Hello, and welcome to today's Tyler Technologies First Quarter 2016 Conference Call. Your host for today's call is John Maher, 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. And as a reminder, this conference is being recorded today, April 28, 2016.
I would like to turn the call over to Mr. Maher. Please go ahead.
Okay. Thank you, Gail, and welcome to our Q1 2016 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I'd like Brian to give the Safe Harbor statement. Next, I'll have some preliminary comments.
Brian will review the details of our Q1 operating results and 2016 guidance. Then I'll have some final comments and we'll take your questions. Brian?
Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10 ks and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.
John?
Okay. Our first quarter performance provided a strong start to 2016 with total revenue growth of 33%. Organic revenue growth was 14% and the acquisitions of New World and Brazos contributed 18% and 1% of our growth respectively. Continued strong growth in our cloud based software as a service revenues as well as increased e filing revenues from Quartz led to 35% growth in our recurring revenues from subscriptions, of which 31% was organic. Bookings for the quarter rose 21% based on non GAAP revenues and our backlog rose 17%.
Excluding Appraisal Services, bookings were up 37%. Q1 was another very strong quarter for SaaS contract signings, with total contract value of $28,500,000 Our largest new contract signed in the Q1 was a 7 year SaaS arrangement valued at approximately $5,000,000 with the City of Milwaukee, Wisconsin for the Munis tax solution. We also signed significant SaaS contracts for our Munis ERP solution with Frederick County Public Schools in Virginia, Alvin Independent School District in Texas, Racine County, Wisconsin, Cecil County School District in Maryland, and Naugatuck, Connecticut. Notable on premise agreements for our Munis ERP solution included Sunrise Florida, which was also included in our which also included our Intergov solutions, Washtenaw County, Michigan Waynesboro, Virginia Spotsylvania County Schools in Virginia and Deschutes County, Oregon. For our New World ERP solution, we signed license agreements with La Crosse County, Wisconsin, New Prairie United School Corporation in Indiana and St.
George Fire Protection District in Louisiana. For our New World Public Safety solution, we signed significant license agreements with Washtenaw Parish Sheriff's Office in Louisiana and Greene County, Pennsylvania. Significant contracts for our InterGov solutions included the City of Pasadena and St. Louis Obispo County, both in California. We signed a notable SaaS contract for our Odyssey contract solution with Hill County, Texas.
Finally, for IRS World appraisal and tax solution, we signed notable license arrangements with Baldwin County, Georgia and Rowan County, North Carolina. During the quarter, we continued to make good progress on integrating New World's products and operations into Tyler. And those efforts are generally progressing in line with our plans. It's now been a little over 5 months since the acquisition closed and our early observations regarding the quality of New World's people and products and their fit with Tyler have only been reinforced since then. New World is on track to contribute to Tyler's 2016 results in line with the guidance that we communicated in February, with expected non GAAP revenues of approximately $124,000,000 During the Q1, we also amended our Dynamics arrangement with Microsoft.
Our resource commitment now runs through March 1, 2018, but the emphasis is moving away from development and towards sales. Our R and D resource commitment has been significantly reduced and we also have committed new sales resources to Dynamics with a focus on helping them develop public sector partner channels. We will continue to receive royalties on public sector sales of Dynamics through 2,034 and our total annual expense related to Dynamics will be about half of our previous spend. Now I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2016.
Thanks, John. Yesterday, Tyler Technologies reported its results for the Q1 ended March 31, 2016. I'm going to provide some additional data on the quarter's performance and update our guidance for 2016, and then John will have additional comments. In our earnings release, we've 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 Q1 were $179,300,000 up 32.8 percent with 13.8 percent organic growth. New World contributed GAAP revenues of $23,600,000 representing 17.5 percentage points of the growth. On a non GAAP basis, revenues were $185,000,000 up 37.1 percent. New World contributed non GAAP revenues of $29,300,000 representing 21.7 percentage points of non GAAP revenue growth.
Software license and royalty revenues increased 17.8%. On an organic basis, license revenues declined 9%, mainly due to the mix of SaaS arrangements and the timing of revenue recognition. In Q1, we received $904,000 of royalties on public sector sales of Microsoft Dynamics AX, up 6.3% from $850,000 a year ago. As John noted earlier, we have a new agreement in place with Microsoft and our total annualized spend on Dynamics in 2016 will be approximately $4,500,000 compared to last year's spend of approximately $8,400,000 With the shift in focus towards sales, approximately $2,500,000 of the expense will remain in R and D with the balance of $2,000,000 included in SG and A expense. Subscription revenues increased 34.8 percent with 30.8 percent organic growth.
