Hello, and welcome to today's Tyler Technologies Second Quarter 2018 Conference Call. Your host for today's call is John Marr, Chairman of Tyler And as a reminder, this conference is being recorded today, July 27, 2018. I would like to turn the call over to Mr. Marr. Please go ahead.
Thank you, Stephen, and welcome to our Q2 2018 earnings call. With me on the call today are Lynn Moore, our President and Chief Executive Officer and Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, Lynn will have some preliminary comments. Then Brian will review the details of our 2nd quarter results and update our 2018 guidance.
Then I'll have some final comments and we'll take your questions. Brian?
Thank you, 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 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. Effective January 1, 2018, we adopted the requirements of ASU No.
20 fourteen-nine Topic 606, revenue from contracts with customers, utilizing the full retrospective method of transition. Prior year amounts have been restated from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Lynn?
Thank you, Brian. Our second quarter results were strong in terms of revenues, earnings and cash flows. Total GAAP revenues grew just over 13% and non GAAP revenues grew almost 14%, of which 12% was organic and 2% was contributed by the Socrata and Sage acquisitions. Both license and subscription revenues were particularly solid in the quarter. Software licenses and royalties were $22,000,000 up 16% and subscription revenues grew 31 percent to $53,000,000 Total recurring revenues from maintenance and subscriptions grew 15% and comprised 63% of total revenue.
From a new contract mix perspective, the number of subscription arrangements in our new business mix was once again greater than traditional license deals. However, the total contract value added from new license arrangements was higher than the value of SaaS deals. Bookings this quarter were solid at $262,000,000 We had a somewhat difficult comparison to the record bookings in the Q2 of last year, which included the $35,000,000 Cook County Odyssey deal. As such, bookings were down 8%. However, bookings grew 34% sequentially over the Q1 of 2018.
It was a particularly successful quarter for new business for our Public Safety division. Our largest new license deals of the quarter were contract with Summit County, Ohio for our New World Public Safety and Brazos solutions and one with San Bernardino County, California for our Eagle Recorder solution, each valued at approximately $3,300,000 Summit County selected our enterprise CAD, enterprise records management system, mobile and other solutions to manage the complex consolidation of 14 law enforcement agencies, 12 fire departments and 6 public safety answering points in the county. This is the largest New World Public safety deals signed during the quarter, each with a total contract valued of $1,000,000 or more, included contracts with the Wyoming Highway Patrol for the full suite of our New World Public Safety and Brazos solutions and Elk County, Pennsylvania for our New World Public Safety solution. Significant license contracts for our Munis ERP solution included the city of Irving, Texas, which is the 12th largest city in the state and among the 100 largest cities in the nation, as well as the Emerald Coast Utilities Authority, the largest water, wastewater and sanitation service utility in Northwest Florida. Significant new SaaS contracts in the quarter included multi suite deals for our Munis and EnerGov solutions with Walton County and the City of Weston, both located in Florida, as well as Glenwood Springs, Colorado Ontario County, New York and Glen County, Georgia for our Munis ERP solution the cities of Atlanta, Georgia and Coral Gables, Florida for our EnerGov solution and the Choctaw Nation in Oklahoma for Odyssey Courts and Justice solution.
Our Courts and Justice division also added the State of New Mexico as its 3rd client for research as a complement to the existing e filing arrangements. We were also very pleased with bookings for Socrata, which had its best bookings quarter in 2 years. Socrata SaaS bookings came in well ahead of plan, reflecting that clients are adopting the new Socrata Connected Government Cloud and are signing longer contracts. Notable new Socrata clients include the State of Texas Department of Information Resources and Pinellas County, Florida, each of which signed 5 year contracts and the California Office of Emergency Services.
Now I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2018. Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the Q2 ended June 30, 2018. I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2018, and then John will have some additional comments. In the earnings release, we have included non GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry.
These measures exclude write downs of acquisition related deferred revenue and acquired leases, share based compensation expense, the employer portion of payroll taxes on employee stock transactions and amortization of acquired intangibles. A reconciliation of GAAP to non GAAP measures is provided in our earnings release. We've also posted on the Investor Relations section of our website under the Financials and Annual Report tab schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues. GAAP revenues for the quarter were $236,100,000 up 13.1%. Organic GAAP revenue growth was 11.2%.
