Hello. Welcome to today's Tyler Technologies second quarter 2017 conference call. Your host for today's call is John Marr, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded today, July 27, 2017. I would now like to turn the call over to Mr. Marr. Please go ahead.
Thank you, Will. Welcome to our second quarter 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 Brian to give the safe harbor statement. Next, Lynn will have some preliminary comments. Brian will review the details of our second quarter results and 2017 guidance. I'll have some final comments. 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'd refer you to our Form 10-K 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 performed at a high level in many respects in the second quarter. Earnings were in line with our expectations. Total GAAP revenue growth was nearly 11%, all of which was organic. Non-GAAP revenue growth was just over 8%. Subscriptions was our fastest-growing revenue line, up 21%. Total recurring revenue from maintenance and subscriptions grew 16% and comprised more than 62% of total revenue. Bookings for the quarter were strong, increasing 14%. For the first half of the year, bookings were up almost 18%. Our quarter-end backlog reached a new milestone at $1 billion, up 17% over last year's. Our largest contract of the quarter was a multi-suite deal with Cook County, Illinois, for our Odyssey Case Manager and Brazos eCitation solutions, valued at $36 million.
Other significant multi-suite arrangements during the quarter included SaaS contracts with Santa Fe, New Mexico, for our Munis and EnerGov solutions, and Nampa, Idaho, for our Munis, EnerGov, ExecuTime, and Tyler Notify solutions. As well as a traditional license contract with Bartlesville, Oklahoma, for our Munis and EnerGov solutions. We signed our 13th statewide Odyssey Courts contract with the state of Vermont. The deal is valued at over $6 million and includes e-filing under a transaction-based arrangement. We also expanded our Odyssey footprint into two additional new states with a SaaS contract for court case management with St. Tammany Parish in Louisiana and our first e-filing contract in the state of Alabama with Jefferson County. Notable new contracts for our New World Public Safety solution included license arrangements with Lehigh County, Pennsylvania, Kendall County 911 in Illinois, and Hamilton Township, New Jersey.
We're pleased with the progress we've made with our competitive position in public safety. Through the first six months of 2017, we've added as many new clients for New World Public Safety as we did for the full year of 2016. For our iasWorld Appraisal and Tax solution, notable contracts included an $8 million SaaS arrangement with Philadelphia, Pennsylvania, as well as major SaaS contracts with Scott County, Minnesota, and the Massachusetts Office of Information Technology, as well as a traditional license contract with Augusta, Georgia. For our Munis ERP solution, we signed notable license contracts with Berkeley, California, Harnett County, North Carolina, Kirkland, Washington, and the Berkeley County School District in South Carolina. In addition, our Munis ERP solution signed notable SaaS arrangements with Glendale, Arizona, and Milford, Connecticut.
For our EnerGov solution, major contracts included a license deal with Fort Myers, Florida, and a SaaS agreement with New Hanover County, North Carolina. 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 second quarter ended June 30th, 2017. I'm going to provide some additional data on the quarter's performance and update our guidance for 2017. 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. GAAP revenues for the second quarter were $209.1 million, up 10.7%, all of which was organic. On a non-GAAP basis, revenues were $209.4 million, up 8.1%.
Software license and royalty revenues decreased 2.5% as we saw a high level of SaaS deals signed in the current quarter bookings mix. Subscription revenues increased 20.5%. We added 105 new subscription-based arrangements and converted 37 existing on-premises clients, representing approximately $49.8 million in total contract value. In Q2 of last year, we added 74 new subscription-based arrangements and had 18 on-premises conversions, representing approximately $31.3 million in total contract value. SaaS clients represented approximately 51% of our software contracts in the quarter, compared to 34% in the prior year quarter. This is the first time the number of new SaaS deals was greater than the number of traditional licensed deals. SaaS contract value comprised 39% of the total new software contract value signed this quarter, compared to 26% in Q2 last year.
