John S. Marr Jr. - President, Chief Executive Officer & Director Brian K. Miller - Executive Vice President - Chief Financial Officer and Treasurer.

Charles Strauzer - CJS Securities, Inc. Alex J. Zukin - Stephens, Inc. Josh Seide - Maxim Group, LLC. Peter C. Lowry - JMP Securities LLC Tim E. Klasell - Northland Securities, Inc. Scott Berg - Needham & Co. LLC Jonathan F. Ho - William Blair & Co. LLC Matthew Lee Williams - Evercore Group LLC Kevin Liu - B. Riley & Co. LLC Mark W. Schappel - The Benchmark Co.

LLC Robert Glyn Moses - RGM Capital LLC.

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. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

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'd like for Brian to give the Safe Harbor statement. Next, I'll have some preliminary comments. Brian will review the details of the second quarter operating results and 2015 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'd 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 quarters 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 towards cloud-based Software-as-a-Service businesses.

As we previously discussed, we had a very difficult comparison for bookings this quarter. This 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 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 solutions included Maui, Kauai, 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 the Kern County, California for our Odyssey Integrated Criminal Justice Solution.

The county's ICJ agreement allows it join the Kern County Superior Court's current Odyssey Case Management and Implementation project for criminal case processing.

With the additional Odyssey applications, such as jails and probation, Kern 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, San Bernardino and San Diego counties signed contracts to add additional case types including civil for 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're confident they will continue to build upon our position as a leader in the emerging space. At the end of May, we acquired Brazos Technology 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. And 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 2,800 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'd 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 am 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 earning 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 quarters 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 doubled the royalties of $576,000 a year ago.

One contract with the U.S. Federal Agency accounted for more than half of the royalties this quarter. Subscriptions 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 five years compared to 5.6 years in last year's second quarter.

The fastest growing subscription-based revenue stream is from 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 head count grew by 134 employees in the second quarter to 3,068 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% (10:34), 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, the non-GAAP operating margin improved 150 basis points to 24.6% as we obtained substantial leverage from both SG&A and R&D expenses. Net income rose 27.8% to $18.8 million, or $0.52 per diluted share.

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 5,400 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 signed 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 for 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 should open bookings in the fourth quarter of this year and some are multi-year agreements that will renew in 2016 or 2017.

As John noted earlier, and as we've frequently discussed in the past, these puts and takes all illustrate that it's 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 in 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're 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. Now, I'd 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've 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 Dynamics 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've discussed previously, our renegotiations with Microsoft suggest that we will have a significantly lower expense level in the future as well and then net results will be positive. Now, we'll take your questions..

We will now begin the question-and-answer session. The first question comes from Charlie Strauzer of CJS Securities..

Hi, good morning..

Morning..

John, if you can talk a little bit more on the Microsoft Dynamics subject that you just mentioned. I know it's tough to kind of predict kind of visibility you're looking out beyond may be a quarter or two quarters. But when you look at the pipeline or proposals that are tracking – that you're tracking out there, kind of the RFPs that are out there.

Are you encouraged by what you're 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. Well, I think as we know over the last couple of years, this certainly hasn't been explosive. It's been a little slower ramp may be than Microsoft expected and to some degree of what we may have even expected.

But I think our sales channel is maturing, the product is settling into really what I call kind of sub-segments of the marketplace where it may have advantages and it'd be particularly strong.

And we've got a pretty good pipe around that, and as part of this kind of reorganization, we're really transitioning from a predominately R&D role in terms of our relationship with Microsoft that initial product is well-build though and exists; it's actually relatively matured.

And so our role will shift where we'll 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 these arrangements. So we have a pretty good pipeline.

We would expect not to have tremendously broad footprint with this product. I think that our direct sales will be again in the sub-verticals where we think it's particularly competitive.

And I think a lot of our focus will be supporting their partners, and building out their sales channels, and targeting sub-verticals that each of them are focused on an 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 product.

So much of our sales focus will be – in addition to our direct sales will be in supporting their partners build a strong presence in that marketplace..

