Hello, and welcome to today's Tyler Technologies Third 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. As a reminder, this conference is being recorded as of today, November 5, 2020.
I would now like to turn the conference over to Mr. Moore. Please go ahead, sir.
Thank you, Eric, and welcome to our Q3 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 Q3 results. Then I'll have some additional comments and we'll take questions.
Ryan? 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 the actual results to differ materially from these projections. We refer you to our Form ks 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 were pleased with our Q3 results as we continued to execute at a high level, particularly in light of the continuing impact of the COVID-nineteen pandemic. After we experienced our 1st year over year decline in quarterly revenues in almost a decade, we returned to revenue growth this quarter driven by strength in recurring revenues. We have not experienced any meaningful cancellations, but longer sales cycles and delays in projects as clients deal with the effects of the pandemic, along with the near elimination of billable travel, led to declines in software license, professional services and appraisal service revenues. However, GAAP subscription revenues grew a robust 18.6% and non GAAP subscription revenues grew 18%.
We continue to experience significant savings in operating expenses in the 3rd quarter, in part driven by the successful deployment of more efficient service delivery and operating models. As a result, our operating margins expanded significantly with our non GAAP operating margin up 300 basis points to 28.6 percent and our adjusted EBITDA was a new quarterly record at $89,000,000 Cash flow has also been very robust throughout the year and both cash from operations and free cash flow reached new quarterly highs in the 3rd quarter. It was also a strong quarter for bookings, which rose almost 13%. While the number of new deals was down, the average deal size and total new contract value both were up compared to last year. It was a strong quarter for new business for our Justice Solutions as we closed some large contracts after extended sales processes.
Our largest deal in the quarter was a license arrangement with the Washington State Courts of Limited Jurisdiction, valued at approximately $15,000,000 for our Odyssey Court case management and Caseload Pro probation solutions, including e filing. We also signed significant Justice Solutions contract with Dallas County, Texas, including a license arrangement for our Odyssey solution for Criminal and Justice of the Peace Courts valued at approximately $8,000,000 and a SaaS arrangement for our jury management solution valued at approximately $1,600,000 Also, for our ODiSI solution, we signed a license arrangement with Saginaw County, Michigan and notable SaaS deals with the City of Akron, Ohio and the Texas Counties of Guadalupe, Leon, Gillespie and Erath. We also signed the first state level contract for our Tyler supervision product, formerly known as Caseload Pro, with the State of Nevada. Our Public Safety division continues to expand its market with the year to date average deal size up 92% over last year. This expansion reflects our increasing competitiveness upmarket as well as an increase in the breadth of products in many deals.
Our Public Safety division had never signed 2 contracts with licenses greater than $1,000,000 each in the same quarter until this quarter when we signed large contracts with Sedgwick County, Kansas and the City of Laredo, Texas. We also signed a multi suite contract with Ellis County, Kansas for our New World Public Safety, Odyssey Quartz, Socrata Data and Insights and Brazos Solutions and contracts with the City of Brownsville, Texas and Des Moines, Iowa for our public safety and Socrata data and insight solutions. Our largest SaaS deal in the quarter was a $6,000,000 contract with the City of Tigard, Oregon in the Portran excuse me, in the Portland Metropolitan area for our Munis ERP and EnerGov Civic Services solutions. We also signed notable SaaS deals for our Munis ERP solution with the City of Fairfield, California Champaign County, Illinois the Virginia Railway Express the City of Thomasville, Georgia and a license arrangement with the City of Christiansburg, Virginia. Other significant SaaS deals for EnerGov Citic Services solution were the cities of Palm Beach Gardens, Florida and Yonkers, New York.
Finally, it was also a strong quarter for new business in our federal space with several new contracts, most notably with the D. C. Department of Consumer Regulatory Affairs, the Countertrade Products and the Fish and Wildlife Service, both departments within the Department of Justice and the Department of Health and Human Services. As we reported in a Form 8 ks filed on September 29, we discovered early on September 23 that an unauthorized third party intruder had disrupted access to some of our internal phone and IT systems. As soon as we discovered this, we shut down points of access to external systems out of an abundance of caution.
We immediately activated our internal incident response plan, which included taking impacted systems offline to further contain the spread. We confirm that the malicious software the intruder used was ransomware. We are following strict protocols laid out by industry standard incident response directives. Because of this, we are being careful not to share certain details around until the investigation is finished. However, there is some information I can share with you today.
On the morning of September 23, our incident response efforts have been facilitated by Tyler's internal resources as well as 3rd party providers. Those 3rd party providers include FireEye Mandiant, a nationally recognized incident response provider. We also have been actively cooperating with law enforcement. Our initial analysis has continued to prove correct. The impact of the incident was directed at our internal corporate network and phone systems.
