Hello, and welcome to today's Tyler Technologies Third 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. As a reminder, this conference is being recorded as of today, November 5, 2020. I would now like to turn the conference over to Mr. Moore. Please go ahead, sir.

Thank you, Eric, and welcome to our third 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 third quarter results. Then, I'll have some additional comments and we'll take questions. Brian?

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 the actual results to differ materially from these projections. We'd refer you to our Form 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 were pleased with our third quarter results as we continue to execute at a high level, particularly in light of the continuing impact of the COVID-19 pandemic. After we experienced our first year-over-year decline in quarterly revenues in almost a decade, we returned to revenue growth this quarter, driven by strength in recurring revenues. We have not experienced any meaningful cancellations, but longer sales cycles and delays in projects as clients deal with the effects of the pandemic, along with the near elimination of billable travel, led to declines in software license, professional services and appraisal service revenues. However, GAAP subscription revenues grew a robust 18.6% and non-GAAP subscription revenues grew 18%. We continued to experience significant savings in operating expenses in the third quarter, in part driven by the successful deployment of more efficient service delivery and operating models. As a result, our operating margins expanded significantly with our non-GAAP operating margin up 300 basis points to 28.6%. And our adjusted EBITDA was a new quarterly record at $89 million. Cash flow has also been very robust throughout the year, and both cash from operations and free cash flow reached new quarterly highs in the third quarter. It was also a strong quarter for bookings, which rose almost 13%. While the number of new deals was down, the average deal size and total new contract value were both up compared to last year. It was a strong quarter for new business for our Justice solutions as we closed some large contracts after extended sales processes. Our largest deal in the quarter was a license arrangement with the Washington State Courts of Limited Jurisdiction, valued at approximately $15 million for our Odyssey Court Case Management and Caseload Pro Probation Solutions, including e-filing. We also signed significant Justice solutions contracts with Dallas County, Texas, including a license arrangement for our Odyssey Solution for criminal and justice of the peace courts valued at approximately $8 million and a SaaS arrangement for our Jury Management Solution valued at approximately $1.6 million. Also, for our Odyssey solution, we signed a license arrangement with Saginaw County, Michigan, and notable SaaS deals with the city of Akron, Ohio and the Texas counties of Guadalupe, Leon, Gillespie and Erath. We also signed the first state-level contract for our Tyler Supervision product, formerly known as Caseload Pro, with the state of Nevada. Our Public Safety division continues to expand its market with the year-to-date average deal size up 92% over last year. This expansion reflects our increasing competitiveness upmarket as well as an increase in the breadth of products in many deals. Our Public Safety division had never signed two contracts with licenses greater than $1 million each in the same quarter until this quarter, when we signed large contracts with Sedgwick County, Kansas and the City of Laredo, Texas. We also signed a multi-suite contract with Ellis County, Kansas for our New World Public Safety, Odyssey Courts, Socrata Data & Insights and Brazos Solutions and contracts with the city of Brownsville, Texas and Des Moines, Iowa for our Public Safety and Socrata Data & Insight Solutions. Our largest SaaS deal in the quarter was a $6 million contract with the city of Tigard, Oregon in the Portland metropolitan area for our Munis ERP and EnerGov Civic Services solutions. We also signed notable SaaS deals for our Munis ERP solution with the city of Fairfield, California; Champaign County, Illinois; the Virginia Railway Express; the city of Thomasville, Georgia, and a license arrangement with the city of Christiansburg, Virginia. Other significant SaaS deals for our EnerGov Civic Services solution were the cities of Palm Beach Gardens, Florida and Yonkers, New York. Finally, it was also a strong quarter for new business in our federal space with several new contracts, most notably with the D.C. Department of Consumer and Regulatory Affairs, The Counter Trade Products and the Fish and Wildlife Service, both departments within the Department of Justice and the Department of Health and Human Services. As we reported in a Form 8-K filed on September 29, we discovered early on September 23 that an unauthorized third-party intruder had disrupted access to some of our internal phone and IT systems. As soon as we discovered this, we shut down points of access to external systems out of an abundance of caution. We immediately activated our internal incident response plan, which included taking impacted systems offline to further contain the spread. We confirmed that the malicious software the intruder used was ransomware. We are following strict protocols laid out by industry standard incident response directives. Because of this, we are being careful not to share certain details around the incident until the investigation is finished. However, there is some information I can share with you today. From the morning of September 23, our incident response efforts have been facilitated by Tyler's internal resources as well as third-party providers. Those third-party providers include FireEye Mandiant, a nationally recognized incident response provider. We also have been actively cooperating with law enforcement. Our initial analysis has continued to prove correct. The impact of the incident was directed at our internal corporate network and phone systems. There has been no evidence of compromise in the separate and segregated environments where we host software for our clients. And to date, there has been no evidence of malicious activity on client self-hosted systems related to this incident. From day one, we have been regularly communicating with our client community and have actively maintained an incident response page on our website. We encourage you to check for updates there as well. In addition to the containment, recovery and remediation efforts we have undertaken, Tyler has also taken steps to supplement the existing multilayered security monitoring, scanning, and antivirus protocols already in place. We are committed to completing our full forensics investigation and taking all appropriate actions in response to our findings. The security incident did impact our ability to deliver licenses and services during late September and into October. We currently estimate the impact on revenue was approximately $1.5 million in the third quarter and $2.5 million in the fourth quarter. We maintained cybersecurity insurance coverage in an amount that we believe is adequate. I want to reiterate that what I have just shared with you represents the information we can share at this point, given where we're at in the stage of our investigation and the recovery process. We will not be addressing the incident further on today's call, and we will not take questions on the incident itself or our investigation. I would, however, like to express my gratitude to all Tyler employees, who once again displayed the heart of Tyler in their response and handling of the security incident, especially our internal IT teams that worked around the clock with an aggressive and coordinated response to recover and remediate our internal systems. As with our response to the COVID-19 pandemic, Tyler demonstrated the resiliency that comes from strong and well-designed business processes and corporate governance practices. Now, I'd like for Brian to provide more detail on the results for the quarter.

Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2020. In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We've also posted on the Investor Relations section of our website under the Financial Reports tab, schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues. Although our revenues continued to be impacted by the COVID-19 pandemic, we were pleased to return to positive revenue growth this quarter. GAAP revenues for the quarter were $285.7 million, up 3.8%. On a non-GAAP basis, revenues were $285.9 million, up 3.2%. Organic revenue growth was 3.3% on a GAAP basis and 2.7% on a non-GAAP basis. Our core software license and subscription revenues grew – combined grew – 8.1% on a non-GAAP basis with 7.8% organic growth. Subscription revenues for the quarter increased 18.6%. We added 114 new subscription-based arrangements and converted a quarterly high of 46 existing on-premises clients, representing approximately $56 million in total contract value. In Q3 of last year, we added 150 new subscription-based arrangements and had 20 on-premises conversions, representing approximately $47 million in total contract value. Subscription contract value comprised approximately 47% of total new software contract value signed this quarter compared to 51% in Q3 of last year. The value weighted average term of new SaaS contracts this quarter was 4.3 years compared to 2.7 years in Q3 of last year. Revenues from e-filing and online payments, which are included in subscriptions, were $23.2 million, up 9%. That amount includes e-filing revenues of $15.1 million, up 2.5% over last year, and e-payments revenues of $8.1 million, up 23.6%. Transaction-based revenues were negatively impacted by reduced operations at some clients as a result of the pandemic. For the third quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $830 million, up 11%. Non-GAAP ARR for SaaS arrangements for Q3 was approximately $265 million, up 21.6%. Transaction-based ARR was approximately $93 million, up 9%, and non-GAAP maintenance ARR was approximately $472 million, up 6.2%. Our backlog at the end of the quarter reached a new high of $1.55 billion, up 9.2%. As Lynn noted, our bookings in the quarter were strong at $292 million, up 12.9%. For the trailing 12 months, bookings were approximately $1.3 billion, up 5.4% against a tough comparison that includes the two large North Carolina courts deals totaling approximately $105 million in the prior trailing 12 months. Our software subscription bookings in the third quarter added $9.9 million in new annual recurring revenue. Cash flow from operations increased 30.5% to $169.8 million and free cash flow grew 34.8% to $165.4 million, both new quarterly highs. In fact, year-to-date, our free cash flow has already surpassed our best full year free cash flow by more than 9%. We ended the quarter with approximately $650 million in cash and investments and no outstanding debt. Our guidance for the full year of 2020 is as follows. We expect 2020 GAAP revenues will be between $1.117 billion and $1.129 billion and non-GAAP revenues will be between $1.118 billion and $1.130 billion. We expect 2020 GAAP diluted EPS will be between $4.53 and $4.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect 2020 non-GAAP diluted EPS will be between $5.48 and $5.58. For the year, estimated pre-tax non-cash share-based compensation expense is expected to be approximately $77 million. We expect R&D expense for the year will be between $88 million and $90 million. Fully diluted shares for the year are expected to be between 41.5 million and 42 million shares. GAAP earnings per share assumes an estimated annual effective tax rate of negative 12% after discrete tax items, and includes approximately $65 million of estimated discrete tax benefits related to share-based compensation, which may vary significantly based on the timing and volume of stock option exercises. Our estimated non-GAAP effective – annual effective tax rate for 2020 is 24%. We expect our total capital expenditures will be between $30 million and $31 million for the year, including approximately $10 million related to real estate and approximately $6 million of capitalized software development costs. Total depreciation and amortization is expected to be approximately $81 million, including approximately $54 million of amortization of acquired intangibles. Now, I'd like to turn the call back to Lynn for some additional comments.

