John S. Marr - Tyler Technologies, Inc. Brian K. Miller - Tyler Technologies, Inc. H. Lynn Moore - Tyler Technologies, Inc..

Peter J. Heckmann - D.A. Davidson & Co. Scott Berg - Needham & Co. LLC Kirk Materne - Evercore Group LLC Alex J. Zukin - Piper Jaffray & Co. Jonathan F. Ho - William Blair & Co. LLC Rob Oliver - Robert W. Baird & Co., Inc. Peter Lowry - JMP Securities LLC Tim Klasell - Northland Securities, Inc. Mark W. Schappel - The Benchmark Co. LLC.

Hello, and welcome to today's Tyler Technologies Third Quarter 2018 Conference Call. Your host for today's call is John Marr, Chairman 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.

And as a reminder, this conference is being recorded as of today, November 01, 2018. I would like to turn the call over to Mr. Marr. Mr. Marr, please go ahead..

Thank you, and welcome to our third quarter 2018 earnings call. With me on the call today are; Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, Lynn will have some preliminary comments.

Then Brian will review the details of our third quarter results and update our 2018 guidance. Then I'll have some final comments and we'll take your questions.

Brian?.

Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information that may include projections concerning the company's future prospects, revenues, expenses and profits.

Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections.

We would refer you to our Form 10-K and other SEC filings for more information on those risks. Effective January 1, 2018, we adopted the requirements of ASU No. 2014-09, Topic 606, Revenue from Contracts with Customers, utilizing the full retrospective method of transition.

Prior year amounts have been restated from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise.

Lynn?.

Thanks, Brian. Our third quarter earnings were in line with our expectations and cash flow exceeded expectations, even though revenues were somewhat below plan. Total GAAP revenues grew 10% and non-GAAP revenues grew 10.5%, with 6.5% organic growth.

We continue to experience exceptional growth in our cloud-based business, as GAAP subscription revenues grew 32% and non-GAAP subscription revenues grew 35%. Total recurring revenues from maintenance and subscriptions grew 14% and comprised 66% of total revenue.

From a product perspective, growth for our enterprise products, which include ERP, appraisal and tax, and civic services, exceeded expectations. We continue to experience strong win rates and industry-leading competitive positions for these products, with significant scale and generally deep sales pipelines.

Growth for our justice products, which include Courts and Public Safety, lagged expectations. We have a number of new Courts & Justice initiatives that we are confident will provide long-term growth, including new offerings like Modria, re:Search and redaction as well as international expansion.

However, revenues from those offerings are initially less predictable and have come online more slowly than planned. We continue to have success in winning new public safety clients. And the total value of new name public safety contracts signed year-to-date is up 34% over 2017.

However, we are also pursuing some larger and more complex opportunities with our New World solutions. The sales process from a number of those deals has been prolonged, affecting the timing of not only license revenues but also the associated professional services and maintenance revenues.

It's also important to note that approximately half of the new public safety contract value for the year is expected to be signed in the fourth quarter, which, if executed, will contribute to an expected acceleration of our growth rate in the fourth quarter. Our long-term view of the opportunity in the public safety space is more positive than ever.

And our investments in the New World product suite are clearly resonating with clients and prospects and positively affecting win rates.

Our largest new license deal of the quarter was with Lubbock County, Texas, valued at $10 million for a comprehensive suite of solutions, including Munis enterprise resource planning, New World Public Safety records management and computer-aided dispatch, Brazos e-citation, SoftCode Civil Process, Odyssey court case management including Tyler Corrections, and Odyssey Jury, Prosecutor, and Pretrial.

These Tyler Alliance solutions will manage Lubbock County's entire justice process from dispatch to disposition. With the addition of these products to the Tyler solutions they already use, Lubbock County will become one of the most comprehensive users of Tyler software in the nation.

Also in the quarter, we signed a $7 million deal with Loudoun County, Virginia, for our EnerGov Civic Services solution. The county will replace its 20-year old legacy land management information system with our EnerGov Community Development suite to streamline and automate its enterprise land management, permitting, and development review process.

Loudoun County also uses our iasWorld property tax solution.