The value weighted average term of new SaaS contracts this quarter was 5.2 years, compared to 5.6 years in last year's second quarter. Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 18.6% to $14 million from $11.8 million last year. That amount includes e-filing revenue of $10.6 million this quarter, up 18.8% over last year. Cash flow from operations was $1.4 million, compared to $19.5 million last year. The decline is primarily due to the timing of payroll and income tax payments. This year, we had one more payday in Q2 than we did last year. Also, last year, we had lower cash estimated tax payments in Q2 as we carried a large prepaid tax balance into 2016 from the prior year.
Free cash flow, which is calculated as cash from operations less capital expenditures, was -$8.9 million, compared to $14.3 million in last year's second quarter. Our CapEx for the quarter was $10.3 million, including $4.7 million related to real estate, compared to total CapEx of $5.2 million in Q2 last year. We ended the quarter with a total of $92.6 million in cash and investments and no outstanding debt. Day sales outstanding in accounts receivables was 101 days at June 30th, 2017, compared to 100 days at June 30th, 2016. Our backlog at the end of the quarter was $1 billion, up 17.3%. Software-related backlog, which excludes backlog from appraisal services contracts, was $988.7 million, a 19.6% increase. Backlog included $266.7 million of maintenance, compared to $235.1 million a year ago.
Subscription backlog was $382.4 million, compared to $258.9 million last year and includes approximately $101 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 approximately $288 million, an increase of 13.8% from Q2 of 2016. For the trailing 12 months, bookings were approximately $952 million, a 24.1% 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 25 new contracts in the second quarter that included software licenses greater than $100,000, and those contracts had an average license of $842,000, compared to 38 new contracts with an average license value of $573,000 in the second quarter of 2016. Our guidance for the full year of 2017 is unchanged from our previous guidance.
We currently expect 2017 GAAP revenues will be between $844 million and $854 million, and our non-GAAP revenues will be between $845 million and $855 million. We expect 2017 GAAP diluted EPS will be approximately $3.26-$3.34 and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate under ASU 2016-09. We expect 2017 non-GAAP diluted EPS will be approximately $3.83-$3.91. We expect that, as in most years, earnings will be stronger in the second half of the year than in the first half, with the greatest sequential increase in earnings coming from the second quarter to the third quarter. For the year, estimated pre-tax non-cash share-based compensation expense is expected to be approximately $37 million. We expect R&D expense for the year will be approximately $48 million-$50 million.
Fully diluted shares for the year are expected to be between 39 million and 40 million shares. GAAP earnings per share assumes an estimated annual effective tax rate of 20% after discrete tax items and includes approximately $29 million of discrete tax benefits related to share-based compensation. We estimate the non-GAAP annual effective tax rate for 2017 to be approximately 35.5%. 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 annually 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 the geographic mix of revenues and expenses, and other factors deemed significant. We expect our total CapEx will be approximately $53 million-$55 million for the year, including approximately $24 million related to real estate. Approximately $16 million 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 million, including approximately $35 million of amortization of acquired intangibles. Now I'd like to turn the call back to John for his further comments.
Thanks, Brian. The strength in our bookings again this quarter reflects both an active local government software market and our competitive strength within that market. As we noted earlier, second quarter bookings rose 14% over last year. Bookings included the $36 million Odyssey contract with Cook County, as well as one other licensed contract and three SaaS contracts that were each valued at over $5 million. As we noted earlier, the business mix included an historical high level of new SaaS contracts. The total contract value for new SaaS contracts of $45 million was 45% greater than our previous high quarter. The contract mix put pressure on our recognized revenues and margins, and we're gratified that we were still able to achieve earnings in line with our expectations, and that our guidance for the full year is unchanged from that we issued in April.
As we've discussed previously, we are investing at a high level in product development initiatives, including major projects that will enhance our public safety products and increase their addressable market. We're pleased with our progress on these projects. Some of the new features were included in releases this quarter, and we believe that these initiatives are beginning to affect decisions in the marketplace. We'll take your questions.
Thank you. We will begin the question and answer session. To enter a question into the question queue, please press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset, then press the star key and the number one. To withdraw your request, please press the star key, then the number two. Please limit yourself to one question and one follow-up, then place yourself back in the queue for additional questions. We will pause momentarily to assemble our roster. Our first questioner today is going to be Alex Zukin with Piper Jaffray. Please go ahead.