Thanks, Brian. With the challenges our clients face as a result of 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. We're gratified by the accolades Tyler is receiving for our innovations to help our clients address the challenges of the current environment. During the third quarter, our Virtual Court solution, which has been selected by approximately 60 courts nationwide, received the AWS Best Remote Work Solution award in conjunction with its use in the city of Alvin, Texas. We also won the Coolest Overall Technology Innovation Award from School Transportation News for our new bus attendance application, which works with Tyler's bus routing solutions to provide schools a tool for limiting bus capacity, contact tracing and social distancing on the school bus. 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 9% for the year. While some of our competitors are laying off staff, we continue to add new employees to support long-term growth opportunities, and we added 27 net new heads during the third quarter, mostly in product development. We also continue to adapt our operations, providing client support and delivering professional services such as training remotely and executing complex go-lives virtually, improving utilization and eliminating most travel costs. Many administrative and sales and marketing activities, including sales demos, trade shows and user group meetings are also being conducted virtually with reductions in associated expenses. We continue to explore the possibility of greater numbers of employees working remotely, even after our offices fully reopen. Lower expenses have more than offset revenue reductions relative to our pre-COVID plan, resulting in margin expansion. Some 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. As a result, we expect to continue to see year-over-year margin expansion in the fourth quarter. We expect that revenue growth for the fourth quarter will continue to be significantly impacted by the pandemic, and to a much lesser extent, the IT security incident. Although our variable revenue streams will continue to be affected by the current environment, we anticipate that recurring revenues, which comprise more than 70% of our total revenues, will continue to be relatively unaffected. While 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 continued 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. Many public sector entities are facing near-term budget pressures that could cause them to delay spending in the coming year. The COVID-19 pandemic has not changed our view of the underlying fundamentals and long-term demand for our software. 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. While it is too soon to fully assess the impact of the elections, we expect that additional federal stimulus will be forthcoming to provide further economic aid to state and local governments. We are confident that new long-term opportunities will emerge from this crisis, as both Tyler and our clients reexamine historical business practices. And that Tyler is better positioned than our competitors to provide innovative solutions to help our clients meet new challenges. Our balance sheet is stronger than ever, with $650 million in cash and investments and no debt. We plan to continue to invest at a high level in R&D and actively pursue M&A opportunities to broaden our total addressable market and build on our strong competitive position. I continue to be extremely proud and inspired by how the entire Tyler team has risen to face the challenges of this year head-on, supporting our clients as well as each other. We are confident in the fundamental strengths of the public sector market and our ability to grow and invest in strategic initiatives in a difficult environment, and we look forward to executing our long-term strategies until conditions allow us to return to a higher growth market. Now, we'll take questions.

Thank you, sir. We will now begin the question-and-answer session. And your first question today will come from Peter Heckmann with D.A. Davidson. Please proceed with your question.

Good morning, gentlemen. Thanks for taking the questions. As regards additional federal government stimulus, there were some – there was a bill floated earlier in the year – just focused on technology modernization. Can you talk about the different types of programs that might be pending and where you expect both broad stimulus funds to help municipal budgets, but as well, any directed programs that you're watching that you think could be relatively near term?

Yeah, sure, Pete. And you're right. I think generally speaking, there's an expectation that there's going to be another round of stimulus. I think both political parties agree on that. I think for certain that the last month or so, maybe two months, it's become a little bit more of a politicized issue that I think will get behind us, now that the election is behind us. In fact, I read an article this morning where Mitch McConnell in the Senate said that getting a stimulus passed by the end of the year was his new top priority as well as – and he made a comment specifically – as well as state and local government stimulus. So, I think that's coming. I think that's the expectation. It's hard to know exactly where everything's going to shake out, but I do think it will become a priority following this election, once things settle out a little bit more. I think I talked about last time – at the last call – the prior Fed Chairman Bernanke, he made a comment coming out of the Great Recession, that one of the things that they, I think, sort of missed the boat on was they did not devote enough money to state and local governments when they were doing their stimulus then. I think that's a significant priority. We've also talked about the Fed has specific bond buying programs for counties and cities, and I think that's going to continue. So, the expectation is there. I think the expectations for our clients, I think there's – that's part of the hesitancy going on right now – but I see that coming on the horizon.

And I'd add one other thing. I think what you were alluding to there is, there does seem to be bipartisan efforts to provide more funding, specifically for state and local government IT upgrades. There was an act – The State and Local IT Modernization and Cybersecurity Act that was proposed back in August – and that act would provide $28 billion over the next five years, specifically to upgrade government IT systems. So, the upgrading of systems is certainly something that the federal government recognizes is important.

Got it. Got it. That's helpful. And then just in terms of where budgets are right now, typically, the fourth quarter is strong for public safety. Public safety seems to have a fair amount of momentum and encouraging to hear bigger solution sets and bigger deal sizes in public safety, but do you think based on where we are we, you're on track with public safety bookings for the fourth quarter or are you – I guess what's your level of comfort that you'll hit your targets there on the public safety side?

