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Tyler Technologies (TYL) Q1 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
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Tyler Technologies (NYSE: TYL)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, and welcome to today's Tyler Technologies first-quarter 2019 conference call. Your host for today's call is John Marr, chairman of Tyler Technologies. [Operator instructions] And as a reminder, this conference is being recorded today, May 2, 2019. And now I would like to turn the conference over to Mr.

Marr. Please go ahead, sir.

John Marr -- Chairman of the Board of Directors

Thank you, Keith, and welcome to our first-quarter 2019 earnings call. With me on the call today are Lynn Moore, our president and chief financial officer -- chief executive officer; and Brian Miller, our chief financial officer. First, I'd like for Brian to give the safe harbor statement. Next, Lynn will have some preliminary comments.

Then Brian will review the details of our first-quarter results and update our 2019 guidance, then I'll have some final comments and we'll take your questions. Brian?

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Brian Miller -- Chief Financial Officer

Thank you, John. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks.

Effective January 1, 2019, we adopted the requirements of ASU No. 2016-02 (Topic 842), Leases, utilizing the modified retrospective method of transition. Our balance sheet now includes both operating lease assets and operating lease liabilities. Previous consolidated financial statements were not restated under the modified retrospective method.

Please note that our growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Lynn?

Lynn Moore -- President and Chief Executive Officer

Thanks, Brian. Our first-quarter results provided a solid start to 2019. This was our 30th consecutive quarter of double-digit revenue growth, as total GAAP revenues grew 11.7% and non-GAAP revenues grew 12.4%. Our core software revenues from licenses and subscriptions grew 25% on a non-GAAP basis, with approximately 13% organic growth.

Software license and royalties revenues in the first quarter declined 4.3% as the mix of new business was more heavily weighted toward subscription arrangements. Approximately 54% of the value of new software deals came from subscription arrangements and 46% from on-premise licenses arrangements. GAAP subscription revenues grew 37.2% and non-GAAP subscription revenues grew 38.5%. Total recurring revenues from maintenance and subscriptions grew 17.1% and comprised 68% of total revenue.

As mentioned earlier, our mix of new business was more heavily weighted toward subscriptions, which put pressure on short-term organic growth, but is a long-term positive for Tyler. Our largest deal of the quarter was a contract with the Bahamas for appraisal services, valued at over $7 million. For our iasWorld property tax software solution, we signed a SaaS arrangement with Lackawanna County, Pennsylvania, valued at approximately $4 million, as well as a license agreement with Berks County, Pennsylvania and a SaaS deal with Chesterfield County, Virginia, each valued at approximately $3 million. It was also a very robust new business quarter for our ERP solutions.

The largest deals of the quarter were SaaS arrangements for Munis, with Guilford County, North Carolina, valued at approximately $5 million; New Castle County, Delaware, valued at approximately $4 million; and the Richton independent School District in Texas, valued at approximately $3 million. We also signed SaaS contracts for Munis valued at over $1 million each, with Las Virgenes Water District in California, Otsego County, New York and Albany, Georgia. Notable license deals for Munis signed during the quarter included contracts with the Micronesian island nation of the Republic of Palau, the Hall County Schools in Georgia and Flagler County, Florida. We also had a very strong quarter for new contracts with our New World Public Safety solutions.

Contracts included notable on-premises license deals, with Monroe County, New York and Paulding County, Georgia. And a subscription agreement with Mount Vernon, New York. For our Odyssey Courts & Justice solution, we signed on-premises license contracts with the Cleveland, Ohio Municipal Court and the state of Maine District Attorney's Office, as well as SaaS arrangements with Liberty County, Texas and the city of Shreveport, Louisiana, which also included our recent acquisition, CaseloadPRO. In addition, we signed an amendment with the state of Illinois to add criminal e-filing, valued at approximately $2 million.

For our Socrata Data Insight solution, significant new signings included: The Nature Conservancy, the U.S. Department of Justice, the City of Everett, Washington, and Baltimore County, Maryland. Finally, for our recently acquired MicroPact solution, we signed a notable federal deal for entellitrak with the Merit Systems Protection Board. As mentioned on our previous earnings call, on February 1, we acquired MyCivic, and on February 28, we closed the acquisition of MicroPact.

We're excited about the addition of the solutions, as well as the team members from both of these companies, and believe that both acquisitions will benefit Tyler by providing avenues into new markets and across our current client base. Now I'd like for Brian to provide more detail on the results for the quarter and update our annual guidance for 2019.

Brian Miller -- Chief Financial Officer

Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the first quarter ended March 31, 2019. I'm going to provide some additional data on the quarter's performance and update our annual guidance for 2019, and then John will have some additional comments. 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.

These measures exclude writedowns of acquisition-related deferred revenue and acquired leases, share-based compensation expense, the employer portion of payroll taxes on employee stock transactions, amortization of acquired intangibles and acquisition-related expenses. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We have 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. GAAP revenues for the quarter were $247.1 million, up 11.7%.