We added 65 new subscription based arrangements and converted 11 existing on premises clients, representing approximately $28,500,000 in total contract value. In Q1 of last year, we added 32 new subscription based arrangements and had 19 on premises conversions, representing approximately $22,200,000 in total contract value. Among the on premises clients converting to the cloud this quarter were 2 large school districts, each of which use our Munis ERP software, the Indianapolis Public Schools in Indiana and the West Contra Costa USD in California. SaaS clients represented approximately 34% of SaaS contract value represented 43% of the total new software contract value signed this quarter and that mix was unchanged from Q1 of 2015. The value weighted average term of new SaaS contracts this quarter was 5.9 years compared to 4.9 years in last year's Q1.
Subscription based revenues from e filing for courts and online payments increased 23.5 percent to $11,900,000 from 9 point $6,000,000 last year. That amount includes e filing revenue of $8,900,000 this quarter, up 21% over last year. Our GAAP blended gross margin for the quarter declined 150 basis points to 45.8%, mainly due to the impact of acquisition related adjustments to revenue and higher amortization of acquired software related to the New World acquisition. These acquisition related items negatively impacting gross margin were partially offset by the positive impact of increased services revenues generated as professional services personnel, which were onboarded in the past few quarters, continue to become billable. Our non GAAP gross margin rose 290 basis points to 51.1%, primarily from the inclusion of New World, which historically has higher gross margins with a revenue mix that includes a greater proportion of higher margin maintenance revenues and less lower margin professional services revenue than Tyler.
SG and A expense increased 42.8% and was 22.7% of total revenues, an increase of 160 basis points from last year's Q1. Excluding non cash share based compensation and related expenses, SG and A expense increased 42.6% and was 19.8% of total GAAP revenues, an increase of 130 basis points and was 19.2 percent of total non GAAP revenues, an increase of 70 basis points over last Q1. The increase in SG and A expense is mainly due to the inclusion of New World, which historically ran at a higher SG and A as a percentage of revenue. Also, commission expense increased due to a higher volume of sales compared to the Q1 of last year. GAAP operating income was $28,000,000 an increase of 3.2% and was impacted by acquisition related adjustments to revenue and increased amortization of intangibles along with higher stock compensation expense.
Non GAAP operating income was $49,100,000 up 48.1 percent. Our non GAAP operating margin improved by 200 basis points to 26.5%. GAAP net income declined 1.1 percent to $17,100,000 or $0.44 per diluted share. Again, this decline is mainly attributable to the acquisition related adjustments to revenue and increased amortization of acquired software and other intangibles from the New World acquisition. Non GAAP net income was $31,300,000 or $0.81 per diluted share, up 46.5% compared to last year.
The fully diluted share count for the quarter increased by approximately 2,700,000 shares over Q1 of 2015, primarily from stock issues and acquisitions and to a lesser extent stock option exercises over the last 12 months, offset somewhat by the recent stock repurchases. In Q1, we repurchased 758,000 shares of our common stock for an aggregate purchase price of $94,500,000 or an average of $124.75 per share. Cash flow from operations was the highest for a Q1 in the company's history at $40,300,000 Free cash flow was $23,500,000 compared to negative $4,000,000 in last year's Q1. New World's operations contributed positively to cash flow with significant maintenance collections in the Q1. Excluding real estate costs, free cash flow was $33,800,000 In Q1, we purchased for approximately $9,700,000 an office facility in Falmouth, Maine, which we had previously leased.
We also broke ground on a major expansion of our office in Yarmouth, Maine to support continued growth in our ERP and Schools business unit. That construction will continue through 2017. We ended the quarter with a total of $69,000,000 in cash and liquid investments and debt of $140,000,000 Day sales outstanding and accounts receivable improved to 69 days at March 31 from 71 days at March 31, 2015. Our backlog at the end of the quarter was $808,700,000 up 17.3% from last year's Q1. Software related backlog, which excludes backlog from appraisal services contracts, was 763,300,000 a 20.5 percent increase.
Backlog included $191,700,000 of maintenance compared to $137,900,000 a year ago. Subscription backlog was $250,900,000 compared to $208,400,000 last year. Our bookings for the quarter, which are calculated from the change in backlog plus non GAAP revenues, were approximately $149,000,000 an increase of 21.1 percent from Q1 of 2015. For the trailing 12 months, bookings were approximately $760,000,000 a 14.3% increase over the prior period. Appraisal Services bookings declined by $13,000,000 from last year's Q1, which included a $12,000,000 appraisal contract with Franklin County, Ohio.