That's helpful. Thank you. And then shifting just from 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 you know just looking at particularly in appraisal, it looks like you're kind of at historically high levels in terms of revenue.

How should we expect that to ramp also?.

Well, it's really across the board. In our courts and justice division, results year-to-date are ahead of plan, and none of that's being given back in the second half. It is not timing, it's just out-performance. So they are ahead of plan.

Our ERP Group, which is led by Munis, with other sub-divisions under it, has been ahead of plan, especially on earnings. And again, it's not timing, it's 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 little lumpy, so that – it is any areas that aren't had a plan, simply those, and that's against smaller units that are going to be a little lumpier.

And as you indicated, the appraisal services is cyclically strong at this point in time. So it's really across the board, and as I mentioned in our 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've 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, where meaningful competitors are not that involved in the new business market at this point in time.

I'd be cautious in saying that, while it's very encouraging, because there certainly are some individually strong competitors up in the marketplace that have improved as well. But again on balance, there are fewer competitors in the space.

They're certainly our traditional competitors we've had that may be 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're able to make at this point in time in relation to the smaller players in this space..

Excellent. Thank you..

The next question comes from Alex Zukin of Stephens..

Yeah. Hey guys. Congratulations on the quarter. A couple of questions for 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'd say, on the order of, is 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's somewhere around $3.5 million in the second half of the year. Some of – 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 have 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. It was a little bit – I realized, you don't guide to the number, it was a little bit below our numbers and consensus.

So just, you know, I wanted to see if you can just talk about the puts and takes?.

Well, I think the biggest difference this quarter was the cash tax payment. So 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'll see what happens in the second half depending on the level of option exercise 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 let's say, pushed it a little higher last year, some of that second quarter's more in the third quarter. But the taxes are the biggest piece..

Got it. That's helpful. And then John, maybe can you just talk a little bit, I know you touched on this on the comments, but if I put the 3% bookings growth, I realize the lumpiness in bookings in context with kind of 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 there?.

Well, obviously we're talking about the second half of the year that we're in. Our sales processes are long, so certainly almost all the business we expect to see this quarter is relatively certain. It's a matter of execution which isn't to be taken for granted for good visibility.

And at this point, it is some deals that it's a matter of timing in the fourth quarter, but you know these things pretty well. I know it's important for us to report bookings and backlog, and I think over a longer period of time, it's 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 multi-year SaaS deals. So if we do a traditional on-premise account, the only thing that goes in the 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 of big deals, multi-year SaaS deals, a number of other things that kind of sway that number around.

And again, over a long period of time that all gets normalized, but I'd just be cautious about over-focusing on it in a quarter. And as I said, we've got very good visibility as for the deal mix in balance of the year.

And there are some bigger deals in it, and there are also – well, the second quarter was a little light on SaaS deals, again it's just deal mix and timing. We know that there will be strong number of SaaS deals in the second half of the year that are multi-year, and well, raise the bookings and 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's helpful. And then just a last one from me. John, just wanted to ask you, which one of your newer initiatives are you guys most excited about? I mean you clearly have a lot of growth irons in the fire, with record holdings and criminal justice and the new Brazos stuff.

So just wondering what's top off mind for you right now strategically?.

Well, not to (30:16) and I'll give you a short answer. But the way we run the company is to try to do that across the board.

So obviously courts and justice has had a great run, and is a very strong leader, and we're 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 is certainly isn't because we're having that success that we have released in other areas of the business. We're a strong company financially as you know.

We're looking for places to make investments, and we're raising the level of investment we're making in products like Munis that are well-established, and then strong leadership position. But we feel it's 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 EnerGov department. You know we don't get too granular with those numbers, but it's fair to say that company has far more than doubled in revenues in the two years it's been on board, and emerging as a real leader in that space as well.

So we're excited about that. So again, we try to look at the whole range of applications, and really we're not looking at where we can tighten things up.

We're 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 their competitive positions and ensure that they can sustain the growth they're on..

Perfect. Thank you, guys..

The next question comes from Brian Kinstlinger of Maxim Group..

Hi, this is actually Josh Seide 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 U.S.? Thanks..