On a non-GAAP basis, revenues were $248.8 million, up 12.4%. Organic revenue growth was 5.5% on a GAAP basis and 5.4% on a non-GAAP basis. As Lynn mentioned earlier, the mix of new software business was weighted toward subscription arrangements, which dampened our organic growth rate for the first quarter. Our core software license and subscription revenues combined grew organically approximately 13%.

Subscription revenues for the quarter increased 37.2%. We added 128 new subscription-based arrangements and converted 13 existing on-premises clients, representing approximately $49 million in total contract value. In Q1 of last year, we added 122 new subscription-based arrangements and had 26 on-premises conversions, representing approximately $25 million in total contract value. Subscription contract value comprised 54% of the total new software contract value signed this quarter, compared to 40% in Q1 last year.

The value weighted average term of new SaaS contracts this quarter was 4.1 years, compared to 4.7 years in Q1 of last year. Transaction-based revenues from e-filing and online payments, which are included in subscriptions, increased 15.6% to $19.2 million, from $16.6 million last year. That amount includes e-filing revenue of $14.6 million, up 17.3% over last year. Annualized total non-GAAP recurring revenues for Q1 were approximately $676 million, up 18.1%.

Our backlog at the end of the quarter was $1.3 billion, up 4.9%. Backlog included $353 million of maintenance, compared to $335 million a year ago. Subscription backlog was $489 million, compared to $468 million last year, and includes approximately $110 million related to fixed fee e-filing contracts. Our bookings for the quarter, which are calculated from the change in backlog plus non-GAAP revenues, were approximately $228 million, an increase of 17% from Q1 of last year.

For the trailing 12 months, bookings were approximately $994 million, down 4.1%. As we noted earlier, the weighted average term of new software subscription agreements this quarter was 4.1 years, compared to 4.7 years last year as we continue to move to standardize on shorter initial subscription terms for most of our software offerings, to provide greater pricing flexibility. If the term of subscription agreements had been the same as in Q1 of last year, bookings growth this quarter would have been 2.6 points higher. Our subscription -- software subscription bookings in the quarter added $11.4 million in new annual recurring revenue, up 148% over the last year's $4.6 million.

For comparison, if all of our new subscription contracts this quarter had been under license arrangements, we estimate that they would have represented additional license bookings of approximately $12 million. We signed 35 new contracts in the quarter that included software licenses greater than $100,000, and those contracts had an average license of $376,000, compared to 33 new contracts with an average license value of $387,000 in the first quarter of 2018. We ended the quarter with $120 million in cash and investments, and $85 million of debt under our revolving credit facility. During the first quarter, we repurchased approximately 72,000 shares of our stock for a total of $14.3 million.

Day sales outstanding and accounts receivable was 104 days at March 31, 2019, compared to 88 days at March 31, 2018. The increase in DSOs is primarily related to the timing of milestone billings under several large percentage of completion contracts, resulting in a $25 million year-over-year increase in unbilled receivables. Excluding unbilled receivables, DSOs were 73 days at March 31, 2019, compared to 61 days at March 31, 2018. Our guidance for the full year of 2019 is as follows.

We expect 2019 GAAP revenues will be between $1.08 billion and $1.10 billion, and non-GAAP revenues will be between $1.09 billion and $1.11 billion. We expect 2019 GAAP diluted EPS will be between three point -- $3.45 and $3.60, and may vary significantly due to the impact of stock option exercises on the GAAP effective tax rate, as well as the final valuation of acquired intangibles. We expect 2019 non-GAAP diluted EPS will be between $5.20 and $5.35. For the year, estimated pre-tax noncash share-based compensation expense is expected to be approximately $62 million.

We expect R&D expense for the year will be between $82 million and $84 million, fully diluted shares for the year are expected to be between 40 million and 41 million shares. GAAP earnings per share assumes an estimated annual effective tax rate of 10% after discrete tax items, and includes approximately $27 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 annual effective tax rate for 2019 is 24%. We expect our total capital expenditures will be between $48 million and $50 million for the year, including approximately $22 million related to real estate and approximately $6 million of capitalized software at MicroPact.

Total depreciation and amortization is expected to be approximately $77 million, including approximately $51 million of amortize -- amortization of acquired intangibles. Now I'd like to turn the call back over to John for his comments.

John Marr -- Chairman of the Board of Directors

Thanks, Brian. We're pleased with our first-quarter results and our outlook for the rest of the year. We began to achieve double-digit revenue growth, even if subscriptions made up more than 50% of new software contracts. We have now achieved subscription revenue growth of greater than 20% in 48 of our last 53 quarters.

Bookings growth was strong and our new business pipeline remains active. We're also pleased to have completed two strategic acquisitions during the quarter. MyCivic will elevate Tyler's current citizen-facing applications by enabling clients to provide a single app for citizens to interact with their local governments in multiple ways. MicroPact is the second largest acquisition in the company's history, and augments our product solutions, positions us in new practices such as health and human services, and presents opportunities to expand our business across new and complementary markets, including the federal market.