On a non GAAP basis, revenues were $237,700,000 up 13.7 percent with 11.8 percent organic growth. Subscription revenues for the quarter increased 30.8%. We added 126 new subscription based arrangements and converted 32 existing on premises clients, representing approximately $31,500,000 in total contract value. In Q2 of last year, we added 105 new subscription based arrangements and had 37 on premises conversions, representing approximately $49,800,000 in total contract value. Subscription clients represented approximately 58% of the number of new software contracts in the quarter compared to 51% in the prior year quarter, while subscription contract value comprised 47% of total new software contract value signed this quarter compared to 39% in Q2 last year.
The value weighted average term of new SaaS contracts this quarter was 4.2 years compared to 5.2 years in Q2 of last year. Transaction based revenues from e filing and online payments, which are included in subscriptions, increased 19.5 percent to $16,700,000 from $14,000,000 last year. That amount includes e filing revenue of $12,700,000 up 20.1 percent over last year. Annualized total non GAAP recurring revenues for Q2 were approximately $603,000,000 up 16.3%. Cash flow from operations was $22,600,000 compared to $1,400,000 last year.
Free cash flow, which is calculated as cash from operations less capital expenditures, was $16,500,000 compared to a negative $8,900,000 for the same period last year. Capital expenditures declined 41% due to the completion of our Yarmouth office expansion. Our CapEx for the quarter was $6,100,000 including approximately $690,000 related to real estate compared to total CapEx of $10,300,000 in Q2 of last year, which included $4,700,000 related to real estate. We We ended the quarter with $192,400,000 in cash and investments and no outstanding debt. Day sales outstanding in accounts receivable was 100 and 14 days at June 30, 2018 compared to 108 days at June 30, 2017.
Excluding unbilled receivables, DSOs were 89 days at both quarter ends, which was unchanged from last year. Our backlog at the end of the quarter was $1,200,000,000 up 10.9%. Backlog included $356,000,000 of maintenance compared to $332,000,000 a year ago. Subscription backlog was $480,000,000 compared to $395,000,000 last year and includes approximately $131,000,000 related to fixed fee e filing contracts. Our bookings for the quarter, which calculated from the change in backlog plus non GAAP revenues, were approximately $262,000,000 a decrease of 8.3% as Q2 of last year included the $35,000,000 Cook County Odyssey contract.
For the trailing 12 months, bookings were approximately $1,000,000,000 Our software subscription bookings in the quarter added $6,600,000 in new annual recurring revenue, down 14% from $7,600,000 last year. Q2 of last year included 3 large subscription deals, each with a contract value of over $5,000,000 For comparison, if all of our new subscription contracts had been under license arrangements, we estimate that they would have represented additional license bookings of approximately $9,200,000 We signed 25 new contracts in the quarter that included software licenses greater than $100,000 and those contracts had an average license of $459,000 compared to 25 new contracts with an average license value of $842,000 in the Q2 of 2017, which included the $35,000,000 contract with Cook County. Our guidance for the full year of 2018 is as follows. We expect 2018 GAAP revenues will be between $934,000,000 $948,000,000 and non GAAP revenues will be between 940,000,000 dollars $954,000,000 We expect that 2018 GAAP diluted EPS will be between $3.50 3.58 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate. We expect 2018 non GAAP diluted EPS will be between $4.76 $4.84 For the year, estimated pre tax non cash share based compensation expense is expected to be approximately $54,000,000 We expect R and D expense for the year will be between $62,000,000 $64,000,000 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 and includes approximately $26,000,000 of 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 tax rate for 2018 is 24%. This rate was reduced from 35% for 2017 to reflect the enactment of the Tax Cuts and Jobs Act. We expect our total capital expenditures will be between $23,000,000 $26,000,000 for the year. Total depreciation and amortization is expected to be approximately $62,000,000 including approximately $40,000,000 of amortization of acquired intangibles.
Now I'd like to turn the call back over to John for his further comments.
Thanks, Brian. Our second quarter results again met or exceeded our expectations by most measures. We again achieved solid double digit revenue growth even if subscriptions made up a higher percentage of new software contracts and this was our 27th consecutive quarter of double digit revenue growth. We're pleased that we've been able to grow earnings significantly while we've funded major incremental R and D initiatives and absorbed an acquisition that is dilutive in the short term. As we've previously discussed, we've significantly increased our R and D spend over the last 2 years with a number of projects across the company.
We continue to be pleased with the progress on these initiatives. And while there is near term pressure on margins from the higher spend, we're confident that these investments are smart and will produce solid returns and further strengthen our competitive position. We believe the investments we're making in our New World Public Safety solutions are starting to affect decisions in the marketplace and were a factor in new business this quarter, including meaningful wins in Summit County, Ohio and the Wyoming Highway Patrol. In Q2, we also launched our Tyler EAM product. This enterprise asset maintenance solution provides a complete view of an organization's assets from procurement to maintenance to retirement as well as citizen engagement and represents a major R and D effort to expand our product offering.
