Hello, and welcome to today's Tyler Technologies Second Quarter 2020 Conference Call. Your host for today's call is Lynn Moore, 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.

And as a reminder, this conference is recorded today, July 30, 2020. I would like to turn the call over to Mr. Moore. Please go ahead..

Thank you, Danielle, and welcome to our second quarter 2020 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, and Brian will review the details of our second quarter results.

Then I'll have some additional comments, and we'll take questions..

Thanks, Lynn. 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 would refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.

Lynn?.

Thanks, Brian. We executed at a high level during the second quarter, as the effects of COVID-19 pandemic continued. From a financial perspective, GAAP revenues declined 1.5%, and non-GAAP revenues declined 2.4%. Revenues for the quarter were approximately $35 million below our pre-COVID plan.

Many procurement processes encountered delays, as clients focused on addressing COVID-19, resulting in several contracts being pushed out of the quarter, reducing license and, to a lesser extent, subscription revenues.

Also, services revenue was negatively impacted during the quarter as billable travel was essentially eliminated and fewer hours were delivered as we transition to providing most services remotely. As I noted on our last earnings call, due to concerns with COVID-19, our annual Connect user conference was canceled.

And although a majority of the content was delivered virtually, we lost more than $6 million of revenue that would have been recognized in the second quarter. Recurring revenues remained strong. GAAP subscription revenues grew 16.6%, and non-GAAP subscription revenues grew 15.6%.

Together, total recurring revenues from maintenance and subscriptions grew 12.3% on a GAAP basis and comprise approximately 75% of total revenues. On the positive side, operating expenses were also well below our original plan. We experienced significant savings in commissions, travel, marketing, health claims and other employee-related expenses.

As a result, our operating margins expanded, with our non-GAAP operating margin up 290 basis points to 27.5%. Our cash flow was another high point in our results, with free cash flow up 226% over last year's second quarter.

Bookings for the quarter were approximately $309 million, and as expected, declined 31.6% due to the very difficult comparison to the second quarter of 2019, which included 2 very large SaaS deals, 1 for the North Carolina Administrative Office of the Courts, and the other with Bayer County, Texas.

Excluding these two contracts, bookings declined approximately 10.9%. Although we have not seen meaningful cancellations, we are seeing delays in procurement processes and lengthening sales cycles due to the effects of COVID-19, which impacted bookings this quarter.

As we have discussed in the past, our new deal mix can be somewhat lumpy from quarter-to-quarter, as was the case this quarter. The number of new software deals was weighted towards SaaS, with 66% of the total.

However, the value of the new software deal is weighed towards on-premise license arrangements at 57%, as more of the larger deals that signed this quarter chose on-premises.

Our largest deal in the quarter was a license arrangement with the state of West Virginia, valued at approximately $9 million for our iasWorld Appraisal solution, including appraisal services.

Perhaps the most significant contract signed in the quarter was a public safety arrangement with Jacksonville, Florida, for our New World Public Safety records management and Brazos eCitation solutions, along with our Socrata Data & Insights, SceneDoc and SoftCode solutions, valued at approximately $5 million.

Jacksonville, the 13th largest city in the nation, represents our largest public safety client to date. This one is important because it not only validates the significant investments we've made in the New World suite to position it to become competitive in Tier 1, but also showcases the strategic value of the acquisitions we've made in recent years.

Other notable license deals during the quarter included an Odyssey court case management contracts, with the 10th Judicial Court in Johnson County, Kansas, which completes our state-wide presence in Kansas.

Along with contracts for our MicroPact entellitrak solution, with the Pennsylvania Turnpike Commission and the United States Department of Agriculture. In fact, three of our seven largest license deals in the quarter were for our MicroPact entellitrak solutions.

We added two new counties in California for Odyssey, a licensed contract with Calusa County and a SaaS contract with Mariposa County. We've now won six of six California court deals that have been executed since the state-provided new funding for case management system replacements last year.

Our largest SaaS deal in the quarter was a $3 million contract with Clay County, Florida for our EnerGov Civic services solution. We also signed a SaaS deal for EnerGov with the city of Sunnyvale, California, valued at approximately $1.3 million.

Other significant SaaS arrangements signed this quarter were with the Bellevue School District in the state of Washington and the City of Lynn, Massachusetts for our Munis ERP solution, with the Abu Dhabi Global markets for our Modria Online Dispute Resolution solution with the Kansas Supreme Court for our CaseloadPRO solution, and with Clearmount County, Ohio for our Socrata Data & Insight solution.

In addition, 42 existing on-premises clients signed contracts to move to the cloud, including Oasis County, Texas, with Odyssey Courts; Franklin County, Ohio and the Cab County, Georgia, with iasWorld Appraisal & Tax; and Alameda County in California with CaseloadPRO supervision.

We also delivered the initial version of our e-warrant system to the state of North Carolina under the contract we signed late in Q1. We also have trial programs underway for e-warrants with 2 counties in Texas. Now I'd like for Brian to provide more detail on the results for the quarter..

we expect 2020 GAAP revenues will be between $1.124 billion and $1.144 billion, and non-GAAP revenues will be between $1.125 billion and $1.145 billion. We expect 2020 GAAP diluted EPS will be between $4.71 and $4.91 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate.

We expect 2020 non-GAAP diluted EPS will be between $5.30 and $5.50. For the year, estimated pretax noncash share-based compensation expense is expected to be approximately $79 million. We expect R&D expense for the year will be between $90 million and $92 million.