Yeah, Pete, I think that's a good question. And the short answer is yes. And what we've seen, generally is, we've seen a little bit of difference in terms of different market segments but public safety the demand's still there. We expect some significant deals to still come through in the fourth quarter. I think one of the things that's encouraging about public safety is as we continue to invest and we've added more portfolio of products to their bag, is that, historically, the fourth quarter was – was one that was, I think, a little more skewed toward their license deals and it still is. But as that business grows and as it gains traction, we're starting to sort of level that out a bit. We've had, as we noted, for the first time ever two license deals over $1 million in Q3, which is pretty incredible. In fact, now I think it's now three of the last four quarters, we've had license deals in excess of $1.5 million. So the momentum's there in public safety. It's funny, I think 10 days from now will be our five year anniversary of acquiring that, and I think it's a testament to the work that those people have put in and the investments we've put in. And we talk about how it takes a little bit of time with some of these investments, these acquisitions, and they're really starting to hit their stride; they're doing a great job.

Good, good to hear. I'll get back in the queue. Thank you.

Our next question comes from Matt VanVliet of BTIG. Please proceed with your question.

Hi, thanks for taking the question. I really appreciate it. I guess, on the front of the services disruption from the ransomware attack. Maybe not a question directly from that, but as how it impacted you during the quarter? You talked about inability or, I guess, a disruption in delivering some of your projects. Was that a reallocation of resources or were you forced to kind of dig a little deeper with some of those customers and assess sort of what happened and sort of give them some additional information to make sure that they were comfortable moving forward? And then on the same front, sort of how that might have impacted overall pipeline processes going on?

Yes. So – and you – I don't want to go into too much more detail. But the short answer is, as we talked about, the incident was really all about our internal systems. It was about our phone systems, our website and things of that nature. However, out of abundance of caution, what we, as I mentioned in my comments, what we did was we immediately shut down all external points of entry. So, that disrupted things like being able to conduct – we do a lot of services – support was disrupted. We weren't able to send e-mails with attachments for a while. And really that, again, that was just out of abundance of caution. So, it was really short term. To your second question, as it relates to pipeline, it has not had any impact really on our pipeline. There was obviously a little short-term disruption, but we haven't seen anything meaningful in terms of future impact of sales or anything like that.

And then, looking at your overall sort of K-through-12 school customer base and potential customers out there, how much of a disruption to their overall typical operational processes – the limited, maybe in-person schooling or definite hybrid situations out there – are either changing that narrative or accelerating some of those deals that they now feel like they need to have more technology in place, more ability to work remotely and have more digital services in place.

Yeah, so I would say two things. As it relates to schools, in particular, I'd say that's one area right now where budget impacts is sort of constraining some deals from moving forward; it's pushing some things out. At the same time, you're right. It's absolutely highlighting – and this goes beyond schools – it's highlighting the need for technology. I think when I look at the business overall of the public sector, I think the shift that we're starting to see, that part of it's due to COVID, but it's new, more online, mobile, public access – things that are interaction with the parents, with the schools – but even more just citizens engaging with their communities. That's something that's going to continue. And I think that was the future anyway, but I think COVID has really sort of accelerated that. So, and I think what's encouraging about that to me, Matt, is that Tyler really is out in the forefront of this. We're the best positioned for this. This brings in our whole Connected Communities vision and things that we're already doing. And so it really puts us in a great position when things – when we sort of get on the other side of this.

All right. Thank you.

Our next question comes from Charlie Strauzer of CJS Securities. Please proceed with your question.

Hi, good morning. Can you talk a little bit maybe just give kind of a quick early view of next year? I know usually you give more detailed guidance on the next call, but just given that you saw a return to growth in Q3, maybe just some early thoughts on next year.

Yes. Sure, Charlie. And I guess I'd start off by saying – and we talked about on the last call – is we don't see any real meaningful change in our pipeline. We know the demand for our services don't go away. We remember how we started the year in the first quarter before it hit. We were out to a really great start and so we sort of expect that to continue. At the same time, we also talked about we're in the middle of these June 30, July 1 budget cycles right now. So my expectation is that there will be some hangover. still be some delays in some deals, still some clients that are reluctant to open up and do some remote delivery of services. We're still waiting to see courts opening back up, so some of our transaction volumes kick up. I'd say stepping back on a high side, just sort of generally, you're right. We are in the budget process right now. It is a little bit early. I'd say on the revenue side, I would expect revenue growth to be higher than what it's been in 2020, but probably not a full return to sort of our pre-COVID expectations of high single digits, 9%, 10%, 11% growth. But I do expect it to be better than this year. But that's kind of where we are on the revenue side.

That's very helpful. Thanks, Lynn. And secondly, just you're generating a ton of cash, really just want to just get a better sense of now that you've got so much cash on the balance sheet, any change in priorities for the use of cash? Is M&A something that's more of a priority and are you seeing any pipeline activity in the M&A front?

