And welcome
to today's Tyler Technologies Third Quarter 2019 Conference Call. Your host for today's call is John Marr, Chairman of Tyler Technologies. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded today, October 31, 2019.
I'd like to turn the call over to Mr. Marr. Please go ahead.
Thank you, Nick, and welcome to our Q3 2019 earnings call. With me on the call today are Lynn Moore, our President and Chief Executive Officer and Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, Lynn will have some preliminary comments. Then Brian will review the details of our Q3 results and update our 2019 guidance.
Then I'll have some final comments, and we'll take your questions. Brian?
Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10 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. Before we get into the Q3 results, I'd like to highlight 2 announcements we made this week. First, on Tuesday, we announced that we have entered into a strategic collaboration agreement with Amazon Web Services. As public sector clients continue to increasingly trend toward the cloud, we continue to evolve our applications in response to their needs. This agreement allows us to leverage the AWS cloud to lay the groundwork for the future of cloud services for the public sector.
It provides the framework for development, training and collaboration in order to support next generation applications that have the scalability, resiliency and security that AWS offers. And we look forward to working closely together bring the most advanced cloud native services to Tyler clients. We also announced yesterday that we have acquired Courthouse Technologies, a leading provider of jury management systems based in Vancouver, British Columbia. THT's SaaS solution serves courts of all states across the United States and Canada, including 5 statewide agreements, and their addition will complement and elevate our existing suite of court solutions. Now turning back to Q3 results.
Our execution in the 3rd quarter was solid as we continue to build upon a strong first half of the year. Cash provided by operations and free cash flow both reached new quarterly highs in the 3rd quarter as did non GAAP EPS. This was our 32nd consecutive quarter of double digit revenue growth as both GAAP and non GAAP revenues grew 16.7%. All of our software related revenue lines grew by double digits and organic revenue growth accelerated from the Q2. Our core software revenues from licenses and subscriptions grew 26% on a non GAAP basis, with 20% organic growth.
Software license and royalty revenues in the 3rd quarter were the 2nd highest in our history, increasing 13.1%. As expected, the new contracts mix shifted somewhat compared to the 2nd quarter as on premises license deals made up approximately 48% of the number and 49% of the 3rd quarter total new contract value. We signed 288 new software contracts in the quarter, a new quarterly high. And through the 1st 9 months of 2019, we have already surpassed the total number of new deals signed in the full year of 2018. Our new software subscription deals added $10,600,000 of new annual recurring revenue, up 59%.
GAAP subscription revenues grew 28.2 percent and non GAAP subscription revenues grew 26.1%. Total recurring revenues from maintenance and subscriptions grew 19.5% and comprised 67% of total revenue. While revenue and bookings in the Q3 were good, they were also affected by delays in the timing of several federal contracts at MicroPact as an increasing amount of MicroPact sales are coming through its partner channel. Several significant deals were signed by partners at the end of the quarter, but the related contracts with MicroPact will not execute until October and will be recognized in the Q4. These include the largest deal, a contract for the Veterans Administration Vocational Rehabilitation Education for a $3,200,000 license fee.
As a result, MicroPact achieved its largest ever license sales month in October. Our strong sales for our Odyssey Court case management solution continued this quarter as well. Our largest deal of the quarter was a SaaS arrangement with the District of Columbia Superior Court for ODiSI case management as well as e filing with a total value of approximately $7,700,000 We also added 2 new Odyssey clients in California, a license arrangement with Shasta County and a SaaS agreement with the Mendocino Superior Court, along with a new fixed fee e filing contract with Snohomish County, Washington. New sales for our ERP solutions continue to be robust. And for our Munis solution, the number of new deals in the quarter was an all time high.
Significant contracts included multi suite deals that include some of our more recently acquired solutions. Among those were contracts with North Richland Hills, Texas for a number of products, including Munis, EnerGov, Socrata Data and Insights and Mobilize and a contract with Longview Texas for our Munis and Socrata Data Insight solutions. We also signed a SaaS agreement for our Munis ERP solution valued at $4,300,000 with the Union County Public Schools in North Carolina. This agreement is one of 8 new SaaS contracts this quarter with North Carolina school districts under the master service agreement we signed with the State Department of Public Instruction earlier this year. For our public safety solutions, we signed significant contracts with Nassau County, New York, the Metropolitan Computer Aided Dispatch in Champaign County, Illinois Fulton County, New York and Grove City, Ohio.