There has been no evidence of compromise in the separate and segregated environments where we host software for our clients. And to date, there has been no evidence of malicious activity on client self hosted systems related to this incident. From day 1, we have been regularly communicating with our client community and have actively maintained an incident response page on our website. We encourage you to check for updates there as well. In addition to the containment, recovery and remediation efforts we have undertaken, Tyler has also taken steps to supplement the existing multilayered security monitoring, scanning and antivirus protocols already in place.
We are committed to completing our full forensics investigation and taking all appropriate actions in response to our findings. The security incident did impact our ability to deliver licenses and services during late September and into October. We currently estimate the impact to revenue was approximately $1,500,000 in the 3rd quarter and $2,500,000 in the 4th We maintain cybersecurity insurance coverage in amount that we believe is adequate. I want to reiterate that what I have just shared with you represents the information we can share at this point given where we're at in the stage of our investigation and the recovery process. We will not be addressing the incident further on today's call, and we will not take questions on the incident itself or our investigation.
I would, however, like to express my gratitude to all Tyler employees who once again displayed the heart of Tyler in their response and handling of the security incident, especially our internal IT teams that worked around the clock with an aggressive and coordinated response to recover and remediate our internal systems. As with our response to the COVID-nineteen pandemic, Tyler demonstrated the resiliency that comes from strong and well designed business processes and corporate governance practices. Now I'd like for Brian to provide more detail on the results for the quarter.
Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the Q3 ended September 30, 2020. 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. 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.
Although our revenues continue to be impacted by the COVID-nineteen pandemic, we were pleased to return to positive revenue growth this quarter. GAAP revenues for the quarter were $285,700,000 up 3.8%. On a non GAAP basis, revenues were point 9 $1,000,000 up 3.2 percent. Organic revenue growth was 3.3% on a GAAP basis and 2.7% on a non GAAP basis. Our core software license and subscription revenues grew combined grew 8.1% on a non GAAP basis with 7.8 percent organic growth.
Subscription revenues for the quarter increased 18.6%. We added 114 new subscription based arrangements and converted a quarterly high of 46 existing on premise clients representing approximately $56,000,000 in total contract value. In Q3 of last year, we added 150 new subscription based arrangements and had 20 on premises conversions representing approximately $47,000,000 in total contract value. Subscription contract value comprised approximately 47% of 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 4 point 3 years compared to 2.7 years in Q3 of last year.
Revenues from e filing and online payments, which are included in subscriptions, were $23,200,000 up 9%. That amount includes e filing revenues of $15,100,000 up 2.5% over last year and e payments revenues of $8,100,000 up 23.6%. Transaction based revenues were negatively impacted by reduced operations at some clients as a result of the pandemic. For the Q3, our annualized non GAAP total recurring revenue or ARR was approximately $830,000,000 up 11%. Non GAAP ARR for SaaS arrangements for Q3 was approximately $265,000,000 up 21.6%.
Transaction based ARR was approximately 93,000,000 was approximately $472,000,000 up 6.2%. Our backlog at the end of the quarter reached a new high of 1 point $55,000,000,000 up 9.2 percent. As Lynn noted, our bookings in the quarter were strong at 2.90 $2,000,000 up 12.9 percent. For the trailing 12 months, bookings were approximately $1,300,000,000 up 5.4 percent against the tough comparison that includes the 2 large North Carolina quartz deals totaling approximately $105,000,000 in the prior trailing 12 months. Our software subscription bookings in the Q3 added $9,900,000 in new annual recurring revenue.
Cash flow from operations increased 30.5 percent to $169,800,000 and free cash flow grew 34.8 percent to $165,400,000 both new quarterly highs. In fact, year to date, our free cash flow has already surpassed our best full year free cash flow by more than 9%. We ended the quarter with approximately $650,000,000 in cash and investments and no outstanding debt. Our guidance for the full year of 2020 is as follows: we expect 2020 GAAP revenues will be between $1,117,000,000 $1,129,000,000 and non GAAP revenues will be between $1,118,000,000 $1,130,000,000 We expect 2020 GAAP diluted EPS will between $4.53 $4.63 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 $5.48 $5.58 For the year, estimated pre tax non cash share based compensation expense is expected to be approximately $77,000,000 We expect R and D expense for the year will be between $88,000,000 $90,000,000 Fully diluted shares for the year are expected to be between 41,500,000 and 42,000,000 shares.
GAAP earnings per share assumes an estimated annual effective tax rate of negative 12% after discrete tax items and includes approximately $65,000,000 of estimated discrete tax benefits related to share based compensation, which may vary significantly based on the timing and volume of stock option exercises. Our estimated non GAAP effective annual effective tax rate for 2020 is 24%. We expect our total capital expenditures will be between $30,000,000 $31,000,000 for the year, including approximately $10,000,000 related to real estate and approximately $6,000,000 of capitalized software development costs. Total depreciation and amortization is expected to be approximately $81,000,000 including approximately $54,000,000 of amortization of acquired intangibles.
