Tyler Technologies Inc Q2 FY2020 Earnings Call

Hello, and welcome to today's Tyler Technologies Second Quarter 2020 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. And as a reminder, this conference is recorded today, July 30, 2020. I would like to turn the call over to Mr. Moore. Please go ahead.

Thank you, Danielle, and welcome to our second quarter 2020 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, and Brian will review the details of our second quarter results. Then I'll have some additional comments, and we'll take questions.

Thanks, Lynn. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Lynn?

Thanks, Brian. We executed at a high level during the second quarter, as the effects of the COVID-19 pandemic continued. From a financial perspective, GAAP revenues declined 1.5%, and non-GAAP revenues declined 2.4%. Revenues for the quarter were approximately $35 million below our pre-COVID plan. Many procurement processes encountered delays, as clients focused on addressing COVID-19, resulting in several contracts being pushed out of the quarter, reducing license and, to a lesser extent, subscription revenues. Also, services revenue was negatively impacted during the quarter as billable travel was essentially eliminated and fewer hours were delivered as we transition to providing most services remotely. As I noted on our last earnings call, due to concerns with COVID-19, our annual Connect user conference was canceled. And although a majority of the content was delivered virtually, we lost more than $6 million of revenue that would have been recognized in the second quarter. Recurring revenues remained strong. GAAP subscription revenues grew 16.6%, and non-GAAP subscription revenues grew 15.6%. Together, total recurring revenues from maintenance and subscriptions grew 12.3% on a GAAP basis and comprise approximately 75% of total revenues. On the positive side, operating expenses were well below our original plan. We experienced significant savings in commissions, travel, marketing, health claims, and other employee-related expenses. As a result, our operating margins expanded, with our non-GAAP operating margin up 290 basis points to 27.5%. Our cash flow was another high point in our results, with free cash flow up 226% over last year's second quarter. Bookings for the quarter were approximately $309 million, and as expected, declined 31.6% due to the very difficult comparison to the second quarter of 2019, which included 2 very large SaaS deals, 1 for the North Carolina Administrative Office of the Courts and the other with Bexar County, Texas. Excluding these two contracts, bookings declined approximately 10.9%. Although we have not seen meaningful cancellations, we are seeing delays in procurement processes and lengthening sales cycles due to the effects of COVID-19, which impacted bookings this quarter. As we have discussed in the past, our new deal mix can be somewhat lumpy from quarter to quarter, as was the case this quarter. The number of new software deals was weighted towards SaaS, with 66% of the total. However, the value of the new software deal is weighed towards on-premise license arrangements at 57%, as more of the larger deals that signed this quarter chose on-premises. Our largest deal in the quarter was a license arrangement with the state of West Virginia, valued at approximately $9 million for our iasWorld Appraisal solution, including appraisal services. Perhaps the most significant contract signed in the quarter was a public safety arrangement with Jacksonville, Florida, for our New World Public Safety records management and Brazos eCitation solutions, along with our Socrata Data & Insights, SceneDoc and SoftCode solutions, valued at approximately $5 million. Jacksonville, the 13th largest city in the nation, represents our largest public safety client to date. This one is important because it not only validates the significant investments we've made in the New World suite to position it to become competitive in Tier 1, but also showcases the strategic value of the acquisitions we've made in recent years. Other notable license deals during the quarter included an Odyssey court case management contract with the 10th Judicial Court in Johnson County, Kansas, which completes our state-wide presence in Kansas. Along with contracts for our MicroPact entellitrak solution, with the Pennsylvania Turnpike Commission and the United States Department of Agriculture. In fact, three of our seven largest license deals in the quarter were for our MicroPact entellitrak solutions. We added two new counties in California for Odyssey, a licensed contract with Calusa County and a SaaS contract with Mariposa County. We've now won six of six California court deals that have been executed since the state-provided new funding for case management system replacements last year. Our largest SaaS deal in the quarter was a $3 million contract with Clay County, Florida for our EnerGov Civic services solution. We also signed a SaaS deal for EnerGov with the city of Sunnyvale, California, valued at approximately $1.3 million. Other significant SaaS arrangements signed this quarter were with the Bellevue School District in the state of Washington and the City of Lynn, Massachusetts for our Munis ERP solution, with the Abu Dhabi Global Markets for our Modria Online Dispute Resolution solution with the Kansas Supreme Court for our CaseloadPRO solution, and with Clearmount County, Ohio for our Socrata Data & Insight solution. In addition, 42 existing on-premises clients signed contracts to move to the cloud, including Oasis County, Texas, with Odyssey Courts; Franklin County, Ohio, and Cab County, Georgia, with iasWorld Appraisal & Tax; and Alameda County in California with CaseloadPRO supervision. We also delivered the initial version of our e-warrant system to the state of North Carolina under the contract we signed late in Q1. We also have trial programs underway for e-warrants with 2 counties in Texas. Now I'd like for Brian to provide more detail on the results for the quarter.

