Hello, and welcome to today's Tyler Technologies first quarter 2018 conference call and webcast. Your host for today's call is Mr. John Marr, Chairman and CEO of Tyler Technologies. At this time, all participants are in 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, May 3rd, 2018. I would now like to turn the conference over to Mr. Marr. Please go ahead.
Thank you, Robert, and welcome to our first quarter 2018 earnings call. With me on the call today are Lynn Moore, our President, 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. Brian will review the details of our first quarter results and update our 2018 guidance. I'll have some final comments, and we'll take your questions. Lynn?
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-K and other SEC filings for more information on those risks. Effective January 1st, 2018, we adopted the requirements of ASU number 2014-09, Topic 606, Revenue from Contracts with Customers, utilizing the full retrospective method of transition. Prior year amounts have been restated from previously reported amounts to reflect the impact of the full retrospective adoption of Topic 606.
We will provide details of the restated annual results for 2016 and quarterly results for 2017 in an 8-K filing next week in conjunction with our 10-Q filing. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Lynn?
Thanks, Brian. We put together a strong start to 2018 with our first quarter results as total GAAP and non-GAAP revenues grew almost 11%. License and royalty revenues were $23 million, up 5%. Subscription revenues paced our growth with a 23% increase. Total recurring revenues from maintenance and subscriptions grew 13% and comprise 65% of total revenue. Since 2010, we have achieved greater than 20% growth in subscription revenues in 31 of the last 33 quarters. On April 30th, we completed the acquisition of Socrata, Inc., a Seattle-based venture-backed technology company focused exclusively on accelerating the shift to digital government. With this acquisition, Tyler clients in every public sector vertical, including justice, public safety, ERP financial, and community development, will have the opportunity to make their data discoverable, usable, and actionable, while potentially including data from other jurisdictions to make analytics even more powerful and meaningful.
The Data as a Service solution will go beyond typical analytics to help local government understand procedural bottlenecks and create predictive models that will assist in improving government operations. Socrata is the industry leader in open data and Data-as-a-Service solutions for local government, providing cloud-based data integration, visualization, analysis, and reporting solutions for state, local, and federal governments, as well as internationally, to improve their performance, increase accountability, gain better financial insights, and extend citizen engagement. Founded in 2007, Socrata employs approximately 150 people. Socrata brings a roster of marquee Tier 0 and Tier 1 clients, such as the Michigan State Budget Office, the Utah Department of Transportation, and general administration offices for several states, including Texas, New York, Illinois, and Pennsylvania, and the cities of Los Angeles, Dallas, and New York.
With a robust cloud-based data management platform and a suite of data conceptualization applications, we expect to help find solutions to the challenges faced by governments in a significant way using big data. The acquisition will allow the business to tailor its solutions to the needs of the public sector verticals we serve and achieve continued market growth potential. Socrata employees and clients will benefit from our broad reach across the public sector space. Also on April 30th, we acquired Sage Data Security, leading experts in cybersecurity. Sage offers a suite of services that supports an entire cybersecurity lifecycle, including program development, education and training, threat detection, technology testing, advisory services, and digital forensics. Sage currently delivers three primary offerings to approximately 240 clients in the healthcare, financial, retail, education, and government sectors.
The acquisition of Sage will allow us to provide our public sector clients with unique cybersecurity services that further protect their investment in Tyler Solutions. Sage's nDiscovery offering pairs well with our solutions and allows us to provide additional value to our clients to manage cyberattacks and data security issues as cybersecurity threats grow in scope and sophistication.
Back to the quarter. Subscription bookings made up a higher percentage of new software deals in the current quarter compared to last year's first quarter, both in terms of the number of contracts and total contract value. We're pleased that we achieved double-digit revenue growth even with that new contract mix. Bookings comparison between quarters is somewhat skewed, as in Q1 of 2017, we signed a $20 million contract with the State of New York for our tax solution. Our largest new license deal of the quarter was with Anchorage, Alaska, for our iasWorld Appraisal and Tax Solution, valued at approximately $3.6 million. We also signed a new license deal with the Northern Territory in Australia, expanding that relationship by adding our Odyssey Courts and Justice solution in additional courts down there.