Other significant on-premises license deals signed during the quarter, each with a total contract value of $1 million or more, included Knox County, Tennessee, for our Munis ERP and iasWorld appraisal solutions; Des Moines, Iowa, for our EnerGov solution; contracts with Hays County, Texas, and the Bi-County Police Information Network in Washington State for our New World Public Safety solution; Norwood, Massachusetts, for our Munis ERP solution; and Casper, Wyoming, for our Munis ERP, EnerGov, and ExecuTime solutions.

The New World Public Safety contracts signed this quarter in Lubbock, Hays, Cameron, and Gillespie counties in Texas represent major new inroads into the Texas market, where New World has previously not had a significant presence.

Significant new SaaS contracts in the quarter included Columbus, Georgia, Consolidated Government for our Odyssey Court Case Management solution; contracts for our Munis ERP solutions with the cities of Roswell, New Mexico, and New London, Connecticut, and the East Side Union High School District in San Jose, California; and Blue Earth County, Minnesota, for our iasWorld appraisal solution.

We also signed a three-year contract with the Texas Office of Courts Administration valued at $5 million to provide redaction and value-added attorney services as an addition to the existing e-filing arrangement. During the quarter, we also announced the availability of the New World ShieldForce mobile application.

ShieldForce makes real-time and mission-critical data for public safety agencies available instantly, ultimately improving their situational awareness and overall safety.

The application provides a vital connection between patrol officers, dispatchers, and command staff by extending computer-aided dispatch functionality onto a smartphone, tablet, or watch. ShieldForce is just one example of innovation we're bringing to market through our increased investments in R&D.

Now, I'd like for Brian to provide more detail on the results of the quarter and update our annual guidance for 2018..

Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2018. I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2018. 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.

We've also posted on the Investor Relations section of our website under the Financial Reports tab schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues. GAAP revenues for the quarter were $236.1 million, up 9.9%. GAAP organic revenue growth was 6.6%.

On a non-GAAP basis, revenues were $237.6 million, up 10.5% with a 6.5% organic growth. Subscription revenues for the quarter increased 32.3%. We added 81 new subscription-based arrangements and converted 31 existing on-premises clients, representing approximately $29.2 million in total contract value.

In Q3 of last year, we added 94 new subscription-based arrangements and had 15 on-premises conversions, representing approximately $42.5 million in total contract value.

Subscription clients represented approximately 47% of the number of new software contracts in the quarter compared to 49% in the prior year quarter, while subscription contract value comprised 37% of the total new software contract value signed this quarter compared to 51% in Q3 of last year.

The value-weighted average term of new SaaS contracts this quarter was 3.6 years, compared to 5.4 years in Q3 of last year. Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 16.4% to $17.9 million from $15.4 million last year.

That amount includes e-filing revenue of $13.3 million, up 12.2% over last year. Annualized total non-GAAP recurring revenues for Q3 were approximately $625 million, up 14.6%. Our backlog at the end of the quarter was $1.2 billion, up 7.3%. Backlog included $355 million of maintenance, compared to $340 million a year ago.

Subscription backlog was $488 million compared to $443 million last year, and includes approximately $128 million related to fixed fee e-filing contracts. Our bookings for this quarter, which are calculated from the change in backlog plus non-GAAP revenues, were approximately $255 million, a decrease of 5.2% from Q3 of last year.

For the trailing 12 months, bookings were approximately $1 billion, up 17.9%.

As we noted earlier, the weighted average term of new software subscription agreements this quarter was 3.6 years compared to 5.4 years last year, as we have moved to standardize on shorter initial subscription terms for most of our software offerings to provide greater pricing flexibility.

The combination of a lower mix of subscription contracts and a shorter term for new subscriptions negatively affected our bookings growth. If the initial term for this quarter's subscription bookings had been the same as last year, our bookings growth would've been 260 basis points higher.

In addition, last year's Q3 bookings included a $12 million contract for re:Search in Illinois. Our software subscription bookings in the quarter added $5.6 million in new annual recurring revenue, down 10.4% from $6.3 million last year.

For comparison, if all of our subscription contracts had been under license arrangements, we estimate that they would have represented additional license bookings of approximately $6.5 million.

We signed 29 new contracts in the quarter that included software licenses greater than $100,000 and those contracts had an average license of $465,000, compared to 32 new contracts with an average license value of $381,000 in the third quarter of 2017.

Cash flow from operations grew 20.8% to $112.1 million and surpassed $100 million in a quarter for the first time. Free cash flow, which is calculated as cash from operations less capital expenditures, was $103.6 million, up nearly 22%.