Yeah. Thank you, guys. I wanted to ask the first question, just can you talk about what drove some of that cloud deal strength, in the quarter? Do you see this as a new trend that you feel you have to start taking into greater account when you do annual guidance at the beginning of the year? I have one follow-up.
At this point, it's probably anecdotal and hard to know if it's a shift or a trend. It's certainly significantly elevated from our historical run rates. As we've said, about 50% of the names, compared to historically or for a number of years now in the 30%-35% range, and about 40% of the dollars. It's a significant jump. Looking at the pipeline, it's somewhat elevated, but that's probably not going to be sustainable. We'll have to see over time. As you probably know, we don't really put a lot of bias in the way we market our products. We offer most of our products hosted as well as traditionally deployed and on-premise, and we're happy to capture the clients either way. This is a market-driven preference that we experienced in this quarter, but it's a little early to know if it's a big shift.
I guess, John, just to follow up on that question then, given there could be a greater ROI for your customers as they are able to take some of their on-prem spend away when they purchase a cloud solution from you, but you guys don't price it any differently, is there then room for you guys to think about different pricing structures and dynamics if this trend does incrementally increase?
You could, I know a lot of companies do. We really have chosen not to and don't have plans to change that. Again, we just think the long-term value of a client, traditionally deployed or hosted, is significant enough that we're very happy to capture the new clients either way. By showing preference toward one, you could be adding a little bit of a hurdle to the other. You want to remember that a much higher % than what we realized in terms of the mix go out to bid for traditional on-premise solutions. A lot of our wins for hosted solutions started with RFPs for traditionally deployed, and as they went through the process and learned more about our cloud offering, they actually switched.
In fact, it's not at all uncommon for someone to select Tyler, in the procurement process, and yet not have decided if they're going to keep it at their site or put it in our facility and then make that decision subsequently. Again, our focus is on putting the software forward, our reference abilities forward, our presence in the marketplace, the Tyler brand, and we're happy to get the client either way.
Alex, this is Brian. Just to be clear, while we don't have a particular bias in how we sell it, there is a difference in the pricing between a traditional on-premises and the cloud model. The cloud model pricing does take into account the hosting component of that. It is a different pricing model.
Got it. That's helpful. Brian, maybe just sticking on that same point, can you walk through maybe the implications to cash flow, when a customer does go with a cloud product in terms of the way that you bill, collect, and how you see that flowing through this year?
Sure. With the traditional on-premise license deal, we typically collect or bill a significant portion of the license upfront, and the rest of the license may be billed on various terms, either milestone-based or time-based. There is a significant upfront collection on the license, and then the services are paid over the period that the services are provided. There's a maintenance stream that's typically annually in advance. The revenue recognition may be a little different there. In some cases, it's percentage of completion accounting, where that license revenue recognition is spread over an implementation period. In most deals, the license revenue recognition follows the billing under the current rev rec rules. In a SaaS deal, typically, the payments are either annually or quarterly in advance. Most deals are the whole contract amount is recognized and billed pro rata over the term of the agreement.
Some clients pay the services separately, and those are over the implementation period. Generally, the cash flow is much more front-end loaded on the license deal and with a smaller recurring fee, and the subscription deal is spread pro rata over what's on an average of about 5 years today, but can be anywhere from four to as much as, in some cases, seven or 10 years. I think the shift this quarter will affect cash flow a bit this year. It's not terribly dramatic, but it'll have a few million-dollar impact on our free cash flow this year. On cash flow in the $200 million range, it's not going to be a sort of a game-changing situation.
Okay. Thank you, guys.
The next questioner today is going to be Brian Kinstlinger with the Maxim Group. Please go ahead.
Great. Thanks so much. On NWS, the increased number of customers, I think, is a clear evidence of the impact of the investments you're making. I'm curious, how long do you think it will be before NWS can move upstream and compete on larger deals effectively?