For our appraisal and tax solutions, we signed a significant SaaS agreement with the City of Minneapolis, Minnesota and license deals with Santa Clara County, California and Macomb County, Michigan. For our Socrata data and insight solution, we had a key win for the Socrata Connected Government Cloud with the New Mexico Administrative Office of the Courts, a longtime Odysee client. Other significant new sightings include the Virginia Department of Rail and Public Transportation and the U. S. Department of Veterans Affairs.
For our recently acquired MicroPact solution, we signed notable arrangements for IntelliTrac with the Utah Department of Health, the Office of Personnel Management with the Inspector General's Office and the Illinois Department of Agriculture. Now I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2019.
Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the Q3 ended September 30, 2019. I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2019, and then John will have some additional comments. In our earnings release, we have included non GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non GAAP measures is provided in our earnings release.
We've also posted on the Investor Relations section of our website under the Financial Reports tab, schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues. GAAP revenues for the quarter were $275,400,000 up 16.7%. On a non GAAP basis, revenues were $277,200,000 up 16.7%. Organic revenue growth rose from the Q2 of 2019 to 8.9% on a GAAP basis and 8.3% on a non GAAP basis. Our core software license and subscription revenues combined grew organically approximately 20%.
Subscription revenues for the quarter increased 28.2%. We added 150 new subscription based arrangements and converted 20 existing on premises clients, representing $47,000,000 in total contract value. In Q3 of last year, we added 81 new subscription based arrangements and had 31 on premises conversions, representing approximately $29,000,000 in total contract value. Subscription contract value comprised 51% of the total new software contract value signed this quarter compared to 37% in Q3 of last year. The value weighted average term of new SaaS contracts this quarter was 2.7 years compared to 3.6 years in Q3 of last year.
Revenues from e filing and online payments, which are included in subscriptions, increased 19 percent to $21,300,000 from $17,900,000 That amount includes e filing revenue of $14,700,000 up 10.5% over last year. Annualized GAAP recurring revenues for Q3 were approximately $740,000,000 up 19.5% and on a non GAAP basis were approximately $747,000,000 also up 19.5%. Our non GAAP operating margin increased sequentially 100 basis points from 24.6% in the 2nd quarter to 25.6% in the 3rd quarter, but declined 150 basis points from last year's Q3. The year over year decline reflects 2 major factors, our increased investment in R and D and the lower operating margins from acquisitions completed in the last 2 years, which also are receiving significant investments that affect their near term profitability as they are integrated into Tyler. Our R and D expense in the 3rd quarter increased almost 24% from last year.
If our R and D expense were flat with last year and the results of our 2018 2019 acquisitions were excluded, our Q3 non GAAP operating margin would have been 28%, up 90 basis points and on a year to date basis 27.9%, up 130 basis points. Our backlog at the end of the quarter was $1,410,000,000 up 13.9%. Backlog included $393,000,000 of maintenance compared to $355,000,000 a year ago. Subscription backlog was $592,000,000 compared to $488,000,000 last year and includes approximately $129,000,000 related to 6C e filing contracts. Our bookings for the quarter were approximately $259,000,000 an increase of 1.6 percent from Q3 of last year.
For the trailing 12 months, bookings were approximately 1,200,000,000 dollars up 18.9%. The intentional reduction in the term of new subscription contracts also impacted bookings growth. Had the average term of subscription bookings in the quarter been the same as last year, bookings growth would have been approximately 4.3%. Our software subscription bookings in the quarter added $10,600,000 in new annual recurring revenue, up 58.9% over last year's 6,700,000 dollars For comparison, if all of our new subscription contracts had been under license arrangements, we estimate that they would have represented additional the quarter that included software licenses greater than $100,000 and those contracts had an average license of 2 $3,000 compared to 29 new contracts with an average license value of $465,000 in the Q3 of 2018. Cash flow from operations rose 16 percent to $130,100,000 and free cash flow rose almost 21% to $125,300,000 both new quarterly highs.