Well, there is only one, as far as – from what I know, there is one active engagement that we're involved in now. And you know one of the reasons we entered the marketplace, we've got a strong partnership that we've invested in, and we do believe that, you know there isn't any Tyler, so to 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'd name to you that is someone we need to kind of overcome. We feel it's a market that doesn't have a leader like that, and it's right for someone to come in, make an investment and establish themselves.

So obviously it's English speaking. The courts operations are very similar to U.S., and there is a market opportunity as there's a need for someone to come in and invest in that. So currently there is just one active engagement, but we believe that if we're able to get established that there will be, you know, a number of opportunities there..

Okay.

And just as a follow-up; can you give us some sense of the deal sizes for Australia opportunities?.

Well, you know, it's like here, there could be some deals that are, you know, less than $1 million and maybe some deals that are $5 million, $6 million, $8 million dollars. 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 U.S.

state is basically what we're adding incrementally to our addressable market space..

That's helpful. Thank you..

The next question comes from Peter Lowry of JMP Securities..

Hi John, hey Brian, nice quarter.

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

Sure. 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's done a good job in having quality earnings backed up by their cash flow.

And we've 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'll continue to be opportunistic there, and be aggressive when it hits 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 marketplace, to bring in subject matter experts, to increase our recurring revenue and customer base, and all of those things; we feel we've kind of hit the critical mass point there.

And so I think you could say our standards have gone up, which means we'll 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.

So that's 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.

And then 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 we have and the incremental margins that come in that growth, it's really just redeploying what we get out of these new revenues back into of the product. 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.

And then how are we going to measure the success of EverGuide? Is it as simple as just customer retention or are there different metrics you might look at? And are there any early indications of success there?.

Well, it's really taking shape now. So I don't think there's early indications. But you know maybe one thing that the investment community takes a little bit for granted it is that Tyler kind of chugs along nicely, and that's not easy. And I think to take for granted that would be a mistake.

So yeah, we have incredibly high retention, literally less than 2%, probably at or under 1% in terms of names. So very, very low, and you could say, well, that's great, and check that box.

But what we see is, we have many clients now that are 10 years, 15 years, 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 those sites and the product every five years, six years, seven years is entirely different than it was five years, six years, seven years previously. So even if the same people are there, they've really never been trained and may not fully appreciate what's in the product they have.

So evergreen for some time now has provided them with all of the updates. There's no relicensing, we never resell into an account, and that's very well received. But just because we provide them with new technology, and new functionality, and higher quality products doesn't mean that they're being well-utilized at that site.

And we can actually go to sites and they can think they need this or need that, and may be they have new leadership that just assumed and they've had the system 15 years, 20 years, they need to go out and get a product that has that, and they don't even appreciate may be that it's in that product.

And EverGuide really takes evergreen to another level where there will be supplementary services, there will be online and training devices, there will be a lot of things that we continually try to add value into their core arrangement with us. And I think we're compensated well to do that, and it's in our interest to do that.

And there are also be incremental services that they can contract for at incremental cost in order to do that.

So it's 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, you know, the atrophy that can occur in an implementation that gets stale over time..

Great. Thank you..

The next question comes from Tim Klasell of Northland Securities..

Yeah. Hey, good morning everybody.

Just, you touched on briefly the large deal you did in the quarter, hoping that it was that relative to, let's say, the Odyssey deal from this quarter last year?.

A large deal in the quarter was, Indiana's e-file deal was around – it 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. Yeah....

Okay.

...$64 million..

Yeah. That's helpful.

And then Brazos, how does that do relative to expectations in the quarter?.

Well, it's just a little teeny bit, and it get closed in the remaining weeks. So I think there's only a few hundred thousand dollars in the quarter, so it's insignificant..

Okay..

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

Okay, great. Great. That's all I had. Thank you..

The next question comes from Scott Berg of Needham..

Hi, John and Brian, congrats on a good quarter. I have two questions. First of all, John the statewide e-file deal that was announced in the quarter, that's your second one with a fixed fee is; I guess it's 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 may be 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 quick business. And we'll continue to protect that. We will not license the product, it's a quick Software-as-a-Service kind of business. Having said that, we recognize that our vertical likes to have certainty in their cost.