Fully diluted shares for the year are expected to be between 41.5 million and 42 million shares.

GAAP earnings per share assumes an estimated annual effective tax rate of negative 23% after discrete tax items, includes approximately $82 million of estimated discrete tax benefits related to share-based compensation, which may vary based on the timing and volume of stock option exercises.

Our estimated non-GAAP annual effective tax rate for 2020 is 24%. We expect our total capital expenditures will be between $34 million and $35 million for the year, including approximately $10 million related to real estate and approximately $6 million of capitalized software development costs.

Total depreciation and amortization is expected to be approximately $81 million, including approximately $54 million of amortization of acquired intangibles. Now I'd like to turn the call back to Lynn for some additional comments..

Thanks, Brian. I want to provide an update on how Tyler Technologies is approaching the challenge of COVID-19 and its effects on our business and our clients. First, our operational response. Tyler's 5,500 professionals continue to provide a high standard of client service with minimal disruption.

Our primary focus continues to be on ensuring that our employees and their families are safe and healthy, while supporting clients who provide essential services to the public. Since mid-March, almost all of our staff have worked from home, with all but the most crucial travel eliminated.

Our clients have faced disruption to their operations, as they deal with the effects of the pandemic on their communities and, in some places, civil unrest and focus on providing vital services to their citizens. Since March, we have seen delays in some procurement processes, although most late-stage processes are moving forward.

Some implementation appraisal service projects have also encountered delays, as clients grapple with balancing social distancing orders with conducting daily operations. We've imposed travel restrictions on our employees, which has all but eliminated our ability to provide services on-site and to visit prospective clients for sales calls and demos.

Virtually every trade show has been canceled, as was our Tyler Connect user conference scheduled for late April.

We are addressing the challenges imposed by the COVID-19 pandemic by adapting the way we do business, including using web and video conferencing extensively for collaboration, conducting sales demos, providing client support and delivering professional services such as training remotely, and even executing complex go-lives virtually.

With the spread of COVID-19, our clients' need for digital connectedness, both within their organizations and directly with the public, is rapidly shifting from a vision to an urgent requirement.

In the last few months, we have seen numerous examples of our team members working to help our clients adapt to the current environment in truly amazing ways. I'd like to highlight a few examples.

Following the cancellation of Connect, we offered much of the valuable content to all of our clients through a program called Still Connected, a series of live and recorded online sessions.

We've delivered more than 320 sessions of content with 17,000 views of recorded webinars, enabling us to reach even more client personnel than would have attended Connect in person.

We accelerated the launch of our new virtual court solution, which provides a turnkey platform built on AWS for conducting face-to-face court sessions with remote defendants over the web. We have offered it without charge for 90 days in order to help clients serve their constituents without interruption.

46 courts are now live, using the solution to handle cases remotely, while also broadening access to justice for disadvantaged or displaced defendants, and 18 additional courts are in the process of onboarding. And just yesterday, AWS recognized virtual court as the best remote work solution in the AWS 2020 public sector partner awards.

Developers on our Versatrans team fast track development of a new bus attendants app that works with our school bus routing solutions to provide schools with a tool for limiting bus capacity and managing social distancing as well as facilitating contact tracing.

Our Appraisal & Tax division worked with clients with active revaluation projects underway, including Delaware County, Pennsylvania and Franklin County, Ohio, to move to remote property valuation hearings.

We've also pivoted from infield data collection work to using remote data to achieve equitable and repeatable property assessments that support vital property tax revenue streams for our clients. We successfully completed more than 180 go-lives across our product groups during the quarter, most with very few or no Tyler personnel on site.

The port of Long Beach, California, the second busiest seaport in the U.S., became our third public safety client to go-live with our new enterprise record solution, along with our full suite of CAD, mobile, field reporting and shield force applications, with a contracted go-live time line that represented a 33% improvement over traditional time lines.

And our Data & Insights division is working in innovative ways to use our Socrata platform to respond to COVID-19 with data. Our Open Data platform was rapidly established as a one-stop shop for information and services for citizens in Buffalo, New York during the pandemic.

Tyler also published on the Socrata platform, our nursing home COVID tracker, an embeddable dashboard displaying detailed national nursing home data on COVID-19 at the county and state levels.

I couldn't be prouder of how our 5,500 dedicated professionals are supporting each other, delivering exceptional client service and displaying the spirit of innovation that has long been a hallmark of Tyler's success.

We've already discussed the financial impact of COVID-19 on our second quarter, with significant reductions to both revenues and costs. I'd like to add some comments on our current outlook for the rest of 2020 as well as provide some thoughts on the long-term outlook and prospects for Tyler.

We believe the revenue impact on the second quarter was approximately $35 million, and we expect that revenue growth for the rest of the year will continue to be significantly impacted.

While we have not seen meaningful cancellations, we continue to see delays in procurement processes and longer sales cycles, as public sector entities continue to focus on issues relating to the pandemic and remote work, which will delay the timing of license and, to a lesser extent, subscription revenues.

We have proven that we can deliver the majority of our professional services remotely, but we expect to see lower software and appraisal services revenues as some projects are delayed by client availability or travel restrictions.

Billable travel was impacted significantly in the second quarter as most travel ceased, and we now expect to see very little travel in the second half of the year. In addition, a number of courts have closed or limited operations during the pandemic, which will continue to impact transaction-based e-filing revenues during this period.

