Hello, and welcome to today's Tyler Technologies Third Quarter 2017 Conference Call. Your host for today's call is John Marr, Chairman and CEO of Tylo Technologies. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. And as a reminder, this conference is being recorded today, October 26, 2017.
I would like to turn the call over to Mr. Marr. Please go ahead.
Thank you, and welcome to our Q3 2017 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. Then Brian will review the details of our Q3 results and 2017 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 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. Tyler executed well in the Q3 and delivered solid earnings that were in line with our expectations. Even as we experienced a high level of subscriptions in our new business mix, we achieved the highest quarterly non GAAP operating margin in our history at 29.2%. Subscriptions was once again our fastest growing revenue line, up 22%. Within subscription revenues, e filing revenues rose 26%, including our first revenues from Research Illinois.
Going back to the beginning of 2010, our subscription revenues have grown more than 20% in 30 of the last 31 quarters. Total recurring revenue from maintenance and subscriptions grew 14% and comprised 64% of total revenue. Bookings for the quarter declined 8% on a difficult comparison to the Q3 of 2016. Bookings in last year's Q3 included approximately $72,000,000 from the 4 year extension of our e filing contract with Texas. Compared to bookings excluding the Texas e file renewal, bookings this quarter rose 24%.
Our quarter back end our quarter end backlog grew 12% to nearly 1,100,000,000. Dollars Similar to the Q2 of this year, our mix of new software contracts had a high proportion of subscription arrangements with cloud contracts comprising about half of our new deal mix. The total contract value of new software subscription contracts signed in the quarter doubled in value from last year's Q3. Our largest new subscription deal signed in Q3 included Clayton County Schools in Georgia for our Munis ERP and Executime solutions valued at approximately $7,500,000 contracts with Pawtucket, Rhode Island and Independence, Missouri for our Munis ERP solution, each valued at approximately $5,000,000 contracts with Blount County, Tennessee Carlsbad, New Mexico and Sumner County Schools in Tennessee for our Munis ERP solution a multi suite arrangement with Clovis, New Mexico for our Munis ERP, EnerGov and Tyler Incident Manager solutions and Kyle, Texas for our ENCODE ERP solution. Significant on premise licenses deals signed during the quarter, each with a total contract value of $1,000,000 or more, included multi suite arrangements with Gwinnett County, Georgia for our Odyssey Court case management, Encode ERP and Eagle Solutions Dover, Delaware for our Munis ERP, Executime and EnerGov Solutions, along with Appraisal Services, Lowndes County, Georgia for our New World Public Safety, Brazos and SoftCode Solutions and Craven County, North Carolina for our Munis ERP and EnerGov Solutions.
We also signed significant on premises license deals for our New World Public Safety solution with Lexington, Kentucky and Burlington County, New Jersey, and license contracts for our Munis ERP solution with Richland, Washington, Odessa, Texas and Ascension Parish, Louisiana. I mentioned earlier that our subscription revenues for the Q3 included our first revenues from Research Illinois, which is an extension of our e filing solution. During the quarter, we signed an amendment with the Administrative Office of the Illinois Courts, a current statewide e filing customer for our first research portal. Under the 4 year $12,000,000 contract, Tyler is providing a web based portal that provides immediate and secure access to a consolidated base of case information. The solution provides a simple, consistent way to view and obtain case records and documents from counties across the state.
It integrates with multiple case management systems to share that information and provides an efficient way for attorneys, judges and other constituents to access important case records and documents at any time and on any device. The contract also gives us the ability to offer additional value added features and services, and we expect to offer additional attorney services on a subscription or transaction fee basis in the future. We will look to expand our research offerings into other states where we provide e filing solutions. Research and our Modria Online dispute resolution offering both provide attractive long term opportunities for recurring revenue growth and margin expansion. Finally, our bookings this quarter included extensions of our statewide e filing contracts with courts in Indiana and Minnesota, with Minnesota converting to a fixed fee arrangement.