Excluding Appraisal Services, software related bookings rose 36.8%. On an organic basis, software related bookings excluding New World and Appraisal Services grew 12.3%. Please 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 Annual Report and Financials tab. We signed 30 new contracts in the Q1 that included software licenses greater than $100,000 and those contracts had an average license of $323,000 compared to 27 new contracts with an average license of $336,000 in the Q1 of 2015. Our updated guidance for the full year of 2016 is as follows.
We currently expect 2016 GAAP revenues will be between $750,000,000 $765,000,000 and non GAAP revenues will be between $765,000,000 $780,000,000 We expect 2016 GAAP diluted EPS will be approximately $1.92 to 2 $0.02 dollars We expect 2016 non GAAP diluted EPS will be approximately $3.35 to 3 $0.45 For the year, estimated pretax non cash share based compensation expense is expected to be approximately $30,000,000 to 31,000,000 dollars We expect R and D expense for the year will be approximately $42,000,000 to $44,000,000 Fully diluted shares for the year expected to be between 38,500,000 and 39,500,000 shares. The share count is impacted by both the timing and volume of stock option exercises and stock repurchases. We expect the GAAP annual effective tax rate for 2016 will be between 38.0% 39.5%. The non GAAP effective tax rate is expected to be in the range of 35.5% to 37%. The tax rate is affected by the timing and volume of stock option exercises.
With the issuance of ASU number 20 sixteen-nine, compensation stock compensation Topic 718 on March 31, which will require us to recognize the income tax effects of stock option exercises in the income statements, both our GAAP and non GAAP effective tax rates could differ substantially from this guidance. We're currently assessing the impact of adopting the new standard and given the scope of the new standard, we're currently unable to provide a reasonable estimate regarding the financial impact. We expect to adopt this standard in mid to late 2016. We expect our total capital expenditures will be approximately $37,000,000 to $39,000,000 for the year, including approximately $18,000,000 related to real estate. Total depreciation and amortization is expected to be approximately $50,000,000 to $51,000,000 including approximately $36,000,000 of amortization of acquired intangibles.
With respect to R and D expense, our previous guidance was for total R and D expense for the year of $46,000,000 to $48,000,000 While our total expected development spend has not changed significantly, the split between R and D expense and development expense included in cost of revenues has changed as we have further refined the classification of some of these projects. The amount of development expense recorded as R and D, which is primarily associated with new products, has been reduced by about $4,000,000 for the year, with a similar increase to the development expense included in cost of revenues for the year. Taking into account this reclassification as well as the change in Dynamics R and D spend, our total R and D expense for the year is expected to be between $42,000,000 $44,000,000 Now I'd like to turn the call back to John for his further comments.
Thanks, Brian. Our market remains very active and our competitive position in the market continues to be very strong across all our product lines. The pipeline is at historically high levels, local government budgets are generally healthy, and we are not seeing signs of weakness in our space. As we noted earlier, we've modestly raised the lower end of our earnings guidance, reflecting our confidence in our outlook for the year. At this point, New World's operations remain on track to deliver the revenue and earnings contribution that we expected at the beginning of the year.
Our balance sheet remains very strong and our cash flow in Q1 was exceptionally high. We used our cash flow and credit facility to aggressively repurchase our common stock during the quarter, buying almost 2% of our outstanding shares at an average price of just under $125 per share. We currently have 643,000 shares remaining on our repurchase authorization. We're pleased with our progress on the integration of New World's products and operations. I was at the New World Public Safety Users Conference in Phoenix earlier this week with almost 7 50 clients attending.
There is a high level of enthusiasm around the combination of Tyler and New World with both our employees and clients. Also this week, we launched the Tyler Alliance initiative to provide a platform through which Tyler clients can share data and communicate more efficiently across jurisdictions to help create safer communities. Tyler Alliance is a component of our strategy to bring more closely together Tyler's public safety and justice solutions with a goal of providing a unique end to end solution from dispatch to disposition. Finally, we're looking forward to hosting 3,000 Tyler clients at Connect 2016, our annual user conference held May 1 through 4 in Phoenix. At the conference, we will also host investors and analysts at a session on Monday, May 2 from 10:45 to 12:45 Phoenix Time, which is Mountain Standard Time.
If you're interested in attending Connect, please contact Brian Miller for more information. A live and archived webcast of the investor session in the accompanying slide deck will also be available at the Investor Relations section of our website. Now Gail will take questions.
We will now begin the question and answer session. Our first question comes from Charlie Strauzer from CJS Securities. Please go ahead.
Hi, good morning.
Good morning, John.