While our variable revenue streams will continue to be affected by the current environment, we anticipate that recurring revenues, which now comprise 75% of our total revenues, will continue to be generally unaffected. Our July 1 maintenance renewals went into place with normal pricing, and we do not expect to see any changes in client retention.

Lower expenses have more than offset revenue reductions relative to our pre-COVID-19 plan, resulting in margin expansion. Many of these expense reductions, such as sales commissions and health claims, are short-term in nature, but we do expect that some savings will be sustainable.

For example, I expect that post-COVID, we will continue to deliver a significant amount of services remotely, improving utilization of our professional services teams and reducing travel expense.

I expect that more of our administrative and sales and marketing activities, including trade shows, will also be conducted virtually in the future, with a reduction in associated expenses. We also will continue to explore the possibility of greater numbers of employees working remotely, even after our offices are fully opened.

On the product development front, we are continuing all of our strategic initiatives, including product R&D projects and accelerating our move to the cloud and still expect that R&D expense will grow at more than 11% for the year. We have not laid off any personnel and do not expect to do so.

And in fact, we added 46 new heads during the second quarter, mostly in R&D. As we remain confident in our long-term outlook, there are uncertainties around the continuously evolving COVID-19 pandemic and its impact on our operations and those of our clients.

For example, government response to the pandemic continues to vary significantly from state to state and even from jurisdiction to jurisdiction within a state, thereby making the duration and scope of business restrictions within the public sector difficult to predict.

Although the CARES Act provided approximately $424 billion in economic aid to state and local governments, an additional stimulus packages will likely provide more assistance, many of our clients face near-term budget pressures that could cause them to defer purchases.

After suspending our guidance last quarter, we have reinstituted annual guidance for 2020 based on our high percentage of our recurring revenues and visibility in the pipeline for the second half, tempered by ongoing uncertainties around COVID-19.

The midpoint of our non-GAAP revenue guidance implies growth of about 4% for the full year, along with operating margin expansion. As I said last quarter, I remain as confident as ever in Tyler's long-term outlook and prospects. Our company's fundamentals have never been stronger.

And just as we did following the challenges of the dot-com bust, 9/11 and the Great Recession, we expect to emerge as a stronger company with an improved competitive position. The pandemic has not changed the underlying fundamentals and long-term demand for our software and services.

Tyler exclusively serves the public sector and our clients will not go out of business. The solutions we provide are essential, whether managing revenue that keeps communities operating, ensuring public safety to help the most vulnerable or providing transparency and access to government for the residents of jurisdictions we serve.

Our software manages mission-critical functions such as 911, courts, property taxes, utilities and payroll. Our clients generally acquire new solutions to replace aging systems that are at end of life and may be unreliable or unsupported, usually a high priority regardless of the economic environment.

If anything, the current crisis is highlighting the unsustainable reliance on outdated technology by much of the public sector. Technology is an increasingly critical factor in helping government function effectively, especially in difficult times.

Long-term opportunities will emerge from this crisis, as both Tyler and our clients reexamine historical business practices. For example, work-from-home postures further highlight the need and benefits of connectivity and cloud services, something we have been actively investing in and are continuing with our strategic collaboration with AWS.

Clients will continue to appreciate the value of data and being connected with others, other departments and jurisdictions as well as with citizens. This is our connected communities' vision, a vision that only Tyler can execute.

Our ability to deliver uninterrupted high-quality services and support during these difficult times only further strengthens our bonds with clients and reinforce Tyler's messages in both agility and stability. As I mentioned earlier, Tyler has endured challenging times in the past and emerged stronger than before.

Today, we believe we are even better positioned to weather the economic slowdown. Recurring revenues made up 75% of our total this quarter. Our competitive position in win rates remains strong, and we have significantly expanded our total addressable market through investments in a combination of M&A and R&D.

Our financial position today is also the strongest it's ever been, with 0 debt, approximately $530 million in cash and investments and substantial additional liquidity available through our $400 million undrawn credit facility.

As a result, we're able to continue to invest at a high level in all of our long-term strategic initiatives, something that many of our competitors may not be able to do. Our ability to actively invest during the Great Recession was a key differentiator that strengthened our overall market position when demand inevitably returned.

We will continue to do the same through this crisis. Finally, we achieved an important milestone last month when Tyler was added to the S&P 500. It's an honor to be listed among other innovative and highly regarded companies in the S&P 500 index. This recognition is the result of a lot of hard work by numerous employees over many years.

Today, we have an incredibly talented team of 5,500 professionals with unmatched public sector experience and deep domain expertise. I'm proud to call them my colleagues, and I'm confident of our ability to together realize the opportunities ahead of us. Now we'll take questions, Danielle..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Peter Heckmann of D.A. Davidson. Please go ahead..

On customer budgets, can you talk a little bit more about, based on your analysis, who's being relatively more affected? Is it states, cities, counties? And how that's affecting some of their priorities for IT spending?.

Yes, sure, Pete. It's a good question. And what we see is, as you know, about 80% of our business is at the local level city county, about 15% is at the state level and about 5% at the federal level. Going backwards from there, at the federal level, we're not really seeing any meaningful impact right now.

We may see some delays, but those budgets seem to be intact. We are seeing some impact at the state level, when you look at our Tyler Federal division, which is really our MicroPact division. Their business is a mix -- pretty even mix between federal and state. And what we're seeing there is we're seeing some delays in RFPs.