As we approach the 90 day mark since the acquisition of Socrata and Sage on April 30, we remain enthusiastic about these most recent additions and continue to be impressed with the talent and passion of their teams that are now part of Tyler. Integration of their operations as well as their products and services is well underway and their results in Q2 met or exceeded our expectations. Just a few weeks ago, Tyler announced the launch of the Socrata Connected Government Cloud, a revolutionary approach to internal data sharing. This solution will empower government workers to access a single source of data and securely share analysis, visualizations and performance measures across multiple departments and programs. Considering our year to date performance, together with our current positive outlook for the second half of the year, we've revised upward our full year earnings guidance.
We're pleased that our outlook has strengthened even after considering the dilutive impact of our 2nd quarter acquisitions. Stephen, now we'll take questions.
Thank you, sir. We will now begin the question and answer And our first question comes from Peter Heckmann with D. A. Davidson. Please go ahead.
Good morning, everyone. Thanks for taking my questions. Brian, on e filing, we've kind of seen revenue plateau there the last few quarters. Can you see some relatively larger projects go live here before year end?
Yes, we've talked broadly over the next couple of years that we expect e filing revenues to move from sort of the current $50,000,000 level to the $75,000,000 annualized range. And that takes place over, as I said, over the course of the next couple of years. There are some go live scheduled throughout the remainder of this year and on into next year, particularly in some of the California counties, where we've been doing implementations of the underlying case management systems and those e filing implementations follow that. Don't really have the specifics of exactly how those fall. The timing becomes somewhat fluid in the short term.
But again, over the next couple of years, we expect e filing revenues to grow by approximately 50% from where they are today.
Okay. That's helpful. And then as a follow-up, just the non subscription backlog, if my math's right, was up about 4% year year. I would have thought maybe the growth rate would have been a little bit higher given the mix. But as you as the mix continues to move towards that subscription, how do you feel like that affects kind of your organic growth rate over the next
4 to 6 quarters?
Well, in the short term, an increased mix of subscriptions obviously puts pressure on organic growth because we don't get the upfront license revenue recognition. So that does give us a little bit of headwind there. We do expect that over time that subscriptions will increase as a percentage of our revenue mix. But as you've seen in the past, it can be very lumpy from quarter to quarter. So we're pleased that we continue to grow both sides of the business, both the license and the subscription side, and we're happy to acquire new customers whichever way they want to come to us.
And we can certainly manage the ups and downs in the short term organic growth as we continue to build that overall backlog.
Okay. Thanks. I'll get back in the queue.
Our next question comes from Alex Zukin with Piper Jaffray. Please go ahead.
Yes. Hey, thanks guys for taking just a couple of questions here and congrats on another solid quarter. So I wanted to start maybe on Socrata. I guess I wanted to ask, given the strength of the bookings, I think Glenn you mentioned strongest bookings in 2 years, How much of that is due to the product being kind of brought to the broader Tyler sales force versus just the Socrata sales force? And how should we think about the opportunity to potentially significantly accelerate both the growth of that business as well as leverage Socrata to actually improve some of the sales cycles on other product lines given kind of some of the higher level selling that happens with that product?
Yes, sure, Alex. I think the high bookings is a function as much of the strategic pivot that they did a couple of years ago and really the release of the Socrata Connected Government Cloud. That pivot they originally Socrata was more of an open data company. The pivot to moves in internal data sharing, the release of that certainly joining Tyler brought some enthusiasm, I think brought some stability. And so I think that was helpful.
But these were deals that were likely somewhat in the queue ahead of time. I don't know that we had a major impact on them other than, like I said, bringing the stability of the Tyler name and the vision for what they had already created and what we're going to do together. You're right on integration with Tyler Products. It's something we're focused on right now. In the near term, we're really focused on probably some of the, what I call, more low hanging fruit, some of the connectors to our products.
In July, we released a product called Open Finance, which was in conjunction with Munis. And that's already been well received. I'd expect a few more of those products to come out probably in the next quarter.
But Alex, in Q2, there were really no Socrata sales through the Tyler channel.
Got it. That's helpful. And then maybe on New World, another, I guess, product where you had a particularly strong quarter with that extremely large deal. Can you speak to maybe what's driving that success? How does the pipeline look given that this is a 4Q weighted business?
And maybe talk about your confidence in that pipeline and those deals and how it's changed maybe over the last quarter?