We ended the quarter with $230,000,000 in cash and investments and no outstanding debt. During the quarter, we also entered into a new 5 year $400,000,000 unsecured revolving credit facility. The new credit facility replaces our previous $300,000,000 secured credit facility, which was scheduled to mature in November of next year. The new credit facility also provides a minimum of $250,000,000 additional uncommitted funding through an accordion feature. In addition to expanding the size and moving to unsecured, the credit facility also contains improved pricing compared to our previous facility.
Day sales outstanding in accounts receivable was 114 days at September 30, 2019 compared to 107 days at September 30, 2018. The increase in DSOs is primarily related to the timing of milestone billings under several large percentage of completion contracts, resulting in a $32,000,000 year over year increase in unbilled receivables. Excluding current unbilled receivables, DSOs were unchanged from last September at 79 days. Our guidance for the full year of 2019 is as follows. We expect 2019 GAAP revenues will be between 1.082 1,000,000,000 dollars $1,095,000,000 and non GAAP revenues will be between $1,090,000,000 and $1,103,000,000 We expect 2019 GAAP diluted EPS will be between 3 point $5.0 $3.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate as well as the final valuation of acquired intangibles.
We expect 2019 non GAAP diluted EPS will be between 5 point $2.2 $5.35 For the year, estimated pretax noncash share based compensation expense is expected to be approximately $62,000,000 We expect R and D expense for the year will be between $81,000,000 $83,000,000 Fully diluted shares for the year are expected to be between 40,000,000 40,500,000 shares. GAAP earnings per share assumes an estimated annual effective tax rate of 10% after discrete tax items, includes approximately $27,000,000 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 annual effective tax rate for 2019 is 24%. We expect our total capital expenditures will be between $45,000,000 $47,000,000 for the year, including approximately $20,000,000 related to real estate and approximately $6,000,000 of capitalized software development costs related to MicroPact. Total depreciation and amortization is expected to be approximately $76,000,000 including approximately $52,000,000 of amortization of acquired intangibles.
Now I'd like to turn the call back over to John for his comments.
Thanks, Brian. We're pleased to continue to build on the strong first half of the year with a very solid third quarter. We again achieved double digit revenue growth as well as achieving the highest quarterly non GAAP EPS and free cash flow in our history. Our competitive position remains high, in part reflecting our increased investment in R and D over the last 2 years, and we signed a record number of new deals in the quarter. We continue to be active in We're starting to see benefits from the investments we've made in acquired products, including integration to Tyler's core products.
For example, 22 new ERP and public safety deals this quarter included Socrata's data as a service platform, and we had 7 wins with Caseload Pro, now branded Tyler Supervision. As Lynn noted, we're also very excited about our new strategic collaboration agreement with Amazon Web Services. This multifaceted agreement brings together Tyler, the nation's largest software company focused exclusively on the public sector and AWS, the broadest and deepest cloud platform. We look forward to working together to accelerate innovation in the development of these strategic initiatives. As we continue to evolve our applications in response to the public sector needs, this collaboration will enable Tyler's clients to deliver better experiences for citizens and further enable governments to use data as a strategic asset in the design, management and delivery of their programs.
Now, Nick, we'll take your questions.
First question comes from Kurt Materne, Everscore ISI.
I guess maybe just to start, I guess Lynn or John, can
you just talk a little bit more
about the AWS deal, just in terms of what maybe you're hoping to accomplish with that in the immediate sort of near term? Are clients asking about AWS and having the flexibility to moving over to it? How do you think about that as a development platform for your own applications? Maybe just a little bit more color on that, kind of what some of the near term goals are and then maybe longer term goals?
Yes, sure, Kirk. I think this is kind of something I've been talking about for the last several quarters. I've been talking about an initiative within Tyler, really a long term strategic initiative about really coming up with a comprehensive company wide cloud strategy. We've talked about it. It involves a lot of different things.
It involves evaluating our current products, our potential roadmaps, trying to figure out how to get them on the right path to become more cloud efficient and hopefully cloud optimized. Looking at our historic approach of cloud agnostic, looking at the long term strategy of the Tyler Cloud, evaluating opportunities with public cloud providers and on and on. And so this really is an extension of that. It's piece of that overall puzzle that we've been working on for the past year. As we continue to focus more on delivering more of our solutions in the cloud and building next gen applications, partnering with AWS helps with that, helps modernizing our portfolio short term.