Thanks, Lynn. Yesterday, Tyler Technologies announced its results for the second quarter ending June 30, 2020. In our earnings release, we provided non-GAAP measures to enhance understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is available in our earnings release. We've posted additional information in the Investor Relations section of our website, including details about quarterly bookings, backlog, and recurring revenues. This marks the first year-over-year decline in quarterly revenue since the fourth quarter of 2010, breaking a streak of 34 quarters of double-digit revenue growth. GAAP revenues for the quarter were $271.1 million, a decrease of 1.5%. On a non-GAAP basis, revenues were $271.3 million, down 2.4%. Organic revenue growth declined 1.9% on a GAAP basis and 2.8% on a non-GAAP basis. Our core software licensing and subscription revenues combined grew 8.4% on a non-GAAP basis with 7.7% organic growth. Total revenues were approximately $35 million below our pre-COVID plan, resulting from about $11 million in delayed license and percentage of completion revenues; $8 million in professional services; $6.6 million from the cancellation of Connect; $4.5 million in billable travel; and $1.4 million from reduced e-filing volumes. Subscription revenues for the quarter rose by 16.6%. We added 125 new subscription agreements and converted 42 existing on-premises clients, amounting to approximately $39 million in total contract value. In the same quarter last year, we added 154 new subscription agreements and made 27 on-premises conversions, totaling roughly $128 million in contract value. Subscription contract value represented around 43% of the total new software contract value signed this quarter, compared to 80% in Q2 of last year. The value-weighted average term of new SaaS contracts this quarter was 3.7 years, down from 6.1 years last year, impacted by a significant 10-year $85 million contract with North Carolina. Revenues from e-filing and online payments, part of subscriptions, remained relatively flat year-over-year at $21.3 million, including $14.2 million from e-filing, which decreased by 1.8%, and $7.1 million from e-payments, which increased by 5%. The closure of court operations in some jurisdictions led to an estimated $1.4 million reduction in transaction-based e-filing revenues this quarter. For Q2, our annualized non-GAAP total recurring revenue was approximately $810 million, a 10.7% increase. Non-GAAP ARR for SaaS arrangements in Q2 stood at approximately $258 million, up by 21.7%. Transaction-based ARR was around $85 million, an increase of 0.3%, while non-GAAP maintenance ARR was approximately $467 million, up 7.4%. Our backlog reached a record high of $1.54 billion at the end of the quarter, a 7.4% increase. As Lynn mentioned, our bookings dropped by 31.6% to about $309 million, comparing unfavorably to the record $452 million in Q2 of 2019, which included the largest contract in our history, an $85 million SaaS contract for the North Carolina courts, plus a $20 million SaaS contract with the Bexar County, Texas courts. Excluding those contracts from last year, bookings declined by 10.9%. Nevertheless, for the trailing 12 months, bookings amounted to approximately $1.2 billion, a 3% increase. Our software subscription bookings in the quarter contributed an additional $9.2 million in new annual recurring revenue. As seen in the first quarter, cash flow was strong in the second quarter, with cash flows from operations rising by 62.5% to $39.8 million, while free cash flow more than tripled to $31.5 million. Our GAAP effective tax rate for the quarter was negative, resulting from discrete tax benefits related to stock compensation and lower cash taxes boosting cash flow. We concluded the quarter with $473 million in cash and investments and no debt. For the full year of 2020, we project GAAP revenues between $1.124 billion and $1.144 billion, with non-GAAP revenues expected between $1.125 billion and $1.145 billion. We forecast GAAP diluted EPS of $4.71 to $4.91, which may vary due to the effects of stock incentive awards on the GAAP effective tax rate. We anticipate non-GAAP diluted EPS to be between $5.30 and $5.50. For the year, estimated pretax noncash share-based compensation expense is projected to be about $79 million, and R&D expense is expected to range from $90 million to $92 million. Fully diluted shares are anticipated to be between 41.5 million and 42 million shares. GAAP earnings per share calculations include an estimated annual effective tax rate of negative 23% and approximately $82 million of estimated discrete tax benefits from share-based compensation, which may change based on stock option timing and volume. Our estimated non-GAAP annual effective tax rate for 2020 is 24%. We expect capital expenditures to be between $34 million and $35 million for the year, which includes approximately $10 million for real estate and about $6 million of capitalized software development costs. Total depreciation and amortization is projected to be around $81 million, including about $54 million for amortization of acquired intangibles. Now I'd like to hand the call back to Lynn for additional comments.