John, Brian, if you could talk a little bit about the pipeline. I know in the release you talked about the pipeline being very active. And when you look at the opportunities in the RFPs that are tracking in the pipeline, Are there some large opportunities in there for Dynamics as well as New World or are these kind of those still kind of more kind of further down the road?
Okay. Well, in general, as we said, the bookings and backlog, I think were pretty strong, probably within a range that someone would expect, in line with our overall growth. Obviously, that is just kind of one piece of the puzzle. Unsigned awards, decisions that are approaching the final stages and our position in those in the longer term pipeline are favorable. So as we indicated, the market in general in our view is toward the higher end of historical levels.
So that's a good thing. We see it being very healthy. More specifically, in terms of the 2 you've mentioned, there are a couple of, I guess, meaningful or what will be notable deals in the Dynamics pipeline that there aren't dozens, but there are a couple of those. So we would expect deals that would be worth mentioning specifically as we go through the year, as they work their way through the process. So there's a reasonable amount of activity there, but as it's been, it's not explosive.
New World had a number of new public safety deals and a few financial deals in the Q1. So they continue to go through that. I think the message has been well received. I was part of delivering that on Monday in Phoenix to the public safety group and many clients approached me and other people that participated and said they heard what they wanted to hear. They're excited about it and they look forward to the progress of the different systems.
Their overall pipeline, so specifically the overall pipeline in public safety, I would say, is not at historically high levels. I don't have as much experience in that space. But according to the New World folks, it's kind of a reasonable market, but not particularly hot at the time. They see that picking up a little momentum later in the year.
Great. Thank you very much. That's helpful.
The next question comes from Kirk Materne of Evercore ISI. Please go ahead.
Hi. This is actually Patrick Feldman on for Kirk. John, has there been any change to your outlook given the economic softness in some of the states with more energy exposure? And then Brian, if I could just follow-up, could you maybe discuss how we should think about the seasonality as it relates to operating margins over the remainder of the year? And is seeing operating margins expand year over year as we look out into 2017 a reasonable assumption to work off of?
Okay. So the answer to the question for me is no. We haven't seen any deals pulled back or timing delayed or any impact. Generally, the public sector budgets are pretty strong. The activity is good and no, we haven't seen any specific impact from energy related changes.
On the margin question, we do expect margins to build through the year. We expect that both gross margins and operating margins will be stronger in the second half of the year, particularly on a non GAAP basis. The amortization or the haircut on the referring revenue starts to narrow, so the difference between GAAP and non GAAP revenues will narrow through the year. But we would expect that margins would be stronger in the second half of the year than the first half of the year. And obviously, I haven't talked much about 2017, but our longer term expectations for consistent operating margin and gross margin expansion based on our targeted growth rates, we would expect to see that progression continue into 2017.
So those long term expectations continue to be the same as we've talked about in the past.
Great. Thanks.
The next question comes from Brian Kinstlinger of Maxim Group. Please go ahead.
Great. Thanks so much. I wanted to touch on Microsoft. I'm wondering maybe if you could highlight your plan to help them in the sales process. Will you be educating the channel partners?
Maybe also what are the existing partners communicated to you as it relates, if at all, to you or Microsoft about the slower ramp maybe than everyone might have expected?
Yes. So we work closely with the Microsoft folks. I think the initial major development of extending the product for the public sector and as well as streamlining it of commercial features and functions that the public sector doesn't need. That major build is largely complete. So I think our strategic value, we've all seen it as shifting.
They don't require that kind of resource complement on the R and D side, so we'll play a more limited role there. As we evaluate where we can add value to the relationship, we all feel that that's now on the sales side. Just like the product is different for the vertical and we've been through that development process, the whole market itself, the way it behaves, the procurement processes, that's different as well. And obviously, just like we have those subject matter experts at Tyler on the dev side, we have it in the sales channel as well. So using some of our people to assist their partners in building those channels is really where we're focused.
And obviously, they're selling through partners and they're not typically software companies. They're typically integrators and they're professional service organizations and they're not typically as strong on the sales and marketing side as a software company like us that's exclusively focused on that space. So we're involved in helping those partners develop their public safety practice. We participate in demonstrations. We participate in proposal generation and basically get them up to speed on working in those spaces.
And probably like the dev side, eventually, they'll be able to work more independently. But right now, I think there's a lot of value that Tyler can bring to that process. In terms of expectations and where we are in relation to that, yes, I think it's lighter than either of the parties expected initially. As I indicated, there are some exciting deals out there. They're not game changers, but certainly meaningful deals where the product, the integrators and our support have competed favorably against the rest of the market and we'll continue to execute in those opportunities and build the practice out.
Great. The last question I have, can you quantify the percentage of your Odyssey installed base that has e file?