They're predominantly overwhelming at the state level, not the federal. At the city and county, it's still a little bit of a mixed bag. I think our clients are still grappling with the new budgets. I think they're still grappling with what type of stimulus funds may be available. And it's varying actually a little bit across our product suites.

When you look at, for example, some of the leading indicators, RFPs and demos and execution of contracts. When you see things on our justice suite right now, our Courts & Justice solutions, our Public Safety solutions. Those are fairly on track right now for this year. We're expecting some pretty good sales.

We've had -- obviously, we talked about Jacksonville, public safety. We expect some significant deals there. We're seeing a little bit more delays right now, I think, on the ERP side. But again, it's a little bit of a mixed bag right now..

Okay. And that's helpful.

And have you seen any indication that some of the smaller municipalities are looking at options of kind of banding together and jointly bidding out to vendors trying to get a volume discount across a number of smaller municipalities? Or is it still just you're basically negotiating with each municipality individually?.

Yes. No, we're not really seeing small jurisdictions band together in that manner. So it's still kind of business as usual in that front..

The next question comes from Kirk Materne of Evercore. Please go ahead..

Hi, thanks very much. Lynn, I want to follow up on a comment you made at the end. Obviously, you all are in a good position relative to 10 years ago and relative to a lot of your competition, both in terms of sort of just the breadth of your portfolio and your financial -- sort of your balance sheet right now.

What are -- is there anything you can do in this kind of environment to help your clients out from a -- like is pricing something that you can help them out with to try to take share in this kind of environment? Are you all going to remain maybe more on the offensive around M&A if something kind of falls into your lap? I'm just trying to get a sense on, is this an opportunity for you all to take market share just given your position in the market? And if there's anything you can really do to accelerate that potentially?.

Well, I think the investments we've been making across the board, particularly in cloud and modernizing our products, I think we're going to see that's becoming more and more important. We're not right now doing anything significantly with pricing. I think you're right. We are in a strong position.

I would argue that today -- sitting here today, we're even in a much stronger position than we were three months ago at the last earnings call, even with our top-line revenues off a little bit. And our balance sheet is that much more stronger than it was three months ago or probably about another $200 million or so.

We're three months further along in all of our R&D initiatives, including modernizing all our core apps and sort of, as I mentioned in our comments, we've learned a lot -- we're learning a lot of things about ourselves in how we do business. And so we know too when we emerge, we're going to be even more efficient.

So I think those are all opportunities. Looking at M&A, as you remember, really last year, we had talked about -- we've done so many acquisitions in 2018 and wrapping into early 2019, we've sort of taken a bit of a deliberate pause. I'd say right now, we're back in the same mode that we've historically been.

I've actually -- we've looked at a handful of deals over the last six, eight weeks, and I anticipate that we'll continue to look at deals. And I think those are some opportunities out there.

We do have a balance sheet that we can use to our favor, to our competitive advantage, both internally with these investments, but also looking at potential M&A deals throughout the rest of the year and into next year..

Okay.

And I realize visibility is challenging right now, but -- and not to get too nuanced on this, but is the challenge really just understanding what's at the top of the funnel? Or how things are progressing sort of through the funnel? Meaning, are the discussions out there still happening? It's just difficult to see how they're going to sort of translate from opportunities into bookings.

I know it's sort of a little bit of a nuanced question, but I'm just kind of -- like the opportunity for you all seems to be pretty massive. I just want to make sure I understand whether or not -- is that -- are people not even talking anymore? Or is it more like, hey, we need to do this.

It's just -- I don't know when I'm going to get the funding to actually buy your technology?.

Yes. I'd say my answer is that it's mostly sort of as it's working through the funnel right now. I think I would sort of remind you back to the comments of last quarter. If you recall, before COVID hit, the market was really pretty robust. We were off to a really great start, which was a sign of what the entire pipeline was.

And actually, we were on pace to beat our internal plan for Q1, which is usually a pretty good indicator of how we'll do for the rest of the year. That pipeline, it doesn't go away, as you know. I mean everything we do is essential, that demand is there.

And so you got to kind of think back, okay, where was the market ahead of time? That market is going to stay. And then also in the interim, the normal pipeline is going to continue to grow, it's just going to be pushed out a little bit. And I do think our clients are still wrestling with that question a little bit.

There is a little uncertainty, there's a little apprehension. Anecdotally, we're hearing some things from some of our salespeople. Clients are saying, we sort of still need to see what budgets are looking like. We feel pretty confident that Feds are going to provide some more stimulus funding, but it just hasn't happened yet.

Even within climate -- within jurisdictions, there's funds there. Obviously, our maintenance and subscriptions are not being canceled. Those are still there. But the -- moving forward with new projects, there's a little politics going on as who's going to get what funds and when. And so just a little apprehension and uncertainty right now..

Our next question comes from Matt VanVliet of BTIG. Please go ahead..

Hello. Thanks guys. Good morning. Appreciate for taking the questions. I guess digging in a little bit more, you talked about ERP being a little bit slower, but some of the other areas that are maybe viewed as more critical, but need to have some sort of upgrade in technology like Courts & Justice.

Maybe digging in a little bit more on some of the other areas, whether that's a little bit more on the civic planning side? Are you seeing any traction in municipalities wanting to get some of those revenue-generating capabilities back if construction can pick up and people are a little bit more back at work? And then also on the school systems, as they're all planning on what it might look like or taking a dual-track process in terms of what the fall might look like, are you having more conversations around potential to make purchases there?.