Finally, we want to thank the nearly 6,000 clients and 1,000 Tyler associates and partners who participated in Connect 2019, our annual user conference held in Dallas last month. This was our largest Connect ever by a wide margin. We welcomed clients from all 50 states, Guam, Canada, Spain and the Netherlands, who took part in 1,100 training classes across 66 different educational tracks, featuring 18 different Tyler product groups, as we continue to share progress with our vision on Connected Communities. We were especially honored to welcome former President George W.

Bush as the featured speaker at Connect, and we were all inspired by President Bush and his appreciation of the challenges faced by those working in the public sector. We also hosted investor and analysts at Connect, and the presentations and replay of our Investor Day are available in the Investor Relations section of our website. Now, Keith, we'll take questions.

Questions & Answers:


Operator

[Operator instructions] And this morning's first question comes from Brent Bracelin with KeyBanc Capital Markets.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Lynn, perhaps I'll start with you, and this more of a, kind of strategy question, particularly on the heels of coming off this user conference. But as we think about kind of software model transitions, we've seen lots of software companies transition to kind of a subscription-first approach, while still giving some customers flexibility in the licensing side. You're starting to see in large customers go to this -- in choosing kind of subscription. At what point do you start to incentivize the sales team to lead with subscription? And just wanted to understand kind of the philosophy behind a subscription-first approach going forward, just given the changing customer preferences that we're seeing show up here in the quarter?

Lynn Moore -- President and Chief Executive Officer

Yes, sure, Brent. No question, we're continuing to see an evolution in the market. I think if you look, sort of through -- at the subscription rates five years ago versus today, it's significantly different. I'd anticipate that five years from now, it will continue to be different.

Historically, as you know, we've taken the approach of a little bit of agnostic. There's still a good chunk of the market out there that is looking for on-premises, but at the same time, we are making plans internally as the markets continue to shift to the cloud. We had not gotten to the point where we're actually trying to lead the market in that direction. We are being responsive.

But we do have a number of cloud initiatives going on within Tyler from a product standpoint. In other words, in other areas, and it is a focus for us as we look out over the next couple of years.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Got it. Certainly helpful color there. And then just as a technology kind of focus, would you want -- is there a kind of governor related to moving to subscription first around technology, i.e, would you want a multitenant kind of SaaS offering before you kind of push it? Or is that less tied to the decision tree around moving toward a subscription-first approach?

Lynn Moore -- President and Chief Executive Officer

Well, as you know, each of our product lines are -- our leading products have 25, 30 years of functional -- deep functionality that's been put in them. We're taking the approach that we're evolving those products. As we look to move to the cloud, and as we look to even potentially move to the public cloud more as opposed to the Tyler cloud, we are doing product assessments right now. There's different ways of sort of addressing the multi-tenancy.

In some areas, it's more practical than others. In some areas, you may have more of a multitenant front end, but they have a single instance back end, and there's certain areas where you would get multitenant all the way through. We're actually doing some sort of long-term product analysis in that regard right now. I wouldn't expect anything in the near term to come out with that, but that is part of our long-range planning from a strategic basis.

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Got it. Super helpful color there, appreciate the transparency. And then, last one for me, just Brian, as you think about that e-filing business, a snap back in growth there. I know it dipped below double digits, now we're back healthy in double-digit growth territory there.

Can you just remind us the visibility you have into that business, the timing of the rebound here, and if that's sustainable?

Brian Miller -- Chief Financial Officer

Sure. Visibility varies there. We have a fair number of commitments for new e-filing customers already signed up. And some of these are customers where were in the process of implementing a court system and they'll start e-filing once that court system goes live.

Those are currently engaged in e-filing, but on an optional basis, and at some point, depending on their own internal schedules, we'll move to mandatory e-filing. So we have some visibility over that, but the visibility over the timing isn't perfect. We also certainly have a pipeline of new customers that we're pursuing on the e-filing basis, some of which are existing Tyler courts customers, and some of which are not. So I'd say visibility over new business is fairly good, but the timing can certainly vary.

I'd expect to see growth kind of in this mid-teens range throughout this year and beyond that. We do believe that both e-filing, as well as some of the other e-services, like research and Modria Online Dispute Resolution will continue to be drivers that grow above Tyler's core organic growth rate.

Operator

And the next question comes from Peter Heckmann with D.A. Davidson.

Peter Heckmann -- D.A. Davidson -- Analyst

Brian, could you remind us, in terms of your annual guidance, what is your assumption for mix to subscription? And how might those organic growth calculations change the mix for the rest of the year, look like the mix in the first quarter?

Brian Miller -- Chief Financial Officer

Yes. The range of our guidance, which is still relatively wide on the revenue side, encompasses what we believe is the reasonable range that that mix might fall in. And I'd say, this quarter would be on the high end of that in terms of the subscription mix at 54%. So I think it ranges broadly between kind of 45% and 55% subscription mix if it stayed at north of, say 55% for the full year, that would be challenging to achieve in revenue.

But we do have visibility into a lot of the mix in the pipeline, which, and based on that, we believe that the actual mix for the full year will fall within the range that our guidance encompasses.