Thanks, Brian. I want to provide an update on how Tyler Technologies is approaching the challenge of COVID-19 and its effects on our business and our clients. First, our operational response. Tyler's 5,500 professionals continue to provide a high standard of client service with minimal disruption. Our primary focus continues to be on ensuring that our employees and their families are safe and healthy while supporting clients who provide essential services to the public. Since mid-March, almost all of our staff have worked from home, with all but the most crucial travel eliminated. Our clients have faced disruption to their operations, as they deal with the effects of the pandemic on their communities and, in some places, civil unrest and focus on providing vital services to their citizens. Since March, we have seen delays in some procurement processes, although most late-stage processes are moving forward. Some implementation appraisal service projects have also encountered delays, as clients grapple with balancing social distancing orders with conducting daily operations. We've imposed travel restrictions on our employees, which has all but eliminated our ability to provide services on-site and to visit prospective clients for sales calls and demos. Virtually every trade show has been canceled, as was our Tyler Connect user conference scheduled for late April. We are addressing the challenges imposed by the COVID-19 pandemic by adapting the way we do business, including using web and video conferencing extensively for collaboration, conducting sales demos, providing client support and delivering professional services such as training remotely, and even executing complex go-lives virtually. With the spread of COVID-19, our clients' need for digital connectedness, both within their organizations and directly with the public, is rapidly shifting from a vision to an urgent requirement. In the last few months, we have seen numerous examples of our team members working to help our clients adapt to the current environment in truly amazing ways. I'd like to highlight a few examples. Following the cancellation of Connect, we offered much of the valuable content to all of our clients through a program called Still Connected, a series of live and recorded online sessions. We've delivered more than 320 sessions of content with 17,000 views of recorded webinars, enabling us to reach even more client personnel than would have attended Connect in person. We accelerated the launch of our new virtual court solution, which provides a turnkey platform built on AWS for conducting face-to-face court sessions with remote defendants over the web. We have offered it without charge for 90 days in order to help clients serve their constituents without interruption. 46 courts are now live, using the solution to handle cases remotely, while also broadening access to justice for disadvantaged or displaced defendants, and 18 additional courts are in the process of onboarding. And just yesterday, AWS recognized virtual court as the best remote work solution in the AWS 2020 public sector partner awards. Developers on our Versatrans team fast track development of a new bus attendants app that works with our school bus routing solutions to provide schools with a tool for limiting bus capacity and managing social distancing as well as facilitating contact tracing. Our Appraisal & Tax division worked with clients with active revaluation projects underway, including Delaware County, Pennsylvania and Franklin County, Ohio, to move to remote property valuation hearings. We've also pivoted from infield data collection work to using remote data to achieve equitable and repeatable property assessments that support vital property tax revenue streams for our clients. We successfully completed more than 180 go-lives across our product groups during the quarter, most with very few or no Tyler personnel on site. The Port of Long Beach, California, the second busiest seaport in the U.S., became our third public safety client to go live with our new enterprise record solution, along with our full suite of CAD, mobile, field reporting, and shield force applications, with a contracted go-live timeline that represented a 33% improvement over traditional timelines. And our Data & Insights division is working in innovative ways to use our Socrata platform to respond to COVID-19 with data. Our Open Data platform was rapidly established as a one-stop shop for information and services for citizens in Buffalo, New York during the pandemic. Tyler also published on the Socrata platform our nursing home COVID tracker, an embeddable dashboard displaying detailed national nursing home data on COVID-19 at the county and state levels. I couldn't be prouder of how our 5,500 dedicated professionals are supporting each other, delivering exceptional client service, and displaying the spirit of innovation that has long been a hallmark of Tyler's success. We've already discussed the financial impact of COVID-19 on our second quarter, with significant reductions to both revenues and costs. I'd like to add some comments on our current outlook for the rest of 2020 as well as provide some thoughts on the long-term outlook and prospects for Tyler. We believe the revenue impact on the second quarter was approximately $35 million, and we expect that revenue growth for the rest of the year will continue to be significantly impacted. While we have not seen meaningful cancellations, we continue to see delays in procurement processes and longer sales cycles, as public sector entities continue to focus on issues relating to the pandemic and remote work, which will delay the timing of license and, to a lesser extent, subscription revenues. We have proven that we can deliver the majority of our professional services remotely, but we expect to see lower software and appraisal services revenues as some projects are delayed by client availability or travel restrictions. Billable travel was impacted significantly in the second quarter as most travel ceased, and we now expect to see very little travel in the second half of the year. In addition, a number of courts have closed or limited operations during the pandemic, which will continue to impact transaction-based e-filing revenues during this period. While our