Yes, Matt, it's a good question. And I would say right now that we're only a couple -- it's just a couple of months. And so I would take some of my comments as much anecdotal as anything. I don't know that there's anything that's established a firm trend right now.

We're just seeing what deals we believe are going to continue to go forward and close, and we're certainly seeing that with some public safety and courts deals. As we saw back in the Great Recession, which I think we kind of lean on for a little bit of experience, we talked about how we're replacing end of life, we talked about how this is essential.

And in some cases, it's okay, where exactly are they in an end of life, and can they squeeze 1 more year out of this financial system? Or can they squeeze 1 more year, two more years? And they may be in a position to sort of doing some of that. I think your comments are stud about our civic services and permitting, licensing and planning.

A couple of the deals I mentioned in my comments were some of our larger deals in the quarter. And I think the pipeline and outlook there still looks pretty good.

With respect to schools, that's certainly an area of some uncertainty right now in a lot of facets, right? I mean a lot of schools haven't even made up the decision as to how they're going to operate next year, whether or not they're going to bring kids back or not, which obviously creates ripple effects, not just in our business, but through all our kids' lives and our employees' lives and those around the country.

So I'd say there's a little bit of uncertainty still there around schools. One of the things that we've done to your comment about civic services and recovery is our Data & Insights division is really working closely with our Munis ERP solution and with our EnerGov Civic Services solution. We're coming out with some products.

They've come out this quarter. We've got a few clients who are piloting them right now. On the ERP side, we call them Executive Insights, and on the EnerGov side, civic services, we're calling them community development insights. And it's -- these are -- this is Data & Insights. It's our Socrata platform.

It's built on top of Munis for the executive insights, providing real-time financial fiscal health metrics like budgets, cash balances, HR metrics, payroll revenue versus budget, certain areas, property revenues versus budget.

And certainly on the community development insights, it's helping them sort of understand the economic health and recovery, what's going on? Is it's -- it's pulling up real-time data on permits issued, permit applications, inspections, the value of permit construction that's going on. So these, I think, are pretty valuable tools.

They're -- like I said, we've got 4 early adopters right now, a lot of positive feedback. And I think once we sort of get those solidified, you're going to let us roll that out.

And that's just an example of us leveraging some of the investments we made before in Data & Insights, where I think there's a big future here and applying it right now to specific needs of our clients..

Great. That's very helpful. And then following up on some of the free cash flow strength, in particular, around a lack of travel and maybe broader T&E-type of expenses and even commissions.

But are you guys taking a look at what -- where you're at in terms of on plan or meeting quotas for salespeople? Are you looking to reset those at all to bring down those numbers to try to hit a certain percentage on quota? Should we expect maybe a little bit more of a payout in the back half if bookings can pick up a little bit? Just curious overall, kind of what the planning is around that to keep your salespeople happy, but understanding that maybe original numbers might not get hit?.

Yes, it's a fair question. I think at a broad level, when you're looking at expenses and our operating margins for the rest of the year, I mean we kind of outlined that on our guidance, and we're expecting a lot of the things that are -- that we've seen over the last few months to continue on. We're evaluating.

And we've done some things with our salespeople, and we'll continue to evaluate that. It's interesting. When we had this conversation three months ago, I think everybody, including us, thought the world would probably be in a little bit different place right now.

And I think that's one reason we pulled down our guidance as there was so much uncertainty in around travel and things like that. And so as we're starting to see that this is going to continue on a little bit longer than probably even my expectation, certainly to the degree a few months ago, we're going to continue to look at that stuff internally..

The next question comes from Alex Zukin of RBC Capital Markets. Please go ahead..

Yes. Hi, Lynn. Hi, Brian. It's Scott Wilson on for Alex today. I guess, first question, just to level set the guide. Last quarter, the message was that you were confident in mid-single-digit growth. The reinstated guide is now at 4%, which is a little bit below where we were modeling.

I guess with that in mind, you kind of hit on some of these things, but just to kind of be clear, what are the things that you're more confident in relative to 90 days ago? And what are the areas where you're less confident relative to 90 days ago?.

Well, I'll start, and Brian, why don't you jump in? I think 90 days ago, we were generally under the assumption that local jurisdictions, I mean, just in general, your daily lives, but also what's going on with our clients that really, as we got into the third quarter, we'd start seeing a little bit more return to normal that people would be traveling, our ProServe's team would be on-site delivering services.

Our appraisal services would be ramping up, that we would be starting to see more sales -- more in-person sales demos. And I think we just sort of -- I don't say we missed the boat, but it's -- things have continued to evolve. So I think that's an area that I think we sort of really didn't get a good feel for.

I'm not sure three months ago; we had a really good feel for some of the operating expense savings that we would have throughout the rest of the year. It's certainly been a learning experience. One of the things we talk about as a management team constantly is something that successful companies do is they're constantly looking internally.

They're constantly looking at ways to improve. Companies striving to do better.

And what we've been able to do over the last few months is really take a hard look at some of our historical business practices, whether it's that on-site delivery of services, whether it's internal Tyler travel, whether it's the number of Trade Shows we do as well as the way we position some of our products we talked about Virtual Court.

So this is a learning experience. It's a good one. And I think it's something that's going to help us emerge on the back end.

Brian?.

Yes.

I think -- so I think if you look just at the change really from basically our soft guidance of mid- single-digit growth, the biggest change is to what we've actually implemented in the current guidance is around -- on the revenue side around billable travel that we did expect we'd see more of that come back as we got into the third quarter and into the fourth quarter.