It also helps with some training for our staff to help them get the skills necessary to build some of these next gen It helps with our long term strategy eventually moving away from the Tyler cloud. So it's really just a continuation of stuff that we've been talking about. I don't know that we're in a position still to sort of outline, you can expect this in this quarter and that in that quarter. But it's a part of an overall movement that we've been working on for the past year. I want to be careful on a couple of things.
I want to make sure that it's clear about what it's not. We're not it's not an immediate radical shift in our business model away from on premise. We certainly recognize the increasing market shift in the public sector. We believe that's going to continue in the future. We've talked about where rates were 5 years ago versus today and where we think they'll be in the future.
But we're going to continue to be responsive. There's still significant demand in the market for on premise and we're going to be responsive to that man even as we are evolving and moving the strategy more to the cloud. It's also not an immediate move away from our existing Tyler cloud. We've got existing customer commitments. We've got financial commitments.
And again, as I mentioned, some of our products will can today move more easily into a public cloud in a more cost efficient manner and some needed some work to become a little more cloud efficient and hopefully over time cloud optimized. So at a high level, that's where it is. In the near term, it's we're going to continue to solidify our relationship. It's an overarching framework for us to work on various initiatives. But we're really focusing on future development, on training, on collaboration, migrating customers where it makes sense, but really recognizing the market and where it's going and again an extension of the work we've been doing inside of Tyler for the past year.
Super. That's helpful. Maybe just one follow-up for Brian. Brian, I apologize if I missed this, but any impact from Courthouse on the Q4 guidance or maybe how to think about it for fiscal 2020?
No, it's a relatively small deal, less than $5,000,000 in annual revenues. So, the impact won't be material in Q4.
Okay. Super. Thank you all.
Our next question comes from Scott Berg, Needham and Company. Go ahead.
Hi, everyone. Thanks for taking my questions. I guess let's start with Lynn. We were at the IACP event here earlier this week and had some great discussions on the public safety side of your business and how that business is positioning better out market. Could you maybe talk about the company's overall efforts to move more into those Tier 1 type customers?
Historically, it hasn't been a big focus. I know you're doing more there more recently, but maybe an update on some successes and opportunities there would be great.
Yes, sure. Absolutely. So we've talked about a little bit, Scott, over the last really last couple of years. We've made a lot of investments. Part of the purpose of those investments was, one, to get the product more competitive, but also position it to move upscale upmarket.
Those investments have been paying off in our core market in terms of number of RPs we're responding to shortlisting. But I think you've also seen this year, the number of new names we're getting is up significantly year over year. And as an example to your direct question is, the larger deals are starting to be on our horizon. We expect to close by the end of the year approximately twice as many deals that were in the $1,000,000 plus range as last year. So a good example of those investments.
I think stepping back when you look at the quarter for Public Safety, there were really 2 big operational milestones, which are really key to fueling that growth upmarket. I mean, we've done the work on the product, and we don't talk a lot about it, but we had 2 really big go lives this quarter, Scott. One was in Orlando, Florida, and that was really our 1st Tier 1 CAD go live. And by that, I mean, it's a jurisdiction that has over 1,000,000 plus calls a year. So it's the first time we've been able to do that.
Burlington County, New Jersey, another successful go live. They were Tier 1 client for both CAD and Records. We talk about this stuff occasionally, but again, this is kind of the secret sauce of Tyler. This is the hard stuff, getting clients up and running on time, on budget. As you know, it's a reference business.
Getting them happy is going to help play as we continue to move up market and get more and more opportunities, having these Tier 1 sites up and running and referenceable. In Orlando's case, for example, our team got multiple personal handwritten notes from the clients, just all about the success of the implementation. So that's really good stuff. We don't put out press releases about it. But to your point about moving upstream, you got to those references in place and it was a really good quarter for Public Safety to do that.
