new to us as well.

And as we can -- our objective is as we add, they're not just new revenue streams.

They're incremental value and create a comprehensive relationship that our customers are going to look to as a good partner.

Our next question will come from Alex Zukin of Piper Jaffray.

I have just a few.

Maybe first for John or Lynn.

Can you guys talk about the performance in the quarter versus your internal expectations for -- on a bookings basis?

And particularly, what drove the strength if it was ahead of internal expectations in light of a couple of million in business getting pushed out of the quarter due to the hurricane?

These quarters are fluid, and this is a quarter where the performance was good and laid in and a lot of these deals came in.

SaaS deals do come with multiyear arrangements, so they do help elevate bookings in backlog.

And so that mix drove that to some degree as well, but win rates remain elevated.

They've improved in some of the areas that we're investing.

And the volume of that was pretty good.

And we expect that to continue into this quarter.

RFP activity and win rates that we would project over those support this continuing.

Got it.

And then -- as -- if we start -- I know you guys are cautioning us against this, but if you start drawing a trend line into the mix, the incremental mix of business going into Subscription versus License or Perpetual.

Bigger picture question, over the next 3 years as -- if -- while conversions activity may not change, if the net new customers coming in are coming in, in the cloud modality, how does your financial profile either your margin CAGR or your margins or your earnings CAGR or your top line CAGR start to look or change over the next 3 to 5 years versus the previous 3 to 5 years if this is more of a permanent mix shift?

I really think it's more a function of adding some lumpiness.

And being a little light on revenue this quarter and then that not occurring in another quarter.

But I really don't think that the top line growth rate over, say the next 3, 4, 5 years or margins will be significantly different.

Obviously, if we are going to stay at that elevated level, there'll be some lumpiness and so the growth rate would be a little lighter in those quarters.

And then obviously, those new revenues -- those new elevated run rate revenues start to contribute and you benefit from the outside.

But you're definitely not talking about more than say 100 or 200 basis points on the revenue side and then we talked earlier on the margin side, margins are pretty similar.

License and Maintenance margins are pretty high.

So it's hard for Cloud revenues to exceed those.

So I don't think there'd be an impact on margins.

And you have to remember, License revenues are only 8%, 9% of our total revenues.

We already are very heavy on the recurring revenues and have more and more new recurring revenue streams there.

So the impact on the short-term growth is still relatively modest.

Got it.

And then maybe on that theme, Brian, you mentioned the CapEx investments for the incremental Cloud capacity for fiscal '17.

Is there a way to get a sense for how we should think about that for fiscal '18 just given this mix shift?

We did have some investments this year that were in our data centers and capability -- infrastructure capability around our Cloud business that was to support future growth.

So there was a little bit of investments sort of ahead of the growth.

So we're working through our capital plans for next year, but I think generally those would -- those investments would grow in line with the revenue growth.

Got it.

And then last one from me on the Research Portal product.

Is there any way to quantify maybe the incremental TAM for this product if you were able to sell it to all of your existing e-file customers?

And is it possible also to get a sense for if you sold $1 of e-file, how much of $1 of research would represent as an incremental after that opportunity?

Kevin, I think at this point, it's still a new and emerging revenue stream.

Like I said -- like we've talked about before, it's not just the portal itself.

It's the opportunity also to offer some services directly to attorneys.

The market's still new.

There's -- we've talked with our customers.

They're certainly receptive for it.

I do think the value proposition is -- will be different for the states that already have a unified system versus the County-by-County states.

And so we're still -- we're still looking at all that.

Our next question will come from Kevin Liu of B. Riley and Co.

Just 1 question from me.

As you're starting to see more of your business shift towards SaaS, can you just talk about what sort of near-term impact that has on your Services business?

And as you look kind of longer term, if you do see the mix get towards this 50-50-type mix, would you expect that to kind of reduce the need for hiring on the consulting side going forward?

Not really.

The vast majority of the Services are application-related.

Converting their systems, implementation, project management, training, those really don't change at all.

There obviously would be a small segment, things they do from a system standpoint that we do in our facility.

So there could be a modest shift from maybe the last 5% of the professional services we deliver to the site that we actually perform at the data center as an internal function.

But certainly, the vast majority of the services are related to the application.

And we still need to convert their systems, train them and show them how to use those systems to support that process.

And that doesn't change very dramatically based on where the system resides.

Got it.

And just 1 quick follow up on kind of the e-filing services or the Research Portal.

For some of these newer attorney services that you might offer, would those also be kind of subject to or more receptive in the County-by-County states, or do you think it would actually apply pretty broadly across your entire Courts & Justice on an e-filing basis?

No.

I think they would apply in every state.

These would be services that would be marketed directly.

I think there are states who have the -- who already have a unified system that still have an interest in this Portal.

And we have -- that would be something that we would try to push throughout the entire client base.

(Operator Instructions) Our next question will come from at Pat Walravens with JMP.

Can I ask a little bit about the software bookings?

So it's a question I've been getting and I'm just not sure how to answer it.

So they were down 6% Q3, and I get there was a difficult comp of 41% last year.

But in Q2, you grew bookings 16% and you also had a difficult comp, right, of 37% last year?

So I'm just wondering how is this quarter different than last quarter?

It really relates more towards the big deals.

So what costs there were -- what big deals there were in the previous quarter.

Last year's third quarter, on the software side had a bigger number of not megadeals, but deals in the $1.5 million to $5 million range.

Obviously, this -- the -- some of those came in, in a SaaS model this year.

And Q2 didn't have big deals of last year?

Q2 of last year.

Of last year.

Because that comp was almost as big, right?

That was a 37% software bookings.

You're talking on just on the software side or total bookings because...

I'm talking just on the software side.

I don't know off the top of my head what the comp was in Q2 of '16.

I'll have to look into that a little further.

Yes.

okay.

It was 37%, but -- okay.

And then my second question is bigger picture, which is -- so right now, the Cloud-based business, that's all entirely hosted data centers, right?

We -- they're all -- it's all our -- 1 of them is completely hosted in our own facility and 1, we rent space in a facility and manage it.

Okay.

So what are the prospects for using third-party clouds?

Is -- I'll just leave it with that.

What are the prospects for using third party?

We're very active.

We watch it very closely, actively monitor what's available on those sites and what the costs are.

Currently, we still feel that we provide greater value, more flexibility.

We think our clients like the fact that everything from our support people, our software engineers and the people managing the hosted facility are all integrated into 1 solution and that still drives value.

We do certainly believe that over time, hosting facilities can become more generic and more of a commodity and that potentially the kind of mega-cloud sites could potentially deliver the same service at a lower value, and we won't be opposed to that when that point is reached.

And so again, we monitor for it very actively and we continue to think at this point in time, that there are advantages to us continuing to host those facilities, but we don't have some aversion to doing this at other facilities when that becomes appropriate.

At this time, there appear to be no more questions.

Mr. Marr, I'll turn the call back over to you for closing remarks.

Great.

Well, thank you, and I appreciate everybody joining us on the call today.

If you do have any further questions, feel free to contact Lynn, Brian and myself and we'll be happy to work with you.

Have a great day.

The conference is now concluded.

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