It's a good question. I'd say that we're very pleased that we're already impacting win rates, the difference between what they were and what they are is significant enough to attribute that certainly to the investments we're making. We're pleased with that, it's a good observation that we're still focused on generally the same addressable market that they have been traditionally. It would really be kind of phase 2 of that, which is an important part of their growth strategy to broaden that addressable market, including moving upstream. The full impact of these investments is a two and a half year process that we're maybe approaching the first year of right now. Again, it's probably another year to 18 months before we fully realize that, and that'll be a gradual ramp-up, right? You'll win some deals. You'll install them.
Some people want to see the product. Some people want to be able to go to a number of sites that are up and running, they'll be early adopters, then there'll be a process before we're probably looked at as a regular contender in that marketplace. I'd suspect again, it's a ramp-up a year from now to three years from now.
Great. Follow-up, kind of a numbers question, kind of longer-term thinking. I think you're putting about $6 million annually into the upgrades, and you're almost entering your second year of that. What happens once those 2 years are done and the $12 million have been put in? Are you going to reallocate those resources? Are you going to slow spending? Is it going to drop? I know we had a similar situation a while back with Dynamics, where there was some confusion about what would happen after those investments were made as well.
Yeah. Well, Dynamics would be an exception to my answer, basically, which would be that historically, when this project was planned, there is the option to redeploy or reduce headcount. My expectation would be, and my experience would tell me, that that's probably not what will happen. Preferably, we'll get the impact that we're starting to see on win rates, broadening our market presence, and we'll be a bigger, busier company, and we'll choose to keep those heads where they are and continue to invest, and our revenues will grow, certainly, at a much accelerated rate over our growth in our R&D spend. We'll effectively catch up with it. We'll see leverage in that, and we'll benefit from that. If we're successful and we're capturing significant wins in the marketplace, I doubt we'll reduce headcount.
I think it will just grow at a significantly lower rate than overall revenue growth.
Great. Thanks so much.
The next questioner is going to be Scott Berg with Needham & Company. Please go ahead with your question.
Hi, everyone. Congrats on a good quarter. I've got two quick ones. John, the first one is maybe for Brian. Just wanted to go back to the SaaS, the subscription mix in the quarter relative to your guidance three months ago. Was the SaaS mix in the second quarter in line with your expectation? Because you're maintaining guidance for the full year might suggest that. Just want to kind of understand how you viewed the second quarter a few months ago.
I'd say the mix was marginally more heavy this quarter towards SaaS than we would've
probably included in our plan. Certainly, we make adjustments along the way. There are a lot of puts and takes, and as you see, we've historically done a pretty good job of managing costs to keep in line with the revenues. Yeah, I'd say this is a higher level than we would've expected. As John said, a lot of times, even in the current quarter, we have deals that we've been awarded that we're not sure which model they'll go with. That's why we set a range at the beginning of the year on the revenue side that's fairly broad, and typically narrow that as we get later in the year where there's a little more certainty around it. I'd say the mix was a little more heavy towards SaaS.
As a result, while we've kept the same revenue range for the year's guidance, I'd say, as we sit here halfway through the year, I'd expect it would be challenging to hit the high end of that range. There's a lot of business to be won in the second half of the year, I'd say, it'd be a challenge to get to the top end of that range today.
Got it. Thank you. That's helpful. Then, my follow-up would be around the public safety business in the quarter. Your win rates in Q1 were very high for that business relative to what they were last year. Wanted to see what you guys are seeing in trends in the second quarter. Don't expect 71% win rates from the first quarter to be sustained in the second quarter necessarily, any commentary on what that business looked like and maybe what your pipeline strength looks like going into the second half of the year. Thanks.
They were very close in the second quarter to what they were in the first quarter. Win rates are very elevated now over a six-month period of time over what the previous run rates were. The pipeline's good. Those are definitely leading indicators. They don't convert to revenues overnight, certainly our investment in those products and in the organization in general is not a significant contributor to margin and revenue and earnings growth. We certainly have confidence that that will accelerate as these sites come online, so probably next year.
Our next questioner today is going to be Timothy Klasell with Northland Securities. Please go ahead.
Hey, guys. Congrats on the quarter. Just a quick follow-up on Scott's question. You mentioned that it might be a little challenging to hit the high end of guidance for the year. Is that just solely because of some of the shift towards SaaS, or is there anything else out there we should be aware of that might be contributing to the challenges in hitting the high end of the guidance?