Peter Heckmann -- D.A. Davidson -- Analyst

Got it. That's helpful. And then, now that you've had MicroPact for a couple months, any updated thoughts? As we speak, have you been able to initiate any early cross selling discussion? Look, has there been any notable bookings since close and can you talk about what you think the top line growth rate might look like as MicroPact falls into organic calculation next year?

Lynn Moore -- President and Chief Executive Officer

Yes, Pete. Let me take some of that, and then Brian may get to the growth rate question. MicroPact, we have owned -- we've only owned it -- it was only 1 month in this year's financials. We have owned it a couple of months.

There's a lot of excitement, both from their team and our team about it. The initial transition's going well. We're encouraged by the amount of federal activity that they experienced in Q1. It was coming off a couple years of a little bit muted activity.

I think we described that on our last call with the changing administration. But even with the strong -- I mean, even with the government shutdown in Q1, they had a good strong license quarter. We had a couple of nice wins in the first quarter. I mentioned one in my opening comments, the U.S.

Merit Systems Protection Board, which is really a federal administrative law judges' agency that conducts employee appeals and merit system studies. What's interesting about that is there are multiple ALJ, administrated law judge, agencies both at the federal and state levels, so getting one of those is strategic. We had a nice win with the Tennessee Office of the Inspector General, which is something that looks at civil and criminal fraud abuse in the Tenn care programs -- Tennessee care programs. Again, strategic because it was our first state-level Inspector General deal, and again, there's a lot of Inspector General Offices throughout in both the federal government, as well as in the state and local agencies.

So some encouraging signs, but again, we've had it now two months, but we're happy with the team, we're happy we've done the acquisition. I think you -- had also mentioned some cross-selling. Here, right now, I'd say, we've introduced the Socrata platform there. We're very early in the stages of doing that analysis, but we believe Socrata will play well in their federal agencies.

And so with that, Brian, do you want to --

Brian Miller -- Chief Financial Officer

Yes. In terms of their growth rate, I'd say this year we'd have expectations around growth, sort of in line with Tyler's overall growth, kind of that high single digits. Certainly, some opportunities to outperform that, but at this point, I think we're comfortable with growth at MicroPact, in line with Tyler's overall growth.

Operator

And the next question comes from Kirk Materne with Evercore ISI.

Kirk Materne -- Evercore ISI -- Analsyt

I guess, just maybe, the first one's for Brian. Brian, just in terms of the subscription mix this quarter, and you mentioned going forward in the year, you feel pretty comfortable right how about, sort of the composition that the pipeline sets up. But when you continue this quarter, were a lot of those a deals that ended up going subscription, are these decisions that customers are making at the last minute, so it's just getting harder for you guys to get visibility into that? And then I just had a quick follow-up on that front.

Brian Miller -- Chief Financial Officer

It's a mix, and it varies from quarter to quarter. Certainly there are deals in the pipeline that only one on-premises from the start, there are deals that -- typically, a smaller group of deals that only want subscription, although that number is, over time, increasing. And some don't know that we give proposals for both a subscription arrangement and a license arrangement, and some of those select Tyler, and even up until very close to when they execute a contract, they haven't decided yet. So we certainly, going into the last month of the quarter, we have deals that we've been awarded that don't know which way they're going to go in terms of subscription or license.

So there's a variety, and it's different each quarter. And so it does make it a little less predictable than just knowing if we're going to win the deal or not. And over time, we probably get a little better at that, but it does create some uncertainty, and that's one reason we keep the guidance range on the revenue side a bit wide, maybe a bit farther into the year.

Kirk Materne -- Evercore ISI -- Analsyt

And just -- if a customer does go subscription, can you just remind, I guess me, of the reg rec around that? Do you start to get to recognize that once it's invoiced? Or do you have to wait until they've actually implemented the technology? Meaning, I think all of us understand that the benefit -- the long-term benefit of bookings versus maybe upfront, but I guess, just when do the bookings start to come in on to the income statement for you?

Brian Miller -- Chief Financial Officer

Yes. When we sign a subscription arrangement, generally, we start recognizing revenue when they have access to the software, which is pretty close to the signing. So we'll generally start to recognize those and those are recognized on a pro rata basis over the term of the agreement, and most of those agreements have a fixed fee over that initial term of the agreement. But we do start recognizing pretty quickly.

Kirk Materne -- Evercore ISI -- Analsyt

OK. Good. So some of those deployed this quarter will start showing up this fiscal year, you don't have to wait 12 months or whatever?

Brian Miller -- Chief Financial Officer

Yes. To the extent that mix is higher on subscription, it's better for us because that's early the year, when we get more benefit in the current year.

Kirk Materne -- Evercore ISI -- Analsyt

And last one, and maybe for Lynn, just said clearly, the subscription mix keeps going up, it seems that your customer base is slowly getting more comfortable with your cloud-based technology. What's the opportunity for you all to sort of partner up with one of the bigger public cloud vendors, to allow them to focus more on the infrastructure and you all simply, you can either focus more on the application side? Is it still too early on that front? It seems like an opportunity maybe longer term? Just any thoughts you might have on that would be helpful.