Our CapEx for the quarter was $8.5 million including approximately $215,000 related to real estate, compared to total CapEx of $7.6 million in Q3 of last year, which included $3.6 million related to real estate. We ended the quarter with $315.3 million in cash and investments and no outstanding debt.

Days sales outstanding in accounts receivable were 107 days at September 30, 2018, compared to 94 days at September 30, 2017. Excluding unbilled receivables, DSOs were 79 days at September 30, 2018, compared to 74 days at September 30, 2017. Our guidance for the full year of 2018 is as follows.

We expect 2018 GAAP revenues will be between $934 million and $944 million, and non-GAAP revenues will be between $940 million and $950 million. We expect 2018 GAAP diluted EPS will be between $3.63 and $3.71 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate.

We expect 2018 non-GAAP diluted EPS will be between $4.76 and $4.84. For the year, estimated pre-tax noncash share-based compensation expense is expected to be approximately $55 million. We expect R&D expense for the year will be between $62 million and $64 million.

Fully diluted shares for the year are expected to be between 40.2 million and 40.5 million shares.

GAAP earnings per share assumes an estimated annual effective tax rate of 4% after discrete tax items and includes approximately $36 million of discrete tax benefits primarily related to share-based compensation which may vary significantly based on the timing and volume of stock option exercises.

Our estimated non-GAAP annual effective tax rate for 2018 is 24%. This rate was reduced from 35% for 2017 to reflect the enactment of the Tax Cut and Jobs Act. We expect our total capital expenditures will be between $23 million and $26 million for the year.

Total depreciation and amortization is expected to be approximately $62 million, including approximately $40 million of amortization of acquired intangibles. Now I'd like to turn the call over to John for his comments..

Thanks, Brian. Tyler continued to execute at a high level in the third quarter. We achieved double-digit revenue growth for the 28th consecutive quarter. We're pleased that we were able to grow non-GAAP operating income for the quarter, while increasing our R&D spend 44% and absorbing acquisitions that are mostly dilutive this year.

Our non-GAAP earnings guidance for the year is unchanged from the second quarter when we adjusted it upward from our initial outlook. Although we have revised our revenue guidance to slightly lower the upper end of the range, we expect organic and total revenue growth to accelerate in the fourth quarter.

At the midpoint of our non-GAAP revenue guidance, total revenue growth for the fourth quarter would be approximately 14% and organic revenue growth would be approximately 9%. As Lynn noted earlier, our enterprise products are performing exceptionally well.

Revenues for the second half of the year from these products are exceeding expectations with solid double-digit growth from what are some of our more mature products. For our justice products, second half growth is below our plan in part, because we've reduced our outlook for revenues from new initiatives to drive long-term growth.

Although these revenues have proven to be less predictable and slower to develop, the market has been very receptive to these offerings and recent activity is encouraging. For re:Search, we have contracts with Texas, Illinois and New Mexico and we signed contracts this quarter with 14 counties in Georgia.

The lack of precedents is driving longer than expected timeframes to turn on value-added services for attorneys. For redaction, we signed a three-year contract with Texas this quarter and with pilot project starting in both Texas and New Mexico, we expect to expand across our client base from there.

With Modria, we have signed several contracts including major clients like Clark County, Nevada and Los Angeles County, California and have several pilot projects underway. For the lack of precedents for online dispute resolution is resulting in smaller pilot projects than originally expected.

Initial results have surpassed client expectations and we expect that these early successes will lead to expanded use and a greater contribution to growth in 2019 as our sales pipeline is strong. We continue to make significant progress with integrating Socrata, now known as our data and insights division.

The new Socrata Connected Government Cloud has resonated with the market since its release earlier this year and we've signed seven new contracts for SCGC in the quarter, adding new clients at the federal, state and local levels.

We're also successfully cross-selling Socrata through our other Tyler divisions and are building a strong pipeline through other Tyler channels.

While investing in product development at a high level, we've also completed two additional acquisitions that add native cloud solutions with important functionality, one in the third quarter and one in early October for a total combined purchase price of approximately $14 million in cash.

CaseloadPRO acquired August 31 strengthens the probation and supervision offerings in our justice suite. MobileEyes, acquired October 1, adds valuable solutions for fire protection and inspections. We continue to pursue additional strategic acquisition opportunities to broaden our capabilities, expand our addressable markets, and enhance growth.