Now I'd like for Brian to provide more detail on the results for the quarter and our updated annual guidance for 2017. Thanks,
Lynn. Yesterday, Tyler Technologies reported its results for the Q3 ended September 30, 2017. I'm going to provide some additional data on the quarter's performance and update our guidance for 2017 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, 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. GAAP revenues for the Q3 were $214,100,000 up 10.1%. Dollars up 10.1 percent. On a non GAAP basis, revenues were $214,400,000 up 8.4%. Software license and royalties revenues were essentially flat as our new software contract mix had a high proportion of subscription deals for the 2nd consecutive quarter.
Subscription revenues increased 21.6%. We added 94 new subscription based arrangements and converted 15 existing on premises clients, representing approximately $42,500,000 in total contract value. In Q3 of last year, we added 50 new subscription based arrangements and had 18 on premises conversions representing approximately $22,700,000 in total contract value. SaaS clients represented approximately 49% of our new software contracts in the quarter compared to 28% in the prior year quarter. This is the 2nd consecutive quarter that the number of new SaaS deals was essentially a fifty-fifty split with traditional license deals.
SaaS contract value comprised 51% of the total new software contract value signed this quarter compared to 29% in Q3 last year. The value weighted average term of new SaaS contracts this quarter was 5.8 years compared to 5.6 years in last year's Q3. Transaction based revenues from e filing and online payments, which are included in subscriptions, increased 22.9% to $15,400,000 from $12,500,000 last year. That amount includes e filing revenue of 11,900,000 dollars this quarter, up 25.8 percent over last year. Cash flow from operations was $92,800,000 compared to $79,200,000 last year, up 17.2%.
Free cash flow, which is calculated as cash from operations less capital expenditures, was $85,200,000 compared to 71,600,000 dollars Our CapEx for the quarter was $7,600,000 including $3,600,000 related to real estate compared to total CapEx of 7 point $6,000,000 in Q3 of last year. We ended the quarter with $186,300,000 in cash and investments and no outstanding debt. Days sales outstanding and accounts receivable was 87 days at both September 30, 2017 2016. Our backlog at the end of the quarter was $1,100,000,000 up 12.2%. Software related backlog, which excludes backlog from appraisal services contracts was $1,000,000,000 a 14.2% increase.
Backlog included $260,500,000 of maintenance compared to $236,200,000 a year ago. Subscription backlog was $419,100,000 compared to $337,500,000 last year and includes bookings for the quarter, which are calculated from the change in backlog plus non GAAP revenues were approximately $246,000,000 a decrease of 7.5 percent from Q3 of 2016. We had a difficult comparison to last year's Q3, which included the e file Texas renewal of approximately $72,000,000 Excluding the e file Texas renewal from Q3 of 20 16, bookings grew 23.6%. We also saw a handful of deals push out of the 3rd quarter because processes were delayed in areas affected by hurricanes Harvey and Irma. For the trailing 12 months, bookings were approximately $932,000,000 a 10% increase.
Note that we have posted a spreadsheet detailing our quarterly bookings calculations on the Investor Relations section of our website at www.tylertech.com/investors under the Financials and Annual Report tab. We signed 32 new contracts in the 3rd quarter that included software licenses greater than $100,000 and those contracts had an average license of $381,000 compared to 58 new contracts with an average license value of 300 and 62,000 in the Q3 of 2016. As noted earlier, significant increases in our clients choosing subscription arrangements 2017 is as follows. We currently expect 2017 GAAP revenues will be between $840,000,000 $848,000,000 and non GAAP revenues will be between $841,000,000 $849,000,000 We expect 2017 GAAP diluted EPS will be approximately $3.46 to $3.52 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate under ASU 20 sixteen-nine. We expect 2017 non GAAP diluted EPS will be approximately $3.86 to $3.92 For the year, estimated pre tax non cash share based compensation expense is expected to be approximately $38,000,000 We expect R and D expense for the year will be approximately $48,000,000 to $49,000,000 Fully diluted shares for the year are expected to be between 39,300,000 and 39,600,000 shares.
GAAP earnings per share assumes an effective and estimated annual effective tax rate of 14% after discrete tax items and includes approximately $38,000,000 of discrete tax benefits related to share based compensation. We estimate the non GAAP annual effective tax rate for 20 17 to be approximately 35.0 percent. This rate was lowered from 35.5% to reflect the estimated benefit of the R and D tax credit not expected at the beginning of the year. Beginning in 2017, Tyler is adjusting its non GAAP financial income using a tax rate equal to Tyler's annual estimated tax rate on non GAAP income. This rate is based on Tyler's estimated annual GAAP income tax rate forecast adjusted to account for items excluded from GAAP income in calculating Tyler's non GAAP income as well as significant non recurring tax adjustments.