Got it. Helpful. And then from a follow-up perspective,
you had a couple
of MicroPact deals that kind of moved out of Q3 into Q4 and certainly understand the rationale there. But as you've moved into new segments, federal is obviously new with MicroPact, Socrata has brought some state opportunities in international maybe that you didn't have before is, how do you view the predictability of the business today around deal flow? I know the business has always had some quarters where deals will get awarded, but maybe not get invoiced and there'll be some movement there. But it seems like the last couple of quarters, there's been some more movements there. Is this kind of a short term trend as you have these assets kind of for the first time in your purview or maybe is predictability a little bit less certain versus what's been historically very easy to guide to with the small local customers?
Yes, Scott, I think it's a couple of things. I think you're right. We're still learning a little bit about these markets. And then as it relates to MicroPact, we're still learning and they're still learning really about this, the partner channels. And they have spent some time and made some investments over the last couple of years, but this is really the year that it's really starting to see fruition.
And I think that was just sort of a little bit of an internal miss that as you know, some of the federal deals, which is a significant part of their business, certainly not all their business, has a lot of business comes in at September 30. Well, the partners were getting that business, but didn't turn around and sometimes that business comes in literally at the stroke of midnight on September 30 as well. There's no time for us to get that contract. I think part of it too is, and you see this in a couple of our lines is when you don't have the as the business is growing and you don't have the deal flow and you have some little bit more larger deals, you tend to have some deals that will slip that may impact performance a little bit more as opposed to say our ERP side of the business where there's a more continuous and constant deal flow. So deal slip in, deal slip out, it's kind of just the nature of the business and we normally don't talk about it.
But some of these lines where there's a little bit larger deals, we see this with Odyssey sometimes, even our core business, The predictability just gets a little bit off internally. But for the year and generally, like I told the guys at MicroPact, the good news is you won the business. We'll take the business when we get it. As you know, we don't put out quarterly guidance, perhaps this is part of the reason. But the good news is that all the business trends are there.
But you're right, we're still learning a little bit of the space. Great. That's all
I have.
Thanks for taking my questions.
Our next question comes from Keith Housum, Northcoast Research. Please go ahead.
Good morning, guys. In terms of the Courthouse acquisition, just trying to understand, is this typical of your, I guess, your common pattern of making acquisitions? Do you foresee a need to spend some significant amount of R and D in terms of updating their portfolio or integrating with yours?
Yes, Keith. I'd say it's in line with a lot of our recent acquisitions, which are have been more strategic and primarily product acquisitions. We've talked in the past about our white space initiative and looking for things that either voids or deficiencies in our current offerings. And I think that's Courthouse Technologies sort of fits that bill. I'd say it's very similar rationale and thought processes as our Caseload Pro, which is now Tyler Supervision acquisition last year.
Courthouse Technologies is a company that had a really a leading jury management solution. We had our own existing jury management solution. It was probably not an A, it was certainly not a strength of ours. It's something that we see in a lot of deals. I think about half of our Odyssey deals requesting jury as well as other products.
We had some outstanding customer requirements. So it had been on our list, our R and D list to put in some more investment. And yet we were able to find a company with a solid product to bring in. To your question about R and D, like almost every investment we do, we don't just put them in and let them run. We make some investments.
We make some integrations. We usually end up spending a year or 2 sort of getting them Tylerized, getting them on track. And then our history has generally been as you look out a couple of years and you really see that growth start to take off. So I do expect some investment there, but the product is in pretty good shape and a lot of that will be integration related.
Great. Appreciate it. And then just Brian, first a little bit of drilling down deeper into the e filing business. I know you're up about 10% year over year. But at some point over the next year or 2, should we expect even acceleration of that growth as you guys sign up more customers?
Or is this a pretty good cadence to think about that growth quarter over quarter and year over year?
I think
generally, kind of mid teens is probably the right way to think about it. We have some sort of backlog of e filing, in that we've got commitments from some clients that are in the process of implementing, cake management solutions that will go live on e filing once that system is in place. We have others that are still not fully mandatory. So there's additional volumes to come and then we expect to continue to win new business as we did this quarter. I think Snohomish County, Washington was a new e filing customer.
So I think generally, it can be a bit lumpy too, especially if larger solutions or larger systems come online or jurisdictions. But I think kind of mid teens is the right way to think about that on average as growth.
Great. Thank you.
Our next question comes from Rob Oliver from Baird. Please go ahead.