As we noted earlier, Q3 was a record quarter for cash flow. The strength of our balance sheet and consistency of our cash flow give us a great deal of flexibility to deploy capital and create value.

While we did not repurchase our stock in the third quarter, we have since resumed buyback activity and have repurchased approximately 155,000 shares of our common stock in October. We currently have remaining authorization to repurchase 1.8 million shares.

Finally, in October, we launched our newly redesigned website, which is easier to navigate and provides a vastly improved visitor experience compared to our previous site. We invite you to visit our website at tylertech.com and explore the new content. Now we'll take your questions..

We will now begin the question-and-answer session. The first question today comes from Alexis Huseby with D.A. Davidson. Please go ahead..

Hey. Good morning. This is actually Pete Heckmann. Had a question, Brian.

So just to be clear, on a constant term basis of about 5.4 years, bookings would have been down about 2.5% year-over-year? Is that how I interpret your comment?.

That's correct..

Okay.

And then just on the LTM bookings growth, are you comparing bookings under 606 to bookings under 605? I'm seeing a lower growth number on the LTM than 18%?.

Those should be both 606 numbers, so everything should be restated for 606. We have a schedule of bookings that's posted on the website, but those should all be restated 606 bookings. It does include adding Socrata into the backlog as well, so that's included in that number, the new number..

Got it. Okay, okay. That's helpful.

And then as regards Socrata, did Socrata generate sequentially higher revenue in the third quarter?.

Sequentially higher than from Q2 to Q3?.

Yes..

I believe that's the case. Socrata's revenues did increase significantly from Q2 to Q3. Although for us really it was only in a month in Q2, so it's a little hard to compare the two months before Tyler to the month after, but generally Socrata revenues are increasing, and also looking at a fairly significant increase in Q4 over Q3..

Got it. Okay. Thank you..

The next question comes from Scott Berg with Needham & Company. Please go ahead..

Hi, everyone. Thanks for taking my questions. Lynn, I wanted to start off with the comments on the Public Safety business. Is – that business I know is more weighted towards the back half of the year than your other products. So I guess it's not a surprise that Q4 is heavier there.

But as you look at the bookings opportunity there with your expectations on Q4, how does that compare for the entire year versus your beginning of the year expectations?.

Well, I think our expectations are still strong in Public Safety. As I think we mentioned in the comments, the second half and Q4 in particular has a large number of new clients. I think about half of their new licenses are really scheduled to be signed in Q4.

I think overall in 2018, licenses in Public Safety are looking to be up around 25%, 30%, new names are up maybe 10% to 12%, and really the deal size is growing as well. I think the average size deal year-over-year is up in the 55%, 60%. So overall, I think what's going on at Public Safety is good.

We just had – they just had their largest user conference, the IACP. Our new products are showing well. The integrations that we're showing with Socrata, there's a lot of excitement around what we can do with the Socrata Public Safety analytics. So generally speaking, it's the trends there are still looking good..

Yeah. We attended that conference and came away pretty positive on it. So that's why just seeking commentary there. It sounds like you're feeling pretty comfortable at least with that business over the near term. Yeah. And then the last question I have is around Socrata. You've had the asset for five months. It sounds like you're starting to sell it well.

But five months later, any differences in opinion in the opportunity there, whether positive or on the negative side? Or is it kind of right in line with initial expectations?.

I'd say right now it's right in line with expectations. There is a lot of excitement, I think internally in Tyler and as well in the market.

I think I mentioned in the call last quarter, one thing that we've been doing is we've been looking at opportunities within Tyler and we've been working on product roadmaps for each division and how Socrata is really going to integrate with each of the different divisions. And so we're still finalizing those and prioritizing those.

I think we're looking to hopefully come out with some new products in the very near term and show some new stuff at the Connect user conference next year..

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

The next question comes from Kirk Materne with Evercore ISI. Please go ahead. Kirk, your line is open..

Oh, sorry about that. Thanks. Thanks, gentlemen. Just maybe to start off with, I realize there's a lot of moving parts to the business model right now in terms of mix shifts from on-prem, the subscription and obviously the duration changes that are going to impact bookings.

But, can you just maybe level set where you think you are at this point this year versus your initial expectations in January? It sounds like justice is maybe a little bit slower than you hoped, maybe at the beginning of the year. Other things it sounds like you guys are very upbeat about.