variable revenue streams will continue to be affected by the current environment, we anticipate that recurring revenues, which now comprise 75% of our total revenues, will continue to be generally unaffected. Our July 1 maintenance renewals went into place with normal pricing, and we do not expect to see any changes in client retention. Lower expenses have more than offset revenue reductions relative to our pre-COVID-19 plan, resulting in margin expansion. Many of these expense reductions, such as sales commissions and health claims, are short-term in nature, but we do expect that some savings will be sustainable. For example, I expect that post-COVID, we will continue to deliver a significant amount of services remotely, improving utilization of our professional services teams and reducing travel expenses. I expect that more of our administrative and sales and marketing activities, including trade shows, will also be conducted virtually in the future, with a reduction in associated expenses. We also will continue to explore the possibility of greater numbers of employees working remotely, even after our offices are fully opened. On the product development front, we are continuing all of our strategic initiatives, including product R&D projects and accelerating our move to the cloud and still expect that R&D expense will grow at more than 11% for the year. We have not laid off any personnel and do not expect to do so. And in fact, we added 46 new heads during the second quarter, mostly in R&D. As we remain confident in our long-term outlook, there are uncertainties around the continuously evolving COVID-19 pandemic and its impact on our operations and those of our clients. For example, government response to the pandemic continues to vary significantly from state to state and even from jurisdiction to jurisdiction within a state, thereby making the duration and scope of business restrictions within the public sector difficult to predict. Although the CARES Act provided approximately $424 billion in economic aid to state and local governments, additional stimulus packages will likely provide more assistance, many of our clients face near-term budget pressures that could cause them to defer purchases. After suspending our guidance last quarter, we have reinstituted annual guidance for 2020 based on our high percentage of our recurring revenues and visibility in the pipeline for the second half, tempered by ongoing uncertainties around COVID-19. The midpoint of our non-GAAP revenue guidance implies growth of about 4% for the full year, along with operating margin expansion. As I said last quarter, I remain as confident as ever in Tyler's long-term outlook and prospects. Our company's fundamentals have never been stronger. And just as we did following the challenges of the dot-com bust, 9/11, and the Great Recession, we expect to emerge as a stronger company with an improved competitive position. The pandemic has not changed the underlying fundamentals and long-term demand for our software and services. Tyler exclusively serves the public sector, and our clients will not go out of business. The solutions we provide are essential, whether managing revenue that keeps communities operating, ensuring public safety to help the most vulnerable or providing transparency and access to government for the residents of jurisdictions we serve. Our software manages mission-critical functions such as 911, courts, property taxes, utilities, and payroll. Our clients generally acquire new solutions to replace aging systems that are at the end of life and may be unreliable or unsupported, usually a high priority regardless of the economic environment. If anything, the current crisis is highlighting the unsustainable reliance on outdated technology by much of the public sector. Technology is an increasingly critical factor in helping government function effectively, especially in difficult times. Long-term opportunities will emerge from this crisis, as both Tyler and our clients reexamine historical business practices. For example, work-from-home postures further highlight the need and benefits of connectivity and cloud services, something we have been actively investing in and are continuing with our strategic collaboration with AWS. Clients will continue to appreciate the value of data and being connected with others, other departments and jurisdictions as well as with citizens. This is our connected communities' vision, a vision that only Tyler can execute. Our ability to deliver uninterrupted high-quality services and support during these difficult times only further strengthens our bonds with clients and reinforce Tyler's messages in both agility and stability. As I mentioned earlier, Tyler has endured challenging times in the past and emerged stronger than before. Today, we believe we are even better positioned to weather the economic slowdown. Recurring revenues made up 75% of our total this quarter. Our competitive position in win rates remains strong, and we have significantly expanded our total addressable market through investments in a combination of M&A and R&D. Our financial position today is also the strongest it's ever been, with 0 debt, approximately $530 million in cash and investments, and substantial additional liquidity available through our $400 million undrawn credit facility. As a result, we're able to continue to invest at a high level in all of our long-term strategic initiatives, something that many of our competitors may not be able to do. Our ability to actively invest during the Great Recession was a key differentiator that strengthened our overall market position when demand inevitably returned. We will continue to do the same through this crisis. Finally, we achieved an important milestone last month when Tyler was added to the S&P 500. It's an honor to be listed among other innovative and highly regarded companies in the S&P 500 index. This recognition is the result of a lot of hard work by numerous employees over many years. Today, we have an incredibly talented team of 5,500 professionals with unmatched public sector experience and deep domain expertise. I'm proud to call them my colleagues, and I'm confident of our ability to together realize the opportunities ahead of us. Now we'll take questions, Danielle.