With the challenges our clients face as a result of the spread of COVID-nineteen, 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. We're gratified by the accolades Tyler is receiving for our innovations to help our clients address the challenges of the current environment. During the Q3, our virtual court solution, which has been selected by approximately 60 courts nationwide, received the AWS Best Remote Work Solution award in conjunction with its use in the city of Alvin, Texas. We also won the Coolest Overall Technology Innovation Award from School Technology News for our new bus attendance application, which works with Tyler's bus routing solutions to provide schools a tool for limiting bus capacity, contact tracing and social distancing on the school bus. On the product development front, we are continuing all of our strategic initiatives, including product R and D projects and accelerating our move to the cloud and still expect that R and D expense will grow at more than 9% for the year.
While some of our competitors are laying off staff, we continue to add new employees to support long term growth opportunities, and we added 27 net new heads during the Q3, mostly in product development. We also continue to adapt our operations, providing client support and delivering professional services such as training remotely and executing complex go lives virtually, improving utilization and eliminating most travel costs. Many administrative and sales and marketing activities, including sales demos, trade shows and user group meetings are also being conducted virtually with reductions in associated expenses. We continue to explore the possibility of greater numbers of employees working remotely even after our offices fully reopen. Lower expenses have more than offset revenue reductions relative to our pre COVID plan, resulting in margin expansion.
Some 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. As a result, we expect to continue to see year over year margin expansion in the 4th quarter. We expect that revenue growth for the Q4 will continue to be significantly impacted by the pandemic and to a much lesser extent, the IT security incident. Although our variable revenue streams will continue to be affected by the current environment, we anticipate that recurring revenues, which comprise more than 70% of our total revenues, will continue to be relatively unaffected. While we remain confident in our long term outlook, there are uncertainties around the continuously evolving COVID-nineteen pandemic and its impact on our operations and those of our clients.
For example, government response to the pandemic continued 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. Many public sector entities are facing near term budget pressures that could cause them to delay spending in the coming year. The COVID-nineteen pandemic has not changed our view of the underlying fundamentals and long term demand for our software. 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.
While it is too soon to fully assess the impact of the elections, we expect that additional federal stimulus will be forthcoming to provide further economic aid to state and local governments. We are confident that new long term opportunities will emerge from this crisis as both Tyler and our clients reexamine historical business practices and that Tyler is better positioned than our competitors to provide innovative solutions to help our clients meet new challenges. Our balance sheet is stronger than ever with $650,000,000 in cash and investments and no debt. We plan to continue to invest at a high level in R and D and actively pursue M and A opportunities to broaden our total addressable market and build on our strong competitive position. I continue to be extremely proud and inspired by how the entire Tyler team has risen to face the challenges of this year head on, supporting our clients as well as each other.
We are confident in the fundamental strengths of the public sector market and our ability to grow and invest in strategic initiatives in a difficult environment, and we look forward to executing our long term strategies until conditions allow us to return to a higher growth market. Now we'll take questions.
Thank you, sir. We will now begin the question and answer session. And your first question today will come from Peter Heckmann with D. A. Davidson.
As regards additional federal government stimulus, that there were some or there was a bill floated earlier in the year just focused on technology modernization. Can you talk about the different types of programs that might be pending and where you expect both broad stimulus funds to help municipal budgets, but as well any directed programs that you're watching that you think could be relatively near term?
Yes, sure, Pete. And you're right, I think generally speaking, there's an expectation that there's going to be another round of stimulus. I think both political parties agree on that. I think for certain that the last month or so, maybe 2 months, it's become a little bit more of a politicized issue that I think will get behind us now that the election is behind us. In fact, I read an article this morning where Mitch McConnell in the Senate said that getting a stimulus passed by the end of the year was his new top priority as well as and he made a comment specifically as well as state and local government stimulus.
So I think that's coming. I think that's the expectation. It's hard to know exactly where everything is going to shake out, but I do think it can become a priority following this election once things settle out a little bit more. I think I talked about last time at the last call that the prior Fed Chairman, Bernanke, he made a comment coming out of the Great Recession that one of the things that they, I think, sort of missed the boat on was they did not devote enough money to state and local governments when they were doing their stimulus then. I think that's a significant priority.
We've also talked about the Fed has specific bond buying programs for counties and cities, and I think that's going to continue. So the expectation is there. I think the expectation is for our clients. I think there's that's part of the hesitancy going on right now, but I see that coming on the horizon. I'd add one other thing.
I think what you were alluding to there is there does seem to be bipartisan efforts to provide more funding specifically for state and local government IT upgrades. There was an act, the state and local IT modernization and cyber Security Act that was proposed back in August. And that act would provide $28,000,000,000 over the next 5 years specifically to upgrade government IT systems. So the upgrading of systems is certainly something that the federal government recognizes is important.
Got it. That's helpful. And then just in terms of where budgets are right now, typically the Q4 is strong for public safety. Public safety seems to have a fair amount of momentum and encouraging to hear bigger solution sets and bigger deal sizes in public safety. But do you think based on where we are, you're on track with public safety bookings for the Q4 or are you I guess what's your level of comfort that you'll hit your targets there on the public safety side?