Other significant on-premise license deals signed during the quarter, each with a total contract value of $1 million or more, included multi-product arrangements with Peoria, Illinois, for our Munis and EnerGov solutions, Carson City, Nevada, for our Munis, EnerGov, and ExecuTime solutions, the Harrisonburg-Rockingham Emergency Communications Center in Virginia for our New World Public Safety, Brazos, and SoftCode solutions, and Bedford County, Virginia, for our Munis and EnerGov solutions, as well as license deals for our Munis solution with the Pittsburgh Public Schools, the second-largest school district in Pennsylvania, and the cities of Newton, Massachusetts, and Bentonville, Arkansas. Significant new SaaS contracts in the quarter included deals for our Munis solution with the cities of Gresham, Oregon, Fishers, Indiana, and Upper Darby Township in Pennsylvania.
We also signed notable SaaS arrangements with Fresno County, California, for our Eagle Recorder solution, and with the city of Rancho Cordova, California, for our EnerGov solution. Finally, we signed an amendment with the Minnesota State Court Administrator's Office, a current statewide Odyssey client, to include our Odyssey Supervision solution. 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 first quarter ended March 31st, 2018. I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2018, and then John will have some additional comments. In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. These measures exclude write-downs of acquisition-related deferred revenue and acquired leases, share-based compensation expense, the employer portion of payroll taxes on employee stock transactions, and amortization of acquired intangibles. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We have 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 first quarter were $221.2 million, up 10.7%. On a non-GAAP basis, revenues were $221.4 million, also up 10.7%. Revenue growth was strong considering the higher percentage of subscription agreements in our bookings this quarter. Subscription revenues for the quarter increased 23%. We added 122 new subscription-based arrangements and converted 26 existing on-premises clients, representing approximately $25 million in total contract value. In Q1 of last year, we added 92 new subscription-based arrangements and had 17 on-premises conversions, representing approximately $25.8 million in total contract value. Subscription clients represented approximately 63% of the number of new software contracts in the quarter compared to 45% in the prior year quarter. While subscription contract value comprised 40% of the total new software contract value signed this quarter compared to 29% in Q1 of last year.
The value-weighted average term of new SaaS contracts this quarter and Q1 of last year was 5.3 years. Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 19.5% to $16.5 million from $13.8 million last year. That amount includes e-filing revenue of $12.5 million, up 19.9% over last year. Annualized total non-GAAP recurring revenues for Q1 were $572 million, up 13.2% from last year. Cash flow from operations was $44.6 million compared to $48.2 million last year, down 7.4%. Free cash flow, which is calculated as cash from operations less capital expenditures, was $35.7 million, up 26%. Capital expenditures declined 55% due to the completion of our Yarmouth office expansion. Our CapEx for the quarter was $8.9 million, including approximately $890,000 related to real estate, compared to total CapEx of $19.8 million in Q1 of last year, which included $7.8 million related to real estate.
We ended the quarter with $307.2 million in cash and investments and no outstanding debt. Day sales outstanding and accounts receivable was 88 days at March 31st, 2018, compared to 82 days at March 31st, 2017. Our backlog at the end of the quarter was $1.2 billion, up 16.8%. Backlog included $334.7 million of maintenance compared to $297.6 million a year ago. Subscription backlog was $467.9 million compared to $378.3 million last year, and includes approximately $139 million related to fixed fee e-filing contracts. Our bookings for the quarter, which are calculated from the change in backlog plus non-GAAP revenues, were solid at approximately $195 million, an increase of 9.5%. For the trailing 12 months, bookings were approximately $1 billion. Our software subscription bookings in the first quarter added $4.6 million in new annual recurring revenue, up 17.8% from $3.9 million last year.
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 $5.7 million for the first quarter. Note that historic backlog and bookings numbers will also be restated to reflect the retrospective adoption of Topic 606. We signed 33 new contracts in the first quarter that included software licenses greater than $100,000, and those contracts had an average license of $387,000, compared to 36 new contracts with an average license value of $707,000 in the first quarter of 2017, which included the $20 million contract with the State of New York. Our guidance for the full year of 2018 is as follows: We expect 2018 GAAP revenues will be between $933 million and $949 million, and non-GAAP revenues will be between $939 million and $955 million.