We will now begin the question-and-answer session. The first question comes from Peter Heckmann of D.A. Davidson. Please go ahead.

On customer budgets, can you talk a little bit more about, based on your analysis, who's being relatively more affected? Is it states, cities, counties? And how that's affecting some of their priorities for IT spending?

Yes, that's a great question, Pete. As you know, about 80% of our business operates at the local level, which includes cities and counties, around 15% at the state level, and about 5% at the federal level. Currently, we are not experiencing any significant impact from the federal level, although there may be some delays, the budgets appear to be stable. At the state level, particularly within our Tyler Federal division, which includes our MicroPact division, we are noticing delays in requests for proposals, primarily at the state level rather than the federal. For city and county business, the situation is mixed; our clients are still working through their new budgets and are trying to understand the availability of stimulus funds, with variations across our product offerings. For instance, when examining leading indicators like RFPs, demonstrations, and contract executions, our Courts & Justice solutions and Public Safety solutions are on track for solid sales this year. We've mentioned our expectations for significant deals in Jacksonville's public safety sector. However, we are observing some additional delays on the ERP side, making the overall situation somewhat mixed.

Okay. And that's helpful. And have you seen any indication that some of the smaller municipalities are looking at options of kind of banding together and jointly bidding out to vendors trying to get a volume discount across a number of smaller municipalities? Or is it still just you're basically negotiating with each municipality individually?

Yes. No, we're not really seeing small jurisdictions band together in that manner. So it's still kind of business as usual on that front.

Hi, thank you very much. Lynn, I want to follow up on a comment you made at the end. Clearly, you are in a better position compared to 10 years ago and relative to many competitors, especially concerning the range of your portfolio and your current financial situation. In this environment, is there anything you can do to assist your clients? For example, can you adjust pricing to help gain market share? Are you considering being more proactive regarding mergers and acquisitions if an opportunity arises? I'm trying to understand if this is a moment for you to capture market share based on your standing in the market and if there are actions you can take to speed up that process.