And now we've eliminated most of that from the plan for the remainder of the year. So the midpoint of our guidance now is 4% growth, and so it's still kind of in that mid-single digits. But that's the biggest downside. Now those revenues are basically no margin revenues. So the effect is positive on our margins.

Probably the things we're more confident in as well would be somewhat around the pipeline for the second half of the year. Obviously, we're three months closer to that, the deals that in our plans are pretty far along in the pipeline. We have better visibility into and better information around that.

And as Lynn mentioned, the expense savings, we -- now with a quarter -- a full quarter behind us in this environment, we have a better feel for where those savings are happening and the volume of those..

That makes sense. And then just a follow-up. When looking at kind of your SaaS ARR specifically this quarter, it actually looked pretty strong to me. I mean it was up 8% sequentially, 22% year-over-year, not that different than this time last year.

So I guess with that in mind and contrasting your license revenues down 18%, were you a little surprised at the strength in the quarter? And then like with that in mind, is COVID potentially accelerating the shift to SaaS at a greater rate than even your strategy that kind of was focused on pricing and sales incentives to kind of incent that shift? Is that happening? Out of curiosity..

I do think that COVID is partially responsible for accelerating clients' desire to shift to the cloud and notwithstanding that we -- that our larger deals this quarter were mostly on the license side.

But we did see some license deals and some SaaS deals, but more license deals slide out of the quarter, which resulted in that bigger decline in our license revenues. Yes, but the ARR growth this quarter on the revenue side, a lot of that represents deals we signed in prior quarters that are now coming online.

For example, we've started recognizing revenues even in the North Carolina, e-warrants contract we signed last quarter. We're continuing to ramp up with the North Carolina court system and expand revenues there. So those prior bookings feed into the actual revenue recognition growth over time. And so we're benefiting from that.

But we do think that this environment will continue to accelerate clients' desire to be in the cloud, which certainly, long-term, is a good thing and consistent with our desire to move more of our business to the cloud and where a lot of our investments are coming in today..

The next question comes from Rob Oliver of Baird. Please go ahead..

Great. Thank you guys. Yes, a follow-up to that last question. Lynn, since you took over, you've been kind of moving, I think, your sales team more towards a cloud subscription focus, and that's bearing fruit. And I guess when you look back at previous downturns, customers were faced with a really expensive perpetual license renewal.

And I'm just wondering, I know you said in your prepared remarks that subscription was also impacted this quarter, and that makes sense.

But wondering to what extent as you guys work with your customers, you are leading more with that subscription side as it seems like it might be a much more palatable entry point for customers looking to do things with you guys? And then I have a follow-up..

Yes, I think that's right, Rob. I think as their budget pressures in public sector, people are going to be looking to do things that are more and more efficient and investing in large infrastructure and large IT shops, I think, is not going to be the way. It's going to go.

And we have been moving more, I would call right now into what we call a cloud-preferred approach, historically, it was cloud agnostic. And so we're doing things with our salespeople. We're trying to get out that message of ROI, trying to get the message of security of the cloud. And I think you're starting to see that in our new sales.

I think also what's interesting is, we talked about it -- I talked about a little bit in our prepared remarks, but is the SaaS flips that are going on within Tyler, those are continuing to gain traction. And I'd say, historically, if you look back a few years ago, most of the SaaS flips were really occurring on the ERP side.

Really beginning last year, we started putting more internal focus, for example, in our Appraisal & Tax division on SaaS flip. We started to get the message out to our customers that the cloud is going to be the future. And that message is being well received. We're also starting to see it really in our Courts & Justice side.

It's a focus of theirs this year. They've done some things, really looked at their pricing, as you know. They've got some very small clients up to some very large state-wide clients. And they've done some things with some tiered pricing and stuff, so they can start rolling that out. And it's showing in the numbers.

I think we talked about 42 SaaS flips, but some of the more significant SaaS flips we had this year, you look at appraisal and tax, it was Franklin County, Ohio, it was Cab, Georgia. At C&J, it was Oasis County, Texas, which is Corpus Christi and Alameda County in California, which is our CaseloadPRO solution.

So the focus, not only just on new sales, but also going back into our installed base with SaaS flips is something that's continuing to gain traction with us, and it's going to be a focus in the near future..

That's really helpful. And I just had one follow-up. Just on the New World Public Safety side, it's nice wins this quarter. And I know the win rates have continued to improve for you guys there. And it may be early to tell, I know it's sort of Q4-heavy, but anything that you guys are hearing from your customers relative to budgets.

And I guess I'm particularly interested in what municipalities are thinking relative to their ability to spend amidst current protests and the environment that we're in, considering police funding and things like that?.

Yes, sure. I think there's some really -- we've talked about a lot over the last several -- the last couple of years. I mean we've made a lot of investments in public safety that are really starting to pay off.

Those investments were done to modernize the apps, but really to expand the TAM, and the Jacksonville contract is really a strategic win for them. As I mentioned, it's a full suite, including e-records, field reporting, SoftCode, Brazos, SceneDoc, Socrata.

That win validates not only our investments we've been making in public safety and moving up market. But it also validates the acquisitions that we've been doing over the last several years. As I noted, is as I reel those off, SoftCode, Brazos, SceneDoc, Socrata, those are all recent acquisitions and things that we've done to enhance our offerings.