We expect 2018 GAAP diluted EPS will be between $3.34 and $3.44, 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 $4.73 and $4.83. For the year, estimated pre-tax non-cash share-based compensation expense is expected to be approximately $55 million. We expect R&D expense for the year will be approximately $58 million to $60 million. Fully diluted shares for the year are expected to be between 40 and 40 and a half million shares. GAAP earnings per share assumes an estimated annual effective tax rate of 10% after discrete tax items and includes approximately $26 million of estimated discrete tax benefits related to share-based compensation, which may vary significantly based on the timing and volume of stock option exercises. We estimate the non-GAAP annual effective tax rate for 2018 will be 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 $22 million and $25 million for the year. Total depreciation and amortization is expected to be approximately $64 million, including approximately $41 million of amortization of acquired intangibles. Now I'd like to turn the call back over to John for his final comments.
Thank you, Brian. Our first quarter results met or exceeded our expectations. We achieved solid double-digit revenue growth even as subscriptions made up a higher percentage of new software contracts. Margins were in line with our expectations as we began to ramp up our discretionary R&D investment we outlined at the beginning of the year. We are increasing our R&D spend on a number of projects company-wide in 2018, and R&D expenses is expected to increase by approximately 23%-27% over 2017. We are underway and making good progress with several of these initiatives. Although the higher R&D spend pressures short-term margins, we are confident these investments further strengthen our competitive position and drive meaningful addition to future revenues. We're excited about the acquisitions of Socrata and Sage.
Both of these companies bring Tyler a wealth of valuable expertise in areas that are top of mind for the public sector entities, data and analytics, and cybersecurity. We welcome their clients and employees to the Tyler family. We will leverage our sales organization and customer base to drive growth at Socrata and Sage, that we expect to exceed our overall revenue growth rates. While Socrata will be dilutive to earnings for the balance of 2018, we expect it will be accretive in 2019. We've updated our full year guidance to include the operations of the acquired businesses for the last eight months of 2018. Our current outlook for Tyler's core business is positive, and we're pleased that our guidance for the non-GAAP earnings per share is unchanged even with the acquisition dilution.
Finally, we want to thank the nearly 5,000 clients who attended Connect 2018, our annual user conference, last week in Boston. Clients took part in over 1,000 classes, over 54 educational tracks, and we continue to share with them our vision of Connected Communities and the progress we've made on that since last year. Now, Robert, we'll take questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press * then 2. As a courtesy, we ask that you limit yourself to one question at a time. Please know, however, that there will or may be an opportunity later to reenter the question queue.
At this time, we will pause momentarily to assemble our roster. The first question comes from Brent Bracelin of KeyBanc Capital Markets. Please go ahead.
Thank you. One for John and one for Brian, if I could here. John, with the acquisition of Socrata, with the investments you've made in the public safety products over the last year, what's the broader strategy around Tier 1, Tier 0 cities? Walk us through your appetite. Are you getting kind of pulled into that environment, or do you see an opportunity to kind of disrupt the status quo in those larger city environments?
No, not really. Obviously, we do creep up into the tier 1 and tier 0 marketplace as we move forward, that helps us expand the addressable markets we're working within. Courts and Justice probably has the biggest presence, doing very large cities, large counties, and statewide implementations, as you know. We'll continue to kind of creep up in that space, but it is not a high-priority initiative for us. The deals below that level are much more product-oriented and less project-oriented, as you get into very large tier 0 deals, they take on a life of their own. There's a lot of product expansion issues, again, they come to be very service-intensive and more project-oriented.
We do prefer product-intensive implementations where the license fees are a higher percentage of the engagement or the subscription fees, and the post-implementated run rates, recurring run rates, are higher as a percentage of the overall contract. That's what drives our model in a way that's most productive for us. Again, we'll continue to inch in that direction, but it'd be a mistake to think that that's the highest priority for us. Socrata obviously has a strong presence there.