I don't think SaaS by itself, the mix is responsible for everything in our numbers. No question, it's a very elevated adoption rate. Certainly affects revenues and margins in the quarter, and we'll see how it goes forward. It's certainly a meaningful part of the story. No, it's not the whole thing. I think in some of our businesses that experienced very high growth rates over the last three years, namely Courts & Justice, there's a little bit of a digestion period going on, executing on those contracts, addressing certainly the success of those sites and the customer satisfaction. There's a little opportunity cost to digesting those sites, investing in our relationships with those, in terms of opportunity cost, in terms of current revenues and earnings. All of these divisions have strong outlooks. Their pipelines look good, their competitive positions look good.
While there's a pause in some of the growth right now that isn't mix-related, all of them have expectations for accelerated growth in the second half and into 2018.
Okay, great. For both of you guys, maybe John, at your user conference, you dove a lot into creating a sort of common look and feel across as much of your product line as you can, and I certainly see how that can provide leverage over time. What sort of feedback are you getting from customers? Is that entering into the conversations yet of sort of the future of where you're taking this and how you can leverage it? Are we a little bit too early to start hearing that feedback from the customers yet?
Probably a little early. It's a vision. It's a commitment, an investment that's going on. There are some early deliverables that support and add credibility to this strategy, and customers are excited about that. If you were at the conference, you saw that. It was very well received. There's always a trick when you're in this process. What we have that's deliverable, referenceable, we can take people to sites and show them, is winning. That's a leader in the marketplace. While we'll talk about this vision and the strategy, and we're anxious to share the early deliverables to lend that credibility to it, you also want to remain focused on what you have that you can touch and feel and see today that wins.
It's a little of both, but it is early, and I think over the next couple of years, as more and more of the evidence is deliverable, it'll play a bigger role in the decision process.
Great. Thank you very much, guys.
The next questioner is going to be Brent Bracelin with KeyBank. Please go ahead.
Thank you for taking the question. First, for Brian, is really on the guidance for the second half. Guidance does imply that you're going to see an acceleration in growth. I guess the question here is, with not a lot of visibility into whether those awards are perpetual or SaaS Cloud, what's the confidence you can see a growth? What's baked into your assumption relative to the second half acceleration, relative to the mix of SaaS? Do you expect it to stay the same, decline? Help us understand, in order to see an acceleration, what are you assuming on the mix side for subscription SaaS?
I'd say the range of guidance is still fairly wide, and that takes into account a wide range of SaaS Cloud versus traditional mix. We expect that mix will fall within that range, within the range on the margin is where there's a little less visibility. Certainly, we have a lot of visibility. There are a lot of deals in the pipeline that are very clearly going to be license deals or very clearly going to be SaaS deals. I'd say we have a strong confidence, the same level of confidence that we normally do going into the second half of the year, in being within that range. We've chosen not to narrow the range at this point.
The visibility on the growth is pretty clear. A majority of the growth comes from maintenance and subscriptions. Those are highly visible and under contract. We've had good license sales. We've got growth from new customers. We've got increases. Our biggest renewals are right now, the end of June, early July. We get increases in those, and then the good SaaS sales over the last several quarters support that. That's highly visible growth, I think the variance that could occur on new licenses is pretty narrow. I think the visibility for the second half, we just sat through our quarterly meetings, is pretty strong. There's always some risk and there's always some upside, I think we've got pretty good visibility on what'll occur in the second half.
Very helpful. My second question is tied to just the composition of backlog. Clearly, backlog's growing faster than revenue, really wanted to understand, is the mix of backlog by product changing much, or is it relatively balanced across ERP, Courts, Justice, Public Safety? Any color relative to, as you look at the backlog versus the revenue mix today, is there a shift, relative to those buckets?
I don't think there's any fundamental shifts going on there. Courts & Justice, obviously, signs, and to some extent, our appraisal and tax business on the software side typically signs larger contracts that are executed over a number of quarters, in some cases, a number of years. Their backlog, the percentage of our total backlog that they make up, typically is outsized related to their percentage of our revenues just because of the nature of their projects. Courts & Justice also has the e-filing backlog, and we have several significant fixed price e-filing arrangements, including Texas and Illinois and Indiana, that are in the backlog as well. To the extent that C&J has the larger projects, they have a bigger percentage.