Yes. Sure, Charlie. And yes, we're always – we've talked before – we're always looking at deals and that's continued. That has not slowed down during COVID. In fact, one of the things that we've done over the last six months, you probably remember us talking about over the last couple of years is our white space initiative. We've actually taken the time, dived a little deeper, refined that, and really making that forefront. We're going to continue to be opportunistic on those deals. But we're out there, we're looking. I would like to see us do some deals, and so we're out there looking.

Our next question comes from Rob Oliver with Baird. Please proceed with your question.

Great. Thank you, guys, for taking my question. Good morning. Lynn, one for you and then I had a follow-up for Brian. Lynn, so I think it was around this time of year that you guys started to see that cross-sell traction in New World Public Safety into some of your existing Tyler accounts. I think it started on your home turf in Texas. And I'm curious, you mentioned that the federation approach is starting to take hold. Curious this quarter with that strength that you saw in public safety, it's getting a bit more linear and less back-end loaded, are you seeing that trend continue where you're seeing pull-through from Tyler customers that are also committing on the public safety side as well and how that's progressing?

We are. We've gotten, as you mentioned, we – I think some of the initial traction was in Texas. We're seeing some good things on the West Coast in California. I think what's particularly encouraging is this continued move-up market, which is also part of the fact that we're – the Tyler Alliance story – the total Tyler story is really starting to resonate. The largest deal they did this quarter was Sedgwick County, Kansas, that was about a $1.6 million license deal. And that was a full suite of CAD, enterprise records, but also pulling through things – SoftCode, our field reporting, Tyler Corrections, Brazos, Socrata, Mobility – all these things. And that's part of that strategy as well. And I think the key selling point there was really the whole Tyler Alliance story. And that's what – that's the feedback we've gotten from the field and the client. And that's what's also encouraging because as we know, there's – there isn't anybody else out there that can compete on that level. And in fact, the competitor we had in that was Motorola. So it's particularly gratifying to see these strategies start to play out and start to win these bigger deals, which include going upmarket as you – but also as you say – leveraging other Tyler relationships, other Tyler products to get these deals.

Great. Thanks, Lynn, appreciate that. And then, Brian, just for you, you guys are executing really well on the margin front with the strong margin growth year-over-year. And just curious, I know some of those benefits likely come from COVID, but if we could just get some color on how that breakdown might be to think about what was a COVID benefit and what might be something that's more sustainable in terms of margin benefit? Thanks, guys.

Yes. And as we work through our planning for next year, we'll have a better idea of how those – how much of it is actually sustainable. Coming into the year, pre-COVID, we had had a goal kind of holding margins flat with last year after a couple of down years as a result of our significant increases in R&D. We've continued to spend R&D pretty close to what we expected for the year, but we're now up – this quarter – up 300 basis points. I don't expect that the margin growth will be as high in Q4 or that we'll see 300 basis points next year. But we do expect that we'll be back on a margin expansion opportunity in that a significant part of the gains, although they've come about because of COVID, we've been able to change business practices, particularly remote delivery of services, changing the way we approach some things like trade shows, eliminating a lot of administrative travel that I think will be permanent gains. So, if you look at the 300 basis points we picked up this quarter, maybe as much as half of that would be a sustainable kind of a gain.

Your next question comes from Jonathan Ho with William Blair & Company. Please proceed with your question.

Hi. Good morning. Just wanted to just start out with maybe getting a little bit more clarity around sort of the reduction in the full year revenue guidance. Was this mainly due to, I guess, the issue faced, just wanted to get maybe just the main factors behind that.

Sure. Yes, if you look at the change in our full year revenue guidance, I believe the midpoint of our guidance came down by about $11 million compared to where that was when we reinitiated guidance after Q2. About $4 million of that is what we talked about earlier on the call related to the IT security incident where we lost primarily services revenues, some license revenues, as a result of a lack of ability to interface with clients while our systems were compromised. There's about $1 million related to lower e-filing volumes, as courts have not reopened as fast as we anticipated at the end of Q2. A lot of e-filing volume is around evictions and debt collections. And as you know, there's – the CDC has now put in place a broader moratorium on evictions and so those volumes are lower than we expected. And then there's about roughly $8 million of an effect on licenses, which are primarily sales delays, processes being pushed out, and that's a combination really of COVID and its impact on our clients' ability to work remotely, and budget pressures as well. So those are – and then lastly – licenses are also being affected by a greater shift towards SaaS in our pipeline than even we anticipated at the end of the second quarter, for the reasons we talked about, Lynn talked about earlier on the call.

Got it. And just to build on that, with budget pressure on state and local governments, are you starting to see, I guess, a greater desirability towards moving to cloud and SaaS solutions and particularly, for the cost savings side, is that starting to accelerate? Thanks.