The non GAAP tax rate used in future periods will be reviewed periodically to determine whether it remains appropriate in consideration of factors, including Tyler's periodic effective tax rate calculated in accordance with GAAP, changes resulting from tax legislation, changes in geographic mix of revenues and expenses and other factors deemed significant. We expect our total capital expenditures will be approximately $53,000,000 to 50 $5,000,000 for the year, including approximately $24,000,000 related to real estate. Approximately $16,000,000 of our 2017 CapEx is related to our cloud business, which includes hosted SaaS solutions and e filing, including assets to accommodate future growth. Total depreciation and amortization is expected to be approximately $50,000,000 including approximately $36,000,000 of amortization of acquired intangibles. Now I'd like to turn the call back over to John for his further comments.
Thanks, Brian. This was another strong quarter for Tyler and we're pleased that we met our earnings expectation with our highest quarterly non GAAP operating margin ever. We achieved these results even while facing a revenue headwind from the 2nd consecutive quarter in which we've had a high level of subscription contracts in our new contract mix. We noted earlier, approximately half of our new software contracts this quarter, both in terms of the number of deals and the total contract value were cloud based subscription arrangements. The total contract value for new SaaS software contracts of $36,000,000 was double that of last year's Q3 and included 8 new SaaS contracts valued at more than $1,000,000 each.
Although the increase in cloud sales over the last two quarters is a headwind to short term revenue and earnings growth, these new cloud contracts will drive higher recurring revenues going forward. We're pleased that so many of our new clients are selecting Tyler solutions whether they choose to run on premise or in the Tyler cloud. Our win rates and bookings remain good, reflecting an active market in our strong competitive position. There are a variety of factors that influence an individual client's decision on whether to purchase a license and run on premise or enter into a subscription arrangement with us and we believe that most in most cases, we have a limited ability to direct that decision. We're certainly happy to win new clients regardless of which model they choose and we clearly have the strength to manage any short term pressures on revenues and earnings that come with a shift toward more subscription business.
While this is a 2nd consecutive quarter with a meaningful shift in the mix of new business towards subscription, we do not expect the mix we do expect the mix to vary significantly from quarter to quarter. We're also pleased with the continued momentum in our subscription revenues from e filing and other transaction based offerings. We have continued to add new e file clients and are extending our relationships with courts and attorneys by adding new capabilities and services such as research and online dispute resolution. We're gratified that our e filing clients continue to renew and extend those arrangements, often well before the expiration of the initial terms as Minnesota and Indiana have recently done. As we've discussed previously, we are investing at a high level in product development initiatives, particularly with respect to enhancing our public safety products to improve our competitiveness and broaden our addressable market.
These projects continue to progress on schedule and the marketplace is reacting favorably to our vision for public safety and the Tyler Alliance. Finally, our thoughts and best wishes for a speedy recovery are with the more than 800 Tyler client sites that were affected by hurricanes Harvey, Irma and Maria. I'd also like to express my appreciation to the many Tyler professionals who have gone the extra mile to support these clients. Prior to each storm, our disaster recovery team proactively reached out to the 269 Tyler clients with contracted disaster recovery services that were in the path of a storm, including sites like Aransas Pass Port Arthur Independent School Districts in Texas and the government of the United States Virgin Islands. Our teams continue to work with the effective clients to make sure they can continue to manage their critical business processes.
Lynn and I have heard from a number of clients who have complimented Tyler on our dedication and performance to these disasters and our performance in situations like these are what make Tyler a trusted partner for local governments. Now we'll be happy to take questions.
We will now begin the question and answer session. Our first question will come from Kirk Materne with Evercore ISI. Please go ahead.
John, I want to follow-up on that last comment you made just sort of on the split or the decisions of clients going either for SaaS or license. I'm sure Brian had some thoughts on this. But is I guess two questions around that. When you guys think about the lifetime value of the client, does it change if they go SaaS? Meaning, are you gaining not only more revenue dollars, but more gross profit dollars over, say, a 5, 10 year period than if they go with the license option?