Lynn Moore -- President and Chief Executive Officer

I think you've stated a good point. It's certainly an opportunity. As I mentioned earlier, we're looking at the move to the cloud from a sort of a companywide, long-term strategic perspective. And doing something like that is certainly something that's on the list of -- that we're looking into.

Operator

And the next question comes from Alex Zukin with Piper Jaffray.

Alex Zukin -- Piper Jaffray -- Analyst

Just maybe a couple. Maybe staying around the same topic. Lynn, can you remind us, just of the unit economics, when a customer goes with the subscription arrangement versus a license arrangement? Clearly, you're getting more pricing flexibility because of the contract duration being smaller, but why not have -- why not charge more for subscription? And why not incentivize the sales organization around selling subscription in a more meaningful way to kind of drive cloud transition, given the customers are a bit more open to that historically adapting it?

Lynn Moore -- President and Chief Executive Officer

Sure. As we said, it does seem -- the market is moving. It does still vary from quarter to quarter. We had a pretty strong SaaS quarter this quarter, but I think overall, if you step back it is moving.

Again, historically, we have not done that. In part because, at the end of the day, the value of Tyler is capturing the customer for long-term value, whether it's on-prem or subscription. And so we want to make sure we get that customer and there's still a fair amount of business out there, that if we went 100% one way, we would start missing out on. We think that we can evolve over time and help lead that a little bit, but again, we're about trying to capture the customer.

You asked about the model. Generally speaking, it's about 3 years before, when you take the original license in the maintenance versus the subscription, to where it sort of -- I think those lines intersect. Then when you start looking at long-term, you know, 10 years, we believe, it's in sort of the 1.8% times revenue.

Alex Zukin -- Piper Jaffray -- Analyst

Got it. And then maybe for Brian, how should we think about the Public Safety business this year, when we start to kind of core Tyler growth and how do the pipelines look at the moment? It seems like you're closing the deals that flipped out of Q4? What's the curve look like? Do you feel like there's going to be more linearity now that you've had it under, under your belt for longer, you understand that business a little bit better, just help us frame that a bit?

Lynn Moore -- President and Chief Executive Officer

Well, that business is still heavily weighted toward the second half of the year, and particularly in the fourth quarter. And we expect that to be the case this year. Having said that, this was a really strong first quarter. I think their bookings were up, in Q1, 38% over last year's Q1, and this may have been the best first quarter for bookings they've ever had.

Now as you know, that part of that is due to some deals that we had originally expected would have been back in Q4, that -- and I think all of those deals that we had expected to close in Q1 did close this quarter. But we still expect it'll be a heavily fourth-quarter weighted business this year, but see times of really good growth, the investments we've made in the product over the last three years since we acquired New World are really starting to manifest themselves in these higher win rates and bigger opportunities and starting to affect deals in the market. We do think that, also this year, that we're now positioned to start to pursue some deals that are larger than those that New World's typically focused on in the past, with the investments we've made over the last couple of years, now at the point where we can respond to our fees for bigger deals. That we wouldn't expect to have an impact on this year.

Those are long sales processes, and to the extent we start to pursue some of those larger deals this year, there are probably decisions that are made well into next year beyond and see revenues beyond that. But we feel like the foundation we've laid there for growth that starts to catch up with Tyler's overall growth and starts to contribute to higher growth in Tyler's core, in the Public Safety area, are starting to pay off.

Alex Zukin -- Piper Jaffray -- Analyst

Got it. And then just one final one on cash flow. Is there any -- anything unusual on collections in the quarter? I think cash flow, I remember, was a little bit light of our expectations. And maybe, can you just give an update on where should be thinking about for free cash flow for the year?

Lynn Moore -- President and Chief Executive Officer

Sure. We don't guide to free cash flow, but -- that we've talked about cash flow growth, in excess of our non-GAAP earnings growth. And I think we probably expect to see that this year. We -- this quarter, cash flow, really, I think the biggest factor there, in terms of that being below last year's is increase in unbilleds, and that's coming from a couple of places.

One, we have a number of relatively large percentage of completion contracts, some on the tax side, think places like New York City, where we have a very large project under way, New York state, where we also have a large tax project under way; British Columbia, and those all have milestone billing arrangements. And those milestones lag where we recognize revenue. New York City is one of those where we went live this quarter, with their new property tax system, and so we expect to see a significant billing here in Q2 following that milestone. But we have a number of those large projects that have unbilleds, so it's just the timing of those billing arrangements that -- until they turn around.

We do expect to see some of those this year. The other impact is from the adoption of 606, where we recognize revenue at a faster rate on licenses. We used to recognize revenue just to the extent we could bill it, so we didn't have unbilled receivables on licenses. Now under 606, we recognize that upfront and it creates an unbilled receivable, so it drives DSOs up.

But I think we'd expect to see free cash flow growth in probably low double digits over last year.

Operator

And the next question comes from Rob Oliver with Baird.