Yes, Jonathan, I think that's a good observation. And I think going in – pre-COVID – we were already starting to see this shift in the market and I think that was going to continue on its own anyway. I think, secondly, as we've talked about over the last year plus or two years, as Tyler has shifted its approach from more of a cloud agnostic to more cloud preferred or cloud first, we're doing things with how we do our sales and how we inform clients. And so, I think that's been part of it. But absolutely, COVID has played a role there. And we're seeing that really across all of our divisions. I mean we're seeing it – our Munis ERP – they're all coming in right now at rates, subscription rates that were higher than their original 2020 plan. And so that's definitely occurring, and again, the good news is that we've been preparing for it and ready for it and we've been investing towards there. So it's a short-term headwind, continues to be, but that trend is going to continue, I believe.

Your next question comes from Keith Housum of Northcoast Research. Please proceed with your question.

Great. Thanks. Good morning, guys. To come back to the transaction costs and some of the delays you're seeing in evictions and recovery of debt, does this perhaps create a pent-up demand as we look into next year, assuming that some of these restrictions let up and the courts kind of open up. Are we perhaps looking to have an opportunity for significant revenue growth from that area next year?

Yes, Keith, that's a good observation. I think that's right. That's certainly our expectation. I mean, even though courts have been starting to reopen some, as Brian mentioned, there has been this moratorium. And really about almost two-thirds of court filings are either debt-related or landlord-tenant eviction type things. So, our expectation is that, that will go up. Even when you look at sort of on the more municipal side or traffic side, you don't have a lot of citations out there. You don't have a lot of people paying court fines and things like that on the – more on the municipal side – but we would expect that those will return to normal. But in terms of the backlog on the civil side, yes, I think that's our current expectation.

Yes. And a little bit of what you were saying earlier about moving those cases forward – we've also seen some discussion about the actions around local jurisdictions enabling some of that – I think that creates some pent-up demand as those jurisdictions start to clear out their backlogs. I think that will create growth opportunities in the future.

Great. And Brian, just a follow-up for you. Gross margins came in probably the best that I remember them being. Maybe it's more just a geography question more than anything else, but is that more due to lower travel costs? Or was there other items going on in gross margins that perhaps are sustainable going forward?

Well, a big piece of that, both at the gross and operating margin is the absence of billable travel, which has essentially no margin on it. And so that continues to – that loss of that revenue continues to be – have a positive impact. That's probably the biggest point. The other thing is we are seeing, as we move to the remote delivery of services, we actually gain utilization and efficiency there because we're not putting people on airplanes every Monday and every Friday, and we're able to use that time to deliver services. And so, that shift is having a positive impact as well. And that is something that we expect to be sustainable. Although certainly in the future, there will be some billable travel and some return to on-site services, we believe that in the long-term, we'll continue to deliver a significant amount of services remotely as our experience over the last two or three quarters is proving that that can be done very effectively and clients are increasingly accepting of that model.

Your next question comes from Scott Berg with Needham & Company. Please proceed with your question.

Hi, Lynn, Hi, Brian. Congrats on a good quarter and thanks for taking my questions. I guess two questions. Let's start off with Lynn, on the public safety side. You talked about how – I think it's three of the last four quarters you had $1 million-plus transactions. Obviously, your sales traction has been very strong there, with how you've been able to add some new innovation of the product and pushed upmarket. But as you look at those deals today, versus maybe three or four years from now, is it simply just your ability to take the same product and move it upmarket or has that product evolved at all? And you've had maybe better success selling, maybe either more or different modules within that suite that's relatively broad at the end of the day.

Yes, Scott, it's actually – it's quite a number of factors. And I want to be clear, is through last four quarters, we've had license deals in excess of $1.5 million, which is even better. And you're right, it's – we've done a lot over the last several years, both in terms of expanding our functionality. We're now responding to more RFPs, than we could before. We're more compliant than we were before. So, we've made the product much more robust. In addition, it's hard to underestimate, really what we've done on the service side as well, really shoring up client references. As we've introduced these new products, CAD and e-records, the number of go-lives that have been successful, in getting those references, that's the stuff we don't spend a lot of time talking about. But one of the biggest initiatives this year was our e-records which was going about the same as the CAD. They had, I think, 15 big go-lives scheduled for this year and a number of those had pushed back a little bit just because of COVID, but we're on track to get all those done. We've had 11 of them successful. And that's the hard stuff and it's that referenceability. But then when you talk about, again, moving upmarket, it's all these tuck-in acquisitions and integrating them. It's these things like SceneDoc, SoftCode, Brazos, Socrata. And what you don't ever know is, in these big deals, you never know exactly what's the tipping point. But our – what we can deliver, the full suite of products – is so much more competitive and then it's so much more broader than what other people are offering that it just becomes very compelling.

Got it. Quite helpful and then from a follow-up perspective and one of your other questions here shortly, a few minutes ago, Lynn, you talked about how public safety transactions and what's usually a seasonally stronger fourth quarter looked like you're generally on track. With the earlier comments about pipelines kind of slipping and some deals moving into maybe the first half of 2021, what are the product areas that are seeing the most delays there, if it's not public safety?