I believe the investments we are making across the board, especially in cloud and modernizing our products, are becoming increasingly important. Currently, we are not making significant changes to our pricing. We are indeed in a strong position, and I would argue that we are even in a much stronger position now compared to three months ago during the last earnings call, even though our top-line revenues have decreased slightly. Our balance sheet has also improved by about $200 million since then. We have progressed further in our R&D initiatives, including modernizing our core applications. As I mentioned in my earlier comments, we are learning a lot about ourselves and our business operations, which will make us more efficient when we emerge. These are all opportunities for us. Regarding mergers and acquisitions, as you may recall, we had been very active in 2018 and early 2019, but we took a deliberate pause. Currently, we are back to our usual approach and have reviewed several deals in the past six to eight weeks. I expect that we will continue to explore potential deals, which present opportunities. Our balance sheet positions us favorably, providing us with a competitive advantage for both our internal investments and potential M&A deals throughout the remainder of this year and into next year.

I understand that visibility is currently limited, but I'd like to clarify whether the main challenge lies in discerning what's happening at the start of the process or how things are progressing through it. Are discussions still ongoing, even though it's tough to predict how they will convert from opportunities into actual bookings? The potential for your growth seems significant. I want to ensure I grasp whether people are no longer engaging in discussions or if they're simply stating they need to proceed but are uncertain about when they'll secure the funding to invest in your technology.

Yes. My response is that things are mainly progressing through the funnel at this stage. I would remind you of my comments from last quarter. Before COVID impacted the market, it was quite strong, and we started the year on a positive note, which typically indicates how the entire pipeline will perform. We were actually on track to exceed our internal plan for the first quarter, which is generally a promising sign for the rest of the year. This pipeline remains intact, as everything we do is essential and the demand is present. It's important to remember where the market stood previously; that market will endure. In the meantime, the usual pipeline will continue to expand, albeit with some delays. I believe our clients are still navigating some uncertainty. We're hearing from our sales team that clients are looking to evaluate their budget situations. We are fairly confident that the government will introduce more stimulus funding, but that has yet to materialize. Even within certain sectors, there are available funds. Our maintenance and subscription services continue without cancellations. However, moving forward with new projects involves some political dynamics concerning fund allocation. Thus, there is currently a degree of apprehension and uncertainty.

Hello. Thanks, guys. Good morning. Appreciate you taking the questions. I guess digging in a little bit more, you talked about ERP being a little bit slower, but some of the other areas that are maybe viewed as more critical, but need to have some sort of upgrade in technology like Courts & Justice. Maybe digging in a little bit more on some of the other areas, whether that's a little bit more on the civic planning side? Are you seeing any traction in municipalities wanting to get some of those revenue-generating capabilities back if construction can pick up and people are a little bit more back at work? And then also on the school systems, as they're all planning on what it might look like or taking a dual-track process in terms of what the fall might look like, are you having more conversations around potential to make purchases there?

Yes, Matt, that's a good question. Right now, we are only a couple of months into this situation. My comments should be seen as somewhat anecdotal since there's no established firm trend at the moment. We're observing the deals we believe will continue to progress and close, particularly in public safety and courts. Reflecting back to the Great Recession for some experience, we discussed replacing aging systems and how essential these upgrades are. In some cases, organizations are assessing whether they can extend the life of their current systems for an additional year or two. Your comments regarding our civic services, including permitting, licensing, and planning, are valid. A couple of the larger deals I mentioned were significant for the quarter, and our pipeline and outlook in that area still appear strong. In contrast, the schools sector does carry a degree of uncertainty. Many schools have yet to decide how they will operate next year, which impacts not only our business but also the lives of students, employees, and communities across the country. Hence, there's still some unpredictability surrounding schools. In terms of civic services and recovery, our Data & Insights division is actively collaborating with our Munis ERP and EnerGov Civic Services solutions. We have introduced some new products this quarter, and a few clients are currently piloting them. On the ERP side, we call them Executive Insights; on the EnerGov side, they are named Community Development Insights. These offerings utilize our Socrata platform and are designed to provide real-time financial health metrics, such as budgets, cash balances, HR metrics, and property revenue comparisons against budget. Likewise, Community Development Insights helps clients understand economic health and recovery by providing real-time data on permit issuances, applications, inspections, and construction values. These tools are proving to be quite valuable, and we currently have four early adopters who have provided positive feedback. Once these tools are fully solidified, we’ll be able to roll them out more broadly. This demonstrates how we are leveraging past investments in Data & Insights to meet our clients' specific needs.