They'll continue to pursue that with their direct sales resources, Tyler's role there will be able to productize it even further, make what are typically APIs that they have with various different applications in these areas, make those interfaces more seamless and ready out of the box, lower service deliverable, and take the success they have had in the very large governments and drive that down into the mid-tiers where we have a bigger presence.
Very helpful. Brian, just as you think about kind of the R&D investments this year, you do now have two acquisitions, and those bring some engineering talent as well. Does this give you more flexibility to moderate kind of your investments in R&D this year and leverage some of their engineering teams, or are you working on different projects and that's not the way we should kind of think about the flexibility you have on R&D this year?
I think it's more the latter. I think both Socrata and Sage's R&D talent is fully focused on their initiatives. Certainly, there'll be integrations with Tyler products, and as we continue to tie those together, that'll be added to their plates. I don't think we expect those to change our R&D spend or the projects that we already have underway pre-acquisitions.
Got it. Very helpful. Thank you.
The next question comes from Rob Oliver of Baird. Please go ahead.
Hi. Good morning. Thank you for taking my question. Guys, on Socrata, just curious for some more color around the product integration plan. I think we are the new folks here, but I think according to our math, that's the largest deal you guys have done since New World. That was a separate product area. This is going to be more an integration on top of your existing products. Just want to understand kind of how we should look for that product integration pathway. Thank you.
Socrata typically is application agnostic. They typically go into sites and run over all kinds of different applications. Obviously, we have a strong presence, and they're out there, and we've gotten to know each other. Many Tyler clients are Socrata clients as well and have already done that interface work. We will, as we go forward, as I said in the earlier question, we will take what are typically application interfaces that have to be put in place during any implementation, and with the Tyler application, certainly our larger platforms, make that more of an out-of-the-box interface that works more seamlessly and eliminate that need on a site-by-site basis. We'll still do those types of interfaces to non-Tyler applications, and sites will be able to interface and have a user experience that addresses all of their applications, whether they're Tyler or not.
It'll enable it to be much more ready, lower implementation service needs, and make it more viable in the mid-range accounts where it's been most successful historically in the higher accounts.
Great. Thanks, John. I have a couple more. I can pop into the back of the queue. Thank you, guys.
The next question comes from Pete Heckmann with D.A. Davidson. Please go ahead.
Morning, everyone. I apologize if I missed it, on Sage, I'm inferring that the annualized run rate revenue is close to $15 million. Is that about right? I would assume it'd be somewhere around neutral to slightly accretive on an annual basis.
No, Sage's revenues are in the $7 million-$8 million range, it is roughly neutral to slightly accretive.
Okay. In terms of then what you're adding on an annualized basis to Socrata, I think you said in the press release it was $25 million of run rate revenue, it sounds like you're thinking on an annualized basis, maybe something closer to 30.
Yeah. Their last fiscal year was 25, yes, it'd be more in the $30 million range this year.
Got it. Okay. Then just real quick, could you give us an update on the application you've developed in Illinois for searching court filings and whether or not that is at a point where you think you can market it to other states?
Yeah, Peter, this is Lynn. We're finalizing that for research, the research product for Illinois. It's targeted to go out the last half of this year and go live. We do think it's fairly portable. I think it will fairly be easy to move from state to state. You should expect to see results from that later this year.
Great. I appreciate it.
The next question comes from Alex Zukin of Piper Jaffray. Please go ahead.
Hey, guys. Thanks for taking my question. Maybe Brian, a couple for you. You mentioned as a percentage of bookings over the past few quarters, subscription has gotten to be maybe a little bit north of your expectations on a pretty continuous basis. I guess my question is, what is the expectation for the full year at this point? How confident you are in that projection? I'll stop there for a second.
Well, it bounces around a lot from quarter to quarter. The mix, some of it is somewhat random, although as we've said in the past, we do expect in the long term to continue to see a shift towards subscription. Last year, for the full year, it was about, in terms of contract value, 63% license-based and 37% subscription. Actually this quarter, although it was higher than last year, it was still reasonably in line with that. The fourth quarter typically has a higher license mix with a higher level of business for public safety, which is almost exclusively a licensed business. Certainly large contracts, which tend to be more license-based, affect that. In this quarter, the revenue mix didn't include any of the mega contracts. It was much more a normal bread and butter kinds of contracts.