Well, definition of has, I guess, is
Sorry, using and then
has. Yes.
It would be low. Obviously, tech and again, then it's is it names or dollars because Texas is one name, but big dollars and but maybe it's somewhere around a third at this point. So I see some of the research you guys are publishing talk about new names and there will be some new names obviously as the year rolls through. But a lot of the growth on the Odyssey side will be back into the base, other products, an integrated criminal justice system rather than maybe just a case management system, if it was started that way, other case types. And obviously, the big one is building out the e file.
So we have agreements and understandings with many of our clients that, that is a big part of what they want to accomplish in their relationship with us. But it's relatively low in terms of those that are fully implemented and the revenue run rates are up where they would be in a fully implemented system.
Great. Thank you.
The next question comes from Jonathan Ho of William Blair and Company. Please go ahead.
Good morning. I just wanted to start out with one of the comments that you made last quarter around New World maybe being a little bit slower getting out of the gate. Did we see any deals from last quarter maybe slip into this quarter and help on the booking side relative to New World?
Nothing meaningful. Obviously, there's always deals moving around from timing standpoint, but no, nothing really meaningful.
Okay. And then just given the high percentage of SaaS deals that were elected this quarter, how should we think about the trend? Are you starting to see sort of an inflection point here? Just want to get an understanding of where you see that going for the balance of the year?
Maybe is the answer. We do see in probably this quarter and the deals that are far enough along to know whether or not we're likely to be selected and which type of deployment they'll choose, it does remain elevated. But whether or not that's a trend and a permanent uptick, it's probably still a little early to say. But no question Q1, it was higher, and we do have some visibility on it remaining higher in the next quarter or 2, let's say.
I think a couple of trends we are seeing more of with respect to the SaaS bookings is that we're seeing it being adopted more broadly across our product lines as opposed to just in the ERP space. So we're seeing more Odyssey deals primarily at the lower end. But Odyssey deals, we're seeing more appraisal and tax deals, intergov deals. So it's more broad, the adoption across our product lines than it was going back 3 or 4 years ago. And we're certainly seeing more larger deals coming in on the SaaS side.
So not necessarily the percentage of the number of deals, but whereas if you go back a few years, it was mostly on the small end. And for example, this quarter, the biggest deal of the quarter with Milwaukee was a SaaS deal. So we are seeing more on the high end. And thirdly, longer terms. So that certainly increases the contract value that we book.
But I think customers as they become more comfortable with the offering are certainly signing up for longer initial terms.
Great. Thank you.
The next question comes from Tim Klasell of Northern Securities. Please go ahead.
Good morning and thank you for taking my question. Just wanted to drill in a little bit on the longer terms and the longer duration that you mentioned earlier in the call, are there any particular products where their customers are getting more comfortable and more committed upfront like the ERP or is there any pattern that you can share with us?
I don't think particularly across products. It's I think it's more a progression that when we first started doing staff hosted deals 13 or 14 years ago, they were all 3 year initial terms. And now I'd say the standard would be 5 and certainly a lot of 7s and some as long as 10 years. So I think it's a combination of the market or our market becoming more comfortable with the SaaS offering in general and our history and reputation in providing that, that customers are they expect to use these systems for a very long time and they're comfortable committing to a longer term upfront. I don't think it varies a lot by product.
Okay, good, good. And then going back to your comment about public safety not being particularly hot, should we expect seasonality? Is that just sort of how that market works? Or maybe it was the New World acquisition that sort of maybe disrupted things. Maybe you can walk us through that maybe a little bit more detail.
They do seem to have stronger activity late in the year. But no, I don't think this is a function of this acquisition. This is an observation of the market in general and that the activity in the market in general at this point in time by historical standards seems marginally light. It's nothing I'd read into too dramatically, but it's just not a particularly fat pipeline at this point in time. They see names coming into the pipeline later in the year.
So there isn't a real concern about the activity long term. But just a snapshot at this point in time, which will impact the deal flow over the next couple of quarters, isn't all that robust. Quite frankly, that could work well for us. I think the message has been well received. I think the vision that Tyler has for a fully integrated criminal justice system is easy to understand and clearly makes sense and adds incremental value to what's existed in the marketplace.
But I think it's a good thing that we're able to refine that message and actually deliver certain things that are encouraging about what we're trying to achieve there and be in a stronger competitive position as the deal flow picks up again. So that's what we're busy doing right now.
Okay, great. Thank you very much.
The next question comes from Pete Heckmann of Avondale Partners. Please go ahead.
Good morning, everyone. Thanks for taking my question. I'm having a little trouble finding this worksheet that you mentioned. And so maybe you could help me a little bit. Could you give us New World's bookings for the quarter?