And you're never quite sure what is the tipping point in the deal, but certainly, those helped round out a deal and help us move upstream. So those are continuing to pay off. As you look at budgets in public safety, as I mentioned earlier, that was a very large contract for us.

We've got some significant opportunities that we think are still going to close this year. There's a lot of attention right now on defunding the police and what does that mean and what does it not mean? And that concept has kind of been around for a long time, probably going back to the civil rights days of the '60s.

And I think it's not quite clear what that means for some. Is it -- are you talking about defunding? Are you talking about reforming? It's really talked about at some of the Tier 1 cities. But at the end of the day, public safety is going to be funded. Public safety is very important.

I'm not sure that across the nation, despite what you see on television that there's some overwhelming push that there's going to be a defunding of police departments across the country.

I think if anything, it probably puts a greater emphasis on technology, it puts a greater emphasis on some of the investments that we've been making, things like mobility and things -- I think a greater emphasis on data and insights and transparency and the things we're doing with Socrata integrating with our Public Safety solution.

And so it's -- at the end of the day, I just -- I think that public safety is funding is going to be there. What we see in the near-term and the pipeline is there. And I think we're in a great position given all the investments we've been making in the last couple of years..

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

Hi, Lynn, congrats on a good quarter. A couple, I guess, quick ones for me. First of all, Brian, you had a nice expansion in operating margins, and you kind of highlighted the reasons for them, obviously, in the quarter, less travel, et cetera, less sales commissions.

But operating margins have compressed a little bit over the last two to three years, mainly as you've invested more in product, you've obviously made a couple of acquisitions that had some lower-margin structures.

But is this new level -- or the operating margins in the second quarter, is this kind of a sustainable level, do you think going forward with some of the changes you and Lynn highlighted to maybe service delivery, et cetera? Or you think that operating margins could maybe revert back to where they've been over the last 12 to 18 months as we come through this?.

I think it's probably somewhere in between. Some of these things that are affecting our margins are fairly onetime or temporary situations. For example, our lower health claims costs around -- because people haven't been having elective procedures or going in for their physicals. That will come back. Some of the trade shows likely will come back.

But in the long term, I think we're learning we can do virtual trade shows and learning some about the value of some of those things that we've done in the past and that some of them won't, company T&E. We just had very effective quarterly management meeting virtually, and we probably won't go back to having 4 of those in person afterwards.

When you multiply those across the company, I think a lot of those will have permanent positive impacts on margins and efficiency, and there will be some of those that will come back. I think the biggest thing is probably around how we deliver services. And that's something we've talked about, pre-COVID, is doing that much more effectively.

We have little to no margin on a lot of our professional services. We do them to control the quality of our engagements and have successful implementations that we can control, but don't make much money on that. And so this has certainly proven that we can do that effectively -- a large portion of that remotely.

And that our clients who might have previously resisted that are willing to accept that. And so I think that will be one of the permanent changes. So I think there are some long-term margin improvements that will come out of this, and that's clearly a positive for us. So net, I do expect our margins will be better.

But I think there's some reversion as some things come back. We do have -- and also, as we've said, we've really continued with our R&D. So a little bit of delays in hiring some people. But generally, we added quite a few R&D heads this quarter.

And generally, we're going full steam ahead with our existing investment plans, and our R&D for the full year will be very close to what our plan was. So this margin expansion is even in the light of what was sort of our original plan for R&D..

Scott, if I could amplify on that, too. I agree with Brian about remote delivery of services, and it's something that clients are becoming more acceptant of that. It's not like next year or two years from now, we'll be 100% virtual delivery of services. That's just not -- that's probably not feasible.

We'll do some things to help -- that is -- it's good to see clients accepting it. The fact that we're being successful with our go-lives is very important. We may do some pricing with either on-prem versus remote that will help. And then stepping back, I mean we talked earlier about it was a tough quarter for bookings because of last year.

We're setting up a tough margin year for next year. And coming into the expectation, you're right, we have been investing heavily for a couple of years. And our expectation originally coming in the year was a little more flattish margins from the year before, and with margin pickup to start coming in 2021.

So I would expect really going back to that baseline that we will have a pickup and perhaps a little bit more than we might have expected because of some of these sustainable savings, but still a little too early to tell exactly what that is..

Great. Super helpful. And then a quick follow-up on, Lynn, your prior comments on customers that are moving towards your subscription solutions outside of your ERP customers, whether it's Public Safety, Courts & Justice, et cetera.

Are those customers making the initial purchase decision still on a perpetual basis, and you're seeing more of those conversions to the cloud? Or are you actually seeing customers kind of net new upfront, selecting cloud from the get-go?.

We're seeing net new. It's been in our Courts & Justice space. We've been seeing more in the cloud. We're seeing it more on the A&T side, same with EnerGov and things like that. But we're also -- really, the point of my comment was the focus was to outline our focus on internally on flips across a broader spectrum of our products.

And so it's just part of our overall long-term initiative of moving to the cloud and say it's starting to get some traction..

The next question comes from Charlie Strauzer of F -- I'm sorry -- CJS Securities. Please go ahead..

Hi, good morning. Just, Brian, for you, it's probably best view is on the guidance for the year.

Just some additional commentary on how to think about the split between Q3 and Q4, just to help us kind of models a little bit better?.

Yes. And on the split, certainly, the timing has some uncertainty in it, as it always does. Bookings can be lumpy, particularly on the license side. We typically have a bigger license quarter in Q4 around public safety. So I'd expect that we would see sequential revenue growth in each of Q3 and Q4.