We have a range of expectations for the year, I'd say they generally encompass something, a mix that's slightly below the last year's numbers, in terms of the percentage that were subscription to a few points above that in terms of the overall mix. I guess the midpoint would be somewhere around a similar mix to last year. For the full year, when you take into account larger contracts that may come in during the year as well as the second half of the year public safety surge, we'd expect a modest expansion in terms of the mix that comes in as subscriptions.
Got it. On free cash flow, I think for the quarter, it was a little light of our expectations or consensus. I know it's not a number you guide for, but I just wanted to understand maybe what was different, anything in collections, or how should we think about free cash flow for the balance of the year from a growth perspective?
The lower cash from operations and the change in working capital is mostly related to a higher balance of unbilled revenue. You will see some movement in that and between unbilled and deferred revenue with the switch to 606. There's some sort of changes on the back end going on there. The total increase in unbilled revenue is primarily related to just the specific billing terms on several contracts, particularly some larger contracts, where we've been able to recognize revenue prior to being able to bill it in accordance with the contract terms. That will all turn around. We think a fair amount of that during this year. Obviously our CapEx for the year is projected to be about half of what our CapEx was last year. We still look to see a nice increase in cash flow for the full year.
Is it possible just to get a sense for what was the impact of that unbilled in the quarter in terms of revenue recognized, but cash flow that was not billed?
Well, let's see. Our unbilled receivables at March 31st were about $65 million. December, it was about $52 million. There was about a $13 million increase in our unbilled receivables.
Perfect. Thank you, guys.
The next question comes from Scott Berg of Needham & Company. Please go ahead.
Hi, John, Lynn, Brian. Congrats on a good quarter. I have one of the follow-ups. They're both pretty brief. John or Lynn, wanted to see if you wanted to comment a little bit on the expansion deal in the Northern Territory of Australia. I assume they're pretty pleased with the initial implementation that's led to this one. Just broader speaking, how do you reflect on any potential international efforts with the success of that initial contract?
Hey, Scott, it's Lynn. I think all in all our first toe in the water down there, I think has been quite a success. We got them up running, up live, on time, extremely happy. What you see here is they've actually expanded some additional court types, which I think reflects our execution down there. As you know, it's a fairly small state in Australia. Getting off the ground and being successful there was certainly very important. It's our first real international foray in the courts area. I do think there are some additional opportunities in Australia. I think there will be some coming up in the next 12-18 months, perhaps sooner. I think we're going to be well-positioned there, by virtue of the fact of how we did perform down in the Northern Territory.
Great. Just a brief follow-up for Brian. With the revised guidance that includes the two acquisitions, I was kind of surprised your R&D expense didn't increase from the prior guidance. I assume each of those companies was at least spending a little on R&D combined, which probably would've made your number go up, and maybe your guidance just is now going to be on the high end of that range versus maybe on the lower end before. Just wanted to comment a little bit on integration efforts there, because I thought there'd be a fair amount, at least in the short term.
Yeah. Both of those obviously just closed a couple of days ago. Although their earnings contributions and revenues are included in the guidance, I don't think we revised the R&D. We don't expect there to be any incremental R&D in total. Those numbers haven't been pulled out and added into that guidance. That guidance we gave is really sort of Tyler ex the acquisitions. They didn't necessarily report R&D the same way we do. We'll update those numbers. In total, we don't expect to add significant resources as a result of the acquisitions.
Got it. Thanks. Helpful. I'll jump back in the queue.
The next question comes from Jonathan Ho with William Blair & Company. Please go ahead.
Hi. Good morning. Just wanted to see if you could maybe update us in terms of the R&D investments this year and maybe what milestones we should be looking for in terms of the outcomes for those investments.
They're pretty broad, Jonathan. They're certainly the kind of investments that roll out over time. They're across many applications, and many different functions. It can be features, it can be upgrades in user experiences, it could be working on new interfaces. Certainly a lot going on around Nexus Alliance and Connected Communities. It'd be a long list of different things. Certainly, Public Safety, which has really been underway at an elevated level for two years, is starting to show and release more of what they've been working on. That's pretty ready. You saw a release this past quarter on EAM or Enterprise Asset Management. There's really a number of different applications that probably every quarter, there's a new release in some application. Every quarter or so, there's an upgrade in the demonstration products that we're presenting.