So when we do go to a fixed fee basis, it is completely the result of projections on what those volumes will be in just converting it into fixed fee so that they have visibility on what their cost are. And I think if we are a vertical software company, then we need to appreciate the market we're in and be to 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 if their actual volumes are little lower then we may come out on the good.

But these are, obviously in all these states have been established and if that courts for a very, very long-time, then the volatility is within a relatively tight range. If their actual experience, you know, were outside that range for whatever reason, then I think the second generation of those contracts would reflect that.

But I think it's a tight range. And I don't think they're going experience filings or case volumes that are dramatically different than what they've been experiencing for years..

And Scott, Indiana is a little different in the way they approaches most of our e-filing clients in most cases, and that includes Texas with the fixed price range, but in most cases, the users, the attorneys are actually paying filings with each transaction or in the case of Texas with a case as a whole.

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

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

Got it. And then one follow-up for me Brian is on the gross margins around Professional Services. Obviously, you've hired a lot lately to service the contracts, you know, the large uptake of the California courts and justice deals over the 12 months in particular, along with some ERPs.

But when do we start getting some leverage from that, and I when does that hiring slow a little bit? Is that a back half of 2015 opportunity or you're just 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 bit, and 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 to the beginning of next year..

Great. That's all I have. Thanks for taking the questions..

The next question comes from Jonathan Ho of William Blair & Company..

Hey, guys. Congratulations on the strong quarter.

I just wanted to understand a little bit more; so just relative to the California contracts that you've 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 sort of follow-on opportunities from counties that you've already won?.

Yeah, 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 months to 12 months and some that could be a two year or three year process.

So certainly still in the relatively early stages of all that business that was won. We mentioned, as an example, and we've said before that a lot of these deals, you know, the $64 million that we booked in Q2 of 2014 doesn't take all those counties 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's a subset of that.

So the significant work that remains from the original engagement, but probably more significantly there are significant other opportunities like the one we mentioned with Kern County with a signed $5 million follow-on to add other case types and other applications for the project..

Got it..

And they are high level. We believe the total market opportunity for the Integrated Criminal Justice, all those other applications beyond Case Management is roughly equal size 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 there are similar sized opportunities..

Got it.

And then just relative to sort of AMCAD's exit to the market, have you started to see, now that we're pretty far long 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?.

Yeah, it's been (48:36) I think one account, we may have signed last quarter and others watching that, and there were some kind of correlations established of their clients to kind of 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 may be.

We watched 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'll 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 may be shifting some of the 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 an updated view on where the investments may go going forward? Thank you..

Yes. We continue to work on details kind of structuring a new arrangement that's more representative of our relationship once the product's now deployed versus when it was in pre-release R&D. And obviously, in those early years, we brought value in bringing that vertical expertise to the product.

That's largely reflected in the product, and so our involvement on the R&D side will be quite down significantly.

Some of those resources will be redeployed and are being redeployed on the sale side and that's not all direct sales, a reasonable amount of those resources will – we have a lot of experience in RFPs, 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 yeah, high level our R&D spend will come down significantly. Our sales and sales support spend will go up. We'll continue to build out some to degree of 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..

The next question will come from Matt Williams of Evercore ISI..

Hi, guys. I'm 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's in the Brazos acquisition.

How should we think about how you're sort of 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 sort of standalone business that's maybe a little less integrated with some of your other offerings? Just trying to get a sense on that..

Well, I'd say it's a process. And we've 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've had traditionally. So Brazos – mobile is a big leader.

It's a lot of color and decisions these days, and having a very strong mobile-first kind of approach is exciting through 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're able to have an integrated leadership position in both of those areas, there is very meaningful information that can come from that that's more difficult to produce from disintegrated systems.

So that is a big part of our strategy there..

Got it. That's helpful. And then maybe just one more on e-filing. Obviously, outside of the TexFile arrangement, the other component of e-filing revenue continues to sort of accelerate.

I am just curious sort of what other states or locations are sort of driving some of the non-TexFile e-filing growth? And I guess as a sort of 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 roll-out, similar to TexFile; but any color on timing there would be great..