Yes, Pete, I think that's a good question. And the short answer is yes. And what we've seen generally is we've seen a little bit of difference in terms of different market segments, but public safety, the demand is still there. We expect some significant deals to still come through in the Q4. I think one of the things that's encouraging about public safety is as we continue to invest and we've added more portfolio products to their bag is that historically the 4th quarter was one that was I think a little more skewed towards their license deals and it still is.
But as that business grows and as it gains traction, we're starting to sort of level that out a bit. We've had as we noted, we had, for the first time ever, 2 license deals over $1,000,000 in Q3, which is pretty incredible. In fact, now I think it's now 3 of the last four quarters, we've had license deals in excess of $1,500,000 So the momentum is there in public safety. It's funny, I think 10 days from now will be our 5 year anniversary of acquiring that. And I think it's a testament to the work that those people have put in and the investments we've put in.
And we talk about how it takes a little bit of time with some of these investments, these acquisitions, and they're really starting to hit their stride. They're doing a great job.
Good. Good to hear. I'll get back
in the queue. Thank you.
Our next question comes from Matt VanVliet of BTIG. Please proceed with your question.
Hi, thanks for taking the question. Really appreciate it. I guess on the front of the services disruption from the ransomware attack, maybe not a question directly from that, but as how it impacted you during the quarter? You talked about inability or I guess a disruption in delivering some of your projects. Was that a reallocation of resources?
Or were you forced to kind of dig a little deeper with some of those customers and assess, sort of what happened and sort of give them some additional information to make sure that they were comfortable moving forward? And then on the same front, sort of how that might have impacted overall pipeline processes going on?
Yes. So and you're I don't want to go into too much more detail. But the short answer is, as we talked about, the incident was really all about our internal systems. It was about our phone systems, our website and things of that nature. However, out of abundance of caution, what we as I mentioned in my comments, what we did was we immediately shut down all external points of entry.
That disrupted things like being able to conduct some we do a lot of services, support was disrupted, we weren't able to send emails with attachments for a while. And really that again, that was just out of abundance of caution. So it was really short term. To your second question, as it relates to pipeline, it has not had any impact really on our pipeline. There was obviously a little short term disruption, but we haven't seen anything meaningful in terms of future impact of sales or anything like that.
And then looking at your overall sort of K-twelve school customer base and potential customers out there, how much of a disruption to their overall typical operational processes, the limited maybe in person schooling or definite hybrid situations out there are either changing that narrative or accelerating some of those deals that they now feel like they need to have more technology in place, more ability to work remotely and have more digital services in place?
Yes. So I would say I'd say 2 things. As it relates to schools in particular, I'd say that's one area right now where budget impacts is sort of constrained. Some deals are moving forward. It's pushing some things out.
At the same time, you're right. It's absolutely highlighting and this goes beyond schools. Highlighting the need for technology. I think when I look at the business overall of the public sector, I think the shift that we're starting to see that part of it's due to COVID, but just new more online mobile public access, things that are interaction with the parents with the schools, but even more just citizens engaging with their communities. That's something that's going to continue.
And I think that was the future anyway. But I think COVID has really sort of accelerated that. And I think what's encouraging about that to me Matt is that Tyler really is out in the forefront on this. We're the best position for this. This brings in our whole Connected Communities visions and the things that we're already doing.
And so, it really puts us in a great position when things when we sort of get on the other side of this.
Great. Thank you. Our next question comes from Charlie Strauzer of CJS Securities. Please proceed with your question.
Hi, good morning. Can you talk a little bit, maybe just give it kind of a quick early view of next year? I know usually you get more detailed guidance on the next call, but just given that you saw a return to growth in Q3, maybe just some early thoughts on next year?
Yes, sure, Charlie. And I guess I'd start off by saying, and we talked about on the last call is, we don't see any real meaningful change in our pipeline. We know the demand for our services don't go away. We remember how we started the year in the Q1 before it hit. We were out to a really great start.
And so we sort of expect that to continue. At the same time, we also talked about we're in the middle of these June 30, July 1 budget cycles right now. So my expectation is that there will be some hangover, still be some delays in some deals, still some clients that are reluctant to open up and do some remote delirious services. We're still waiting to see courts opening back up, so some of our transaction volumes kick up. I'd say stepping back on a high side, just sort of generally, you're right.
We are in the budget process right now. It is a little bit early. I'd say on the revenue side, I would expect revenue growth to be higher than what it's been in 2020, but probably not a full return to sort of our pre COVID expectations of high single digit 9%, 10%, 11% growth. But I do expect it to be better than this year, but that's where we are on the revenue side.
That's very helpful. Thanks, Glenn. And then secondly, just generating a ton of cash, Really just want to just get a better sense of now that you've got so much cash in the balance sheet, any change in priorities for the use of the cash? Is M and A something that's more of a priority? And are you seeing any pipeline activity in the M and A front?