I'm just trying to get a level set on kind of your expectations about how you are executing against sort of the full year plan and then just so we understand that because it's obviously harder to get a real view into that just by looking at bookings right now? Thanks..

Yeah. I think that's a good question. Obviously, there are some areas of softness in the second half of the year that have contributed to little lighter revenues and it's fair to kind of see how that breaks down. What I think is important to reinforce is our core businesses are performing really well.

We indicated the enterprise side of the business is actually ahead of plan. And this is a little more mature side of the business, a lot of recurring revenues, a big presence in a large marketplace that flows nicely, in other words, when things move out other things tend to move in.

And the business is performing very well and consistently delivering double-digit organic growth. The justice side of the business, the core business is doing well, the competitive position winning important deals.

None of those things affected at all and so performing very much in line with what our expectations are, e-file revenues, maintenance revenues, no attrition, all those core fundamentals is right on track. As we've said, our core growth rate would contract if we didn't add anything else over time. We're adding a lot of things.

We've talked about Modria and re:Search and redaction and international expansion, and other things adding Socrata and Sage in the inorganic growth initiatives that we have. Those things are going to be more difficult to predict and they're going to show up at different times and contribute.

And that is what drives the above double-digit growth organic growth rate. And they're just a little light in the second half of the year. So, I think it's going to be difficult to project those even Public Safety that is new to Tyler and it takes several years literally to kind of Tylerize the whole business model.

Well on track, but harder to predict. And so some of the softness from those growth initiatives in the second half of the year. It's important to say though that all of those are being received well in the marketplace.

We don't have any question about the traction they're going to receive and we've made progress in terms of – these didn't have business models around – they really didn't have a clear value proposition and those things have all been tested and with early adopters who are being embraced.

So, we feel really good about the long-term contribution that these growth initiatives will have and we feel really good that they will provide that incremental growth that consistently has the growth rates where we want them to be, even though the timing of that contribution has been a little short in the second half of this year..

That makes sense. Thanks, John. And then maybe – and this sort of dovetails on one of your comments, but to your point about adding a lot of new products this year, you guys have obviously been more acquisitive than I think historically, listening to just the number of products you brought on.

How should we be thinking about M&A for 2019? And maybe how we should think about sort of margins as it relates to that? Is 2019 more of a year where you guys are hoping to see these products sort of gel coming to the go-to-market model and then, obviously, we hope to see some natural operating leverage from that? Thanks..

Yeah. We just don't – we'll always be excited to do great deals that make sense for the company. And we have tended to be a little more aggressive on strategic deals.

We're always going to be a disciplined buyer, but obviously, some of these, especially smaller strategics, once they are embraced in our sales channel and in our customer base and if you look out a few years – if you now look back a few years at some of these, obviously, it certainly wouldn't have made sense not to do those deals because they maybe were a little more expensive than what we would've liked.

So, you might see us be a little more aggressive on strategic deals that we think there will be a lot of scale and leverage in, but we'll be opportunistic. We can't start 2019 and say we have a particular target for acquisitions. If they're great, we'll do them, we'll have the capacity to do them.

And if they're not, we'll be happy to be patient as well. So, it's a fair question, but we never have a quota on acquisitions. We're certainly always actively engaged in the marketplace.

We're going to be able to have done a number of deals, obviously, a large deal with Socrata, but a number of smaller tuck-in strategic deals that we think have that kind of scale and leverage in the future in 2018 and we'll just have to see what 2019 brings..

Thanks for that. That's it for me. Thanks..

Next question comes from Alex Zukin with Piper Jaffray. Please go ahead..

Hey, guys. Thanks.

So maybe just on those comments around Courts & Justice, if we look at, kind of, maybe just reminding us about what percentage of the total business is coming from Courts & Justice? And what the new assumptions for growth given some of the new initiatives you talked about being able to slow in the second half? What's the assumption for growth there now versus where it was? And are these execution issues? Are these kind of product quality, market demand issues? Help us categorize that? And then I've got just a quick follow-up..

Just from a percentage, Courts & Justice is right around 20% of our business with the whole suite of products..

I don't think it's – go ahead Lynn..

