Welcome to today's Tyler Technologies Second Quarter 2015 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 23, 2015.
I would like to turn the call over to Mr. Marr. Please go ahead.
Thank you, Robert, and welcome to our Q2 2015 earnings call. With me on the call today is Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, I'll have some preliminary comments. Brian will review the details of the Q2 operating results and 2015 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'd 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?
Our 2nd quarter financial performance was outstanding with revenues and earnings exceeding our internal expectations. From an historical perspective, this was our 7th straight quarter of revenue growth greater than 15% and in 5 of the last 6 quarters revenue growth exceeded 17.5%. Software license and royalty revenues were up 21% and at $14,600,000 were the highest in company history. Our 29% growth in recurring revenues from subscriptions reflects continued strong growth in our e filing revenues from Quartz as well as a continuing gradual shift toward cloud based software as a service businesses. As we've previously discussed, we had a very difficult comparison for bookings this quarter, as last year's Q2 included approximately $64,000,000 in new contracts in California for our Odyssey Court solutions.
On an absolute basis, bookings this quarter declined 25%. Excluding the California quartz deals from last year's Q2, bookings rose 3% for the quarter and 12% for the trailing 12 months. While there are a lot of moving parts in the bookings comparisons, the key takeaway is that our bookings, especially with respect to large contracts are often very lumpy. Significant new contracts during the Q2 included a 5 year SaaS agreement with Denver, Colorado for our IAS World Appraisal and Tax solution valued at approximately $7,900,000 Denver has been a long time client and chose to upgrade to our current IES World solution using the cloud. Other significant agreements this quarter included contracts for our Munis solution with the Stafford County Public Schools in Virginia and Leander Independent School District in Texas as well as the City of Pleasanton, California.
A 5 year SaaS agreement from Munis with Carroll County, Georgia and a contract for Infinite Visions with the Mesa Unified School District, Arizona's 2nd largest school district by enrollment. We also signed significant multi suite contracts including Munis and Intergov with the cities of Waco, Texas and Surprise, Arizona. New clients for our InigoV planning, regulatory and maintenance solution included Maui County, Hawaii Miami Dade County, Florida and the City of Overland Park, Kansas. In Courts and Justice, we signed a follow on agreement valued at $5,000,000 with Kern County, California for our Odyssey Integrated Criminal Justice solution. The county's ICJ agreement allows it to join the Kern County Superior Court's current Odyssey case management and implementation project for criminal case processing.
With the additional ODiSI applications such as jails and probation, Kern Superior Court and County Justice Agencies will operate on a single platform that will significantly streamline criminal justice processes and allow agencies to more effectively share information with one another. 2 other California Odyssey clients, San Bernardino and San Diego Counties signed contracts to add additional case types including civil to their implementations. Finally, our bookings for the quarter included a new agreement with the Indiana Supreme Court to provide e filing for court statewide. This 5 year $20,000,000 contract is a fixed price arrangement similar to our e filing contract in Texas. Indiana also uses our Odyssey case management system in court statewide.
Indiana represents our 11th statewide e filing arrangement. Several of these are still ramping up and we're confident they will continue to build upon our position as a leader in the emerging space. At the end of May, we acquired Brazos Technology Corporation for $6,100,000 in cash and 12,500 shares of Tyler stock valued at $1,500,000 Brazos is a provider of mobile held solutions used primarily by law enforcement agencies for field accident reporting and electronically issuing citations. And the Brazos product line is a significant addition to our public safety suite. Brazos had revenues of approximately $10,000,000 last year.
Lastly, in May, we hosted approximately 2,800 clients in Atlanta at Tyler Connect, our annual user conference. At Connect, we announced a new Tyler wide continuous improvement initiative called EverGuide, which builds on our evergreen approach to software licensing. EverGuide will provide the focus and structure to help public sector clients maximize, protect and get the most of their software investment by ensuring they receive maximum benefits from the enhancements released through our evergreen approach to releases and updates. Now I'd like for Brian to provide more detail on the results for quarter and update our annual guidance for 2015.
Yesterday, Tyler Technologies reported its results for the Q2 ended June 30, 2015. I'm going to provide some additional data on the quarter's performance and review our guidance for 2015. Then John will have some additional comments on the quarter and our outlook for the remainder of the year. 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. Our non GAAP earnings exclude 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. Revenues for the Q2 were $146,300,000 up 17.6% with 16.8 percent organic growth. Software license and royalty revenues increased 20.7% and at 14,600,000 were the highest level in the company's history. This was our 10th consecutive quarter of double digit growth in licenses and in 3 of the last four quarters, license and royalty revenues have grown by more than 20%. In Q2, we received $1,200,000 of royalties on public sector sales of Microsoft Dynamics AX by other Microsoft VARs, more than double the royalties of $576,000 a year ago.
One contract with the U. S. Federal Agency accounted for more than half of the royalties this quarter. Subscription revenues increased 28.7%. We added 34 new subscription based arrangements and converted 20 existing on premises clients representing approximately $16,900,000 in total contract value.