So, I would say the area where we're seeing probably more delays is really on the higher end of the ERP space, more of our Munis line. It's interesting the lower end is not seeing the same right now. But then again, stepping back, it was that high-end ERP space that really got out of the gate fast in Q1 and that's what's still so encouraging. We've talked about how the demand didn't go away. What seems to be happening there, as opposed to say, in our Justice solutions or even the lower end space, is that some counties – there's that uncertainty out there – but they just seem to be a little bit more willing to push it out a little bit further, or I'd say, hang on another year. I'd almost analogize it to – you've got a car, an old car you've had since college – and you've got a couple of kids and a spouse and that car's starting to spend more time in the shop than on the road. And you know it's time to get that thing fixed, but golly, your kids who have braces coming up this year or something happening with one of your jobs. You say, I'm going to hang on one more year before I do it. And I think we're seeing that there more so than, say, on the other sides of the business.

Great. Thanks for taking my questions and congrats on the good quarter, again.

Your next question comes from Kirk Materne of Evercore. Please proceed with your question.

Yeah, thanks very much and congrats on a good quarter in a tough environment. Lynn, maybe I was curious about just sort of your philosophy these days on using pricing maybe more as a weapon, given that you're much bigger today than you were back in the economic recession 10 years ago. And just whether or not that resonates with clients or not, meaning, are there things you all can do from an upfront pricing perspective that can help you maybe take share in this period of uncertainty? And I guess, how do you balance that? Because I would think you're now at a point where, as customers are looking to consolidate vendors, if you can help them maybe get over the hump today and hopefully their budgeting problems resolve themselves in the next 12, 18 months, that can make some sense in terms of taking more market share. But just kind of – can you just give me an idea of how you're kind of thinking about that, if at all?

Yeah, sure, Kirk. I think we're doing a little bit of that, and we're doing a little bit of that with some of these products that we're really planning to try to introduce this year or that we really were expecting to sort of jump start this year. And I'm not talking about our major core apps, but some of our smaller products around that, be it – we talked before about at Socrata Data & Insights or our product called Executive Insights. We're doing things there like offering one-year free Premier Executive Insight. We've talked about it with virtual courts. We've done these free trial periods. We're doing things like that around our Tyler Detect, which is our cybersecurity, our research, taxes, things like that. So, we are seeing some of that right now. In terms of 'gaining market share', I think the things that we're doing right now by keeping our investments at the level and accelerating some of them being in that position to really capitalize, knowing that we went into this already in probably the strongest position in the market. And the way I view it, really, Kirk, is that as we're dealing with the effects of this pandemic – and we know it's going to end and we know the demand is going to be there – but every quarter that goes by, Tyler itself is getting stronger and stronger. Our balance sheet is getting stronger. We're investing. Every quarter goes by, we're another quarter down in our R&D and further along in our investments. We don't believe our competitors are doing the same. And so, I really like our position right now. And yeah, we're looking at things like that on some of these products we're trying to jump start, but we're not really doing that really across our core apps right now.

Okay. That's helpful. And then I guess for you or maybe Brian, just you've mentioned M&A a couple of times. Has the environment for doing deals gotten better perhaps over the last six months as smaller vendors are obviously probably feeling more pressure from either balance sheet or growth – revenue growth perspective. And obviously, valuations across software have been fairly robust over the last six months. So just kind of curious, I know you're always looking, but have the – I guess, has the bid-ask spread maybe started to narrow a little bit on things that you find attractive, maybe relative to six or nine months ago?

I'd say that in terms of the sort of number of deals we look at, it's probably kind of consistent with what we were before. I haven't seen any really increased activity there. I think my expectation, if you go back to the Q1 call, my expectation might have been – you might have seen more on the valuation front. I think some of them may have come down a little bit, but the broader market is still doing pretty well. I'm talking about the public markets and sometimes people tend to point to that when they shouldn't. But we haven't seen any meaningful expectations right now out of valuation, probably about the same as before.

Your next question comes from Brent Bracelin of Piper Sandler. Please proceed with your question.

Thanks, and good afternoon. I guess, Lynn, I wanted to go back to this concept of this digital awakening that we're clearly seeing across other enterprises, other segments of the market. On one hand, totally appreciate a greater level of uncertainty with state and local budgets. But on the other hand, you do have kind of a new reality and a new digital reality. What are you seeing just from a state, local engagement activity metric? You talked a little bit about seeing larger deals materialize because of maybe this digital shift, but is the engagement activity picking up as well, too? I get there will be budget uncertainty, but is the – is there anything you can see that gives you more confidence that that shift to digital could also accelerate in that government vertical?