Great. That's very helpful. Following up on the strong free cash flow, particularly due to reduced travel and other related expenses, are you evaluating your sales performance against your targets or quotas? Are you considering adjustments to those goals to align better with current results? Should we anticipate potentially higher payouts in the latter part of the year if bookings improve? I'm interested in your planning around this to ensure sales team satisfaction, while recognizing that original targets may not be achieved.

Yes, that's a valid question. At a high level, when we consider expenses and our operating margins for the remainder of the year, we've outlined our expectations in our guidance. We're anticipating that many of the trends we've observed over the past few months will continue. We're in the process of evaluating our sales strategies and have implemented some changes that we will keep assessing. It's interesting to note that during our last discussion three months ago, many, including us, expected the situation to be quite different by now. This uncertainty, particularly around travel, is one factor that led us to lower our guidance. As we recognize that these conditions may persist longer than I initially anticipated, we're committed to ongoing internal assessments.

Yes. Hi, Lynn. Hi, Brian. It's Scott Wilson on for Alex today. I guess, first question, just to level set the guide. Last quarter, the message was that you were confident in mid-single-digit growth. The reinstated guide is now at 4%, which is a little bit below where we were modeling. I guess with that in mind, you kind of hit on some of these things, but just to kind of be clear, what are the things that you're more confident in relative to 90 days ago? And what are the areas where you're less confident relative to 90 days ago?

I'll start, and Brian can join in. About 90 days ago, we generally believed that local jurisdictions and daily life would begin to return to normal in the third quarter. We expected that people would start traveling again, our ProServe team would be delivering services on-site, and our appraisal services would increase. We anticipated seeing more sales and in-person demonstrations. However, things have continued to change, and I believe we didn't fully grasp the situation. Three months ago, we weren't fully aware of the operating expense savings we would have for the remainder of the year. It has certainly been a learning experience for us. As a management team, we often emphasize that successful companies constantly evaluate their internal processes and seek improvement. Over the past few months, we've rigorously assessed some of our historical practices, including on-site service delivery, internal travel, the number of trade shows we attend, and how we market products, such as Virtual Court. This has been a valuable learning experience, and I believe it will benefit us in the long run. Brian?

Yes. If you consider the change from our previous soft guidance of mid-single-digit growth, the most significant adjustment in our current guidance relates to billable travel. We anticipated seeing a resurgence of that as we entered the third and fourth quarters, but we've now removed most of it from our plans for the rest of the year. The midpoint of our guidance is now 4% growth, which still falls within the mid-single digits. This is the main downside. However, those revenues come with little to no margin, so the impact on our margins is actually positive. We are also more confident about the pipeline for the second half of the year as we are closer to it, and the deals we have in mind are well-progressed in the pipeline, giving us improved visibility and more information. Additionally, as Lynn pointed out, after having a full quarter to assess the current environment, we have a clearer understanding of where expense savings are occurring and the scale of those savings.

Great. Super helpful. And then a quick follow-up on, Lynn, your prior comments on customers that are moving towards your subscription solutions outside of your ERP customers, whether it's Public Safety, Courts & Justice, et cetera. Are those customers making the initial purchase decision still on a perpetual basis, and you're seeing more of those conversions to the cloud? Or are you actually seeing customers kind of net new upfront, selecting cloud from the get-go?

We're seeing an increase in new business, particularly in our Courts & Justice sector. There has been a rise in cloud adoption on the A&T side and with EnerGov. The main point I wanted to emphasize is our internal focus on expanding our product offerings. This is part of our broader long-term strategy to transition to the cloud, and we are beginning to see progress in that area.

Hi, good morning. Just, Brian, for you, it's probably best view is on the guidance for the year. Just some additional commentary on how to think about the split between Q3 and Q4, just to help us kind of model a little bit better?