In Q2 of last year, we added 44 new subscription based arrangements and had 21 on premises conversions, representing approximately $17,800,000 in total contract value. SaaS clients represented approximately 24% of our new software clients in the quarter compared to 28% in the prior year quarter. SaaS contract value represented 30% of the total new software contract value signed this quarter compared to 12% in Q2 of 2014. The value weighted average term of new SaaS contracts this quarter was 5 years compared to 5.6 years in last year's Q2. The fastest growing subscription based revenue stream is from e filing for courts and online payments.
These revenues increased 30.7 percent to $10,000,000 from $7,700,000 last year. Total e filing revenue of $7,600,000 this quarter grew 32.7% over last year, with 45% of that increase related to our Texas e filing contract, which contributed $4,800,000 of revenues this quarter. Our blended gross margin for the quarter declined 40 basis points to 46.7 percent, mainly due to accelerated hiring and onboarding of professional services and development staff to support our current backlog and anticipated new business. Our non GAAP gross margin also declined by 40 basis points to 47.5%. We have added a net of 333 people in the last 12 months with 86% of those included in cost of sales.
Our total headcount grew by 134 in the 2nd quarter to 3,068 employees, including 41 employees added through the Brazos acquisition. SG and A expense increased 10.9% in the quarter and was 20.8 of total revenues, a decrease of 120 basis points from last year's Q2. Excluding non cash share based compensation expense, SG and A expense increased only 8.8%, only half the rate at which our revenues grew. Operating income was $29,600,000 an increase of 25.3%. Non GAAP operating income was $36,000,000 up 25.3 percent.
Despite slightly lower gross margins, the non GAAP operating margin improved 150 basis points to 24.6 percent as we've sustained substantial leverage from both SG and A and R and D expenses. Net income rose 27.8 percent to $18,800,000 or $0.52 per diluted share. The fully diluted share count increased by approximately 936,000 shares, primarily from stock option exercises and to a lesser extent stock issued in acquisitions. During the Q2, we repurchased approximately 5,400 shares of our common stock for a total of $645,000 or about $119.50 per share. Our effective tax rate was 36.8% and benefited from a higher qualified manufacturing activities deduction.
Our effective tax rate may increase during the second half of the year if stock option exercises increase and generate significant excess tax benefits that limit this deduction. Free cash flow was $12,700,000 compared to $9,400,000 in last year's Q2. Note that free cash flow was reduced by cash tax payments of $16,800,000 in the 2nd quarter compared to $8,600,000 last year. Days sales outstanding and accounts receivables were 94 days at June 30, 2015, compared to 104 days at June 30, 2014. DSOs increased sequentially from 71 days at March 31, which is our normal seasonal trend related to the timing of maintenance billings.
Our backlog at the end of the quarter was $723,000,000 up 10.4% from last year's Q2. Software related backlog, which excludes backlog from appraisal services contracts, was $672,400,000 an 8.6% increase. Backlog included $165,000,000 of maintenance compared to $154,400,000 a year ago. Subscription backlog was $229,000,000 compared to $185,700,000 last year. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were $179,000,000 down 25.1% from last year's Q2.
Q2 of last year included bookings of approximately $64,000,000 related to the California court signings. Excluding the California courts deals, bookings for this quarter rose 2.8%. For the 12 months ended June 30, bookings declined 10.8 percent over the prior 12 month period as the prior 12 month comparison included the California courts deal signed in Q2 of 2014 and the contract for statewide e filing in Texas, which was signed in the Q3 of 2013. Excluding these two items, the trailing 12 month bookings rose 11.6%. Digging a little deeper into this quarter's bookings, there are a couple of factors to point out.
First, as we mentioned earlier, we signed a new fixed price e filing contract with the State of Indiana, which contributed about $20,000,000 of bookings this quarter. As a reminder, our e filing contracts other than Texas and now Indiana are transaction based, generally with a fee per filing and future revenue streams from those arrangements are not included in bookings and backlog. 2nd, maintenance bookings declined slightly this quarter from the Q2 of last year. This is not the result of attrition, but rather it is because last year's Q2 maintenance bookings included more than $7,000,000 of maintenance agreements, which extend beyond the normal 1 year term, several of which were related to the new California quartz projects. As a result, they contributed unusually large bookings in Q2 last year, but did not renew or contribute to bookings this quarter.
Some of those will renew and show open bookings in the Q4 of this year and some are multi year agreements that will renew in 2016 or 2017. As Sean noted earlier and as we frequently discussed in the past, these puts and takes all illustrate that it's simply the nature of our business that bookings are often lumpy. This is especially true with respect to large contracts for which revenue recognition often takes place over several quarters or even years. We signed 25 new contracts in the 2nd quarter that included software licenses greater than $100,000 and those contracts had an average license of $484,000 compared to 43 new contracts with an average license license value of $867,000 in the Q2 of 2014. Again, last year's comparison includes 12 contracts with courts in California.