Yes, sure, Charlie. And yes, we're always we've talked before, we're always looking at deals and that's continued. That has not slowed down during COVID. In fact, one of the things that we've done over the last 6 months, you probably remember us talking about over the last couple of years is our white space initiative. We've actually taken the time, dived a little deeper, refined that, and really making that forefront.
We're going to continue to be opportunistic on those deals, but we're out there, we're looking. I would like to see us do some deals, and so we're out there looking.
Great. Thanks for taking my questions.
Our next question comes from Rob Oliver with Baird. Please proceed with your question.
Great. Thank you guys for taking my question. Good morning. Lynn, one for you and then I had a follow-up for Brian. Lynn, so I think it was around this time last year that you guys started to see that cross sell traction in New World Public Safety into some of your existing Tyler accounts.
I think it started on your home turf in Texas. And I'm curious, you mentioned that the federation approach started to take hold. Curious this quarter with that strength that you saw in public safety, it's getting a bit more linear and less back end loaded. Are you seeing that trend continue where you're seeing pull through from Tyler customers that are also committing on the public safety side as well and how that's progressing?
We are. We've gotten as you mentioned, we I think some of the initial traction was in Texas. We're seeing some good things on the West Coast in California. I think what's particularly encouraging is this continued move up market, which is also part of the fact that we're the Tyler Alliance story, the total Tyler story is really starting to resonate. The largest deal they did this quarter was Sedgwick County, Kansas.
That was about a $1,600,000 license deal. And that was a full suite of CAD enterprise records, but also pulling through things, soft code, our field reporting, Tyler corrections, Brazos, Socrata, mobility, all these things. And that's part of that strategy as well. And I think the key selling point there was really the whole Tyler Alliance story. And that's the feedback we've gotten from the field and the client.
And that's what's also encouraging because as we know, there's anybody else out there that can compete on that level. In fact, the competitor we had in that was Motorola. So it is particularly gratifying to see these strategies start to play out and start to win these bigger deals, which include going up market as you but also as you say, leveraging other Tyler relationships, other Tyler products to get these deals.
Great. Thanks, Lynn. Appreciate that. And then Brian, just for you, guys executing really well on the margin front with the strong margin growth year over year. And just curious, I know some of those benefits likely come from COVID, but if we could just get some color on how that breakdown might be to think about what was a COVID benefit and what might be something that's more sustainable in terms of margin benefit?
Thanks guys.
Yes. And as we work through our planning for next year, we'll have a better idea of how those how much of it is actually sustainable. Coming into the year, pre COVID, we had a goal of kind of holding margins flat with last year after a couple of down years as a result of our significant increases in R and D. We've continued to spend R and D pretty close to what we expected for the year, but we're now this quarter up 300 basis points. I don't expect that the margin growth will be as high in Q4 or that we'll see 300 basis points next year.
But we do expect that we'll be back on a margin expansion opportunity and that a significant part of the gains, although they've come about because of COVID, we've been able to change business practices, particularly remote delivery of services, changing the way we approach some things like trade shows, eliminating a lot of administrative travel that I think will be permanent gains. So if you look at the 300 basis points we picked up this quarter, maybe as much as half of that would be a sustainable kind of a gain.
Thanks again.
Your next question comes from Jonathan Ho with William Blair and Company. Please proceed with your question.
Hi, good morning. Just wanted to start out with maybe getting a little bit more clarity around the reduction in the full year revenue guidance. Was this mainly due to, I guess, the issues faced? Just wanted to get maybe just the main factors behind that.
Sure. Yes, if you look at the change in our full year revenue guidance, I believe the midpoint of our guidance came down by about $11,000,000 compared to where that was when we reinitiated guidance after Q2. About $4,000,000 of that is what we talked about earlier on the call related to the IT security incident where we lost primarily services revenue, some license revenues as a result of a lack of ability to interface with clients while our systems were compromised. There's about $1,000,000 related to lower e filing volumes as courts have not reopened as fast as we anticipated at the end of Q2. A lot of e filing volume is around evictions and debt collections.
And as you know, there's a the CDC has now put in place a broader moratorium on evictions. And so those volumes are lower than we expected. And then there's about roughly $8,000,000 of effect on licenses, which are primarily sales delays, processes being pushed out, and that's a combination really of COVID and its impact on our clients' ability to work remotely and budget breakers as well. So those are and then lastly, licenses are also being affected by a greater shift toward SaaS in our pipeline than even we anticipated at the end of the second quarter for the reasons we talked about or Lynn talked about earlier on the call.
Got it. And just to build on that, with budget pressure on state and local governments, are you starting to see, I guess, a greater desirability towards moving to cloud and SaaS solutions? And particularly for the cost savings side, is that starting to accelerate?