Yes, the timing of the split does have some uncertainty, as is often the case. Bookings can be unpredictable, especially regarding licenses. Typically, we experience a stronger license quarter in Q4 related to public safety. Therefore, I expect to see sequential revenue growth in both Q3 and Q4. The growth rate in these quarters is likely to be quite similar, as both would need to contribute consistently toward the annual guidance target. We also anticipate sequential growth in earnings for Q3 and Q4. While there will be sequential revenue and earnings growth, pinpointing the exact split is somewhat challenging. However, I believe the guidance suggests approximately 5% growth for the second half of the year, which should be relatively uniform in both quarters.

Hi, good morning. I just wanted to start out with the virtual courts opportunity that you talked about. Can you give us maybe a sense of what that could look like? I know you're offering it for free in the beginning, but could this be an add-on module? Like can you talk a little bit about pricing or uplift as you kind of build out that capability?

Sure. Once it moves beyond the free trial phase, it will be an add-on. It's a cloud service hosted on AWS, so it's a subscription supplement to our existing offerings. Currently, this is mainly with our municipal court clients, which are typically less complex, such as traffic courts and similar types of courts, many of which serve smaller customers. Therefore, the individual increase in revenue is moderate compared to their current recurring revenues with us. However, we believe it has broad applicability across our municipal court clientele. We are also considering expanding a similar service to our larger Odyssey customer base. While I can't provide specific numbers on the opportunity, I would say it represents a meaningful increase from the existing recurring revenues with those customers.

Got it. And then in terms of your ability to sell add-on capabilities and incremental offerings versus, I guess, the larger systems. I mean clearly, you're seeing delays in the bigger procurements. But is there an opportunity to maybe circle back to existing customers to upsell additional modules as you think about, I guess, pivoting in the current environment?

Yes, I think that's a good point, Jonathan. And the short answer is yes. And we're actually seeing that. Our Insight sales across the board is holding fairly steady right now. And so I do think that's an opportunity, not just in this environment, but I actually think it's one of our larger opportunities as a company as we continue to move forward.

Good morning guys. A question for you on the guidance. How important is the, I guess, the federal relief if it comes through? And what kind of impact would it have on your guidance if we do or do not get federal relief from the government?

I don't anticipate it having a significant impact for the remainder of this year. However, I expect it will begin to have a larger effect as we enter 2021, especially as we move through this budget cycle. While it's one thing for the Federal government to announce substantial stimulus measures, as we've seen with their responses to COVID, it's another matter for local jurisdictions to submit their applications and secure the funding. This is a crucial aspect, as it may alleviate some of the current uncertainty and anxiety, but I don’t foresee it having a substantial impact in 2020.

Yes, most deals that are going to close in the next 2 quarters are pretty far along in the pipeline that worked through lengthy sales processes already. And those generally are already funded in an existing budget and also generally are very high priorities in terms of the needs. So those, we expect to be largely unaffected to the extent we see delays around those. It's less around funding and more around just the logistics and the disruption that the clients are having that has slowed down some of the processes and might push them out of this quarter into next quarter and more of the short-term kinds of delays.

That's insightful. As I consider your business in e-filings and appraisals, is there a chance for pent-up demand? Once we hopefully move past the COVID situation by the end of the year or shortly after, will there be an increase in e-filing transactions and subsequently revenue? Has the pent-up demand been addressed, or does it seem like we've simply delayed it, pushing it further down the line?

I think there might be an opportunity for an increase in e-filing, although I can't say for certain. E-filing is currently facing challenges. While some courts have reopened, a large portion of civil filings at present are related to debt and landlord evictions. There are still moratoriums in place, even in open courts, which means some of these cases will persist. We believe there could be some pent-up demand, but we don’t have firm certainty about it at this time.

And about 75% of our e-filing is on a fixed fee basis and 25% is transactional and variables. So it's a minority of our business on the e-filing side that's affected today. But some of those places where the courts are shut down, we've seen that to be significant.

At this time, there appears to be no more questions. I'll turn the call back over to Mr. Moore for closing remarks.

Thanks, Danielle, and thanks, everyone, for joining us today. We certainly hope you all stay safe and healthy. And if you have any further questions, please feel free to contact Brian Miller or myself. Thanks.

The conference has now concluded. Please, you may now disconnect.