Based on our performance through the first half of twenty fifteen and our outlook for the balance of the year, we have raised our earnings guidance for 2015 from our revised guidance in April. We're currently expecting 2015 revenues will be between $575,000,000 $581,000,000 We expect 20.15 diluted GAAP EPS will be approximately $1.97 to 2.05 We expect 20.15 non GAAP diluted EPS will be approximately $2.50 to 2.58 dollars For the year, estimated non cash share based compensation expense is expected to be approximately $20,000,000 to 20,500,000 dollars Fully diluted shares for the year are expected to be between 36,000,000 and 36,500,000 shares. We estimate an effective tax rate for 20 15 between 37% 38%. The tax rate and share count each are affected by the timing and volume of stock option exercises. We expect our total capital expenditures will be approximately $13,500,000 to $14,500,000 for the year.
Total depreciation and amortization is expected to be between $15,500,000 $16,000,000 including approximately $6,700,000 of amortization of acquired intangibles. I'd like to turn the call back over to John for further comments.
Okay. Thanks, Brian. Market conditions in the Q2 generally continued the trends we've seen for the last several quarters and activity in local government market is good. Our bookings and revenue growth for the last several quarters are clearly well in excess of the market as we continue to gain share and expand our market leadership position. Our competitive position remains very strong across all our major product lines and win rates are high, reflecting both the long term commitment to product development and the consistently high level of execution on our engagements.
While there are no while there are obviously a lot of moving parts with respect to our bookings and a number of factors that contribute to lumpiness in contract signings, we remain very confident that the combination of our existing backlog, the pipeline and new business opportunities in our market leading competitive position continue to support our growth objectives. As mentioned earlier, we benefited from a significant deal on the Dynamics side of our business. And fortunately, this was incremental to a broader set of business that was experienced in the quarter. The direction of Microsoft royalties continues to trend upward. And as we've discussed previously, our renegotiations with Microsoft suggest that we will have a significantly lower expense level in the future as well and the net results will be positive.
Now we'll take your questions.
The first question comes from Charlie Strauzer of CJS Securities.
Hi, good morning. Good morning.
John, if you could talk
a little bit more on the Microsoft Dynamics subject that you just mentioned. I know it's tough to kind of predict kind of visibility looking out beyond maybe a quarter or 2. But when you look at the pipeline of proposals that are tracking that you're tracking out there, kind of the RFPs that are out there, are you encouraged by what you're seeing on your side of the business? Obviously, you can't tell from your VAR partners out there, but give us a little bit more color if you can on the pipeline.
Okay. Sure. Well, I think as we know over the last couple of years, this certainly hasn't been explosive. It's been a little slower ramp maybe than Microsoft expected and to some degree what we may have even expected. But think our sales channel is maturing.
The product is settling into really what I'd call kind of sub segments of the marketplace where it may have advantages and it would be particularly strong. And we've got a pretty good pipe around that. And as part of this kind of reorganization, we're really transitioning from a predominantly R and D role in terms of our relationship with Microsoft. That initial product is well built out. It exists.
It's actually relatively mature. And so our role will shift where we'll have a kind of lighter presence on the R and D side. They still have a significant R and D staff and we'll continue to invest significantly in the product. But I think our experience on the sales, marketing and even service side is now where we add value to this arrangement. So we have a pretty good pipeline.
We would expect not to have a tremendously broad footprint with this product. I think that our direct sales will be again into sub verticals where we think it's particularly competitive. And I think a lot of our focus will be supporting their partners in building out their sales channels and targeting the sub verticals that each of them are focused on and helping them become more productive. Ultimately, our objective is that the revenue stream from Microsoft is largely complementary, meaning international. The significant deal in this quarter was a federal DoD department that we would not have pursued with our proprietary products.
So much of our sales focus will be in addition to our direct sales will be in supporting their partners build a strong presence in that marketplace.
That's helpful. Thank you. And then shifting just for
my follow-up to the guidance, if you could give a little bit more granularity on the segment level in the back half of the year? And also just looking at particularly in the appraisal, it looks like you're kind of at historically high levels in terms of revenue. How should we expect that to ramp also?
Well, it's really across the board. Our Courts and Justice division results year to date are ahead of plan and none of that's being given back in the second half. It is not timing, it's just outperformance. So they're ahead of plan. Our ERP group, which is led by Munis with other subdivisions under it, has been ahead of plan, especially on earnings.
And again, it's not timing, it's expected to continue throughout the balance of the year. Most of our local government division is. There's a couple kind of smaller growth areas there that are small enough that they're still a little lumpy. So that if there's any areas that aren't ahead of plan, it's simply those and that's again smaller units that are going to be a little lumpier. And as you indicated, appraisal services is cyclically strong at this point in time.
So it's really across the board. And as I mentioned in our prepared remarks, it isn't really a reflection of the marketplace. The market is healthy. I think since the post 2008, 2009 dip, as we've said, has recovered at somewhat normal levels, but we really do continue to make meaningful gains in our competitive position. Our win rates are strong.