And then as well on a similar basis as you presented for the quarter, I think that's helpful to look at organic software bookings. Do you have that on a trailing 12 month basis?
Yes. So New World's bookings for the quarter were about $20,000,000 And the organic software bookings
were,
let's see, about $41,000,000 So that's software and services excluding software and services and then subscription bookings on an organic basis were $42,000,000
Okay, okay, great. And so I'll track that worksheet down. And then second question, could you just give us an update on progress in California if there's been any new developments with additional counties and perhaps any update in terms of how you see that state evolving from AE filing standpoint over the next 2 years?
We don't expect and didn't experience a tremendous amount of new client activity there. I think the largely the big wave of people that had to do things following the change in direction out there has occurred. As I indicated earlier, there is a lot of opportunity expanding those relationships to if they started on a narrow footprint in terms of case types and applications, expanding it to include a more integrated criminal justice system and other case types. So that's the plan. In terms of e filing, some of them there is a little bit of e filing going on actively right now.
A number have contracts with us and are in process to bring that up and online. But regardless of the contractual relationship, it's our expectation that the vast majority of those counties have every intention of doing e filing after they bring their case management systems online.
Okay. And in terms of timeline, would you think that's a 2017 or 2018 item or?
I would think it's a as much as a 3 or 4 year process and that you'll see progress throughout that period of time that quarter by quarter and year by year, more and more clients and more and more volume will go through there. So it will be a gradual build.
Okay.
Thank you. We We do have 3
or 4 California counties that start to come online in the second half of the year with e filing revenues. I don't believe they're mandatory, so the numbers are relatively small. But throughout this year, I think Santa Clara County, San Diego County, looks like Orange County, all will start to generate some e filing revenues in the second half of the year.
Great. Thank you.
The next question comes from Zach Cummins with B. Riley and Company. Please go ahead.
Hi, good morning. So, can you go ahead and talk about the current capacity of your sales team and its ability to support New World Systems and all its public safety initiatives?
The sales team, I think our capacity has been strong and it is we don't add that many heads. Really, we don't have much turnover at all. And I think that the individual people there, their abilities to manage higher levels of business develop as the company grows. So it's actually surprising to me that the request for heads is low relative to the growth. So I think there's a lot of capacity in the sales channel and you won't see significant jumps in headcount there even as the business grows.
Our ability to handle the New World business, there may be an assumption there that's not correct. So Tyler's existing sales channel won't have direct responsibility for selling those products. We will continue to use what were existing New World Resources to do that. And so those sales channels are in place. There's a lot of coordination going on, on both sides, both of their product sides between Tyler's channels and theirs.
There are some leadership positions that, where we've moved Tyler people into those channels to maybe Tylerize to some degree and create a best of both worlds channel. But again, the feet on the street are largely the same people that were in place at New World before and they'll again grow below in line with the overall growth of the company because I think the capacity has some leverage in it.
Great. Thank you. That was really helpful. And in the Q4 call, you talked about some prior New World customers that were still undecided once Tyler acquired New World. I was wondering if you could give us kind of an update on if some of those customers decided to remain with Tyler or kind of what the whole dynamic was there?
Well, there hasn't been any attrition caused. And even if the client base wasn't pleased with this decision, which isn't the case, again, I was at the public safety I it is generally being received very positively. But obviously, even if somebody didn't like it, it takes a long time to change, right? You need to spin up a process to go acquire a new system, implement it. That's at least a 2 year process.
So you wouldn't see any attrition at this point in time. But we don't expect that this deal is going to trigger attrition. I think this deal is breathing enthusiasm into their relationship. I believe they genuinely understand Tyler's interest in the business And we've added, you saw this last quarter, we talked about increases in R and D and service, 62 new heads in the plan for the year rather than what could have been heads that were dropped as cost synergies in a deal. So, I think that's really clear to their base and they're excited and enthusiastic about it.
And to the extent there were prospects that were in the pipeline that were close to a decision around the time the acquisition was announced, we talked on the Q4 call about as we expected, there were some delays, not talking about a lot of people, but at least a handful of deals that were in that stage where they step back to be sure they understood, what the impact of the acquisition was. And I don't think we've had any significant surprises there. Again, we're talking about maybe a large handful of deals and there probably been a couple on the ERP side that have that we're deciding between the New World product and the Tyler product. So if they went with the Tyler product, that's still in our family. I don't think we've lost any deals on the public safety side because of the acquisition.
So no real surprises there. And that as we expected all kind of gets back on track after a quarter or so.
All right, great. Thank you. That was really helpful.