It'll be a consistent release of new features, new functions, better technology, better user experiences. I think it's already impacting some decisions, both decisions themselves, whether or not we win a deal, as well as whether or not someone includes EnerGov or somebody includes ExecuTime or EAM or other applications that we have developed with the intention of making these deals bigger to begin with or to sell them back through the installed base.
Thank you.
The next question comes from Kirk Materne of Evercore ISI. Please go ahead.
Thanks very much. John, maybe you mentioned with Socrata, a lot of your customers already are using them. Can you just talk about, is the buyer the same person? Meaning, when you think about the buyers for the applications, which would, I think more likely than not be in the IT function. Does Socrata sort of pull you guys up to another level within some of these state and local government institutions in terms of the decision-makers? Can you just talk about that conceptually, just in terms of how you think that could benefit you, if at all, from this combo?
Yeah, no, it's a good question. This is early, and this is definitely an atypical deal for us.
We're more out ahead of it. This is not as essential as a payroll system or a court system, things we typically focus on. We think we're out ahead of this. There's a strong player in the market in Socrata that we felt fit very well with us. Obviously, we have the most content on the backside of this, and it makes a lot of sense. Admittedly, this is earlier stage than what we typically do. I think, the answer would be both. Certainly, on the technology side, it's a lot of the same people. The IT leadership and a government that would be certainly involved in buying application software is going to be involved in that as well. As you move away from that, instead of being led by application management users, this will get into a mayor's office.
This will get into a governor's office. This will get into a little more that side of the business, which is good for us. Our exposure historically has been with tax collectors, and treasurers, and accountants, and judges and policemen, and the people that run these applications along with the IT people, this will cross over into the executive offices. It's certainly got more of a citizen-facing appeal. With our Nexus Alliance and Connected Community strategies that pull all of our different back office solutions together, I think that's a good thing. Again, it'll be a gradual, this is a long-term investment for us, but it will process over into the executive side of governments, and I think that's a good thing when you look at the comprehensive Tyler objectives.
That's very helpful. One for Brian. Brian, when I look at Socrata and Sage, can you just give us a little bit of an overview of how the composition of the revenue, meaning, subscription versus license versus professional services for those two companies, split up however you want. I was just curious of how we should see that contribution sort of roll on to the income statement. Thanks.
Yeah. I don't have the exact mixes, but Socrata is heavily weighted towards subscriptions. They are a pure cloud business, hosted at AWS. It's around 90% subscriptions. There's a small professional services revenue stream along with that. As John talked about earlier, those are typically not big service engagements related to those implementations. Sage is also a mixture of subscription-based nDiscovery services, which is their lead product, as well as professional services that go along with that around the cybersecurity services that we provide. It's a little bit more of a mix, but both of them are primarily subscription-based businesses.
Great. Thanks very much. Congrats on the acquisitions.
Thanks.
The next question comes from Mark Schappel with Benchmark. Please go ahead.
Hi, good morning. Thank you for taking my question. John, could you just speak to the growth rate of the public safety business in the quarter? If I recall correctly, the plan was to punch it up to about 9% this year from about 6%-7% last year. Based on what you're seeing in the pipeline here, I was wondering if you could give us some indication whether that's on track.
It's on track. It might be on the lower end of the range of expectations we had. After an acquisition, there really were a lot of moving parts related to different revenues, and things that almost make it difficult to get very good comparisons, so they're working through those things. The reception's been very good to the investments we're making. The customer satisfaction reference ability has clearly improved significantly, and we're pleased with all of those things. Again, I think we are working through some transitional issues that have made the growth rate a little more stubborn for a little bit longer. At this point, the leading indications of the win rates and the improvement in the competitive position, and then again, stability in the customer base and their ongoing revenues, make us very confident that they'll see accelerated growth in the coming quarters.