Yes, Jonathan, I think that's a good observation. And I think going in pre COVID, we were already starting to see this shift in the market. And I think that was going to continue on its own anyway. I think secondly, as we've talked about over the last year plus or 2 years, as Tyler has shifted its approach from more of a cloud agnostic to more cloud preferred or cloud 1st. We're doing things with how we do our sales and how we inform clients.
And so I think that's been part of it. But absolutely, COVID has played a role there. And we're seeing that really across all of our divisions. I mean, we're seeing it our Munis ERP, it's they're all coming in right now at rates subscription rates that were higher than their original 2020 plan. And so that's definitely occurring.
And again, the good news is that we've been preparing for it and ready for it, and we've been investing towards there. So it's a it is a short term headwind, continues to be, but that trend is going to continue, I believe.
Your next question comes from Keith Housum of Northcoast Research. Please proceed with your question.
Great. Thanks. Good morning, guys. Come back to the transaction costs and some of the delays you're seeing in evictions and recovery of debt. This perhaps created a pent up demand as we look into next year, assuming that some of these restrictions let up and of course, you know, open up.
Perhaps looking at an opportunity for significant revenue growth from that area next year?
Yes, Keith, that's a good observation. I think that's right. That's certainly our expectation. I mean, even though courts have been starting to reopen some, as Brian mentioned, there has been this moratorium and really about almost 2 thirds of court filings are either debt related or landlord tenant eviction type things. So our expectation is that that will go up.
Even when you look at sort of on the more municipal side or traffic side, you don't have a lot of citations out there, you don't have a lot of people paying court fines and things like that on the more on the municipal side, but we would expect that those will return to normal. But in terms of the backlog on the civil side, yes, I think that's our current expectation.
Great. And Brian, just a follow-up for you. Gross margins came in probably the best that I remember them being. Maybe it's more just a geography question more than anything else, but is that more due to lower travel costs or is there other items going in gross margins that perhaps are sustainable going forward?
Well, a big piece of that both at the gross and operating margin is the absence of billable travel, which has essentially no margin on it. And so that continues to that loss of that revenue continues to have a positive impact. That's probably the biggest point. The other thing is we are seeing as we move to the remote delivery of services, we actually gained utilization and efficiency there because we're not putting people on airplanes every Monday and every Friday, and we're able to use that time to deliver services. And so that shift is having a positive impact as well, and that is something that we expect to be sustainable although there's certainly in the future there will be some billable travel and some return to on-site services.
We believe that in the long term we'll continue to deliver a significant amount of services remotely as our experience over the last 2 or 3 quarters is proving that that can be done very effectively and clients are increasingly accepting of that model.
Great. Thank you.
Your next question comes from Scott Berg with Needham and Company. Please proceed with your question.
Hi, Lynn. Hi, Brian. Congrats on the good quarter and thanks for taking my questions. I guess two questions. Let's start off with Lynn on the public safety side.
You talked about how I think it's 3 of the last 4 quarters you've had $1,000,000 plus transactions. Obviously, your sales has been very strong there with how you've been able to add some new innovation to the product and push it up market. But as you look at those deals today versus maybe 3 or 4 years from now, is it simply just your ability to take the same product and move it up market? Or has that product evolved at all and you've had maybe better success selling maybe either more or different modules within that suite that's relatively broad at the end of the day?
Yes, Scott. It's actually it's quite a number of factors. And I want to be clear, it's through the last 4 quarters we've had license deals in excess of $1,500,000 which is even better. And you're right, we've done a lot over the last several years, both in terms of expanding our functionality. We're now responding to more RFPs than we could before.
We're more compliant than we were before. So we've made the product much more robust. In addition, it's hard to underestimate really what we've done on the service side as well, really shoring up client references. As we've introduced these new products, CAD and e records, the number of go lives that have been successful in getting those references, that's the stuff we don't spend a lot of time talking about. But one of the biggest initiatives this year was our e records, which was going that's the same as the CAD.
They had, I think, 15 big go lives scheduled for this year. And a number of those had pushed back a little bit just because of COVID, but we're on track to get all those done. We've had 11 of them successful and that's the hard stuff and it's that referenceability. But then when you talk about again moving up market, it's all these tuck in acquisitions and integrating them. It's these things like SceneDoc, SoftCode, Brazos, Socrata.
And what you don't ever know is in these big deals, you never know exactly what's the tipping point. But what we can deliver the full suite of products is so much more competitive and then it's so much more broader than what other people are offering that it just becomes very compelling. Got it. Quite helpful.
And then from a follow-up perspective, and one of your other questions here shortly, a few minutes ago, Lynn, you talked about how public safety transactions and what's usually your seasonally stronger Q4 look like you're generally on track. With the prior with the earlier comments about pipelines kind of slipping and some deals moving into maybe the first half of twenty twenty one, What are the product areas that are seeing the most delays there if it's not public safety?