When you look at new assumptions for growth, I think as John said these – they've got a lot of really good growth initiatives. These initiatives are being tested in the market. They're well received. The fact that there was a little bit of some delay in proving out the model, you look for example at re:Search Illinois.

This was a deal that we went in the year expecting that that was going to fire up really towards the middle of the year and that thing has been pushed back, but not due to any other issues just in the fact that it's a new model out there and it just hasn't gone live yet.

And so in terms of assumptions for growth going forward, we believe these initiatives are going to kick in and start contributing in the future in 2019, 2020. I would expect that C&J will continue to contribute at a pretty meaningful level and have growth kick back up into the 9%, 10%, 11%, 12% range over the next couple of years..

Great. And maybe just a follow-up for Brian.

Can you talk about how many points of growth Socrata contributed to that LTM bookings growth number of 18%? And then how does that kind of bookings growth rate impact the prospect for continued double-digit topline growth?.

As you know, the bookings number can be very lumpy in our business. So this quarter and actually last quarter were both quarters where bookings were comprised mostly of a lot of our good volume of our sort of normal bread and butter kinds of deals.

But we didn't have any of the mega deals, the deals with contract values of $20 million or $30 million that do occur from time to time. We had a couple of those last year and we have large deals in the pipeline, but their timing is somewhat random and certainly lumpy.

So, again, as we have over a long period of time, we remind people to not focus too much on single quarter bookings and that would be the case this time where bookings were below last year's level even when you factor out the impact of change in the term of new subscription deals, bookings were still down a bit.

There was a bit of a difficult comp in it. There was a $12 million deal in the last year's second quarter. But generally they were down slightly, but again on the trailing 12-month basis that 17%. Of that, Socrata accounted for a couple percent of that trailing 12-months bookings, so that 17% growth, about two points of that was from Socrata.

So still the longer-term trailing bookings support our growth objectives that we've talked about in the sort of north of 10% range. And also to point out that the larger bookings, the big contracts are typically recognized over several years. So the revenue recognition and the bookings are very different.

So we put those into backlog and then recognize them over the extended period of time, so the lumpiness has less of an effect on the revenue growth than it does on the bookings growth..

Perfect. And then maybe just to sneak another one. I know there was some private equity kind of consolidation of assets in the market over the last quarter in your space which was a little bit unusually large I think versus historical periods.

Any sense or early signs of what that combined entity now looks like from a competitive standpoint? What that does to the competitive environment for new products for you guys going forward?.

Yeah. Alex, I think we know what you're talking about. I think we've seen it even beyond this deal. Other deals, we've seen some PD firms coming into the space, I think sort of recognizing the value of the long-term recurring revenue streams. We're obviously very familiar with those assets.

The Superion assets I think had been in the market now three different times in 12 years. The TriTech assets have now been in the market twice in four years. It's a little bit early. Typically, we know the private equity playbook. It's a little bit different than ours.

They generally look for more of an exit in the near term, while we're looking more long-term. Obviously, this is a different type of deal, because these two firms were merging. But typically they leverage the assets pretty strong. They look for synergies.

which is code for cost cutting, which can sometimes lead to a little bit of disruption in the market, both with their employees and some of the customers. We probably – we've heard a little bit anecdotally about some of that disruption. But that's about it right now. We haven't really seen any meaningful impact in the market.

And other than that, we typically don't comment too much on what our competitors are doing..

Great. Thank you, guys..

Next question comes from Jonathan Ho with William Blair & Company. Please go ahead..

Hi. Good morning. I just wanted to get a better sense from you.

In order for some of the newer initiatives to pick back up or accelerate, what really has to happen here? Is this a function of having more budget set aside or education of the marketplace? Just wanted to get some color in terms of maybe what the next milestones are that we should be looking for?.

Well, Jonathan, I think it's – we're talking about initiatives that are really changing the way some courts are doing business. There is a little bit of education. There's a little bit of decision-making (38:34).

When you look at something like Modria for example, we're taking a similar approach with Modria that we did with e-filing, which is we need to get in there, we need to get some pilots going. Then we need – then the courts adopt that. They go to more of a permissive approach. And then ultimately to a mandatory approach. Same thing with re:Search.

We've got some pilots out there. The reception is good. But some of these things just take some time. It's part of a function of the market we're in. The things move slowly in our market. But certainly the excitement and the energy is out there. We've got active pilots out there. We've got active interests. We've got projects going on.