Yes, sure, Alex. We had Summit County was the largest deal, as I mentioned earlier, largest deal in certainly probably last 10 years for New World Public Safety. I think it's really a response to our investments and all the work that we've been doing in the last two and a half years since we've acquired them. We've made significant point deal that I mentioned earlier. Those were big license deals.
Summit County was about a $2,000,000 license. Wyoming Highway was about a $750,000 license. So I think it's just the reception to what we've been doing and what I think we do really well, which is develop our own products, get out there, and we do a really good job selling. The pipeline for the rest of the year looks good. You're correct.
There tends to be more heavily weighted in Q4. There's a number of deals that we're chasing that we're going to have to close and it's always a little bit of herding cats at the end of the year, but we like what we see in the pipeline for New World Public Safety.
Got it.
And then if I could just squeeze one more in. With SaaS becoming a greater proportion of the mix, you guys have made some changes on contract durations for new customers. Can you talk about maybe A, why you've made those changes? What does that do for you guys in terms of being able to maybe increase some of the price points earlier in the contracts and what impact that's going to have on bookings? Thanks, guys.
Yes. Over the last year or so, we have changed sort of our standard terms for new SaaS deals generally. Those are now initial 3 year contracts. In the past, 5 years was more the standard and sometime back 7 years was we even frequently had. We prefer to have a little bit shorter initial term contracts to give us flexibility with pricing down the road to respond to potential changes in costs and changes in the customer's operations.
And you see that in quarter where the average term of a new SaaS deal moved down from, I think, 5.2 years last year to 4.2 years this year. So that does have some optical effect on total bookings and backlog because you've got a smaller initial total agreement coming into the backlog. But because we continue to see very, very high customer attention, the same or if not higher in our SaaS customers as our on prem customers. We don't believe we need to push for very long initial terms, but prefer to keep those 3 year standards on new deals. Great.
Thank you, guys.
Our next question comes from Jonathan Ho with William Blair and Company. Please go ahead. Hi, good morning and let me echo the congratulations as well. Just wanted to maybe start out with maybe some of the investments that you're making. Can you give us an update of sort of where we are in terms of that and how much of that is maybe contributing to the strong organic growth so far?
Well, these are kind of ongoing projects. They don't necessarily have beginnings and ends. Some of them are new products, but most of them are incremental investments or I guess elevated investments in some of our core products. So even something like an EAM that we spoke of, obviously, is a new product the team has created, but the team will largely stay in place and we'll continue to invest in the technology and the functionality of that application going forward. The early release is kind of probably the first three releases will take that to an independently competitive position.
Elevated investments in things like JAL and New World Public Safety and research are kind of significant projects that are at a high level and maybe back off at some point in the future. But there's a lot of just small incremental investments and things like Executime and the core products, technology and functionality. Certainly, Sage and Socrata will have incremental investments in their integration into our broader system. So basically, we look at it as having added a lot of heads to different products that we felt could be impactful to our competitive position and catalyst of future growth, and we're starting to see that. We had even marginal bends upward, and our growth rate are encouraging to us and we feel are sustainable and that we can grow in those incrementally.
But you won't see a reduction in these heads. These are not a temporary thing. This is really probably pulling forward heads from 2 3 years out into the current spend to take advantage of those opportunities in the marketplace and we'll grow into them and then we'll see our R and D growth grow at a lower rate than our overall spend and kind of grow back into it is the way I'd encourage you to think about it.
Got it. That's helpful. And then just from a win rate perspective, you've anecdotally talked about New World improving here, but is there anything that you can quantify for us in terms of how that win rate maybe picks up from here or has been evidenced in the most recent set of wins?
The win rates, it improved quickly, as you know, and probably quicker than we could have expected. And our really focus was on, is this sustainable? And it has been. So their win rates are pretty good. They can tick up further, but I think the broader growth for them, they had a leadership position.
And I'm not sure it's a narrow segment of the marketplace, but certainly not the entire marketplace or a significant size. So geographically and more importantly, the size of the clients is broadening that addressable market space and applying what is now a good win rate against a broader marketplace is I think where you'll see the growth over the coming few years.
Got it. Thank you.
Our next question comes from Scott Berg with Needham and Company. Please go ahead.
Hi, everyone. Thanks for taking my questions.
I guess I have 2, they're both kind
of generically around Socrata. Lynn, this is probably for yourself since you made the comments. Best bookings in the quarter, just wanted to see if you can help us unpack that a little bit. Was that ASP driven, just larger ASPs, maybe number of deals relative to what they've seen recently or certain types of products or geo? Just wanted to try to maybe understand what that best quarter kind of looks like for them.