So I would say the area where we're seeing probably more delays is really on the higher end of the ERP space, more of our Munis line. It's interesting the lower end is not seeing the same right now. But then again, stepping back, it was that end that high end ERP space that really got out of the gate fast in Q1 and that's what's still so encouraging. We've talked about how the demand doesn't go away. What seems to be happening there as opposed to say in our Justice solutions or even the lower end space is that some counties are there's that uncertainty out there, but they just seem to be a little bit more willing to push it out a little bit farther or I'd say hang on another year.
I'd almost analogize it to you've got a car, an old car you've had since college and you've got a couple of kids and a spouse and that car is starting to spend more time in the shop than on the road and you know it's time to get that thing fixed, but, golly, your kids will have braces coming up this year or something happened with one of your jobs. You say, I'm going to hang on 1 more year before I do it. And I think we're seeing that there, more so than say on the other sides of the business.
Great. Thanks for taking my questions and congrats on the good quarter again.
Your next question comes from Kirk Materne of Evercore. Please proceed with your question.
Yes. Thanks very much and congrats on a good quarter and a tough environment. Lynn, maybe I was curious about just sort of your philosophy these days on using pricing maybe more as a weapon given that you're much bigger today than you were back in the economic recession 10 years ago? And just whether or not that resonates with clients or not, meaning are there things you all can do from an upfront pricing perspective that can help you maybe take share in this period of uncertainty? And I guess how do you balance that because I think you're now at a point where as customers are looking to consolidate vendors, if you can help them maybe get over the hump today and hopefully their budgeting problems resolve themselves in the next 12 months, 18 months, that can make some sense in terms of taking more market share.
But just kind of can you just give me an idea of how you're kind of thinking about that, if at
all? Yes, sure. Kirk, I think we're doing a little bit of that and we're doing a little bit with some of these products that we're really planning to try to introduce this year or that we really were expecting to sort of jump start this year. And I'm not talking about our major core apps, but some of our smaller products around that be it we talked before about Socrata, data and insights, our product called executive insights. We're doing things there like offering 1 year free premier executive insight.
We've talked about it with virtual courts. We've done these free trial periods. We're doing things like that around our Tyler to Tech, which is our cybersecurity, our research taxes, things like that. So we are seeing some of that right now. In terms of gaining market share, I think the things that we're doing right now by keeping our investments at the level and accelerating some of them being in that position to really capitalize knowing that we went into this already in probably the strongest position in the market.
And the way I view it really, Kirk, is that as we're dealing with the effects of this pandemic and we know it's going to end and we know the demand is going to be there. But every quarter that goes by, Tyler itself is getting stronger and stronger. Our balance sheet is getting stronger. We're investing every quarter goes by, we're another quarter down in our R and D and further along in our investments. Don't believe our competitors are doing the same.
And so I really like our position right now. And yes, we're looking at things like that on some of these products we're trying to jump start, but we're not really doing that really across our core apps right now.
Okay. That's helpful. And then I guess for you or maybe Brian, just you've mentioned M and A a couple of times. Has the environment for doing deals gotten better perhaps over the last 6 months as smaller vendors are obviously probably feeling more pressure from either a balance sheet or revenue growth perspective? And obviously valuations across software have been fairly robust over the last 6 months.
So just kind of curious, I know you're always looking, but have the I guess has the bid ask spread maybe started to narrow a little bit on things that you find attractive, maybe relative to 6 to 9 months ago?
I'd say that in terms of the sort of number of deals we look at, it's probably kind of consistent with what we were before. I haven't seen any really increased activity there. I think my expectation, if you go back to the Q1 call, my expectation might have been, you might have seen more on the valuation front. I think some of them may have come down a little bit, but the broader market is still doing pretty well. I'm talking about the public markets and sometimes people tend to point to that when they shouldn't.
But we haven't seen any meaningful expectations right now at evaluation, probably about the same as before.
Your next question comes from Brent Bracelin of Piper Sandler. Please proceed with your question.
Thanks and good afternoon. I guess, Lynn, I wanted to go back to this concept of this digital awakening that we're clearly seeing across other enterprises, other segments of the market. On one hand, totally appreciate a greater level of uncertainty with state and local budgets. But on the other hand, you do have kind of a new reality and a new digital reality. What are you seeing just from a state, local engagement activity metric?
You talked a little bit about seeing larger deals materialize because of maybe this digital shift. But is the engagement activity picking up as well too? I get there'll be budget uncertainty, but is there anything you can see that gives you more confidence that that shift to digital could also accelerate in that government vertical?
Yes, I think that's right. I mean, I do believe the shift to how government is going to operate, how they're going to deliver services to their citizens. I believe that was going to change pre COVID and I think it's going to change accelerate past that. And one of the things I talk about is, you look at your gifts and you look at how they think about technology and how they use technology, well, they're
going to grow up and
they're the citizens of the future and they're citizens today, but they're the ones that are they're going to demand more. They're going to demand that government works the way everything else in their lives work. Earlier this week, I was I did an interview for the National League of Cities. We talked with Clarence Anthony, the CEO there, and this was for their upcoming user conference. We spent a lot of time talking about the cloud and the local government shift and move to the cloud.