And then Brian for you, when you're contemplating guidance in the Q4 and as we think out to 2018, is 50% sort of the new baselines that you're going to use just to, I guess, potentially be a little bit more, I guess, conservative around that? I realize I think we all understand all bounce around, but I guess I'm just trying to get your thoughts on how you're thinking about integrating that into your guidance process? Thanks.
Sure. Well, we certainly think that the long term value of our clients is very significant regardless of how they become a Tyler client. Our maintenance agreements are substantial in dollars and probably the highest margin revenue that we have as a company. So maybe unlike some industries or companies, the delta between on premise and cloud is probably narrower with us than again in some other places, given the attrition is incredibly low, the annual dollar volume is pretty high in the incremental cost to support new clients is not that significant. So, long term value of on premise traditional clients is very high and certainly approaches cloud clients.
There is short term pressure obviously on revenues as we've seen in the second half of this year and that adoption seems to be higher. There is no question that revenues are higher going forward. The incremental revenues are mostly attributable to the cloud itself, our facilities and the people that manage those facilities and the investment in those. There are high capital investments in hosting these clients and there are incremental headcount to support those clients as well. So, revenues are significantly higher after the initial engagement between 50% 100% higher depending on the arrangement.
The margins on the incremental revenue would be lower than on the base maintenance agreement because of those capital investments and the additional headcount. But the incremental value probably after say the 4th year or so is greater for cloud customers.
And on your question regarding guidance, certainly in the short term, it's a little bit more of a specific identification buildup of that guidance. So as we look out over the next quarter, most of the deals are pretty far along in the pipeline and fall either in the SaaS category or in the license category and we know where that is. There are always some that decide pretty late in the process and even a handful that will have selected Tyler very late in the quarter, but haven't decided yet which model they're going to adopt the software under. So that kind of accounts for the range of revenues and earnings in the guidance. It's a little clearer looking out just at the next quarter than what it would be for the year.
And so that's why we start out the year with a fairly broad range. And I think that given our experience both with recent quarters and looking at the pipeline, we I do believe we'd expect a higher percentage of SaaS in next year's number, but our range of guidance will take into it take that into account, but the underlying assumption, I would expect would have a higher percentage of staff in it.
Okay. Thanks. That's helpful. I'll turn it over to others. Thanks, guys.
Our next question will come from Ken Wong of Citigroup. Please go ahead.
Hey, guys. Thanks for taking my question. Maybe to put a finer point on Kirk's question, in terms of guidance in the subscription mix, I know that it can be a fairly broad range, but should we expect that kind of those deals that are on the fence going forward, you guys will perhaps maybe put those in the cloud camp versus the perpetual camp? Just maybe help us kind of think through what you guys are seeing there?
I think those deals that we don't know which way they're going to go, probably we put a higher proportion of those in the cloud category given more recent experience. I don't know that fifty-fifty is the new norm, but it's probably a little bit above where we the norm will be. But yes, we would expect that the trend would continue towards more cloud business.
And I guess
I think Ken, this is Lynn Moore. I think what's important to note too is that a lot of times it's not so much that are on the fence, they may go out with an RFP and throughout the process, it's geared towards on premises and it's oftentimes not until the very last minute during contracting that that decision is made. And I think to echo Brian's comments, I don't think fifty-fifty is something we can will be the new norm. I do think over the last if you sort of look at a trend line over the last, I don't know, a few years, it certainly is ticking up, but there will be variations from quarter to quarter, but it does make it a little difficult for us to predict some of these deals.
Got it. Thanks, Lynn. And then maybe a follow-up on New World. You guys talked about being able to compete for kind of higher tier deals once you get some added functionality and kind of build out capacity on that product. Are we still on track for that to be a fiscal 2018 type of an event in terms of kind of getting all that capability into the product?