Great. Thanks for taking my First question is for Lynn. Lynn, I just wanted to ask, it sounds like you guys got some nice traction with New World and some wins on the public safety side this quarter. And just wanted to get a sense for you both near term tactically, how obviously it's more of a Q4 back end loaded type of land. So how you feel kind of headed in to Q4 and then the nature of some of those wins and if you're starting to see that kind of federation effect from your Tyler installed base starting to cross pollinate in terms of wins on the public safety side?
Thanks.
Yes. Think going back to my comments before, I'm pleased with where public safety sits today. Like a lot of our we just talked on the question before about acquisitions and investments, and we've invested a lot over the years and sometimes it takes a little bit even longer than we think to sort of get that momentum going, but the momentum is there. I mentioned some of the metrics. We're shortlisted now and more than 90 percent of our RFPs are new names through 3 quarters are up 75% from last year.
The size of deals is going up. Q4 is setting up for big quarter. It still tends to be a little bit seasonal that way. And they have a lot of big deals in the pipeline. It's a lot of operational execution to try to get all those closed.
It's a difficult thing to do, but sort of stepping back at the 20,000 foot level, all the metrics are trending in the right direction. The competitiveness is trending in the right direction. Our products are there. We're getting the references, I mentioned, from Orlando and Burlington, which are key to move up market. And overall, customer sat is in such a different place than it was a couple of years ago.
And you just can't overlook that, making sure that our clients are happy and feel like they're getting value. As we've talked before, you guys know, it's everything we do is out in the public. Our customers are not competitors. They share everything. So being successful with your existing base is such a big part of getting the new business, and they're just doing a great job.
I just would add one thing on your question about cross pollination and how public safety is working with other Tyler products. We're certainly seeing that Our public safety solution had not had much success in Texas historically. And in the last year or so. They've had a number of deals in Texas. I think all of those in jurisdictions that use our Odyssey case management solution on the court side.
Many of our public safety deals include Brazos, our e citation product. We mentioned earlier in the remarks that Socrata Data and Insights is being included in a lot of public safety deals and we expect to go back to our public safety base and add Socrata to a lot of those clients. So clearly, we're seeing impact of Tyler on the Public Safety business.
That's great. Thanks. And then just a quick follow-up, Brian, while I've got you. So, the 51 percent mix on subscriptions this quarter, you've got MicroPact deals that are going to hit this quarter assuming some of them are going to be perpetual license since it tends to be more perpetual. And then you've got kind of public safety year end kind of skewing perpetual.
How should we think about that mix into Q4? Thanks a lot guys.
Well, there's still uncertainty. There's still a lot of deals that are in the pipeline, particularly on the ERP side, where we have we're either a finalist or in some cases have been awarded, but the client is still deciding whether they're going to go to the cloud or be on premises. But generally, I think there's 2 factors. MicroPact has a number of license deals that will be in Q4. Public safety tends to be much more heavily weighted towards license deals today.
And so their seasonality in Q4, both of those tend to trend Q4 more heavily towards licenses in the cloud. But having said that, in Q3, and we did see a bigger mix in ERP in the cloud. So I don't think it's going to be heavily cloud like Q2 was, but we still have a fairly wide range on the revenue side and the biggest factor there is how some of those deals that are uncertain today fall out.
Great. Thanks again, guys.
Our next question comes from Pat Walravens, JMP Securities. Please go ahead.
Great. Thank you. So looking out sort of this is a long time, it's sort of 5 to 7 years, right? Let's assume we're going to be a lot more in the cloud. And SAP has got S4HANA and they're doing a public cloud version and Oracle has got Fusion, but they bought NetSuite.
For your core ERP, what's the plan? I mean, are you going to rewrite it so that we have a sort of a multi tenant true SaaS solution?
Well, Pat, like I said earlier, we are currently in the process of evaluating all of our core products and trying to get them on the right roadmap to be able to be more responsive in the cloud and be more first cloud efficient and then cloud optimized. Our near term, you look out over the next couple of years, I think we're looking to just to evolve away from our approach of historical approach of being cloud agnostic as a business model to perhaps cloud first as a business model. But again, recognizing that there's significant demand for on premises. It's a technical strategic question that I'm not sure I'm ready to give you that product roadmap right now. But it's something that we're working on intently.