ERP, which is the biggest component of our revenues, has a similar sized backlog, and their bookings have continued to grow at a nice pace. Those two would be the pieces that make up the majority of the backlog.
Perfect. Very helpful. My last question is really around the Modria acquisition. Could you walk through the logic there, the hole that it fills, and as you think about when that could start to contribute to some new RFP award momentum?
Sure, Brian. This is Lynn Moore. As a management team, we're always looking for ways to find areas for incremental growth, and I think this is one of the investments that we do. We make some internal investments. We look at some acquisitions, some that are more mature than others, some that are a little more early stage, and I think the Modria sort of fits that bill, more on the early stage. I think Courts right now, they're very interested in a couple things. They're interested in really streamlining their processes, particularly the smaller Courts. There's a lot of clogs and log jams going on. They're also very interested in expanding further their access to justice programs. The online dispute resolution is something that we've gotten a lot of interest from our clients already.
We have a number of courts who are interested in looking at some pilot programs. I'd say those things will be in the more, again, the smaller courts, traffic, family law, small claims, is probably where that stuff will initially roll out. Those type of arrangements will eventually be similar to e-filing in that they will either be transaction based or fixed fee. As of right now, I wouldn't count on any meaningful revenues in the near term. Again, it's something that we've made an investment in. We believe it'll drive some incremental revenue growth and margin growth down the road. Some early traction in the market. It's still a bit unproven right now.
Great. Thank you.
The next questioner is going to be Kirk Materne with Evercore ISI. Please go ahead.
Yeah, thanks very much. First question's for Brian. Brian, you mentioned $200 million in operating cash flow this year, I know that's not necessarily a hard target, it obviously infers some pretty steep acceleration in the back half of the year. Can you just help us bridge how you get there? I know cash flow is always stronger in the second half of the year. Maybe some of the working capital changes this quarter reverse back in your favor. Can you just walk us through that or unpack that a little bit? Thanks.
Typically, what we see is our cash from operations, the vast majority of that in the second half. Last year, we had $192 million of cash from operations, and about $130 million of that was in the second half of the year. The biggest factor there is the timing of our maintenance billings. We have a particularly high maintenance renewal cycle that happens with customers on July 1, tied to a lot of customers' fiscal years. We bill that in Q2 and collect that in Q3, which drives really outsized cash flow in Q3 and on into the fourth quarter. We expect that trend to continue this year, and we don't give guidance on cash flow. That $200-plus million of cash from operations is just a directional number.
We also expect that a couple of the factors that I mentioned earlier in the second quarter, the timing of payroll, that works its way out over the course of the year, as well as the timing of the cash tax payments. Those will sort out over the year, depending on how our stock option exercises fall and what extent we'll be able to take those credits against our future estimated tax payments. We expect both of those will smooth out over the course of the second half.
Okay. My second question is for John. Just on the customers deciding to move or take on sort of a SaaS deal with you all, I'm just curious if there's any commonalities on that front, meaning, those are clients that had skill shortages or they needed to shift more towards an OpEx model versus a CapEx model. I was just wondering if there's any sort of commonality, and if so, do you think that's going to is that something that's permanent in nature, meaning, skill shortages across state and local governments are going to help this trend accelerate potentially in the near term? It sounds like you don't think there's anything that's going to make this persist, but I was just curious on your thoughts there.
Yeah, I don't know that it'll persist at this level, but it does appear there's a trend toward higher adoption of SaaS. There's a few things, and I've said before, the catalyst to buy new software and the catalyst to go to the cloud sometimes are two different things, and the timing of those aren't always aligned. What you're pointing to, kind of the brain drain, which is significant. A lot of long-tenured people on the IT side in local government reaching retirement and as well as the capital investment and infrastructure, those things drive conversion to the cloud. We did 37 flips this quarter, which are our traditional clients that move to the cloud, and so that's being driven by that typically. There seems to be more alignment of those needs along with software needs at the same time, which drives higher adoption.