It's a long process. So there's no kind of switch in terms of when all of a sudden we play in larger sites. Their win rates have already elevated, which is pretty impressive that in a short period of time, both what we've delivered and I think the expectation and the credibility of what's under development is already affecting decisions pretty significantly. Their win rates are meaningfully elevated from where they were and it will be a creep up more than splash into a new tier of sizes. And so to answer your question, yes, I would expect we'd have some deals that are in the higher range than what we would have had next year, but it won't be as if all at once we become a leader in that particular space that could be a multiyear process to achieve that.
Great. Thanks for the color there.
Our next question will come from Brian Kinstlinger of Maxim Group. Please go ahead.
Hi. Good morning, guys. Thanks. I wanted to dig into the Illinois contract just announced this morning. It seems like the value to customers is pretty high and it differentiates you from your peers.
So what's the process now for selling this offering into other states? And are you already talking to other state customers? And what does the sales cycle look like? And then I have one follow-up.
Yes, Brian. I think this is I think one thing that's important to note about this Research in Illinois is that it's really it's a new recurring revenue stream, both in delivering the portal itself, but also in the attorney services. It's an investment that we've been making for some time. We talk a lot over the years about making discretionary investments, either internal benefits. It was originally sort of constructed for the county by county states, which as you know, there's 10 county by county states throughout the country.
But we are also seeing some interest in some of the more consolidated unified states. I think the value proposition for the unified states is not as high, but there is interest there. We are talking with some other states right now, and it's something that we're actively pursuing. It's again, it's a revenue stream that we're excited about, we look forward to, but just like as John mentioned in our New Republic Safety deals, every you know the presence.
Great. And then my follow-up, is the $3,000,000 price based on a volume metric or is there just really a list price for what essentially is a portal or a piece of software?
Yes, it's a fixed price and it's really based on the size of the state and the volume of the e filing. I don't really want to go into more specifics there, but yes, it's just a fixed fee. And then there
would be potentially additional the value added services to attorneys would be on a transaction or a description kind of a basis. So those would be more volume driven.
Great. Thanks so much.
Our next question will come from Brent Bracelin of KeyBanc Capital Markets. Please go ahead.
Thank you for taking
the question. Brian, for you, I wanted to go back to the where a subscription headwind would have an impact, it looks like software license revenue and software services are the 2 segments that were most impacted. I think that's 31% of the business. Is that the right way we should think about if a customer moves to subscription, those two segments will be impacted going forward? And then I have one follow-up.
Really mostly just the license line. The services are really pretty much the same regardless of which model the customer implements under. In the past, when we originally in the earlier days of the subscription model, a lot of clients bundled the services into the subscription arrangement, but now virtually all of them contract for the services separately and pay those as they're incurred. So there's not really a difference between the two models on the services line. It's really just lower license revenues and higher subscription revenues.
Maintenance would be impacted too. So maintenance revenues are recognized in the and then an uptick in the recurring revenue in the and then an uptick in the recurring revenue on the subscription side.
Completely makes sense there. And then just as a follow-up, typically, as you kind of see these transitions from perpetual to kind of subscription, we also see a buildup of deferred revenue on the balance sheet. And it looks like deferred revenue was actually down 2% sequentially. It was up only 3% year over year. Walk me through the components of the subscription revenue and the potential buildup on the balance sheet.
Why did that decline sequentially this quarter even with the mix shift? And how should we kind of think about the components there of what I would normally think would be a tailwind to deferred revenue?
Yes, it's just seasonality. So by far the largest renewal cycle for maintenance is June, July. They build in June and pay in July usually. That's a big fiscal year calendar event for local government in most states in the country. So you get a huge renewal and that's a big spike in the deferred revenue and then you've had 3 months runoff from that.
So that's the sequential decline. But year over year, you won't see
that. And typically It's more maintenance timing related of those renewals than it has to
do with subscription mix. And those renewals, right. That's correct.
Got it.
Okay. Thank
you. Our next question will come from Jonathan Ho with William Blair and Company. Please go ahead.
Hi. I just wanted to start out with a question around Harvey and Irma, whether you could maybe give us a sense of the magnitude of the impact from some of the deals that were delayed there and perhaps the timing on when they could potentially be recognized?
Yes, it was a handful of deals, maybe a half a dozen or so in specific sites that we were pretty far along in negotiations and would have expected them to have signed in Q3 and they've pushed into Q4. So it really doesn't affect the year numbers. It's just a little bit of an effect on Q3 and it's probably in the order of $5,000,000 $6,000,000 of total contract value.