And to some degree, what were meaningful competitors are not that involved in the new business market at this point in time. I'd be cautious in saying that while it's very encouraging because there certainly are some individually strong competitors out in the marketplace that have improved as well. But again, on balance, there are fewer competitors in the space. There certainly are traditional competitors we've had that maybe have become a little more legacy oriented or in some cases left the new business market completely. So for us, those are really the big wins.
Obviously, winning a deal is important, but the big wins are when you really do put some distance between you and what were our previously strong direct competitors and the level of investment that we're able to make at this point in time in relation to the smaller players in the space.
Excellent. Thank you.
The next question comes from Alex Zukin of Stephens.
Yes. Hey, guys. Congratulations on
the quarter. A couple of questions for me. First one, just a clarifying question. Brian, that $7,000,000 in maintenance renewal bookings that you called out, was that part of the $64,000,000 California bookings from last year or is that incremental to that?
Some of it was included in that. So that included some California bookings. I don't know exactly how much of it, but I'd say on the order of it's probably more than half of it was from those California deals.
Got it. And then on Brazos, can
you guys talk about how
much is expected to contribute to revenues this year? It's
somewhere around $3,500,000 in the second half of the year. Some of because Brazos' revenues last year were around $10,000,000 but because we were a partner of theirs and some of their revenues actually flowed through us and were included in our revenues as 3rd party sales. So all of that $10,000,000 isn't incremental to revenues we already had in the plan. So a net increase of around $3,500,000 in the second half of the year.
Got it. And then could you maybe walk through some of the puts and takes on cash flow performance in the quarter? It was a little bit I realize you don't guide to the number. It was a little bit below our numbers and consensus. So just wanted to see if you could just talk about the puts and takes?
Well, I think the biggest difference this quarter was the cash tax payments last year in the Q2. And clearly, our cash flow was better this year in Q2 than it was last year in Q2. But in the first half of the year, we paid about $10,000,000 more most of that in the second quarter in cash tax payments than last year. Last year, we had more of a benefit in the first half of the year from offsetting cash payments from stock option exercises. This year, we didn't realize that same benefit in the first half and we'll see what happens in the second half depending on the level of option exercises that could benefit our cash flow more in the second half.
I guess to some extent, although most of those wouldn't be collected yet, the maintenance billings that we talked about also will affect cash flow unless they pushed it a little higher last year. Some of that second quarter is more of that third quarter. But the taxes are the biggest piece.
Got it. That's helpful. And then John, maybe can you just talk a little bit, I know you touched on this on the comments, but the if I put the 3% bookings growth and I realize the lumpiness in bookings in context with kind of the raise in the guidance, What's the what gives you that confidence as you look at your pipeline, as you look at your business to raise the numbers here?
Well, obviously, we're talking about the second half of the year that we're in. Our the sales processes are long. So certainly almost all the business we expect to see this quarter is relatively certain. It's a matter of execution, which isn't to be taken for granted, but good visibility. And at this point, it is some deals that it's a matter of timing in the Q4, but you know these things pretty well.
I know it's important for us to report bookings and backlog and I think over a longer period of time, it's important for you folks to focus on those trends directionally. But I wouldn't read too much into a single quarter, largely big deals and there was one in Indiana in the quarter. Big deals can drive it up as well as multiyear SaaS deals. So if we do a traditional on premise account, the only thing goes into backlog is the initial implementation. We don't sign 7 year maintenance agreements even though they're near certain to occur.
Whereas if we sign a 7 year SaaS deal, 7 years of revenue goes into the backlog. So there are a number of big deals, multiyear SaaS deals, a number of other things that can kind of sway that number around. And again, over a long period of time, that all gets normalized, but I'd just be cautious about over focusing on it in a quarter. And as I said, we've got very good visibility as to the deal mix in the balance of the year and there are some bigger deals in it. And there are also while the Q2 was a little light on SaaS deals, again, it's just deal mix and timing.
We know that there'll be strong number of SaaS deals in the second half of the year that are multi year and will raise the bookings and the backlog. So again, we feel that the trends that have been established over the last couple of years are largely in place. And I think the beat in the second quarter was not timing. And with the visibility we have in that in the books at this point, we think the direction will continue.
That's helpful. And then just the last one for me. John, just wanted to ask you, which one of your newer initiatives are you guys most excited about? I mean, you clearly have a lot of growth, irons in the fire with record holdings and criminal justice and the new Brazos stuff. So just wondering what's top of mind for you right now strategically?
Well, not to give you a short answer,
but the
way we run the company is to try to do that across the board. So obviously, Courts and Justice has had a great run. It is a very strong leader and we're very excited about their opportunities going forward, turning case management into more of an integrated criminal justice suite, building out the e filing opportunities that we have. But that same kind of focus, it certainly isn't because we're having that success that we have relief in other areas of the business. We're a strong company financially as you know.