Their business is really, as we've talked about in the past, heavily weighted in the second half of the year. It's difficult to draw a conclusion from just the first quarter. As John said, we're generally on track for the full year in line with our expectations.
Thank you.
The next question comes from Zach Cummins with B. Riley FBR. Please go ahead.
Hi, good morning. Thanks for taking my question. With Socrata anticipated to be dilutive to 2018, and you're still maintaining your prior R&D guidance for your core Tyler solutions, can you talk about if there's any anticipated cost savings, or where any of those may be coming from for you to maintain your prior pro forma EPS guidance?
I think the biggest difference, clearly, we communicated that Socrata would be dilutive. With us maintaining the same guidance, clearly, there's some outperformance in other areas of the business, and those are not isolated in any one area. Effectively, the core Tyler business is performing a little stronger for the full year and making up for the Socrata dilution. It's not a lot of dilution. It's in the, I'd say, in the $0.05-$0.10 a share range. Again, that's the dilution offset by outperformance across the rest of the business.
Great. That's really helpful. Then just one other quick question. I saw that Socrata, they have a small federal government business. I know Tyler has historically been focused on the state and local level, if opportunities on the federal side were to present themselves, would you be interested in pursuing any of those?
With Socrata or with our other applications?
Both, I suppose. Would you be more aggressive in pursuing federal opportunities with Socrata, and then would Tyler, with their core business, be open to pursuing some if they became available?
With both these acquisitions, we're going to be careful to make sure that they continue to execute on what their core strategies were. Their traditional markets, which are a little different than ours in both cases, their direct sales resources will continue to focus on that and develop it. In the case of Socrata, certainly their direct resources will continue to pursue federal deals. At some point in time down the road, those relationships certainly could be something that's interesting on our application side, and we're always looking to expand our addressable markets as we go forward. I wouldn't look for that to be a high priority over the next, say, 12 to 24 months, but certainly further down the road, it could be.
All right, great. Thanks for taking my questions.
The next question comes from Patrick Walravens of JMP Securities. Please go ahead.
Great. Thank you, and let me add my congratulations. John, I heard a mention of embedding sort of more AI machine learning kind of functionality, and having that help solve some problems for your customers. I'd love to hear a couple examples of where you think that would work. Then I'd also love to hear your thoughts sort of at a broader level. I mean, your software runs governments and police departments. It seems to me that making sure that any AI you put in reflects human values and justice and fairness and accountability and that kind of thing is a lot more important than for most software companies. I'd love to hear your thoughts on that, too.
Yeah. Well, again, all these things are somewhat early to us, but you're right. I sat through our courts and justice and our public safety presentations at Connect last week in Boston, and there's no question that the track we were already on with Connected Communities and now putting Socrata out in front of that our ability to take different information and different data that's in these systems and integrate it and present it in ways that are more actionable and provide the kind of information that city, county, and state leaders would use to make decisions, but also businesses and citizens that are interacting with those communities as well. A lot of those specifics are to follow, but I think there's an exciting opportunity there, and I think this will accelerate our Connected Community strategy and bring it to constituents that traditionally we didn't serve.
Brian, can I just ask, how should we think about sort of margin expansion once we get in that? I know you're not going to want to be too specific, but once we get past 2018.
Yeah. We've said long term that we continue to expect over, say, a multi-year period, maybe a four- or five-year period or a rolling period, that we believe that if we're growing this low double-digit range, 10%, 11%, 12%, that we should, over time, expect to see an average of, say, 100 basis points a year or more of operating margin expansion. Clearly, that's being pressured this year, and our guidance is below that in terms of actually a little bit of contraction with the increased R&D spend, all of which is expensed in our financials. We still believe that longer-term model of 100 basis points a year on average. Now, whether we get all the way back to that after 2018 in the first year is yet to be seen, but we could expect to perhaps outperform that beyond that.
If you're looking out over the next few years, we'd expect that to be the target.
Okay, great. Thank you.
At this time, there appear to be no further questions. Mr. Marr, I would like to turn the conference back over to you for any closing remarks.
Okay. Thank you, Robert, and thank you all for participating on our call today. If you do have any further questions, feel free to reach out to Lynn Moore, Brian Miller, or myself. Thanks again. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.