Got it. And then in terms of the SaaS headwind, I just wanted to maybe understand if you guys could give us some preliminary thoughts on how we should be thinking about 2018 revenue growth. I know you guys don't really give guidance this early on, but maybe that would be helpful for us just to maybe understand how to think about that for next year?
It will be the next call, Jonathan. Yes, we'll wait till the next call to give guidance for 2018. There is never just because a new year comes in, it doesn't all of a sudden indicate some big pivot in growth rates. We have talked about a number of different investments we are making to accelerate the growth rate. We are happy with the Research Illinois deal as an indication of the new revenue stream that is one of many investments we are making that we believe accelerate that growth rate over time.
All of these are long term processes, so that we will have a few of those things kick in at least modestly new a new year won't bring any significant change in growth rates. But I think over the next several years that the investments we are making and some of these acquisitions we've done that are more strategic of nature, we're convinced will contribute to an acceleration of the growth rate over time.
Thank you.
Our next question will come from Tim Klasell with Northland Securities. Please go ahead.
Yes. Hey, guys. Congrats on the good quarter. First question, on the hurricane side, clearly that impacted a lot of your customers. And has that caused maybe a more rapid change inside of their what they're thinking of maybe going to a SaaS type delivery given the more robust back office nature of having it hosted is are you seeing more of your customers think about going to SaaS faster because of that because of those events?
I think it's too early to probably know that. Are literally still recovering obviously. I think your point makes sense that we have multiple cloud facilities. They have failovers from 1 to the other. And I think the level of redundancy and availability that we can provide is elevated from what an individual site can do for itself.
So, we may see that, but I think it's certainly too early to know that at this point in time. We do offer disaster recovery services to on premise clients and that's what we referred to in the prepared remarks where we had a number of sites declare a disaster. We have their databases and their So we do have services So we do have services to make them or to provide them with higher availability, but I would agree that the availability is greater in the cloud and we may see that influence some decisions, but it's too early to tell.
Okay, great, great. And then sort of a related question, your conversions from on premise to SaaS have been occurring at a fairly steady rate recently. Is there anything out there that you would see that might change that to either elevate it or to decrease it? And is it normally sort of continues to be a at the time of a big systems upgrade? Is any of that changing?
And sort of for you, Brian, if that were to accelerate, what would be the financial impact? Can you sort of walk us through that? Thank you.
I don't think there's a big change. It's been pretty steady. If there is a change, it might be a modest uptick. I don't see it declining. It is available or Tyler offers the cloud basically on all of our enterprise apps now, whereas not too many years ago, it was on originally more with Munis and then some of the others.
So, the uptick could come from just more availability across our enterprise applications. So, it will probably pick up somewhat, but I don't think you'll see a real significant shift there. But we've obviously still got a much larger on premise customer based and cloud based And I think over time that will happen. In terms of the catalyst for it, obviously, they're staying with our applications when they switch over to the cloud. There's 2 major catalysts.
1 is often a turnover or usually retirement in their leadership in the IT side that's been maintaining the system. We're now a trusted partner. And as they bring in new professionals, they want us to play a larger role and reduce that exposure. And the other catalyst would be often that it's time for a major investment in their hardware infrastructure and they can minimize that and basically justify the higher spend with us by not having to basically reinvest in their own facility.
And the financial impact, what the new hosted or subscription rate is for a previous on premises customer, certainly vary depending on how long they've been a customer. But typically, it's an uplift of anywhere from 50% to 100 percent over what they were paying in maintenance. So it's a significant increase in the revenues to us. But the customer would also find deep value in that given that they would have jobs they wouldn't have to fill or hardware they wouldn't have to replace. So it's a strong value proposition for both of us.
Okay, great. Thank you.
Our next question will come from Charlie Strauzer with CJS Securities. Please go ahead.
Hi, good morning. Couple of questions for you. I'd ask you just one question really on some of the newer offerings like the research portal and some of the e filing as well just in the competitive environment that you're seeing there as kind of a different competitor that you're going up against in that those areas and are you seeing more competitors coming into the marketplace given your success there?