So it's just a little bit of a function of time..

Got it. And then just in terms of my follow-up.

Can you give us maybe a little bit of a sense of what's happening in the spending environment? And I think you've talked about a healthy pipeline, but how should we be thinking about that just given some of the macro noise that's out there?.

I don't think there's anything – yes, there's nothing really different there, Jonathan. The market's generally steady. It's going to ebb and flow a little bit. But we're not noticing anything different in the demand side of the business. I think on the enterprise side, we think RFP and demand activity will be modestly higher this year than last year.

Obviously the justice side of the business is driven by larger deals, so it's harder to compare year-over-year. But it's steady there as well. So we haven't seen any disruption on the demand side..

Great. Thank you..

Next question comes from Rob Oliver with Baird. Please go ahead..

Hi, guys. Good morning. Thanks for taking my question. I just wanted to ask on the R&D side of the equation, you guys entered this year with substantially higher R&D investment. We've had a lot of conversation about acquisitions on this call and seems like you guys have made some really good ones to set you up for future growth.

But on that R&D side, I just wanted to get your sense of kind of at this point in the year where you feel you are relative to the leverage you're getting on that R&D and the innovation that you're getting from it? And how you might feel relative to whether that's sort of a new steady state? And how we might think about R&D spend going forward? Thank you..

Yeah, Rob, I think where we are with R&D right now is, as we've noted before, we've got a lot of projects going on. They're spanning the entire portfolio of our products. We're pleased with where that development is. As you know, it takes time. Once we start that development, it takes time to get the products out, get them into RFPs, get them showing.

So we're pleased with the progress of where they are today and what we think they'll drive down the road. As we look out going farther, as you know, we have done some acquisitions. Typically what we do with acquisitions is we bring them in and we actually invest in them. We've got a pretty good history of that.

We talked earlier about some deals in the comments about ExecuTime. That's an acquisition we bought a couple years ago. We took a very deliberate approach to investing in it. And here we are a couple years later, and it's starting to really contribute. We've made some significant acquisitions this year, obviously Socrata.

We're not – we're just now beginning the planning phase for 2019, but when we make an acquisition like Socrata, and we think where there's leverage across our base, it's likely we'll be making some significant investments there. But the amount and the timing of those we haven't worked out yet..

And I wouldn't expect that R&D expense, the gross expense goes backwards next year. But we do believe that as you look out over an extended period of time, over the next several years that we do see leverage over the long term in R&D as we're able to invest – leverage investments across multiple products and ultimately be more efficient about that.

So in the near term we're opportunistic, as we are with M&A, on R&D and those two play together as well depending on as we make various build versus buy decisions and how we allocate the capital between R&D and M&A..

Okay. Thank you, guys..

The next question comes from Patrick Walravens with JMP. Please go ahead..

Hi. It's Pete Lowry in for Pat.

Can you talk a bit about whether your go-to-market or sales motion is different as you sell suite solutions like Courts & Justice?.

It's more of a coordination. We're kind of working through that, but we will continue to maintain separate sales channels. There is a high level of expertise, domain knowledge and relationships that exist in the different channels.

So, again, the skillset, the relationships that somebody on the justice side of the business has is going to be very different than somebody selling an enterprise financial system or tax and appraisal solution.

So we will keep – I think we've consolidated the channels to the extent we will – we look at it, hey, if you've built this organically from scratch, what would you have? And I don't think you'd have a single sales rep selling a court solution, as well as a tax solution. You'd draw the lines pretty much to where we've evolved.

So at this point what's critical is to have sales executives that take the lead.

So that while we have several different people with domain expertise in the different areas that are going to talk the language and understand the needs of the different areas of the solution that we certainly appear as a cohesive comprehensive sales channel when we're representing multi-suite solutions.

And that's really where the evolution and the changes take place now. So I don't see the channels changing much. I think that the coordination of those and establishing leads that are able to present the solution, negotiate a contract, deliver services in a comprehensive way is where we are in the evolution at this point in time..

Okay. Thanks. One quick follow-up.

How should we think about Q4 cash flows? Did some of the outperformance in Q3 pull from Q4 or would that be within normal sequential pattern?.

I think the sequential pattern would be pretty normal. Q3 is always our biggest quarter, it was a little bit better than I think we would've expected. So I don't think our outlook for the – so some of that may have been, sometime in Q3 versus Q4, but Q4 is also a relatively strong period for cash flows.