The next question comes from John Rizzuto of SunTrust. Please go ahead.
Hi, thanks. This is Anubhav sitting in for John. I had a few questions. And the first one, maybe you talked about how your SaaS business seems potentially could be on the verge of acceleration. As you think about it accelerating, what do you think is the impact that happens to revenue and margins if that does happen in a sustained way?
Well, if you could design the rate at which SaaS has been embraced by our marketplace and our existing customers, I think our real what we're experiencing is very consistent with exactly what we'd want. We clearly are transitioning into a strong SaaS player. Clients in that space that want cloud based solutions, but also want proven software specifically designed for that vertical and the service providers and the rest of our message can get it. They don't need to go to the new vendors that maybe are good cloud players, but don't have that track record on the software and service side. So it's progressing well.
I don't see the acceleration being so explosive that you're going to hear from us that it's impacting our growth rate meaningfully or our margins meaningfully. It's swinging from 15% to 20%. And if now it's up in the low 30s for a few quarters, even if it stays there, which would be great, I don't think you'll hear us saying that that's put pressure on our revenue growth or our margins in a meaningful way. Does it change it within a particular quarter, 50 or 100 basis points? Yes, sure, it could.
But I don't see some substantial change in growth or margins because of the lumpiness of the traction that SaaS and cloud solutions have.
Okay. Good. That's helpful. And then the second one is around basically how the government local government market lease said it remained healthy, like you're not really seeing any impact from, let's say, the energy thing. But as you think about it, and this maybe you could just move to the cloud, what factors do you think that you could think about could potentially drive an acceleration in this market as you look forward?
Well, there's a few and they've all been around. In general, I think government and local government is always going to be more cautious and slower to embrace new technology and new deliverables than the commercial industry. And so we've seen that here. So it's a slower evolution in our space and so it's gaining momentum maybe later than it did in other verticals or other industries. So we're seeing some of that.
So that would be one. The other drivers though really often have to do with their resources. So often moving to the cloud can have to do with the brain drain, people retiring or moving on and now they want to go to a trusted partner or provider rather than recruit and train new resources that it's difficult to do competing with the commercial sector. And the third one really is investment in infrastructure. So if they've got a current investment in their own technology and that's serving them well, they're not going to be anxious to move to the cloud.
As that technology ages and is less competitive, that's something that can be a catalyst for Citi or School or Core to look at moving to the cloud. So I'd say those three things generally are the catalysts that cause people to move to the cloud in our space.
Okay. Thanks. And then just one last one on your capital allocation. You've got, I guess, generally speaking, your CapEx is kind of heading up, but you also are buying back more shares as teams. Is that kind of could you just update us what you plan to do with the cash just in general?
Well, in terms of CapEx, it is elevated this year, but again half of it about is real estate related. So we will invest in and own our major facilities when it makes sense. And there were a couple of opportunities to do that this year. So I don't see that happening on a regular basis. We built the Plano facility a couple of years ago.
We built a facility in Lubbock a few years before that. New World had just bought and redone significant facility. This will give us a lot of growth opportunity in our main areas. So I don't see a major real estate investment at those levels in the next few years after this. So that's kind of a one timer thing.
Another significant growth in our CapEx, which is a good thing and will continue is in our technology facilities for hosting cloud solutions. So that's a change over the years and that's becoming significant as that growth is significant. So there is higher CapEx related to cloud if you host your own facilities than there was in our traditional on premise business. So that's more permanent. Our regular PP and E CapEx remains very low.
It's 120 basis points, 150 basis points on revenues. So it's a very low capital intensive business other than again investing in cloud and from time to time investing in real estate. In terms of the buyback, I guess you can tell the way we look at our stock, We bought some stock in the 130s and we bought, I think, quite aggressively in the mid to low 120s. And so that was attractive to us given our long term outlook and we were very aggressive and would be pleased to do it again, although certainly we won't cause the stock to go to that area. But if market conditions do, we would be aggressive and we don't give specific numbers.
It's an active process to look at those values, but over time, I'm sure those numbers will come up or our targets will come up somewhat. We're investing at a pretty significantly higher level in our own products. So that is not CapEx. We don't capitalize any software development. It runs through our P and L.
But so that does put some pressure on earnings. But when we look at the opportunities and the significant cash we'll generate in the coming years, we see reinvesting in our own business as a very attractive way to deploy that capital and you'll see us do some of that. I don't think again, this was a year where we ratcheted that up pretty significantly. I don't think you'll see us telling you every year that that's putting pressure on margins, but certainly we'll actively look for opportunities to invest in our own products and improve their competitive positions.