Yeah, Charlie, this is Lynn. I don't know that the competitive landscape has changed significantly. I think too, when you look at the Research Illinois portal, that's a totally new offering. That's a new offering that we, going back a couple of years, had thought about, had invested in. You really need to have the strength and capability that we have with having our court systems in either in the statewide deals or in the county by county as well as our e filing system.
So that to me is a little bit of a unique opportunity right now.
Do you have like a proprietary advantage like the research portal just given that like you said that you have the court system in place? Are you basically hosting all the data or the documents or is it something that's just layering your software on top of the existing infrastructure there?
I think the competitive advantage is our competitive advantage throughout the entire courts sector and us being the trusted and preferred e filing vendor. And part of what we're trying to do with this, like we do with all our clients is try to continue to provide more and more value to maintain that competitive advantage. So that's not to say that there aren't competitors out there that could potentially get into this market. Like everything else, we keep our eyes out for that. But I think right now, our competitive advantage is really our strength in the entire offering.
And what this does is it enhances our offering and makes it that much more comprehensive. So we have the case management system and then we have the e file. Could they use someone else for something like research? Yes. But we already have the partnership.
We have access to the information. We certainly have an advantage. The online dispute resolution, which will be new to us as well. And as we can our objective is as we add these, they're not just new revenue streams, they're incremental value and create a comprehensive relationship that our customers are going to look to as a good partner.
That's very helpful.
Thank you
very much.
Our next question will come from Alex Yeeken of Piper Jaffray. Please go ahead.
Hey, guys. Thanks for taking my questions. I have just a few. Maybe first for John or Lynn, can you guys talk about the performance in the quarter versus your internal expectations on a bookings basis? And particularly, what drove the strength if it was ahead of internal expectations in light of a couple of 1,000,000 in business getting pushed out of the quarter due to the hurricane?
These quarters are fluid and this is a quarter where the performance was good late in it and a lot of these deals came in. SaaS deals do come with multiyear arrangements, so they do help elevate bookings in backlog. And so that mix drove that to some degree as well. But win rates remain elevated. They've improved in some of the areas that we're investing and the volume out there was pretty good and we expect that to continue into this quarter, RFP activity and win rates that we would project over those support this continuing.
Got it. And then if you start I know you guys are cautioning
this against us, but if
you start drawing the trend line into the mix, the incremental mix of business going to subscription versus license or perpetual, bigger picture question over the next 3 years as if while conversions activity may not change, if the net new customers coming in are coming in, in the cloud modality, how does your financial profile, either your margin CAGR or your margins or your earnings CAGR or your top line CAGR start to look or change over the next 3 to 5 years versus the previous 3 to 5 years, if this is more of a permanent mix shift?
I really think it's more a function of adding some lumpiness and being a little light on revenues this quarter and that not occurring in another quarter. But I really don't think that the top line growth rate over, say, the next 3, 4, 5 years or margins will be significantly different. Obviously, if we are going to stay at that elevated level, there'll be some lumpiness, and so the growth rate would be a little lighter in those quarters. And then obviously, those new revenues, those new elevated run rate revenues you're definitely not talking about more than say 100 basis points or 200 basis points on the revenue side. And we talked earlier on the margin side, margins are pretty similar.
License and maintenance margins are pretty high. So it's hard for cloud revenues to exceed those. So I don't think there'd be an impact on margins.
And you have to remember license revenues are only 8%, 9% of our total revenues. We already are very heavy on the recurring revenues and have more and more new recurring revenue streams there. So the impact on the short term growth is still relatively modest.
Got it. And then maybe on that theme, Brian, you mentioned the CapEx investments for the incremental cloud capacity for fiscal 2017. Is there a way to get a sense for how we should think about that for fiscal 2018 just given this mix shift?
We did have some investments this year that were in our data centers and the capability infrastructure capability around our cloud business that was to support future growth. So there was a little bit of investment sort of ahead of the growth. So, we're working through our capital plans for next year, but I think generally those would those investments would grow in line with the revenue growth. Got it.