We're looking for places to make investments and we're raising the level of investment we're making in products like Munis that are well established and in strong leadership position, but we feel it's appropriate to reinvest a percentage of those incremental revenues back into the product and their experience is strong. Probably the fastest growing smaller unit, but fastest growing and a good catalyst for growth down the road is the intergov department. We don't get too granular with those numbers, but it's fair to say that company has far more than doubled in revenues in the 2 years it's been on board and emerging as a real leader in that space as well. So we're excited about that. So again, we try to look at the whole range of applications and really we're not looking at where we can tighten things up.
We're exercising this with discipline, but we really are looking at in each of those suites, what types of timely investments can we make to improve their competitive positions and ensure that they can sustain the growth they're on.
Perfect. Thank you, guys.
The next question comes from Brian Kingslinger of Maxim Group.
Hi. This is actually Josh Siding for Brian. Can you remind us about the court CMS market opportunity in Australia? How many RFPs may come out over the next 6 to 9 months? And are there new competitors that you otherwise don't see in the U.
S? Thanks.
Well, there's only one as far as from what I know, there's one active engagement that we're involved in now. And one of the reasons we entered the marketplace, we've got a strong partnership that we've invested in And we do believe that there isn't a Tyler so to speak in that marketplace. There is no clear leader that is someone we need to kind of overcome. We feel it's a market that doesn't have a leader like that and it's right for someone to come in and make an investment and establish themselves. Obviously, it's English speaking.
The court's operations are very similar to U. S. And there's a market opportunity as there's a need for someone to come in and invest in that. So currently there's just one act of engagement, but we believe that if we're able to get established that there'll be a number of opportunities there.
Okay. And just as a follow-up, can you give us some sense of the deal sizes for C. A. P. A.
P. Opportunities?
Well, it's like here. There could be some deals that are less than $1,000,000 and maybe some deals that are $5,000,000 $6,000,000 $8,000,000 I don't think there are $20,000,000 deals. I think the entire market opportunity is in the area of the size of Texas. So a larger U. S.
State is basically what we're adding incrementally to our addressable market space.
That's helpful. Thank you.
The next question comes from Peter Lowry of JMP Securities.
Hey, John. Hey, Brian. Nice quarter. Can you talk about how you think about your capital allocation strategy currently?
Sure.
Obviously, the balance sheet has built significantly over the last couple of years. We are very focused, I think, traditionally, meaning literally over the last 10 or 12 years, Tyler's done a good job in having quality earnings backed up by their cash flow. And we've had great opportunities to turn that cash into strong shareholder value through repurchase of our own shares and good acquisitions and ongoing investments in our products. As you saw, we bought a little stock in the quarter. We would have bought more had we had more opportunity at that level.
So we'll continue to be opportunistic there and be aggressive when it hits the numbers that we feel we should be investing at. Our M and A strategy has evolved. We aren't as focused on smaller consolidation plays, the things that were important in the early years to get established as a leader to broaden our addressable marketplace to bring in subject matter experts to increase our recurring revenue and customer base and all of those things we feel we've kind of hit the critical mass point there. And so I think you could say our standards have gone up, which means they'll we'll find deals less frequently. But those deals that do meet our standards could be larger in size.
So I wouldn't look at our strong balance sheet at this point in any way as a negative thing. I think it positions us very, very well to act on what could be more meaningful opportunities when they present themselves. So a strategy that you need to be patient on, but we certainly don't want to be here 3, 4, 5 years from now with the kind of cash in relation to our size that you see in some tech companies. We are very actively looking for in a disciplined fashion ways to deploy capital that will create shareholder value. And then lastly, as I indicated, I think on the prepared remarks or one of the earlier questions, we are investing at a higher level.
I don't think that will necessarily put a lot of pressure on earnings because with the kind of growth we have and the incremental margins that come in that growth, it's really just redeploying what we get out of these new revenues back into the product. So it won't necessarily eat into our balance sheet or our cash position, but we are actively identifying and investing in incremental proprietary investment opportunities within our own product suites.
Okay, great. Thanks. And then how are we going to measure the success of EverGuide? Is it as simple as just customer attention or are there different metrics you might look at? And are there any early indications of success there?
Well, it's really taking shape now. So I don't think there's early indications. But maybe one thing that the investment community takes a little bit for granted is that Tyler kind of chugs along nicely and that's not easy. And I think to take for granted that would be a mistake. So yes, we have incredibly high retention, literally less than 2%, probably at or under 1% in terms of names.
So very, very low and you could say, well, that's great and check that box. But what we see is, we have many clients now that are 10, 15, 20 years with us, which means they may have almost all of their staff having turned over in that period of time. Much of their staff never trained on the product. So the people have changed at those sites and the product every 5, 6, 7 years is entirely different than it was 5, 6, 7 years previously. So even if the same people are there, they've really never been trained and may not fully appreciate what's in the product they have.
So Evergreen for some time now has provided them with all of the updates. There's no relicensing, we never resell into an account and that's very well received. But just because we provide them with new technology and new functionality and higher quality products doesn't mean that they're being well utilized at that site. And we can actually go to sites and they can think they need this or need that And maybe they have new leadership that just assumes they've had the system 15, 20 years, they need to go out and get a product that has that. And they don't even appreciate maybe that it's in that product.
And Evergreen really takes Evergreen to another level where there'll be supplementary services, there'll be online training devices, there'll be a lot of things that we really we continually try to add value into their core arrangement with us. And I think we're compensated well-to-do that and it's in our interest to do that. And there'll also be incremental services that they can contract for at incremental cost in order to do that. So it's a recognition that just because we provide them with updated technology and functionality, it doesn't automatically get used and the site needs to be challenged to invest in that and we need to step up and support that process as well. So I think we're trying to stay ahead of the atrophy that can occur in an implementation that gets stale over time.
Great. Thank you.
The next question comes from Tim Cassel of Northland Securities.
Yes. Hey, good morning everybody. Just you touched on briefly of the large deal you did in the quarter. How big was that relative to let's say the Odyssey deal from this quarter last
year? The large deal in the quarter was Indiana's e file deal. It was $20,000,000 to be recognized over 5 years. And the total contracts in Q2 of 2014 in California, I think was $64,000,000 certainly right around there. Yes, dollars 64,000,000
Okay. Yes, that's helpful. And then Brazos, how did that do relative to expectations in the quarter?
Well, it's just a little teeny bit. I think it closed in the remaining weeks. So I think there's only a few $100,000 in the quarter. So it's insignificant.
It was only in there. It closed May 29. It was only in for a month of the quarter. So it didn't have any kind of a meaningful impact.
Okay, great. Great. That's all I had. Thank you.
The next question comes from Scott Berg of Needham.
Hi, John and Brian. Congrats on a good quarter. I have two questions. First of all, John, the Statewide ePAL deal that was announced in the quarter, now that's your second one with the fixed fee is. I guess it's a 2 part question.
1, what is the likelihood of additional opportunities on that fixed fee nature going forward? And then 2, does that contract do you think it guarantees you more revenues or maybe reduces some of the upside of the transactional nature
of the rest of the businesses?
Well, I guess both. So fundamentally, we look at this as a click business and we'll continue to protect that. We will not license the product. It's a click software as a service kind of business. Having said that, we recognize that our vertical likes to have certainty in their cost.
So when we do go to a fixed fee basis, it is completely the result of projections on what those volumes will be and just converting it into fixed fee, so that they have visibility on what their costs are. And I think if we are a vertical software company, then we need to appreciate the market we're in and be responsive to what works for them. I think in the short term, the answer is both, meaning that if their actual volumes are a little higher, then we may come up a little short. And if their actual volumes are a little lower, then we may come out on the good. But these are obviously, all these states have been established and have had courts for a very, very long time and the volatility is within a relatively tight range.
If their actual experience were outside that range for whatever reason, then I think the second generation of those contracts would reflect that. But I think it's a tight range. I don't think they're going to experience filings or case volumes that are dramatically different than what they've been experiencing for years.
And Scott, Indiana is a little different than the way they approach it than most of our e filing clients in most cases. And that includes Texas where it's a fixed price arrangement. In most cases, the users, the attorneys are actually paying a filing fee with each transaction or in the case of Texas with a case as a whole. Indiana is actually funding it out of state funds. So rather than charging the users, it's coming out of the state budget.
So that I believe drove them more towards wanting to have a fixed price arrangement. But if you look at the pricing on Indiana, what we're getting relative to the number of cases we expect it to generate, it's very similar on a per case basis to what we see in other jurisdictions.
Got it. And then one follow-up for me Brian is on the gross margins around professional services. Obviously, you've hired a lot lately to service the contracts, the large uptick of the California courts and justice deals over the 12 years or 12 months in particular along with some of the ERPs. But when do we start getting some leverage from that? And when does that hiring slow a little bit?
Is that a back half of twenty fifteen opportunity? Or should we be thinking about that more in the first half of twenty sixteen?
I think we start to see
the leverage more in the first half of twenty sixteen. Our hiring does slow down in the last two quarters, at least the plans are for the second half of the year for us to add around 150 net heads and we added around 200 in the first half of the year. So it slows a bit, particularly as you get into the Q4. But I think you really start to see that reflected in more of an uptick in margins as you get into the beginning of next year.
Great. That's all I have. Thanks for taking the questions.
The next question comes from Jonathan Ho of William Blair and Company.
Hey, guys. Congratulations on the strong quarter. I just wanted to understand a little bit more. So just relative to the California contracts that you've won last year, can you maybe update us in terms of how far along you are in terms of completing those projects? And maybe your thoughts around sort of follow on opportunities from counties that you've already won?
Yes, a number of them are live, but I think all of them continue to have considerable work left and considerable dollars that remain in backlog. Some of these projects are bigger than others. So again, some go live and say 8 to 12 months and some it could be a 2 or 3 year process. So certainly still in the relatively early stages of all that business that was won. We mentioned as an example, and we've said before that a lot of these deals, the $64,000,000 that we booked in Q2 of 2014 doesn't take all those counties out of play in terms of opportunities.