Again, whether that persists at this level or is just marginally higher going forward, time will tell. The other thing that is driving certainly the number and not so much the dollar is a lot of our lower-end solutions, that maybe traditionally weren't offered in a SaaS mode, are now. Far more of our solutions are SaaS and maybe even have benefits by maturing in the cloud, and so that's driving higher adoption as well. That's certainly why the number of accounts is higher. Obviously, the dollars are more attributable to Munis deals and Courts deals and the higher-ticket items that we sell.
Okay. That's helpful. Thanks a lot.
Yeah.
The next questioner is going to be Zach Cummins with B. Riley Securities, Inc.. Please go ahead.
Hi. Good morning. I guess just kind of staying on the SaaS deals, are they still typically smaller municipalities that are choosing SaaS deployments, or have you seen some of your larger counties begin to warm up to the idea of SaaS?
It's a mixture. On average, I'd say they're smaller than the average deal. As John said, we have a number of our smaller clients that we're able to now with SaaS solutions, offer a cost-effective model for them to acquire the same level of technologies that some of the larger customers have. For example, in California, on courts, we have L.A. County as an on-premise deployment, the largest county in the country. The smallest county in the state, Alpine County, which I think has something like 1,500 residents, is a SaaS deployment. They're able to obtain the same basic technology under a cost-effective and manageable model. This quarter, our biggest SaaS deal was with the City of Philadelphia, a large customer, choosing our appraisal and tax solution on a SaaS model.
Certainly, I think 60 of our new SaaS clients were less than $10,000 a year kind of clients. We're seeing more of the larger ones, but on average, it's still smaller than the average traditional client.
Okay, great. That was helpful. About a week ago, you announced the statewide deployment of Odyssey and e-filing solutions in the state of Vermont. Do you have any other statewide deals that are currently in your pipeline?
Yes. We don't typically talk about names of customers in the pipeline, there are, I think, at least two states that either formally have an RFP out or have done an RFI or pre-RFP activities for statewide court case management solutions.
Very great. Thank you.
Our next question is going to be Mark Strouse with Benchmark. Please go ahead.
Hi. Thank you for taking my question. Just one question. John, I was wondering if you could just comment on the level and the quality of the RFPs that you're seeing out there in the marketplace. More specifically, I was just curious if the RFP activity is still high and if you're still seeing larger RFPs than you have in the past.
Yeah, the volume's very healthy. Both the short term and the midterm, which would be through early next year and further out, those are all healthy numbers. If our win rates continue, which we expect them to, then it certainly supports the guidance we have and the accelerated growth we're looking for in 2018 and 2019.
Great. Thank you.
The next questioner today is going to be Patrick Walravens with JMP Securities. Please go ahead.
Great. Thanks. John, could I drill down just a little bit? You mentioned spending some resources addressing success and customer satisfaction. Can you just tell us a little bit more about that?
Yeah. When you have pretty high growth, and certainly Courts had very high growth over a three-year period of time, there's always a digesting period following that, and some of those things are not necessarily part of the contract. Certainly, Tyler's practice would always be to go back and work with those clients and identify what's gone well and what needs attention and work with those clients. There are always things that you just choose to do in the interest of customer sat and success and having the reference ability we're looking for to continue to win in those areas. Some of that investment isn't billable, and some of it has and comes at the expense of the opportunity cost of deploying those resources.
Yeah
on billable or revenue-earning things. You have some of that. It's very typical. It's the right thing to do. It's a good investment. That's a piece of some of the slower growth or earnings at this point.
Okay, good. That's helpful. Then, Brian, just sort of big picture for us here. You had a strong bookings quarter. You guys feel good about the business. The RFPs are good. Now it's going to be harder to get to the high end of the range, and the stock is down a little bit. What metrics do you think that investors should be focused on to help see through the impact of the shift to subscription?
Well, I think you need to look at a longer period of time than just one quarter. As we've said, a higher level of subscriptions is a good thing. A higher level of bookings in whichever method they come to us in is a good thing. We've had two strong booking quarters in a row.
Yeah.