So I don't think our view for the full year has really changed from what we were seeing prior to this quarter..

Great. Thank you..

The next question comes from Tim Klasell with Northland Securities. Please go ahead..

Hey, guys. I wanted to sort of jump a little bit into the comments you made around more complex and potentially longer, harder-to-predict sales cycles. In particular, I did a little bit of digging with the Lubbock, Texas, and that seems to be sort of a great example of what you can do with some cross-selling.

But, can you walk us through the longer sales cycles, what that means on the calendar of what you saw before and after and I'm sure you're selling to more departments inside of the government, so it takes longer, but wondering if you can give us some maybe a little bit of color around how much longer it's taking?.

So actually, I think what we need to do is clarify what we said. I don't think we're really seeing a longer sales cycle. So for our core traditional products, I don't think anything's really changed there in terms of the sales process or the cycle.

What we're referring to is, it's taking longer for the market to adopt these newer initiatives that we have; Modria, re:Search, redaction these sorts of things.

So it's not the traditional sales cycle that we've seen lengthening, it's just these new products that are being embraced by the marketplace and from the value proposition all those things are encouraging, but it's taking a little longer for those adoption rates to go up and to see the revenues come online.

So it's really more aligned with the growth initiatives rather than the traditional sales cycle..

Okay, okay. And then just a quick follow-on. A lot of your contracts I believe we have some sort of inflationary clause in there when the contracts renew or maybe on an annual basis. Can you walk us through what those are generally geared to? Are they to the CPI? You have a fixed rate.

Or if we do enter into a high inflationary environment, how are those contracts protected roughly speaking?.

Some of them are CPIs, some of them are just a flat percentage and some of them, the initial engagement is flat for the term of the initial engagement. So it's a competitive marketplace and we negotiate what we can. That's probably the driving reason for what Brian referred to which is a conscious shortening of these initial cycles.

So originally as some of the SaaS solutions were newer and even originally we used to kind of capitalize into the relationship the service component. And the markets kind of matured and settled into paying services for the initial deployment and just having the subscription fee before say hosting and product licensing and maintenance.

So that's – those things evolving. The shorter cycle with hardly any attrition at all doesn't give anything up for us and it gets us to a point where we can just let the market determine the increases. And as you're indicating not have the inflationary exposure.

The three years we're down to what? 3.5 years, 3.4 years or something that's a pretty short period of time and after that for most of these they just go to whatever the appropriate market rate is. So the exposure I think is becoming more and more limited..

And, Tim, even in a deal where there's a three-year agreement, for example, that has a flat fee for that initial term, the economics of the deal would still have the annual increases built into those, but the payment is just an average payment.

So even though optically it may look like there's no growth from those revenues over three years, the economics still have built in increases in it. But we do want to, as John said, limit the long-term exposure to fixed contracts and give us the flexibility with pricing and cost change..

You need to look at the whole customer base too. I think you said you have annualized recurring revenue rates are what, somewhere in the mid-$600 million now. Certainly a high percentage of that, a lot of these thousands of clients have been acquired over many, many years, so the vast majority of that number are people that are on annual contracts.

We certainly aren't looking to increase them at any unusual rate, but should there be inflation exposure, there aren't any limitations at all. It's only those contracts from the last few years that are in there and again that's relatively a small percent..

And virtually all of our maintenance agreements are annual agreements. It's rare that we have multi-year maintenance agreements..

Okay, great. Thank you very much for the color..

The next question comes from Mark Schappel with Benchmark. Please go ahead..

Hi. Good morning. Thank you for taking my question. Just one question, John, on international expansion, it was touched on in your prepared remarks as part of the growth strategy.

I was wondering if you could just remind us real quickly here where the company is at with respect to your expansion efforts overseas?.

Yeah. It's predominantly right now Courts & Justice. So those solutions – and it's predominantly English-speaking places, so some in Europe and, obviously, the first deployments have been in Australia. So that continues to kind of be the case.

We have a – something's going on in South America, but for the most part it's English-speaking Courts & Justice solutions..

Great. Thank you..

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

Okay. Thank you. Appreciate you all joining us on the earnings call today. If there are any further questions, feel free to reach out to Brian, Lynn or myself. Again, thanks for joining us and have a great day..

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect..