Hello, 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, instructions will follow at that time. As a reminder, this conference is being recorded today, July 23rd, 2015. I would like to turn the call over to Mr. Marr. Please go ahead.
Thank you, Robert, welcome to our second quarter 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 second quarter operating results and 2015 guidance. Then I'll have some final comments, we'll take your questions. Brian?
Thanks, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We'd refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise. John?
Our second quarter financial performance was outstanding, with revenues and earnings exceeding our internal expectations. From a historical perspective, this was our seventh straight quarter of revenue growth greater than 15%. In five of the last six quarters, revenue growth exceeded 17.5%. Software license and royalty revenues were up 21% and at $14.6 million were the highest in company history. Our 29% growth in recurring revenues from subscriptions reflects continued strong growth in our e-filing revenues from courts, 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 second quarter included approximately $64 million in new contracts in California for our Odyssey Court solutions. On an absolute basis, bookings this quarter declined 25%.
Excluding the California courts deals from last year's second quarter, 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 second quarter included a five-year SaaS agreement with Denver, Colorado, for our iasWorld appraisal and tax solution, valued at approximately $7.9 million. Denver has been a long-time client and chose to upgrade to our current iasWorld 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 five-year SaaS agreement for MUNIS with Carroll County, Georgia, and a contract for Infinite Visions with the Mesa Unified School District, Arizona's second-largest school district by enrollment. We also signed significant multi-suite contracts, including MUNIS and EnerGov, with the cities of Waco, Texas, and Surprise, Arizona. New clients for our EnerGov 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 million 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 Odyssey 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. Two 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 courts statewide. This five-year, $20 million contract is a fixed-price arrangement similar to our e-filing contract in Texas. Indiana also uses our Odyssey case management system in courts 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 $6.1 million in cash and 12,500 shares of Tyler stock valued at $1.5 million. 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 million 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. I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2015.
Yesterday, Tyler Technologies reported its results for the second quarter ended June 30th, 2015. I'm going to provide some additional data on the quarter's performance and review our guidance for 2015. 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 second quarter were $146.3 million, up 17.6%, with 16.8% organic growth. Software license and royalty revenues increased 20.7%, and at $14.6 million were the highest level in the company's history.
This was our 10th consecutive quarter of double-digit growth in licenses, and in three of the last four quarters, license and royalty revenues have grown by more than 20%. In Q2, we received $1.2 million 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 a 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 $16.9 million in total contract value. In Q2 of last year, we added 44 new subscription-based arrangements and had 21 on-premises conversions, representing approximately $17.8 million 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 five years, compared to 5.6 years in last year's second quarter. The fastest-growing subscription-based revenue stream is from e-filing for courts and online payments. These revenues increased 30.7% to $10 million from $7.7 million last year. Total e-filing revenue of $7.6 million this quarter grew 32.7% over last year, with 45% of that increase related to our Texas e-filing contract, which contributed $4.8 million of revenues this quarter. Our blended gross margin for the quarter declined 40 basis points to 46.7%, 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 second quarter to 3,068 employees, including 41 employees added through the Brazos acquisition. SG&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 second quarter. Excluding non-cash share-based compensation expense, SG&A expense increased only 8.8%, only half the rate at which our revenues grew. Operating income was $29.6 million, an increase of 25.3%. Non-GAAP operating income was $36 million, up 25.3%. Despite slightly lower gross margins, the non-GAAP operating margin improved 150 basis points to 24.6%, as we obtained substantial leverage from both SG&A and R&D expenses. Net income rose 27.8% to $18.8 million, 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 second quarter, 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 $12.7 million, compared to $9.4 million in last year's second quarter. Note that free cash flow was reduced by cash tax payments of $16.8 million in the second quarter, compared to $8.6 million last year. Days Sales Outstanding and accounts receivable were 94 days at June 30th, 2015, compared to 104 days at June 30th, 2014.
DSOs increased sequentially from 71 days at March 31st, which is our normal seasonal trend related to the timing of maintenance billings. Our backlog at the end of the quarter was $723 million, up 10.4% from last year's second quarter. Software-related backlog, which excludes backlog from appraisal services contracts, was $672.4 million, an 8.6% increase. Backlog included $165 million of maintenance compared to $154.4 million a year ago. Subscription backlog was $229 million compared to $185.7 million last year. Our bookings for the quarter, which are calculated from the change in backlog plus revenues, were $179 million, down 25.1% from last year's second quarter. Q2 of last year included bookings of approximately $64 million related to the California court signings. Excluding the California courts deals, bookings for this quarter rose 2.8%.
For the 12 months ended June 30th, bookings declined 10.8% 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 third quarter 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 million 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. Second, maintenance bookings declined slightly this quarter from the second quarter of last year.
This is not the result of attrition, but rather it is because last year's second-quarter maintenance bookings included more than $7 million of maintenance agreements which extend beyond the normal one-year term, several of which were related to the new California courts 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 up in bookings in the fourth quarter of this year, and some are multi-year agreements that will renew in 2016 or 2017. As John noted earlier, and as we've 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 second 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 value of $867,000 in the second quarter of 2014. Again, last year's comparison includes 12 contracts with courts in California. Based on our performance through the first half of 2015 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 million-$581 million. We expect 2015 diluted GAAP EPS will be approximately $1.97-$2.05. We expect 2015 non-GAAP diluted EPS will be approximately $2.50-$2.58. For the year, estimated non-cash share-based compensation expense is expected to be approximately $20 million-$20.5 million.
Fully diluted shares for the year are expected to be between 36 million-36.5 million shares. We estimate an effective tax rate for 2015 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 $13.5 million-$14.5 million for the year. Total depreciation and amortization is expected to be between $15.5 million-$16 million, including approximately $6.7 million 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 second quarter 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 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 and 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. 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.
We will now begin the question and answer session. To enter a question into the question queue, please press star one on your touch-tone phone. If you are using a speakerphone, please pick up your handset and then press the star key and the number one. To withdraw your request, press the star key and then the number two. Please limit your question to one and one follow-up, and then place yourself back in the queue for additional questions. We will pause momentarily to assemble our roster. The first question comes from Charlie Strauzer of CJS Securities.
Hi, good morning.
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 predict visibility looking out beyond maybe a quarter or two, but when you look at the pipeline of proposals that you're tracking out there and 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. I think our sales channel is maturing. The product is settling into really what I'd call subsegments of the marketplace, where it may have advantages, and it would be particularly strong. We've got a pretty good pipe around that. As part of this reorganization where we're really transitioning from a predominantly R&D role in terms of our relationship with Microsoft, that initial product is well built out. It exists. It's actually relatively mature. Our role will shift, where we'll have a lighter presence on the R&D side. They still have a significant R&D staff and will continue to invest significantly in the product.
I think our experience on the sales, marketing, and even service side is now where we add value to this arrangement. 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 subverticals where we think it's particularly competitive. I think a lot of our focus will be supporting their partners in building out their sales channels and targeting the subverticals 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.
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. 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. Also just looking at, particularly in appraisal, it looks like you're at historically high levels in terms of revenue. How should we expect that to ramp also?
Well, it's really across the board. In our courts and justice division, results year to date are ahead of plan. None of that's being given back in the second half. It is not timing. It's just outperformance. 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. 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 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. As you indicated, appraisal services is cyclically strong at this point in time.
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. We really do continue to make meaningful gains in our competitive position. Our win rates are strong. 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. 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. 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.
Yeah. Hey, guys. Congratulations on the quarter. A couple of questions from me. First one, just a clarifying question. Brian, that $7 million in maintenance renewal bookings that you called out, was that part of the $64 million California bookings from last year, or is that incremental to that?
Some of it was included in that. 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. On Brazos, can you guys talk about how much is expected to contribute to revenues this year?
It's somewhere around $3.5 million in the second half of the year. Brazos' revenues last year were around $10 million, but because we were a partner of theirs and some of their revenues actually flowed through us and were included in our revenues as third-party sales. All of that $10 million isn't incremental to revenues we already had in the plan. A net increase of around $3.5 million in the second half of the year.
Got it. Could you maybe walk through some of the puts and takes on cash flow performance in the quarter? I realize you don't guide to the number. It was a little bit below our numbers and consensus. 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 second quarter, and clearly our cash flow was better this year in Q2 than it was last year in Q2. In the first half of the year, we paid about $10 million 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 in that they pushed it a little higher last year. Some of that second quarter, some more of that third quarter. The taxes are the biggest piece.
Got it. That's helpful. John, maybe can you just talk a little bit, I know you touched on this on the comments, but if I put the 3% bookings growth and I realize the lumpiness in bookings in context with kind of the raise and the guidance, 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. The sales processes are long, 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. At this point, there's some deals that it's a matter of timing in the fourth quarter, 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. 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 multi-year SaaS deals.
If we do a traditional on-premise account, the only thing that goes into backlog is the initial implementation. We don't sign seven-year maintenance agreements, even though they're near certain to occur. Whereas if we sign a seven-year SaaS deal, seven years of revenue goes into the backlog. There are a number: big deals, multi-year SaaS deals, a number of other things that can kind of sway that number around. 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. 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. There are also, while the second quarter 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. 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. With the visibility we have and that in the books at this point, we think the direction will continue.
That's helpful. Just the last one from 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. Just wondering what's top of mind for you right now strategically?
Not to give you a short answer, the way we run the company is to try to do that across the board. 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. 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 a strong leadership position.
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 EnerGov department. We don't get too granular with those numbers, it's fair to say that company has far more than doubled in revenues in the two years it's been on board and emerging as a real leader in that space as well, we're excited about that. 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, 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 Kinstlinger of Maxim Group.
Hi, this is actually Josh Seiden for Brian. Can you remind us about the Court CMS market opportunity in Australia? How many RFPs may come out over the next six to nine months, and are there new competitors that you otherwise don't see in the U.S.? Thanks.
Well, from what I know, there's one active engagement that we're involved in now. 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 with a complete offering like what we have. There, again, isn't a single competitor that we'd name to you 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, 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.
Currently, there's just one active engagement, but we believe that if we're able to get established, there'll be a number of opportunities there.
Okay. Just as a follow-up, can you give us some sense of the deal sizes for Australia opportunities?
Well, it's like here. There could be some deals that are less than $1 million and maybe some deals that are $5 million, $6 million, $8 million. I don't think there are $20 million deals. I think the entire market opportunity is in the area of the size of Texas. 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, and 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 the 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. 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&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. I think you could say our standards have gone up, which means we'll find deals less frequently. Those deals that do meet our standards could be larger in size. 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 well to act on what could be more meaningful opportunities when they present themselves.
That's a strategy that you need to be patient on, but we certainly don't want to be here three, four, five 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. 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'll 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. It won't necessarily eat into our balance sheet or our cash position.
We are actively identifying and investing in incremental proprietary investment opportunities within our own product suites.
Okay, great. Thanks. How are we going to measure the success of EverGuide? Is it as simple as just customer retention, 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. I think to take for granted that would be a mistake. Yeah, we have incredibly high retention, literally less than 2%, probably at or under 1% in terms of names. Very, very low, and you could say, "Well, that's great," and check that box. What we see is we have many clients now that have 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.
The people have changed at those sites, and the product every five, six, seven years is entirely different than it was five, six, seven years previously. 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. Evergreen, for some time now, has provided them with all of the updates. There's no re-licensing. We never resell into an account, and that's very well received. 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.
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 this 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. EverGuide 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 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. There'll also be incremental services that they can contract for at incremental cost in order to do that.
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. 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 Cassell of Northland Securities.
Yeah. Hey, good morning, everybody. Just you touched on it 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 eFile deal. It was $20 million to be recognized over five years. The total contracts in Q2 of 2014 in California, I think, was $64 million, certainly right around there. Yeah, $64 million.
Okay. Yeah, that's helpful. Brazos, how did that do relative to expectations in the quarter?
It's just a little teeny bit. It could close in the remaining weeks. I think there's only a few hundred thousand dollars in the quarter, it's insignificant.
Okay.
It was only in there. It closed May 29th. It was only in for a month of the quarter, didn't have any kind of a meaningful impact.
Okay, 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 eFile deal that was announced in the quarter, now that's your second one with the fixed fee is, I guess it's a two-part question. One, what is the likelihood of additional opportunities on that fixed-fee nature going forward? Then two, 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?
I guess both. 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. 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. 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. Obviously, all these states have been established and have had courts for a 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. 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.
Scott, Indiana's a little different in 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. Rather than charging the users, it's coming out of the state budget. That, I believe, drove them more towards wanting to have a fixed price arrangement. If you look at the pricing on Indiana, what we're getting relative to the number of cases we expected to generate, it's very similar on a per case basis to what we see in other jurisdictions.
Got it. The one follow-up from me, Brian, is on the gross margins around professional services. Obviously, you've hired a lot lately to service the contracts, the large uptake of the California courts and justice deals over the 12 months in particular, along with some of the ERPs. When do we start getting some leverage from that, and when does that hiring slow a little bit? Is that a back half of 2015 opportunity, or should we be thinking about that more in the first half of 2016?
I think we start to see the leverage more in the first half of 2016. 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 fourth quarter. 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 & Company.
Hey, guys. Congratulations on the strong quarter. Just wanted to understand a little bit more. 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?
Yeah, 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. Again, some go live in, say, 8 to 12 months, and some it could be a two or three-year process. 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 million 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.
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. There's 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 million follow-on to add other case types and other applications to 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. For example, in Kern County, I believe our initial deal there was around $4.5 million, and this add-on was close to $5 million. It kind of illustrates that they're similar sized opportunities.
Got it. 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 displacement.
Yeah, there's been, I think, one account we may have signed last quarter, and others watching that. There were some kind of coalitions established of their clients to see if they could somehow sustain the product. We see chinks in that armor, and who knows? We just don't see that as a very long-term viable option for those accounts. 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. 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&D side and more to the go-to-market strategy side. Is that still 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 product's now deployed versus when it was in pre-release R&D. Obviously, in those early years, we brought value in bringing our vertical expertise to the product. That's largely reflected in the product. So our involvement on the R&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 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. We will have a team that supports that in our interest for them to build out that channel.
Yeah, at a high level, our R&D spend will come down significantly. Our sales and sales support spend will go up. We'll continue to build out to some degree, a service business that we have established there. The net of it will be a reduction in total spend, probably in the 50% range, so a significant reduction in total spend.
Thank you.
The next question will come from Matthew Williams of Evercore ISI.
Hi, guys. I'm actually on for Kurt this morning. Most of our questions have been answered at this point, maybe just two 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. We've been in this process for some time. I would say, this is an area that we can see accelerated growth and a stronger presence than what we've had traditionally. Brazos, mobile is a big leader. It's a lot of the color in 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 with in courts are different than the competitors we compete with in 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's more difficult to produce from disintegrated systems. That is a big part of our strategy there.
Got it. That's helpful. Maybe just 1 more on e-filing. Obviously, outside of the eFile arrangement, the other component of the e-filing revenue continues to sort of accelerate. I'm just curious, what other states or locations are driving some of the non-eFile e-filing growth? 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'll be somewhat of a gradual rollout, similar to eFile, any color on timing there would be great.
Yeah. 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 $1.5 million this year and Hang on just a second. Sorry. Yeah. It's $1.5 million this year, $3.5 million next year, and then $5 million a year in 2017, 2018, and 2019.
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. 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 as significant, but it's going to be 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 ramp-up phase. 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 & Co..
Hi, good morning. Just one question from 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. If they execute well on this project, you would certainly think and hope that it wouldn't be a one-off. 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've established, even though it hasn't exploded, is very broad. Internationally, I think there were 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. Yeah, 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. 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?
The royalty rates are pretty well established for a very long period of time. We don't get too granular on the agreement, but many years. The changes from the original arrangement, we expect, if there are, will be very modest. They can change very modestly based on our resource commitment and a number of other variables. No, largely the royalty rates are established and will be relatively stable, over a long period of time.
Great. Thanks for taking the questions.
The next question will come from Mark Chappell of Benchmark.
Hi, good morning, and thanks for taking my question. Nice job on the quarter. Brian, just one question for you. I was 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?
Yeah. If I recall correctly, there were two main issues, or not issues, but two main things you addressed with respect to maintenance bookings. One had to do with the Indiana e-filing contribution, the other had to do with, I guess, something that happened last year at this time.
Yeah
with maintenance bookings.
Last year in Q2, we had about more than $7 million of maintenance agreements that went into bookings that were longer than our normal one-year term. With a normal one-year maintenance booking last year in Q2, that would have renewed and showed up for the same or greater amount this year in Q2. 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 fourth quarter of this year, 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. They'll work off that initial arrangement. That creates a little bit of a mismatch in the comparison.
Thank you.
The next question comes from Robert Moses of RGM Capital.
Morning.
Morning, Rob.
Just a couple of questions, and really a clarification on one. I know we've talked a lot about the lumpiness of orders, but just trying to put this in perspective. If you did around $179 million, just going back over the last, I don't know, three or so years, it seems like it's the second highest by a pretty wide margin. Am I thinking about this right? Because I think I've seen a lot of $100 million-$150 million type of numbers. It's still relatively significant in terms of the total dollar value.
You are correct. If you go back over the last two years, other than second quarter of last year, that's still the highest bookings quarter in the last two years.
Okay
Yes, even though it's down from last year's Q2, and there's some moving parts in there, it is still the second-best bookings quarter in the last two years.
Okay, thanks. John, I know this is really tough to comment on, but just M&A environment in general. Been very disciplined historically. Assume you're going to remain so. 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&A environment things you're looking at is about the same as it's been the last year? Is it more aggressive, less aggressive? Just a sense.
Well, it's probably about the same. As I said, our strategy's 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 EnerGov or if you look at our eFile, 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. There's deals out there, you know the PE market's flush with cash and there are cases where valuation, I think, gets out of the neighborhood that we're comfortable in. It's reasonably active. It's just instead of doing a deal or two a quarter, we're probably more likely to do fewer deals that could be more significant in size.
Great. Thanks for the color.
Sure.
At this time, there appear to be no more questions. Mr. Marr, I'll turn the call back over to you for closing remarks.
All right. Well, thank you very much for joining us on the call today. If there are any further questions, feel free to reach out to Brian or myself. Have a great day.
This call is concluded. You may disconnect.