And I mean I think the growth in each of those quarters is probably fairly consistent after -- so the number you need to get to, to get to that over -- the annual guidance number is probably pretty consistent between Q3 and Q4 in terms of a growth rate. And the earnings, we would expect to grow sequentially in Q3 and then again in Q4 as well.

So sequential revenue growth, sequential earnings growth, but exactly where that split falls out is a little hard to tell. I mean I think the guidance implies something around 5% growth for the second half of the year. And that will likely be fairly consistent in both Q3 and Q4..

Got it. That's helpful. And then just looking at the pipeline, you talked about a lot about the pipeline so far.

But if you are seeing new RFPs coming to the pipeline, what areas are those coming in? And are you seeing some RFPs that are maybe leading to new product development ideas for your R&D team?.

Well, there are still some new RFPs. But I would say that's just the volume is -- across is not as robust in certain areas as others, as I mentioned earlier. And this is really sort of looking out over the next 6, 9 months.

And like I said in our -- mentioned earlier in my comments, we're seeing things at the Tyler federal level in the Justice solutions, those leading indicators, RFPs are holding fairly steady. Same with our Data & Insights solution. They're off a little bit right now in some of our ERP solutions.

But again, to my comments before, it's -- this is all timing. These decisions don't go away. They just get delayed..

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

Hi, good morning. I just wanted to start out with the virtual courts opportunity that you talked about.

Can you give us maybe a sense of what that could look like? I know you're offering it for free in the beginning, but could this be an add-on module? Like can you talk a little bit about pricing or uplift as you kind of build out that capability?.

Sure. It is -- once it gets out of the free trial basis, it is an add-on. It's a cloud offering, hosted at AWS. So it's a subscription add-on to the existing base. This is primarily -- today, with our municipal courts customers, which are less complex type courts, traffic courts and those sorts of things, many of them with smaller customers.

So the individual uplift is sort of moderate, I'd say, compared to their existing recurring revenues with us. But it's certainly something we think is very broad applicability across our municipal court base. And also we're looking at expanding a similar offering into our larger Odyssey customer base.

So I don't really -- I think, I'm not really in a position to quantify the opportunity, but it's -- I'd say it's a meaningful uplift from the existing recurring revenues with those customers..

Got it. And then in terms of your ability to sell add-on capabilities and incremental offerings versus, I guess, the larger systems. I mean clearly, you're seeing delays in the bigger procurements.

But is there an opportunity to maybe circle back to existing customers to upsell additional modules as you think about, I guess, pivoting in the current environment?.

Yes, I think that's a good point, Jonathan. And the answer -- the short answer is yes. And we're actually seeing that. Our Insight sales across the board is holding fairly steady right now.

And so I do think that's an opportunity, not just in this environment, but I actually think it's one of our larger opportunities as a company as we continue to move forward..

The next question comes from Keith Housum of Northcoast Research. Please go ahead..

Good morning guys. A question for you on the guidance. How important is the, I guess, the federal relief if it comes through? And what kind of impact would it have on your guidance if we do or do not get federal guidance for the rest of the year? I'm sorry, not federal guidance, but federal relief from the government..

Yes. I wouldn't expect it to have a meaningful impact for the rest of this year. And I think it will start having more of an impact as we get into 2021, and particularly as this budget cycle sort of -- we sort of run through this budget cycle. I mean it's one thing too for the Feds to go ahead and announce some significant stimulus.

We've seen that already with some of the things they've done in response to COVID. It's another thing for the jurisdictions to get their applications in and get the funding and all of that stuff. So it's an important piece.

I think it helps with some of their just general uncertainty right now and anxiety, but I wouldn't expect it to have a meaningful impact in 2020..

Yes, most deals that are going to close in the next 2 quarters are pretty far along in the pipeline that worked through lengthy sales processes already. And those generally are already funded in an existing budget and also generally are very high priorities in terms of the needs.

So those, we expect to be largely unaffected to the extent we see delays around those. It's less around funding and more around just the logistics and the disruption that the clients are having that has slowed down some of the processes and might push them out of this quarter into next quarter and more of the short-term kinds of delays..

Got you. That's helpful.

And then as I think about like almost your business like e-filings and appraisals, is there an opportunity here for pent-up demand? And once hopefully we get through the COVID issue by the end of the year or soon after, is there an opportunity for, I guess, more e-filing transactions to come through -- revenue to come through? Is that pent-up demand has worked through? Or is this pretty much more just delayed it kept -- keeps the can being kicked down the road further?.

No, I think there's -- well, I don't know that we can say for certainty, but we believe that there will be an opportunity potentially for a bump in e-filing.

E-filing is obviously challenged right now, even though some courts have opened, a significant percentage of current e-filings, current civil filings are really debt-related, they're landlord eviction-related. And right now, there's kind of -- there's moratoriums on that even where courts are open. Some of those cases, they won't go away.

So we do think there's a possibility for pent-up demand, but I don't know that we've got real certainty around that right now..

And about 75% of our e-filing is on a fixed fee basis and 25% is transactional and variables. So it's a minority of our business on the e-filing side is affected today. But some of those places where the courts are shut down, we've seen that to be significant..

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

Thanks, Danielle, and thanks, everyone, for joining us today. We certainly hope you all stay safe and healthy. And if you have any further questions, please feel free to contact Brian Miller or myself. Thanks..

The conference has now concluded. Please, you may now disconnect..