Rob Oliver -- Baird -- Analyst

I just wanted to follow-up on the public safety commentary. If we could get a little bit more color on some of the deals, some of the wins that you had this quarter, I know there was some carryover wins from -- or some deals that were pushed out from last quarter. But in particular, relative to the competitive landscape, does Tyler incumbency on the ERP side play a role here? How much is cross-selling, playing into the strength? And then Brian, I know you mentioned that you guys are now set up for some larger deals, exiting this year, and I wanted to just drill down on that a little bit. And then I had one follow up.

Lynn Moore -- President and Chief Executive Officer

I'll start with that, Rob. In terms of the competitive -- the deals of Q1, yes, we are becoming more competitive. The investments are starting to pay off. You talked about cross-selling, I think we talked about on the last earnings call, you see more of that through our Tyler line story and where we've got a strong C&J presence.

We talked last quarter about our C&J presence here, our Odyssey presence in the state of Texas, has opened up the state of Texas somewhat to public safety, and we started to win some business in a state where really they have been shut out historically. If you look in the first quarter, talking again about how our investments are starting to pay off. Public safety got its first win in California in a little over three years, and the California pipeline looks strong. Again, that's a result of the investments we've made in the product.

Our RFP response rate, which is our rate in which we're actually responding to RFPs has increased substantially year over year, primarily because of the investments, and we're now able to check off the functionality, whereas before, if we had a low ability to respond, you may not go through that process. So we're responding to more FPs, as Brian mentioned, larger RFPs. So overall, I think we're pleased with the investments. I think some of the investments we've made and some acquisitions like SceneDoc and Socrata, they're expanding their portfolio.

We're seeing leverage there, both within the public safety base, as well as helping us competitively in new deals.

Rob Oliver -- Baird -- Analyst

Great. And when you guys also called out on the quarter -- by the way, great quarter for the tropical island sales team of Tyler with the wins that -- in Bahamas and Palau. But you also, and we noticed as well, there was a pretty good international attendance at Connect. And so just wanted to just get an update on, are you signaling something to us there or just calling them out and is international kind of a burgeoning area there?

Lynn Moore -- President and Chief Executive Officer

I think a little bit was a shout out to them. It was -- in particular, we talked about the Netherlands, I think those were some of our new MicroPact customers. MicroPact does have some international business. We've got a little bit of an international business.

It's part of our long range growth roadmap. I wouldn't say there's any more emphasis now than there's been in the last couple of quarters. We have a lot of -- I think we have a lot of green space here, but it's certainly part of our long-term growth plans.

Operator

And the next question comes from Scott Berg with Needham.

Scott Berg -- Needham and Company -- Analyst

Congrats on a good quarter. I guess, the two questions I have is, first one, on the construction side in the quarter, are any products in particular seeing a heavier set of demand, moving toward to subscription than maybe what we've seen in the past?

Lynn Moore -- President and Chief Executive Officer

Scott, I don't have the specific numbers by product line. It was a pretty heavy quarter on our ERP side. We're starting to see actually a little more subscriptions in our C&J, we've -- both in some awards and some deals. I think I mentioned in my comments there was one or two fairly significant A&T that went subscription.

So it's been a little bit across the board. The volume of contracts on ERP that seems to sway these numbers a lot and it was certainly a high quarter of the ERP side.

Scott Berg -- Needham and Company -- Analyst

Got it. That's helpful -- sorry, go ahead?

Brian Miller -- Chief Financial Officer

I said, courts and justice, I think you're seeing with Odyssey, greater adoption there as well. But really this quarter, the ERP side and the appraisal and tax side had the highest mixes of subscription relative to the other product groups. And of course, some of those dig an insight, so Socrata business is 100% subscription, so that, as that business grows, that helps push that mix more toward subscription as well.

Scott Berg -- Needham and Company -- Analyst

Helpful. And then me, you mentioned Socrata, you've had that asset now for a year now, I believe you. I guess, looking back over the last year, thoughts on progress you're making with the products in the pipeline? I guess, are you more excited in terms of the opportunities that are out there? I know the use cases are more than abundant, but how's the reception maybe gone today versus your expectations a year ago?

Lynn Moore -- President and Chief Executive Officer

I'd say it's meeting our expectations, Scott. I mean, when we did that acquisition, it was really part of our long-term strategic roadmap, both from a Connected Communities vision, as well as opening up new markets. The prospects for governments going to be, becoming more data-driven, I think, that's a trend we're going to see, and it's good that were on the forefront of it. It's performing about where we'd like.

We do have a lot of initiatives going inside Tyler, as you mentioned, across a lot of different products. We've done some things, as you know, when we acquired Socrata, they were already sort of in the transition from sort of the open data, open gov, to the when we now have the platform, the SCGC, say we're focusing little bit more -- pre-Tyler, they were focused more on Gov 500, that's something that I think is still important. But we're really now focusing on leveraging those solutions and creating solutions rather than hit the platform that will push down through our channels across our base. So yes, I'd say we're still pleased, we're still optimistic what it's going to do for us in the future, and again, it's part of our overall long-term roadmap for Connected Communities.

And again, the whole concept of data-driven decisions in governments.