We see where the market is going. We know the efficiencies of the cloud, not just from a revenue standpoint, but what it can mean for the customer and continuous delivery, continuous improvement, which comes
in part with your multi tenancy
and what it can do operationally as we reduce versions out in the field and stuff like that. So we're in the middle of all that. I think you'll continue to hear us each quarter be a little more specific or give a little more info as this strategy unfolds. But we're going to take our disciplined approach in the way we have done tackled the rest of our business.
And I think the direct answer to the direct answer to your question though is no, we won't be rewriting any of the major apps. They're all architected in ways that they can continue to evolve to be native cloud, certainly multi tenant or whatever the specific objective is. So it's really a matter of priorities that we have functional priorities, quality priorities, user experience priorities and then the technical priorities of evolving toward a more cloud native solution. And we look at the marketplace, we work with our sales and marketing people, and we balance those things and make those decisions. I think as Lynn's been saying, over the last year or 2, there has been a little more focus and the pendulum has swung towards attributing more attention, more resources toward cloud native solutions.
So we'll do that. But all of our major applications can evolve to be entirely cloud native without a rewrite. Rewrites are generally not part of the Tyler strategy. They're not just disruptive to our business. They're very disruptive to the customer.
And so we generally take an approach where we continue to evolve the products without blowing our customers out of the water and delivering this in a non disruptive way to both our clients as well as our business strategies.
Our next question comes from Mark Schappel from Benchmark. Please go ahead.
Hi, thank you for taking my question. Then A question for you on the competitive front. You have a relatively new private equity backed competitor that's out there that's basically been stitched together during the past year or so. I was wondering if given their larger size, if they're starting if you're seeing them in more RFPs, if you're seeing any major impact competitively out there?
Yes. Hey, Mark. So, I am assuming you are I think I know who you're talking about. The 2 PE firms got together and acquired a number of assets of significant size. We're pretty familiar with all those assets.
We've competed with them in the markets for years. I think if you follow them closely, you probably also know got a significant amount of debt. I think their debt has recently been downgraded. We see them in the market. I don't know generally the PE playbook is they look a little more in the near term.
We know that what they've been doing has been a little bit disruptive in the market in terms of trying to consolidate product lines, consolidate business biz ops. So it's been a little bit disruptive in the customer and in their employee base. I heard that a little bit anecdotally. But our competitive position with them has remained strong as it does with against all our other competitors. Our win rates are good across the board.
Great. And then Brian, a question for you. This has been an investment year from an R and D standpoint, which has impacted your operating margins. I was wondering if you could just address in kind of broad brush strokes the company's longer term view on the margin front over the next couple of years?
Yes. I'd say broadly, we expect to be sort of growing into this new level of R and D, we certainly have had elevated investments over the last couple of years. I think R and D has been up more than 30% in each of the last 2 years. That is starting to level out a bit. I think our total R and D expense, excluding acquired companies, was pretty flat with last year's Q3.
So I expect that all else being equal in terms of not having other large compelling opportunities to invest internally that will see R and D headcount start to level out and that we won't see that growth of R and D expense that's way above our revenue growth and that if you look out over the few years, we'll see leverage again on that line. And along with that, that we'll be sort of back on a trajectory of long term operating margin improvement that's more consistent with what we've seen in over a longer period of Tyler's history. So we do believe there's significant operating margin opportunity ahead of us. I'd say the other factor that we pointed out on the call as well is in generally around the acquired businesses, which really are the biggest reason for the fall off in margin improvement in the last year. As Lynn talked about, generally, we're making investments in the short term after we acquire someone.
Some of that's in R and D and some of that's in operating expense, but those investments are sometimes around the product, sometimes around the integration with other Tyler products, sometimes beefing up their organization to take advantages of the opportunities that they have ahead of them. And so with the 7 acquisitions we've done in the last 2 years, collectively, those businesses are just about breakeven right now. So that's a bit of a drag on our margin improvement. But again, as we get through those initial investments, we expect to see profitability the profitability and contribution to margin where today they're not. So yes, if we look out over the next couple of years, margin improvement is still a big part of our story and something that we do have a focus and discipline on and we'd expect to be getting back to that.
Thank you.