Yeah, Indiana actually started this quarter with a small amount of revenues, about $100,000. It ramps up over the next year; I think it's about $1.5 million this year, and – I'm sorry, yeah it's $1.5 million this year, $3.5 million next year, and then $5 million a year in 2017, 2018 and 2019.

So after end of the second, it ramps up to I think $650,000 a quarter in the last two quarters of the year.

Most of the other revenues in the e-filing is – growth right now, there is – beyond Indiana, the big contributor in the 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's not going to be as significant, but it's going to be sort of a gradual ramp up in those counties. The other statewide implementations where we've got e-filing, places like Oregon, Rhode Island, Maryland, are all still in a kind of a ramp up phase.

So it's more gradual with respect to most of our clients right now other than Indiana..

Great. Thanks for taking the questions..

The next question comes from Kevin Liu of B. Riley & Company..

Hi, good morning. Just one question from me.

With respect to the Dynamics deal 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 in Federal that you're aware of, or do you think this is more of a one-off opportunity?.

Simple answer is, we don't know. As we've said, we really have very little visibility to this marketplace and what comes to us indirectly through Microsoft. I think it's 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 – and this has not been explosive, but I think the encouraging thing is that the direction of the royalties largely is up, and the footprint of the market that they have established, even though it hasn't exploded, is very broad. Internationally, I mean I think there were 18 countries on a royalty report this past quarter.

That's typical, that the deals 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.

So yeah, 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's something that they expect to be repeatable..

Got it. And 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 towards 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?.

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 will be, if there are, will be very modest.

So they can change very modestly based on our resource commitment and a number of other variables, but now largely the royalty rates are established and will be relatively stable over a long period of time..

Okay. Thanks for taking the questions..

The next question will come from Mark Schappel of Benchmark..

Hi, good morning. And thanks for taking my question. Nice job on the quarter.

Brian, just one question for you; I'm just wondering if you could just repeat your comments in your prepared remarks with respect to last year's maintenance bookings?.

With respect to last year's maintenance booking?.

Yeah, if I call correctly, there were two main issues, not issues, but two main things you addressed with respect to maintenance bookings.

One had to do with the 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 had 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 a 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 multi-year.

If 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 were multi-year agreements that we won't see the renewal again until 2016 or 2017. So they'll work off their initial arrangement.

So that creates a little bit of a mismatch in the comparison..

Thank you..

The next question comes from Robert Moses of RGM Capital..

Morning..

Good morning, Rob..

Just a couple questions and really a clarification on one. So you know we've talked a lot about kind of the lumpiness of the orders, but just trying to put this in perspective. If you did around $179 million just going back over the last, I don't know, three or so years, it seems like it's kind of second highest by a pretty wide margin.

Am I thinking about this right, because I think that seem like about a $100 million to $150 million type of number, so it's 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's still the highest bookings quarter in the last two years..

Okay..

So yes, even though it's down from last year's Q2 and there are 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. They are very disciplined historically, I assume they're going to remain so.

But just given, you know, what happened to the economy a few years ago and we're at today and given the valuation of the stock market, would you say the M&A environment things you're looking at is about the same as its been the last year or is it more aggressive, less aggressive, just a sense?.

No, it's probably about the same. And as I said, our strategy has evolved and I think it's actually is more selective, more likely to do strategic and consolidation opportunities which theoretically could provide higher values on deals.

If you look at EnerGov or if you look at our e-file, these acquisitions, really why you want to be disciplined on value that certainly can support higher valuation given how they perform once in the Tyler company.

So there's deals out there, you know, (01:02:08) markets flush with cash, and there are cases where valuation, I think, it's out of the neighborhood that we're comfortable in. But its reasonably active. It's just instead of doing a deal or two deals a quarter, we're probably more likely to do fewer deals that could be more significant in size..

Good. Thanks for the color..

Okay..

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

Right. Well, thank you very much for joining us on the call today. And if there are any further questions, then feel free to reach out to Brian or myself. Have a great day..

This call is concluded. You may disconnect..