And then last one for me. On the Research Portal product, is there any way to quantify maybe the incremental TAM for this product, if you were able to sell it to all your existing e file customers? And is it possible also to get a sense for if you sold a dollar of e file, how much of a dollar of research would represent as an incremental to that opportunity?
Hey, Kevin, I think at this point, it's still a new and emerging revenue stream. Like I said, like we've talked about before, it's not just the portal itself, it's the opportunity also to offer some services directly to attorneys. The market is still new. There's we've talked with our customers. They're certainly receptive for it.
I do think the value proposition will be different for the states that already have a unified system versus the county by county states. And so we're still looking at all that.
Got it. Thanks, guys.
Our next question will come from Kevin Liu of B. Riley and Company. Please go ahead.
Hi, good morning. Just one question for me. As you're starting to see more of your business shift towards SaaS, can
you just
talk about what sort of near term impact that has on your services business? And as you look kind of longer term, if you do see the mix get towards this fifty-fifty type mix, would you expect that to kind of reduce the need for hiring on the consultant side going forward?
Not really. The vast majority of the services are application related, converting their systems, implementation, project management training, those really don't change at all. There obviously would be a small segment. Things they do from a system standpoint that we do in our facility. So, there could be a modest shift from maybe the last 5% of the professional services we deliver to the site that we actually perform in the data center as an internal function.
But certainly, the vast majority of the services are related to the application and we still need to convert their systems, train them, show them how to use those systems and support that process. And that doesn't change very dramatically based on where the system resides.
Got it. And just one quick follow-up on kind of the e filing services or the research portal. For some of these newer services that you might offer, would those also be kind of subject to or more receptive in the county by county states or do you think it would actually apply pretty broadly across your entire courts and justice and e filing base? No, I think
they would apply in every state. These would be services that would be marketed directly. I think there are states who have the unit who already have a unified system that still have an interest in this portal. And that would be something that we would try to push throughout the entire client base.
Great. Thank you.
Our next question will come from Pat Walravens with JMP. Please go ahead.
Good. Thank you. Hi, gentlemen. Can I ask a little bit about the software bookings? So, it's a question I've been getting.
I'm just not sure how to answer it. So they were down 6% in Q3 and I get there was a difficult comp of 41% last year. But in Q2, you grew bookings 16% and you also had a difficult comp, right, of 37% last year. So I'm just wondering, how is this quarter different than last quarter?
It really relates more towards the big deals. So what comps there were what big deals there were in the previous quarter. Last year's Q3 on the software side had a bigger number of not mega deals, but deals in the $1,500,000 to $5,000,000 range. Obviously, this some of those came in in a SaaS model this
year. And Q2 didn't have big deals of last year?
Q2 of last year.
Of last year, because that comp was almost as big, right?
That was a 37% software bookings. You're talking on just on the software side.
Yes.
Our total bookings is No, I'm talking just on the software side. Yes. I don't know off the top of my head what the comp was in Q2 of 2016. I'll have to look into that a little further. Yes.
Okay. It was 37, but okay. And then my second question is bigger picture, which is, so right now, the cloud based business, that's all in Tyler hosted data centers, right?
They're all it's all our equipment. 1 of them is completely hosted in our own facility and one we rent space in a facility and manage it.
Okay. So what are the prospects for using 3rd party clouds? I'll just leave it that way.
What are
the prospects for
using 3rd party.
We're very active. We watch it very closely, actively monitor what's available on those sites and what the costs are. Currently, we still feel that we provide greater value, more flexibility. We think our clients like the fact that everything from our support people, our software engineers and the people managing the hosted facility are all integrated into one solution and that still drives value. We do certainly believe that over time, hosting facilities can become more generic and more of a commodity and that potentially the kind of mega cloud sites could potentially deliver same service at a lower value and we won't be opposed to that when that point is reached.
And so again, we monitor it very actively and we continue to think at this point in time that there are advantages to us continuing to host those facilities, but we don't have some aversion to doing this at other facilities when that becomes appropriate.
Okay, great. Thank you.
At this time, there appear to be no more questions. Mr. Marr, I'll turn the call back over to you for closing remarks.
Great. Well, thank you and appreciate everybody joining us on the call today. If you do have any further questions, feel free to contact Lynn, Brian and myself and we'll be happy to work with you. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.