Our next question comes from Tyler Wood from Northland.
Going back to the AWS partnership and the cloud native stuff, when you look across your different business lines, the ERP, the public safety, the courts, which do you see as the best fit for cloud delivery and you think will be quickest to migrate? And then what do you expect to be more gradual and stay on prem for a longer time? Thank you. Well, I think that question has 2 parts. One is, what's the state of our current products to run more efficiently in a public cloud?
As you know, all our products run-in the Tyler cloud today. The second thing is what is the market calling for and where's the demand. It's interesting. The shift in move to the cloud, the SaaS, even Tyler Cloud or whatever, it has been increasing. We've seen it a lot on the ERP side, but we're also seeing it in the other lines.
We're seeing it kind of really across the board. If you look at large recently large court deals, the North Carolina deal we announced last we talked about last earnings call, the D. C. Courts deal, Bexar County, all the larger deals are starting to trend that way. We talked a little bit about on the ERP side, this North Carolina Statewide Schools contract.
That's all those implementations will be SaaS in the cloud. In the public safety side, you're seeing more and more receptiveness from the public safety buyer and the public safety user to having their information up in the cloud, whereas I'd say 4 or 5 years ago, that was probably an area that was more reluctant. So I don't know that there's a specific area where the trend is hotter than the other. It's just the overall market trend that's moving that way. All right.
Thanks. That's all from me.
Next question comes from Jonathan Ho, William Baird and Company. Please go ahead.
Hi, good morning. I just wanted to maybe touch on the ARR metric and just I guess better understand what your broader expectations for maybe what ARR should be growing and just given the duration shift in bookings, is this sort of a more relevant metric when we think about sort of the forward booking performance of the company?
Yes. Jonathan, I'd say certainly as we become more and more of our new business coming through the cloud that the ARR metric becomes more important. There are a lot of nuances to it around Tyler. The $10,600,000 of new ARR that we talked about this quarter. It was up 59% over the new ARR last year's Q3.
That is really around new software bookings. We certainly have we're now 2 thirds recurring revenue. A big chunk of that is maintenance. That's not included in that ARR. It also doesn't include things like e filing, which are also recurring revenue streams.
So it's really just new software deals from the cloud. So it's a piece of it. And it's hard to predict that growth, but certainly our cloud business or subscription business has been growing in the 20% to 30% range for very, very consistently over the last several years and we expect that to continue. So I think we'll continue to refine that metric and put more emphasis on it, but definitely a high growth piece of our business.
Got it. And then can you talk a little bit about the reaction from clients in the sales force now that you are a few quarters into this initiative to pursue, I guess, shorter duration contracts? Has there been much pushback or have you had to, I guess, change incentives in order to get this through?
I don't believe there's been pushback. I think it's more in line with most software companies. We in the early days of our cloud business, we were I think less we and this is going back 15 years ago, we and our clients were newer to it. We felt like we needed to sign customers up to very long term agreements. There is certainly no more attrition in our cloud business than there is in our on prem.
I guess there's actually somewhat less, although it's on a bigger sample and we have pretty negligible attrition in general. So, the the 3 year term that we generally lead with is, I think, pretty consistent with what other vendors provide and our customers are comfortable with that. And so there
haven't been really any
standard terms now.
Got it. Thank you. Our early cloud strategy often bundled the deployment services into the annual fee. So by doing that, we went for extended terms in order to keep the annual cost reasonable. Over time, as the market matured and generally the de facto relationship had services paid for on the side and the annual fee typically was the subscription fee and the hosting fee, it became less necessary for us to require our clients to sign these longer term agreements.
So that was really an evolution in the relationship we had. And as professional services became a line item that they paid for on the side, it wasn't necessary. So we felt there was no reason to have that hurdle out there in the new business market. So it's been well received by clients. Obviously, it gives us some flexibility if the market changes or our cost changes to have some price flexibility down the road.
But the reality is that those increases are very reasonable and have never been anything significant enough to hurt the client.
At this time, there appear to be no more questions. Mr. Morrow, I'll turn the call back over to you for closing remarks.
Okay. Well, thank you, Nick, and thank you all for joining us on our call today. If there are any further questions, feel free to reach out to myself, Brian or Lynn. Thanks again. Have a great day.