Yes, sure. I think it's a little bit of both. It's I don't think it was targeted at one specific geographic area. It was also a combination of a couple of the deals signing up for longer term. I think I mentioned that there were some a couple of 5 year terms involved.
And it's really a function of the work they've been putting in the last couple of years into this CrowdStrike and Company Cloud. So it's across the board. It was both number of deals, size of deals, term of deals, nothing one thing specific, Scott.
Got it. Helpful. And then question for you, Brian, on the impact of Socrata in the quarter. I can do the math on the revenue side. That's pretty easy.
And obviously, it's not the only acquisition in the quarter. But can you help us understand maybe from a bookings perspective what was organic versus inorganic in that number?
Yes. Bookings were in the $7,500,000 range from Socrata. So that would be the inorganic part. I'm sorry, 5.7
percent. Our next question comes from Kirk Materne with Evercore ISI. Please go ahead.
Yes. Good morning, everyone. Congrats on the quarter. I guess my question, I was actually just curious around some of the contracts that you guys have been selling on a subscription basis. Is there any commonality just around why people are moving in that direction, whether it's the size of the constituency, whether either certain regions that are more comfortable with sort of moving to a subscription model.
I was just kind of curious, I'm guessing it's more idiosyncratic than that on a customer by customer basis, but I was just curious if you're seeing any trends on that front?
I think it's just government market, local government market slower to embrace these changes. So for years, we were our migration was slower than the commercial markets you might follow. The comfort level with this has grown. The awareness of it has grown and they're just embracing it. And it was a question earlier on the impact on growth.
We really feel it's been if we could design the migration from a timing standpoint, this has been a really good one, right? We had pretty good reception 10 years ago, 12 years ago when we launched this. It's slowly and incrementally built. Therefore, the cannibalization of licenses and the profitable business model we have has been slow enough to not overly impact that. And seeing this continue to slowly grow has really worked well for our model, and that's what we see going forward.
Geographic or even across products, I don't think there's anything it's pretty consistent. I think in recent quarters, maybe over the last year, we have reported that we have seen more larger contracts in this area. Early on, it was more of a mid range kind of play and we have seen more of the larger clients move to a SaaS model. So it seems to be if there's any change, it's on the high end.
Okay. And just
to add to that, I think the other thing is in the increased bookings and subscription model is that we have added more pure SaaS solutions like Socrata, in the courts and justice area, Modria and research and e file, those growth the growth of those offerings has also been high and that's helped cause that mix to go up.
Okay. And you guys obviously noted that your win rates are up in the public safety area. I was just interested when you look out at the pipeline at the RFPs that you see coming, is there any real change in the broader market, I guess, from your view, John or Lynn, just in terms of what you would have expected? I'm just wondering whether or not the broader sort of economic lift we're seeing is sort of helping or encouraging some of your customers to make faster decisions or decisions maybe they were waiting on for a year from now? Thanks.
I don't think the we've talked in the past that the 'eight, 'nine economic issues were deep enough to affect us, but it's rare. And I don't know that economic issues we could say are attributable to much of what's going on with us. The market is good. It's a little lumpy right now on a couple of segments. We're a little light on RFPs and kind of leading indicators, but others were very strong.
And so across the board, it's pretty good. And our general outlook is positive. There was some lumpiness on the internal numbers inside, but again, generally, it's pretty strong, but probably not impacted by economic issues at this point.
Okay, great. That's it for me. Thanks, guys.
Our next question comes from Tim Klasell with Northland Securities. Please go ahead.
Yes. Hi. My question is around the Socrata acquisition. First, the large deal you mentioned, is that common in the pipeline or is that sort of and if you sort of look forward, should we expect to see more of those? Or is that a little bit of an abnormality, if you will?
Thank you.
Yes, Tim. I think Socrata historically has been focused on what they've called the GO 500, which is the sort of the larger tier local governments and state and fed. I think you're going to continue to see some of that. I think some of what Tyler brings is our client base. So you're going to see a little bit more mix as we push this out throughout our client base.
But I think you're going to continue to see a good mix of that. This quarter, not only did they have the Texas DIR, which I mentioned, the State of California emergency services, they also did a smaller deal with the U. S. Department of Agriculture. So they're playing in all kinds of different markets.
And what we're excited about is are the markets that we're going to bring to them.