There are still significant opportunities in those counties. Some of them were a single case type and have several other case types that are potential opportunities for us and other applications as well. So I think most of these counties have an objective to have an integrated criminal justice solution in place, but most of them started with something that's a subset of that. So the significant work that remains from the original engagements, but probably more significantly, there are significant other opportunities like the one we mentioned with Kern County where they signed a $5,000,000 follow on to add other case types and other applications for the project.
Got it.
At a
very high level, we believe the total market opportunity for the integrated criminal justice, all those other applications beyond case management is roughly equal size to the case management opportunity. So for example, in Kern County, I believe our initial deal there was around $4,500,000 and this add on was close to $5,000,000 So it kind of illustrates that they're similar sized opportunities.
Got it. And then just relative to sort of AMCAD's exit to the market, have you started to see now that we're pretty far along in that process, more interest from their existing customer base in terms of switching over or at least early indications. I just want to get a sense of where that might be tracking in terms of competitive displacements?
Yes. There's been I think one account we may have signed last quarter and others watching that. And there were some kind of coalitions established of their clients to kind of see if they could somehow sustain the product. And we see chinks in that armor and who knows, but we just don't see that as a very long term viable option for those accounts. So we've picked up a couple maybe.
We watch the others closely. And I think some of them are trying to see if there's a viable path for them and there's a lot that goes around maintaining these products and supporting them that will make that difficult and we'll continue to watch it closely.
Got it. And then just one last one on my side. In terms of the Dynamics opportunity, you guys had talked in the past about maybe shifting some of the spending away from the R and D side and more to the go to market strategy side. Is that still sort of the current thinking? Or can you give us maybe an updated view on where the investments might go going forward?
Thank you.
Yes. We continue to work on details kind of structuring a new arrangement that's more representative of our relationship once the market once the product is now deployed versus when it was in pre release R and D. And obviously, in those early years, we brought value in bringing our vertical expertise to the product. That's largely reflected in the product. And so our involvement on the R and D side will be brought down significantly.
Some of those resources will be redeployed and are being redeployed on the sales side. And that's not all direct sales, a reasonable amount of those resources will we have a lot of experience in RFPs and demos and managing these marketplaces and all of these things that some of their very capable partners may not have that vertically oriented expertise. And we will have a team that supports that. It's in our interest for them to build out that channel. So yes, at a high level, R and D spend will come down significantly.
Our sales and sales support spend will go up. We'll continue to build out to some degree of service business that we have established there. But the net net of it will be a reduction in total spend probably in the 50% range, so significant reduction in total spend.
Thank you.
The next question will come from Matt Williams of Evercore ISI.
Hi, guys. I'm actually on for Kirk this morning. Most of our questions have been answered at this point, but maybe just 2 for me. I guess number 1, just with the public safety offerings and the Brazos acquisition. As we think about how you're sort of going to go after this public sector market, is there a lot of integration with some of your existing product areas that we should expect?
Or is this business going to be more of a sort of standalone business that's maybe a little less integrated with some of your other offerings? Just trying to get a sense on that.
Well, it's a process and we've been in this process for some time. But I would say this is an area that we can see accelerated growth and a stronger presence than what we've had traditionally. So Brazos mobile is a big leader. It's a lot of the color and decisions these days and having a very strong mobile first kind of approach is exciting to our public safety offering. In terms of standalone, no, I think we see our public safety offering.
We enjoy a very strong leadership position in Courts and Justice. And I think as we grow our public safety position that we have the opportunity to have a complete end to end criminal justice solution that doesn't exist. The competitors for the most part that we compete within courts are different than the competitors we compete within public safety. And if we're able to have an integrated leadership position in both of those areas, There's very meaningful information that can come from that that's more difficult to produce from disintegrated systems. So that is a big part of our strategy there.
Got it. That's helpful. And then maybe just one more on e filing. Obviously, outside of the tech file arrangement, the other component of the e filing revenue continues sort of accelerate. I'm just curious sort of what other states or locations are sort of driving some of the non tech file e filing growth?
And I guess as a sort of follow on to the Indiana deal, when should we expect that to start to contribute going forward? I assume it will be somewhat of a gradual rollout similar to TxFile, but any color on timing there would be great.
Yes. Indiana actually started this quarter with a small amount of revenues about $100,000 It ramps up over the next year. I think it's about $1,500,000 this year and hang on just a second, sorry. Yes, the $1,500,000 this year, dollars 3,500,000 next year and then $5,000,000 a year in 2017, 2018 2019. So after and in the second, it ramps up to I think $650,000 a quarter in the last two quarters of the year.
Most of the other revenues in the e filing is growth right now. There's Beyond Indiana is the big contributor in the second half of the year. We start to see some e filing revenues in some of the California counties in the second half of the year. Most of those are smaller volume counties. So it's not going to be a significant, but it's going to be a sort of a gradual ramp up in those counties.