Operator

And the next question comes from Charlie Strauzer with CJS Securities.

Charlie Strauzer -- CJS Securitie -- Analyst

Most of my question has have been answered, just a couple quick ones. Just to continue to the SaaS discussion. But as SaaS continues to show very robust growth here, and if that continues throughout the year, I would suspect that you will have an impact on hardware sales, is that correct?

Lynn Moore -- President and Chief Executive Officer

Sorry, hardware sales?

Charlie Strauzer -- CJS Securitie -- Analyst

Yes. Meaning, more SaaS means probably less hardware sales, is that correct?

Lynn Moore -- President and Chief Executive Officer

Really, we don't do -- I guess, maybe marginally, but we don't do a lot of hardware sales on, around the core products. Most of the hardware sales come from either really small clients who want to buy everything from one place. But most of it is around products like our Brazos mobile citation device product, which carries hardware with it. Our newer probation software acquisition has some hardware that goes with that.

So I guess, marginally, it could reduce the hardware, but most of our hardware today is around us, public safety and probation products.

Charlie Strauzer -- CJS Securitie -- Analyst

Excellent. And then just as we look at the progression of the year, in terms of seasonality, the back half of the year versus your front half of the year versus for revenue and also in thinking about Q2, how should we think about the progression there?

Brian Miller -- Chief Financial Officer

Yes. I think much more heavy toward the back half of the year. We expect to see a progression -- a pretty significant progression in Q2 because of getting a full quarter of MicroPact. And then expect, again growth from the last two quarters, fairly significantly above where we are in Q2.

So I'd expect to see increasing growth both from an organic perspective and total growth perspective sequentially each quarter in the year. Also, organic growth will benefit from the acquisitions in 2018, particularly, Socrata and Sage becoming part of organic growth after this quarter. So again, sequential growth, but pretty strong growth from Q1 to Q2 in terms of overall revenues, and then solid growth from there to Q3 and Q4.

Charlie Strauzer -- CJS Securitie -- Analyst

And anything funky in terms of weird comps or bookings from Q2 that we should be aware of from last year?

Lynn Moore -- President and Chief Executive Officer

I think Q2 was pretty standard. I don't recall anything jumping out as being an unusually large contract last year in Q2. Our biggest deal last year where we didn't have any of the mega deals throughout the year. Last year was certainly a year where we didn't have any of the megadeals throughout the year, but I'll take a look, but I don't recall anything unusual in the Q2 bookings last year.

Operator

And the next question comes Keith Housum with Northcoast Research.

Keith Housum -- Northcoast Research -- Analyst

Just two quick questions for you. Can you help me out, the safety wins, the wind rate this quarter versus say, what was the first quarter last year?

Lynn Moore -- President and Chief Executive Officer

I'm sorry, can you repeat that, Keith? I didn't quite catch all that.

Keith Housum -- Northcoast Research -- Analyst

Just going back to the public safety segment, just looking for the win rates this year versus last year, trying to understand the progression there?

Lynn Moore -- President and Chief Executive Officer

It's pretty consistent from where it was last year. We've made pretty big strides, as you know, we talk about on calls the last couple of years. I've made the comment a few times that we didn't have enough data points to call it a trend. I'd like to think we're now in that trend.

So it's pretty consistent. And again, it's consistent with a larger pipeline and a larger, more fee responses. So that's those are all positives.

Keith Housum -- Northcoast Research -- Analyst

Gotcha. And Brian, can you just remind me or provide some color on the profitability of the subscription business versus the license? What impacts to the bottom line did they you have in the quarter for movement to more subscription this quarter?

Brian Miller -- Chief Financial Officer

Well, in the short term, it's a negative to profitability because you're not getting that upfront license. We have a conversion factor. And we said that if all of the subscription deals had been license deals, it would've been an additional, approximately $12 million of licenses, which would have generally gone directly to the bottom line and you can sort of extrapolate that, if 10% of them had been license deals. So in the short term, it puts pressure in both revenue growth and earnings growth, because those licenses would've gone, for the most part, directly to income.

Over the long term, and as Lynn said, the breakeven point, say, for a three-year subscription agreement is somewhere around that, in the end of that third year, later in the fourth year in terms of revenues is breaking even. And after that first year, the margins are higher and the earnings are higher on the subscription arrangement over the life of the subscription agreement, certainly revenues might be double, and even with the double, what it would've been under a license arrangement. And even with the hosting costs factored in, the earnings on that subscription arrangement will still be fairly a good amount higher than the long-term earnings on a license customer.

Operator

And the next question comes from Jonathan Ho with William Blair & Company.

Jonathan Ho -- William Blair -- Analyst

I just wanted to maybe start out with a few higher-level questions. If clients are more willing to look at SaaS solutions, does this potentially change the type of competitor you'll see with maybe some of the commercial SaaS ERP vendors that haven't competed as much in this space, maybe trying to get more of a foothold in the market?