Okay, good. And then on sucralto, have their win rates picked up? And is this giving you as part of Tyler, is this giving you comfort around maybe doing more of these, I call it for Tyler, the nontraditional acquisition of more of a technology and paying maybe a little bit higher multiple for a younger company. Is it giving you more confidence that maybe this should be in your acquisition quiver, if you will, or in your acquisition pipeline? Thank you.
Yes. I guess I would say, we're going to continue to be focused on the things that we do well. What we really liked about Socrata was the complementary nature to Tyler's business. As you say, a little bit out of our wheelhouse, but at the same time, really a glove and hand complement. The vision that we have and where we're taking the company towards the Connected Communities vision is something that Socrata fit just perfectly with.
We look at acquisitions regularly. We look at all types of acquisitions. I don't know that I would expect us to do something that's significantly outside of our current wheelhouse. And again, I would consider Socrata a little bit different, it really was a good complement and part of our overall strategic growth.
Okay, good, good. And did the win rate, did that get affected or have you noticed any change with Socrata being part of the Tyler family?
Socrata, their product is not really sold through RFP. They do a good job selling. That's what we're going to do. We've only had them 60, 90 days now. What we expect to do is we expect to be able to push this through our customer base and then they're going to continue with their sales force and continue to do things that they've been doing.
So, I'm not sure win rates are as appropriate as more as just there's going to be continued add on sales.
Good enough. Thank you very much for that insight. Thank you.
Our next question comes from Rob Oliver with Baird. Please go ahead.
Thanks. This is Matt Lemenager on for Rob this morning. I wanted to follow-up on Alex Zukin's question earlier on New World Public Safety, the nice deal wins cited in the prepared remarks Summit County, Ohio and Wyoming. Were those deals competitive? And maybe who you ultimately went up and won against there?
Yes, sure. Both those deals were highly competitive. Summit County had been out for a long time. It's a deal we had been chasing, certainly a larger deal. As I mentioned earlier, largest contract they've ever signed.
I think, to John's comment, it's an example of them also expanding their addressable market. Tri Tech was involved in the Wyoming deal that we won recently. Off the top of my head, I'm not sure who the players were in Summit County, but no, it was very competitive.
Okay. Thanks. That's helpful. And then on Socrata, it sounds like the contract lengths are increasing there, the one in the state of Texas DIR, I think you said contract length of 5 years. I don't know if we've heard this.
What is the average contract length for a typical Socrata deal, more of the average, not the longer one?
I think generally their portfolio is made up of 1 year contracts. I think it's still a little bit early. We're actually encouraged by some people wanting longer term. I think it helps prove the stability of the product and what it can do strategically for our clients. But typically, they are 1 year contracts.
Okay. Thank you.
Our next question comes from Brent Bracelin with KeyBanc Capital Markets. Please go ahead.
Thank you for taking the question here. I wanted to do one more question on Socrata and that was specifically given you said that there were no Socrata deals or sales through the tighter channel. When do you expect Socrata to be sold more broadly through the tighter channel? And maybe just touch on the sales cycle. Is it different than your sales cycle?
Sure, Brent.
I'd expect Tyler sales to start occurring this quarter. Like I mentioned earlier, we released a product called Open Finance, which was in conjunction with Socrata and Munis that got released July 1. We're currently working on those integration plans both on a product standpoint and a sales standpoint. It's going to take a little work internally, but I believe those sales will start coming in this quarter and certainly in Q4 and continue to build as we get into next year.
And the sales cycle in Sequoia, is it different than your other products?
Well, there's a big segment here. So I think they're high end direct sales. Some of those may be longer. It's a newer product. It's a newer concept.
It's typically not something they're replacing or have done. It's a new initiative. So they could be longer. But I think as we go into and move into the traditional Tyler clients, a lot of that will be through our inside sales channel and into our existing customer base. And I think those will generally be non competitive, non RFP deals that will go through our inside sales channel.
And I would think they'd be shorter processes. And the same is true for Sage that these will differentiate us and help us in the new business, new name market, But I think the volume over the next 2 or 3 years will be into our installed base and they'll tend to be through a relationship that it exists and a non competitive, non RFP process.
Very helpful. My last question is really around the industry. I know you touched on it a little bit, but just personally, property taxes, certainly paying a lot more today than it was 1, 2, 3 years ago. You now have a Supreme Court ruling, where Nexus changes. And so you now are going to see online sales taxes.
All of that should help the budgets of local government. So walk me through just how you look at the health of the budgets of local government and is the appetite to modernize higher now than it was in the last 1 or 2 years or not? It's just this is just a slow moving kind of market. Any color there would be helpful.