Yeah, I think that's right. I mean, I do believe the shift to how government's going to operate, how they're going to deliver services to their citizens, I believe that was going to change pre-COVID, and I think it's going to change and accelerate past that. And one of the things I talk about is, you look at your kids and you look at how they think about technology and how they use technology, well, they're going to grow up. They're the citizens of the future – they're citizens today, but they're the ones that are – they're going to demand more. They're going to demand that government works the way everything else in their lives work. Earlier this week, I was – I did an interview for the National League of Cities. We talked with Clarence Anthony, the CEO there, and this is for their upcoming user conference. We spent a lot of time talking about the cloud and the local government shift and move to the cloud. And to me, it's something that's coming. It was coming anyway. I think COVID is accelerating that. And you talk about budget constraints. I mean, that's one of the factors about that. You've got, as you move to the cloud, you do create some budget certainty. You take away sort of some of the uncertainties of these large capital spends. You talk about security in today's world. We spent a lot of time talking about cybersecurity. And the cloud is such a more secure environment and you're dealing with these players like AWS who we're aligned with, they've got all kinds of resources to spend on that infrastructure, and that's their business. And that's not really that's not really a local government's business. And so – and I think they're starting to recognize that. And so, I do think the shift is real and I do think it's accelerating.

Great. That's encouraging. And just one quick follow-up for Brian, if I could. We're seeing more talk of statewide deals. And I don't think we kind of really saw that in the past. As you look at the pipeline, is there a healthy amount of activity on more statewide deals? Just trying to understand that statewide deal trend that you've seen in Kansas, Washington State, North Carolina. I'd just love to hear the pipeline of activity around kind of statewide and what's driving that. Thanks.

Yes. I'd say it's a little bit of a mixed bag. State is certainly an area that today is probably less than 15% of our revenue – somewhere between 10% and 15%. And I think it represents in the long-term, a big growth opportunity for us as we expand – move some of our products upmarket into the state and sell some of our products that are used locally, sell them statewide. We've had some really good examples of that in the last couple of years. Our school bus transportation system Versatrans had a great statewide deal in the Carolinas. North Carolina, adopting Brazos and our new e-warrants solution statewide, where those have typically been purchased at the local level, and they did that in conjunction with implementing our Odyssey court system statewide. Just this quarter, we had a significant win with our probation system with the state of Nevada. It's the first time we've had a state-level contract for that product, and that's a product we acquired about a year ago. So, and obviously with Odyssey, we've had a significant statewide presence where a lot of court systems, maybe 40 of the 50 state court systems – court systems are operated at the state level – and we've had great success there over the years. So I do expect we'll continue to build on that. In our Federal division, the MicroPact business we acquired a little over a year ago, that I'd say right now, probably the greatest pressure they're seeing is in their state market. But I think that's really a short-term phenomenon, and that's really around budget pressures. But we do expect to grow our state business and certainly our federal business as we expand beyond our traditional focus just on local government.

Your next question comes from Scott Wilson with RBC Capital Markets. Please proceed with your question.

Yeah. Hey, guys. Thanks for taking the call. Maybe first for Lynn, to better understand kind of what's informing your expectation for better revenue growth, but still kind of growth below your target 9%, 10%, 11% next year. Can you comment on what you're seeing in your end market in terms of RFP activity? Are you starting to see that come back or is it still below historical levels? And has there been any change in the types of RFPs that are coming to market, maybe in terms of size or the products that are in demand in the current environment?

Yes. So again, we're still early in our process. What we're seeing in RFP activity, again, it's sort of mirrors what we're seeing right now across Tyler. There are certain areas that we're not feeling the impact. It's – the delays are shorter. The pipe is there. The RFP activity is still pretty good. It's a little softer in a few areas. And part of it's recognizing that the time from RFP to getting a deal done, it does take time. You're certainly aware of our sales cycle. So it is a – it's very preliminary right now, but we do drill down. We look – we build bottoms-up budgets – we look at RFP. We look at all those leading indicators, RFPs and demos and things like that, even RFIs. And so that's really what it's based on right now, but again, it's preliminary.

Got it. Understood. And then maybe a quick one for Brian. To put a finer point on kind of your margin expansion commentary. I guess, historically, you've talked about 50 to 100 bps of margin expansion annually. Is that still in the cards for next year given the outsized expansion you've seen this year? Or should we be kind of thinking about maybe a more modest step back in terms of that type of expansion next year?

Again, we've got a lot of work to do on our planning process, but I would say we – and even pre-COVID – we expected that 2021 would be a year where we would return to margin expansion. And so if I were guessing, I'd say probably in that range, but probably on the lower end.

Your next question comes from Joe Goodwin of JMP Securities. Please proceed with your question.

Hi, good morning. Thank you for taking the question. Just curious on – when you're doing a conversion from an on-premise customer into the cloud or subscription, do – and I understand this might vary across products, across Tyler. But is there – do customers need to be on a specific version before actually moving to the cloud or under the subscription? Is there any dynamic there or can they go from any version direct to the cloud? Thank you.

Yes. No, there's not a – they don't need to be upgraded to the most current version to make that transition.

At this time, there appears to be no further questions. Mr. Moore, I'll turn back to you for any closing remarks.

Okay. Thanks, Eric, and thanks everybody for joining us today. I certainly appreciate the interest, and we hope you stay safe and healthy. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks, everybody.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.