And to me, it's something that's coming. It was coming anyway. I think COVID is accelerating that. And you talk about budget constraints. I mean, that's one of the factors about that.
You've got as you move to the cloud, you do create some budget certainty. You take away sort of some of the uncertainties of these large capital spends. You talk about security in today's world, we spend a lot of time talking about cybersecurity and the cloud is such a more secure environment and you're dealing with these players like AWS who we're aligned with, they've got all kinds of resources to spend on that infrastructure and that's their business. And that's not really local governance business. And so and I think they're starting to recognize that.
And so I do think this shift is real and I do think it's accelerating.
Great. That's encouraging. And just one quick follow-up for Brian, if I could. We're seeing more talk of statewide deals and I don't think we kind of really saw that in the past. As you look at the pipeline, is there a healthy amount of activity on more statewide deals?
Just trying to understand that statewide deal trend that you've seen in Kansas, Washington State, North Carolina? I just love to hear the pipeline of activity around kind of statewide and what's driving that? Thanks.
Yes, I'd say it's a little bit of a mixed bag. State is certainly an area that today is probably less than 15% of our revenue, somewhere between 10% and 15%. And I think it represents in the long term a big growth opportunity for us as we expand, move some of our products up market into the state and sell some of our products that are used locally, sell them state wide. We've had some really good examples of that in the last couple of years. Our school bus transportation system, VersaTrans, had a great statewide deal in the Carolinas, North Carolina adopting Brazos and our new e warrant solutions statewide where those have typically been purchased at the local level and they did that in conjunction with implementing our Odyssey Court system statewide Just this quarter, we had a significant win with our probation system with the State of Nevada.
It's the first time we've had a state level contract for that product and that's a product we acquired about a year ago. So and obviously with Odyssey, we've had a significant statewide presence where a lot of court systems, maybe 40 of the 50 state court systems are court systems are operated at the state level, and we've had great success there over the years. So I do expect we'll continue to build on that. In our federal division, the MicroPact business we acquired a little over a year ago, that I'd say right now probably the greatest pressure they're seeing is in their state market. But I think that's really a short term phenomenon and that's really around budget pressures.
But we do expect to grow our state business and certainly our federal business as we expand beyond our traditional focus just on local government.
Helpful color there. Thank you.
Our next question comes from Scott Wilson with RBC Capital Markets. Please proceed with your question.
Yes. Hey, guys. Thanks for taking my call. Maybe first for Lynn, to better understand kind of what's informing your expectation for better revenue growth, but still kind of growth below your target 9%, 10%, 11% next year. Can you comment on what you're seeing in your end market in terms of RFP activity?
Are you starting to see that come back or is it still below historical levels? And has there been any change in the types of RFPs that are coming to market, maybe in terms of size or the products that are in demand in the current environment?
Yes. So again, we're still early in our process. What we're seeing in RFP activity, again, it's sort of mirrors what we're seeing right now across Tyler. There are certain areas that we're not feeling the impact. It's the delays are shorter.
The pipe is there. The RFP activity is still pretty good. It's a little softer in a few areas, and part of it's recognizing that the time from RFP to getting a deal done, it does take time. You're certainly aware of our sales cycle. So it is a combination it's very preliminary right now, but we do drill down.
We look we build bottoms up budgets. We look at RFP. We look at all those leading indicators, RFPs and demos and things like that, even RFIs. And so that's really what it's based on right now. But again, it's preliminary.
Got it. Understood. And then maybe a quick one for Brian. To put a finer point on kind of your margin expansion commentary, I guess historically you've talked about 50 to 100 bps of margin expansion annually. Is that still in the cards for next year given the outsized expansion you've seen this year?
Or should we be kind of thinking about maybe a more modest step back in terms of that type of expansion next year?
Again, we've got a lot of work to do on our planning process that I would say we and even pre COVID, we expected that 2021 would be a year where we would return to margin expansion. And so if I were guessing, I'd say probably in that range, but probably on the lower end.
Makes sense. Thanks, Ed.
Our next question comes from Joe Goodwin of JMP Securities. Please proceed with your question.
Hi, good morning. Thank you for taking the question. Just curious on when you're doing a conversion from an on premise customer into the cloud or subscription, I understand this might vary across products, across Tyler. But is there do customers need to be on a specific version before actually moving to cloud or into the subscription? Is there any dynamic there?
Or can they go from any version direct to cloud?
Yes. No, there's not a a they don't need to be upgraded to the most current version to make that transition.
At this time, there appears to be no further questions. Mr. Moore, I'll turn back to you for any closing remarks.
Okay. Thanks, Eric, and thanks, everybody, for joining us today. Certainly appreciate the interest, and we hope you stay safe and healthy. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks, everybody.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.