The other statewide implementations where you've got e filing places like Oregon, Rhode Island, Maryland are all still in a kind of a ramp up phase. So it's more gradual with respect to most of our clients right now other than Indiana.
Great. Thanks for taking the questions.
The next question comes from Kevin Liu of B. Riley and Company.
Hi, good morning. Just one question for me. With respect to the dynamics deal on the federal sector you secured this quarter, is it your sense that there are other large opportunities within either the DoD or other agencies in federal that you're aware of? Or do you think this is more of a one off opportunity?
Simple answer is we don't know. As we've said, we really have very little visibility to this marketplace and what comes to us indirectly through Microsoft. I think it's reasonable to think that winning a significant deal at the federal level is the result of a concerted effort to secure business there. And if they execute well on this project, you would certainly think and hope that it wouldn't be a one off. So the encouraging and this has not been explosive, but I think the encouraging thing is that the direction of the royalties largely is up and the footprint of the market that they have established even though it hasn't exploded is very broad Internationally, I mean, I think there were 18 counties on our royalty 18 countries on our royalty report this past quarter.
That's typical that the deals come from 12, 15, 18 countries, different levels of government, federal governments, state and local governments, complementary public sector, businesses, universities, transit authorities, things like that. So yes, we would hope and we would expect that if they have a successful significant engagement at the federal level that they didn't establish that presence for a single deal that that's something that they expect to be repeatable.
Got it. And actually if I could sneak one more in. Just with respect to the Microsoft negotiations going on now, if you do shift more of your resources towards the sales and service side, is there an opportunity to also claim a higher royalty rate? Or would you expect that piece of the partnership to remain unchanged?
Royalty rates are pretty well established for a very long period of time. We don't get too granular on the agreement, but many, many, many years. And there are the changes from the original arrangement we expect will be if there are, will be very modest. So they can change very modestly based on our resource commitment and a number of other variables. But no, largely the royalty rates are established and will be relatively stable over a long period of time.
Okay. Thanks for taking the questions.
The next question will come from Mark Schappel of Benchmark.
Hi, good morning and thanks for taking my question. Nice job on the quarter. Brian, just one question for you. I wondering if you could just repeat your comments in your prepared remarks with respect to last year's maintenance bookings?
With respect to last year's maintenance bookings?
Yes. If I recall correctly, there were 2 main issues or not issues, but 2 main things you addressed with respect to maintenance bookings. 1 had to do with the Indiana e filing contribution and the other had to do with, I guess something that happened last year at this time with maintenance bookings?
Last year in Q2, we had about $7,000,000 more than $7,000,000 of maintenance agreements that went into bookings that were longer than our normal 1 year term. So with a normal 1 year maintenance booking last year in Q2 that would have renewed and showed up for the same or greater amount this year in Q2. Because those extend for, in some cases, 18 months, some cases, multi year, you didn't get that renewal this year in Q2. Some of those will renew in the Q4 of this year. So they were 18 month initial agreements.
Some of those were multi year agreements that we won't see the renewal again until 2016 or 2017. So they'll work off that initial arrangement. So that creates a little bit of a mismatch in the comparison.
Thank you.
The next question comes from Robert Moses of RGM Capital. Good morning.
Good morning, Just a couple of questions and really a clarification on one. So I know we've talked a lot about kind of the lumpiness of orders, but just trying to put this in perspective, if you did around $179,000,000 just going back over the last, I don't know, 3 or so years, it seems like it's kind of the 2nd highest by a pretty wide margin. Am I thinking about this right? Because I think I've seen like a lot of $100,000,000 to $150,000,000 type of numbers. So it's still relatively significant in terms
of the total dollar value.
You are correct. If you go back over the last 2 years other than Q2 of last year, that's still the highest bookings quarter in the last 2 years. Okay. So yes, even though it's down from last year's Q2 and there are some moving parts in there, it is still the 2nd best bookings quarter in the last 2 years.
Okay. Thanks. And then John, I know this is really tough to comment on, but just M and A environment in general, they're very disciplined historically, assume you're going to remain so. But just given what happened to the economy a few years ago and where we're at today and given the valuation of the stock market. Would you say the M and A environment things you're looking at is about the same as it's been the last year?
Or is it more aggressive, less aggressive? Just a sense.
It's probably about the same. And as I said, our strategy has evolved and I think it actually is more selective, more likely to do strategics than consolidation opportunities, which theoretically could put higher values on deals. If you look at Intergov or if you look at our e file, these acquisitions really while you want to be disciplined on value, they certainly can support a higher valuation given how they perform once in the Tyler company. So, there's deals out there, you know the key markets flush with cash and there are cases where valuation I think gets out of the neighborhood that we're comfortable in. But it's reasonably active.
It's just instead of doing a deal or 2 a quarter, probably more likely to do fewer deals that could be more significant in size.
Great. Thanks for the color.
At this
time, there appear to be no more questions.
All right. Well, thank you very much for joining us on the call today. And if there are any further questions, then feel free to reach out to Brian or myself. Have a great day.
This call is concluded. You may