The trailing 12 months is strong. We do have more larger deals where that revenue is recognized over multiple years. We've got, again, the subscriptions that are recognized more slowly but will come out of that backlog number and help accelerate revenue growth going forward. I think you just need to look at the same metrics, but it's hard to isolate on one quarter and put sort of undue emphasis on what happened there. Still, again, our look for the whole year really hasn't changed. The range is like, and I'm really talking more about revenues than earnings when I talk about being challenging to reach the high end of the range. As I've said, we have cost levers, typically do a pretty good job of managing the cost to fit the revenues. The challenge is more on the revenue side this year.
Again, looking at the big picture, I think we feel good about the ability to accelerate that above the current level as we move into the second half of the year and on into 2018.
Okay, good. Thank you.
Again, if you would like to ask a question, please press star then one on your touch-tone phone. Our next question today is going to be a follow-up from Alex Zukin with Piper Jaffray. Please go ahead.
Hey, guys. Just some clarifying questions. John, I guess the first one for you, I'm trying to understand where did bookings land versus your expectations? Your commentary about strong bookings seems a bit at odds with the commentary about the digestion period and the slower growth. I'm trying to understand the customers deciding to go with cloud. Outside of a mix shift question, did the digestion period factor into your outlook at the beginning of the year or in the first quarter? Help us understand the gives and takes on that.
Yeah, some of it's in the model, maybe there's a little more of it going on than was in the model. Bookings and backlog will be affected and be elevated as a result of higher SaaS adoption. Those are multi-year arrangements, so more goes into backlog. The contract value is simply higher than an on-premise arrangement, where really it's just the initial engagement that goes into backlog, and multi-year maintenance arrangements are not. They don't exist contractually, so they don't go in. That will raise the bookings and the backlog a little bit.
And-
Got it.
Our guidance at the beginning of the year, which is unchanged, was for a range of revenue growth that was modestly below what we've historically done. This sort of pause in growth, some of which maybe marginally is related to the SaaS shift this quarter, but was more bigger picture in terms of as we make investments in things like public safety and position that for higher growth going forward, digest some of the ultra-high growth we've seen in areas like courts and justice over the last couple of years. That was built into our model at the beginning of the year. This one quarter higher level of SaaS adoption is a relatively minor tweak to that.
Understood. Maybe, Brian, just as another clarifying question, I realize you don't guide to cash flow, but I think when I was asking my question, I was specifically asking about free cash flow. I'm curious if that $200 million number that you were referencing, is that a free cash flow number or an operating cash flow number?
I was referring to cash from operations being north of $200 million. I'm not any more specific than that. We've said what our CapEx would be in the low to mid $50 million range. It's a very general number of north of $200 million free cash flow. We'll leave it at that. I was talking about cash from operations. I didn't say how much north of $200 million.
Got it. Maybe just a last follow-up. Given that pause in dynamic, does this give you more confidence at all? I realize you have a range for this year, so you're not going to guide for next year, but maybe just the confidence in the ability to accelerate growth given the incremental higher bookings and visibility that you guys might have.
Yeah, I think the combination of the bookings and backlog accelerating as you'd expect they would, ahead of revenues accelerating is encouraging. There have been some pipeline questions. Pipeline's very healthy. Win rates remain strong. We're broadening the breadth of the product organically as well as some of the acquisitions we've done in recent years. All of those things together contribute to an accelerated growth rate, which I think we'll begin to see in the second half of the year. I've said we have pretty good visibility on that, and I think that'll continue into 2017 and 2018. If you look at Tyler's growth rates, our current growth rate in this year is below our historical line, and you're going to have years below it and years above it.
All indications are that this is simply a growth year that's a little bit on the lower end of the range, not a reset of the range, and that we would expect it to accelerate in the second half of the year and into the next couple of years that we have some visibility on.
Perfect. Thanks, guys.
At this time, there appear to be no more questions. Mr. Marr, I'll turn the call back over to you for your closing remarks.
Okay. Thank you, Will, thank you all for participating on the call today. If you do have any further questions, feel free to reach out to Brian, Lynn, or myself. Have a great day. Thank you.
The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.