Okay. Thanks, sir. That's it for me. Thank you.
The next question comes from Patrick Walravens of JMP Securities. Please go ahead.
Great. Thank you. So two quick questions. One is, if you could comment on the competitive environment and whether you're seeing any changes there or there's any new potential entrants? And then secondly, just on your pipeline commentary, when was the last time that you felt the pipeline was a little light like this?
Thank you very much.
Yes. I don't see any real new entrants and I don't expect that. It is a major investment to enter any of these areas of the business. There are mature, established players in all of these areas of the business. And I just think if someone is looking for a place to make a significant investment, the thresholds to establishing yourself in this space are very significant, very obvious, and I just don't expect to see a lot of new names.
We see our existing competitors flow in and out. I would say that happens. So there and I don't comment on specific names. I'll not do that. But certainly some of these competitors become a little less competitive and some of them eventually become legacy players.
But some of them say, hey, we need to do some of what Tyler does and reinvest in their product or reinvest in their channel and become stronger competitively. So, I think sometimes because our market shares are very strong and we do feel we have a strong position in this market, people think it's a little more automatic than it is. And so there's no question there's good competitors there. There are competitive positions like ours flow within certain ranges and that's what we deal with on a day in and day out basis, but not really any new clients in that space. In terms of a light pipeline, I want to clarify that.
The pipeline in general, we believe is strong. We believe the marketplace in general is, if you were bracket the normal experience, it's on the higher end or the more active end of what is typical in this space. Specifically, I said that the public safety side, from what those folks who are more experienced and have more history in that area report to us is a little bit lighter than would be typical at this point in a year. And their visibility suggests that that's temporary and they expect it to recover later in the year.
Okay. Have you ever seen that before? Is there a time you've seen that before?
I've
not been in this space before. This is public safety specifically. We had a very small presence there, based on, again, what they're telling us and their history, which is good. This just it's a little lighter than it normally is. It's not like it's terribly weak and that's really all we know at this point.
Great. Thank you.
The next question comes from George Prince of RBC. Please go ahead.
Hey, congratulations guys. It's quite remarkable what you do here.
Thank you.
Can you talk a little bit about the cross selling opportunity? Maybe what you define as cross selling? What percentage of your business you're currently doing cross selling and what the potential is?
Yes. I don't know if I have percentages for you, George, but
Ballpark is fine or
Yes. But there are a number of places where it's pretty productive right now. Probably the most productive area is Intergov. So Intergov, when we bought them, we kept their direct sales channel in that space. And so if a large county comes out for their solutions, they handle that as they did before on a direct basis.
But we also trained our other sales channels on their products, product presentation. And so we do what is a lot of incremental business through our other sales channels, I guess most a lot of it through the munisales channel. A lot of their solutions include EnerGov Now and it's a pretty big ticket item. So if they sell a $500,000 Munis license, it might drag a $200,000 license for Intergov. So that would be an example where it's very active and it's very incremental and it also improves our competitive position.
So you'll never know for certain, but that could have been a deal that maybe Munis wouldn't have won without it. So all good stuff and all the kinds of things we're trying to accomplish with those types of acquisitions. On our criminal justice side now, which we've talked a lot about our objectives there, which will deliver a solution that's different than exists in that marketplace. So and it isn't just the big ticket items. So New World's Public Safety and obviously our Odyssey system, as they combine and will drive synergies there.
But the soft code solution that we acquired a couple of years ago is in this whole alliance. The Brazos system, which is mobile devices and applications in the field, that's a lot of potential. So it's happening. It helps in a lot of ways. Obviously, there's incremental revenue.
It improves the competitiveness of the core system by adding on these other extensions and we do see more of it. If you look historically at Tyler, we have this broad offering that really nobody else has, but we have focused on those individual applications individually in this, call it, the first phase of Tyler's product strategy. The next phase of the strategy does have a lot more focus on building horizontal use of these different applications, adding benefits and value to using multiple products. And so we talked about, I think, last quarter, creating an incremental R and D team that's led by Jeff Green that focuses on those synergies. And there's a lot of that now so that it's not just having 2 products from the Tyler family, but really being able to specifically identify tangible advantages to having multiple Tyler suites.
Sounds good. Good luck.
All right. Thanks, George.
At this time, there appears to be no more questions. Mr. Maher, I'll turn the call back over to you.
Good luck.
All right. Thanks, Stuart.
At this time, there appears to be no more questions. Mr. Meagher, I'll turn the call back over to you for closing remarks.
Okay. Well, thank you, Gail, and thank everybody for joining us on today's call. If you do have any further questions, feel free to reach out to Brian and myself. Thanks again. Have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.