To be fair, we can't have it both ways. So we've always said we are not very economically sensitive, our marketplace. I mentioned earlier that the 'eight, 'nine issue was deep enough that it did affect us. I really think that's the only time in the last 30 years that something got to that point where there was a meaningful impact on our marketplace. So right now, we're in kind of modest swings in the marketplace.
And as we've said, everything we do is essential. Everything has to be done. There is an appetite to do it well and to use technology to enhance productivity and cost, and we benefit from that. But so it's a healthy market. It's better when the economy is good, but it's not a big dramatic shift really in that demand.
We expect it to be steady. Everything we do again is essential and there's a lot of older systems that need to be replaced and they'll be replaced really regardless of When the obviously, they can move those forward or at least do them on time. And really what we saw in 'eight, 'nine was that weakness pushed some things out that still occurred. So if you look back at us historically, we had a flat year at that time, couple of lower growth years and then we had some higher than trend level years as the catch up occurred. Property values are a primary funder of local government and therefore our solutions.
In most cases, there are some obviously distressed studies in counties around the country, but in most cases, almost every year, there are more parcels than there were the previous year. And in most cases, the values over the long term continue to go up. So your tax is due and their budgets due and their ability to afford our systems benefits from that. Sales taxes, generally in cities, sometimes we large cities, sometimes we have sales tax, but generally sales tax are a state revenue thing. And so as we've said, we can't have it both ways, but our the revenues that directly fund local government, property taxes, utilities, fees, fines, these sorts of things tend to be very steady and not as influenced by economic swings, state being income and sales and federal being predominantly income.
Those are the things that obviously swing and have greater variances based on economic conditions. Local government does get revenue sharing. Generally, one of the last things that's touched because it goes to education and sewer and public safety and things that are not politically nobody wants to touch politically. So generally, they're one of the last things to get touched. But the direct revenues are property taxes, utilities and those things that we all pay regardless of what kind of year we had.
Very clear. Thank you.
Our next question comes from Pat Walravens with JMP Securities. Please go ahead.
Hi, this is Matthew Spencer on for Pat. Thank you for taking our question. Just big picture, what's the biggest challenge facing the IT departments of state and local governments today?
Probably transition of resources. A lot of brain drain going on. Probably the biggest impact of that on us is what we call our flips, so the conversions from on premise to SaaS. So there's a lot of resources that are reaching retirement. And as they move out, it's a catalyst for people to say, hey, we don't have the experts that we're relied on all these years.
The employment market is difficult. They're limited in the compensation they can provide for what is really a broad set of skills. And so that would be maybe the biggest thing. Obviously, security is a big deal for everybody right now. And if you could just Google it and you can see a lot of different hacks, number of ransom situations.
And I think our timing on Sage is really, really good. And again, through our installed sales channel where we have an established relationship, we're a trusted partner, we think that's a need that we can help serve for our clients and will further enhance the stickiness of our relationship with our
Benchmark. Please go ahead. Hi, Benchmark. Please go ahead.
Hi. Thank you for taking my question. I do have a question on Modria. The solution was initially thought to be a potential 2019 revenue event. And I was John, I was just wondering based on your early experience with the product in Nevada, whether you believe we'll be hearing a lot more of that solution with respect to new deals around that timeframe?
Around what timeframe? Sorry. 2019. Yes. No, I think they're direct channel and what they would have been doing on their own, which will continue as strong as Lynn said.
We're not a direct impact on that. Those are the resources that have been there and will continue to be there. The evolution of their product and what's been released recently are things that obviously were underway. I think they were a small venture backed company. There's some uncertainty around that.
And the Tyler brand and presence in the marketplace, along with our financial stability enhances that. And I think we'll continue to see them do well there and probably do better than they would have with the benefit of those things. The real incremental revenue will come as we start to drive that through our installed channel and into our customer base, which as Lynn said, is beginning at this point in time. We'll start slowly and build from there. So certainly, we'd hope and expect that 2019 would see higher revenues and we'll watch the run rates.
It's all recurring. It's all SaaS. And I think you'll see those recurring revenue run rates certainly grow in 2019 and beyond.
Thank you. Yes. And Mark, as it relates to Modria, there is a lot of excitement in the market about that. I kind of view it similar to e filing in that in the sense that e filing was something that came along and started fundamentally transforming the way courts operate. And I think Moderia has that potential down the road.
You mentioned Clark County, that's one of our greatest partners with C and J. They are initially filing client. They did just finish a pilot project out there in 3 courts. It was a parenting plan contract and parenting plan courts where that's really divorces with children. And by all accounts, it was very well received.