Lynn Moore -- President and Chief Executive Officer

Jon, we're not seeing a lot of that right now. They certainly come into our space from time to time. The difference still is, is if the decision's not, well, SaaS or cloud, maybe a big part of the decision is, at the end of the day, it's the features and functionality that we've got that maybe the commercial base vendors don't have, and it's that deep domain expertise. Certainly it's, you see a little bit more, it will be a -- but I don't see it just yet, as a trend in the market.

Jonathan Ho -- William Blair -- Analyst

Got it. And then, just in terms of the investments that you've made across the broader product suite, are you starting to see opportunities to become more of a strategic partner for agencies as opposed to just selling sort of point solutions on a contract-by-contract basis? Just trying to understand this, these agencies go through digital transformation whether you've got an opportunity to influence that a little bit more?

Lynn Moore -- President and Chief Executive Officer

Well, I think that's part of our long-term strategy and goal, that's kind of what Connected Community is all about. We talked about it last quarter, with the city of Lubbock deal when we sold a whole host of solutions. I think that's an opportunity down the road, and that's something that I think we're uniquely positioned to do. Which is part of our overall growth strategy.

Operator

[Operator instructions] And the next question comes from Tim Klasell with Northland Securities.

Tim Klasell -- Northland Securities -- Analyst

Just a couple of quick questions. One, on your conference calls, ServiceNow mentioned that they saw a nice uptick in federal government for various reasons. Being offered a somewhat similar platform as MicroPact, and now that you've had it for a couple of months, any changes in your thinking with how that will affect, obviously, the federal business and how much of that will be sold into your core state and local?

Lynn Moore -- President and Chief Executive Officer

I don't know that our, Tim, that our thoughts have changed a lot. Like I mentioned a few minutes ago, as you've said, we've had MicroPact for a couple months. We're very excited about it. They had a very strong first quarter, relatively speaking.

They had some nice, strategic wins. There are some big competitors in that space, but we're faring well. We've had some nice wins, not yet contracts, over some significant name competitors, which we're excited about. But overall, we're excited about the opportunity.

Tim Klasell -- Northland Securities -- Analyst

And then jumping over just to the subscription side, I think Brian, you mentioned you had three buckets of the guys who are thinking, crowd guys, who are sort of maybe in the middle, and guys who were thinking going SaaS. And I understand that the guys in the middle, that is pretty variable. But in your results, how much of it is due to, gee, you just had a stronger quarter or maybe a higher hit rate in the bucket of maybe on-prem versus maybe a little bit lower in the SaaS or vice versa? How much of the variability is just randomness in the deals coming in versus the middle bucket, just being hard to call?

Lynn Moore -- President and Chief Executive Officer

I think a lot of it is just randomness. It just varies based on -- and you're seeing those percentages, although the trend over a long period has been toward more subscription, you've seen those percentages in the mix bounce around a lot from quarter to quarter. And frankly, just a lot of it is randomness. The customers that happen to make decisions in this quarter, which one of those buckets they fall in.

I do think that today, that a lot of the customers still are in one of the camps or the other, and that often, we have somewhat limited ability to drive them more toward subscription. But generally, to the extent that we do believe we have the ability to influence someone, and it could be because they're open to either model, or it could be that as we go through the process, that we find that maybe due to their infrastructure or challenges they have internally, that they're a better candidate for a SaaS arrangement, and we are able to move them more toward that. But in many cases, we have a pretty limited ability to change which way they want to go. But there's a lot of randomness in there, and I think you'll continue to see that bounce around from quarter to quarter.

Tim Klasell -- Northland Securities -- Analyst

OK. Good. And then one final one, I think in a past case, you guys mentioned, you're awarded, but not signed. Sort of your off balance sheet backlog, if you will.

Has that changed appreciably this last quarter? Or was it sort of looking at your normal, sort of band, if you will?

Lynn Moore -- President and Chief Executive Officer

Pretty normal. We talked about an active pipeline. We certainly got, we like to have a number of deals that are awarded. Sometimes to predict exactly how long that contracting cycle will be, particularly with larger deals that take longer, the more complex processes, to get to a signature on a contract.

But I'd say the volume of those is pretty normal right now.

Operator

And this time, there appear to be no more questions. Mr. Marr, I'll turn the call back to you for closing comments.

John Marr -- Chairman of the Board of Directors

OK. Thank you, Brian. Thank you for joining us today. If you have any further questions, feel free to call Lynn, Brian, or myself.

Have a great day.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

John Marr -- Chairman of the Board of Directors

Brian Miller -- Chief Financial Officer

Lynn Moore -- President and Chief Executive Officer

Brent Bracelin -- KeyBanc Capital Markets -- Analyst

Peter Heckmann -- D.A. Davidson -- Analyst

Kirk Materne -- Evercore ISI -- Analsyt

Alex Zukin -- Piper Jaffray -- Analyst

Rob Oliver -- Baird -- Analyst

Scott Berg -- Needham and Company -- Analyst

Charlie Strauzer -- CJS Securitie -- Analyst

Keith Housum -- Northcoast Research -- Analyst

Jonathan Ho -- William Blair -- Analyst

Tim Klasell -- Northland Securities -- Analyst

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