We had certain over 50% of litigants used the Modria solution and the number who used the Modria solution for a full outcome was high, approximately almost half. They are the ones that used it to certainly whittle down the issues to where a court or a mediator only had to decide on a few issues that was also high, approaching that same number. So, the excitement still seems to be there, but it is a change in the way courts do business. So it will probably start slow, but momentum is starting to build and I would expect to see continued revenue growth out of Modria in 2019.
Thank you.
Our next question comes from Kevin Liu with B. Riley FBR. Please go ahead.
Hi, good morning. I was just wondering how much of a revenue uplift do you expect from your New Mexico e file business with the adoption of research? And could you talk about what sort of interest levels you're seeing from your existing eVal customers for that product?
Yes. Research is in New Mexico about $250,000 a year initial contract. We have as I mentioned, it's our 3rd state to adopt research behind Illinois and Texas. We have active discussions with a number of other both states and counties throughout the country that use our e filing solutions and our Odyssey customers. And we do expect to see additional adoption of that over the coming year.
Those contracts really are the fee that the state is paying us or the courts are paying us for the research capability. We have additional opportunities from adding value added services that we contract directly with the attorneys that are on top of those amounts. It would be more transaction or subscription based numbers. Those are in the early stages of getting into place. And because those are also sort of new offerings that haven't existed in the market before, It's a little hard to predict exactly what those are, but we expect over the next couple of quarters to start to see some history on the added value added attorney services and start to see how that revenue stream will build as well.
Got it. And just one quick question on the margin side of things. Your services and recurring gross margin expanded nicely from the Q1. Should we think about this as kind of more gradual expansion over time? Or is this similar to kind of your R and D investment where there's a fair amount of investment going on right now, just given the opportunities you see in the market?
I expect that to be an overtime thing. That will margins on the long run will continue. We believe we have significant margin expansion opportunity and the subscription side of the business, particularly as it grows and we get past the initial implementations and get into the out years with these incremental subscription customers, they become more and more profitable. So we do expect over the long run to see expansion in margins in the short term, obviously impacted by the increased investment in R and D and the lumpiness of license revenues.
All right. Thanks for taking the questions.
And our next question comes from Charlie Strauzer with CJS Securities. Please go ahead.
Hi, good morning. Just one quick question, just kind of picking up on the SaaS subscription comments, that you guys have had. And if you look at the kind of the RFPs that are coming out today versus maybe 5 years ago, are you seeing a much greater amount of kind of requirement for a SaaS based offering or cloud based offering going forward on these types of RFPs?
It's still very few pure SaaS RFPs come out. Occasionally that occurs and when it does sometimes SaaS companies have been in there pre selling and driving it. But that's still a limited bit of the market. Generally, they're looking for a solution and they almost assume that it would be an on premise solution and through the process, through Tyler and maybe through other exposure to other vendors, they learn more and more about the SaaS offering and migrate in that direction. So initially, that's not necessarily their intention and they kind of move in that direction.
As we've said before and it continues to be the case, it's not at all unusual that we're selected as a vendor and they then look deeper into SaaS versus on prem and it's a subsequent decision as to which way they're going to procure the system. And as Brian said earlier, we know SaaS is hot. We like to model ourselves. We're successful with it. But really, the long term value of these clients is significant to us either way.
And we really go after the business in a relatively non biased way and are happy to get the business either way.
And John, when you think about the turning existing customers from license to SaaS, how much of that is driven by some of the kind of the user conference that you do every year versus kind of just traditional your sales guide knocking on the door showing it to them?
Well, their awareness is enhanced by those that participate in the user conference or connect, user groups. There's a lot of user action in groups that are usually user conference or not. But our we have a significant inside sales channel and their job is to have a relationship with that client. And as I said earlier, whether they've got a big infrastructure investment that's on the horizon, whether there's going to be significant turnover in that talent, Through these relationships, we're very aware of when those catalysts for a flip are coming and we're in there making them aware of what their options are. And that's really what that relationship is and what drives what we refer to with these flips.
And it's a pretty steady business. The relationship with clients buy our solution, use it, get comfortable with us, we become a trusted partner, we've had the benefit of the license fee and then some number of years later they flip to SaaS. That's just a great customer relationship for us over the long term and that's something we see a lot of.
Great. Thank you very much.
Sure.
At this time, there appears to be no more questions. Mr. Marr, I'll turn the call back over to you for closing remarks.
Great, Stephen. Thank you. Appreciate everybody participating in the call today. If there are any further questions, feel free to reach out to Lynn, Brian and myself. Again for your interest and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.