Q3 2021 Tyler Technologies Inc Earnings Call

Your host for today's call is Lynn Moore, President and CEO of Tyler technologies. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time and as a reminder, this conference is being recorded today October 28, 2021 little more.

Please go ahead.

Thank you, Jason and welcome to our call.

With me 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 comments on our quarter and then Brian will review the details of our results.

I'll end with some additional comments and then we'll take questions.

Thanks Lynn during the course of this call management may make statements that provide information other than historical information and may include projections concerning the companys 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 19 nine.

Five or.

They are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K, and other SEC filings for more information on those risks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise.

Lynn.

Thanks, Brian.

Our third quarter results were exceptionally strong building on the momentum we established in the first half of the year.

This was our first full quarter, including Nics results and it was our best quarter ever by most financial measures.

We achieved new quarterly highs in revenues non-GAAP EPS free cash flow adjusted EBITDA bookings and backlog.

Total revenues grew 69% with organic growth of seven 6%.

As a result of the surge in the Delta variant Nic's COVID-19 related revenues from tour health and pandemic unemployment initiatives were significantly above plan at $43 $3 million.

We had expected those revenues, which have relatively low margins to wind down in the second half of the year, but we now expect they will continue into the first half of 2022.

Nic's core revenues grew 5% in the quarter.

Recurring revenues comprised over 80% of our quarterly revenues for the first time and were led by 183% growth in subscription revenues.

Excluding <unk> revenues subscription revenue growth was robust at 23, 9%, reflecting our accelerating shift to the cloud.

We have now achieved greater than 20% subscription revenue growth and 55 of the last 63 quarters.

Software licenses and services revenues grew 13, 9% or 2% excluding nics.

As expected our margins compressed compared to last year's third quarter.

Some expenses like Tradeshows and employee health claims as well as lower margin revenues like billable travel that declined in 2020 due to Covid pandemic had begun to return this year.

Margins were also impacted by the inclusion of NSC and particularly by the continuation of their lower margin Covid initiative revenues.

As a result, our non-GAAP operating margin declined 330 basis points to 25, 3%.

Excluding Nic's Covid initiative bread initiative revenues and related costs, our non-GAAP operating margin was 26, 8%.

Bookings reached a record high in the third quarter at approximately 601 million more than double last year's third quarter.

Excluding <unk> bookings grew 51, 9% with the biggest contributor being the $63 million renewal of our fixed fee E filing arrangement with the state of Illinois.

We're very pleased to report early success this quarter with joint sales efforts between Nics and Tyler solutions teams we.

We signed agreements with the Virginia Department of housing and community development valued at approximately $24 million to provide a digital and call center solution for tenant landlord and third party filing of rent relief program claims.

He will also provide administrative dashboards for Marcia crowded data and insight solutions as well as payment processing capabilities.

Our largest software deals of the quarter also came from NFC was $6 1 million SaaS contract with the West Virginia Division of motor vehicles for digital titling.

This new digital vehicle titling and registration management system will go beyond modernization and revolutionize how the DMV manages vehicles and interacts with businesses and citizens.

In addition to the streamlining of nearly every vehicle related process in place today. Many legacy paper processes will be fully replaced with secure digital solutions.

The solution utilizes technology to govern and secure the vehicle ownership process, adding security, reducing fraud and providing the flexibility that other state DMV operations are lacking.

The arrangement, which Leverages our state Master agreement has an initial term of five years.

In addition to the SaaS fees the agreement will generate estimated transaction revenue of more than $3 million per year.

I'd like to also highlight a few more significant deals signed this quarter.

We signed appraisal services contracts with the Delaware counties of Newcastle and Kent.

In addition, new Castle County selected our Ias World appraisal solution under a SaaS arrangement with.

The deals have a combined value of approximately $19 million.

Coupled with the appraisal services contract signed last quarter was Sussex County Tyler.

Tyler will now be performing a property reassessment for the entire state.

Also for Ias World property tax and appraisal solution, we signed SaaS arrangements with the regional municipality of Wood Buffalo in Alberta, Canada valued at approximately $3 $1 million.

Franklin County, Ohio valued at approximately $3 $5 million and Summit County, Ohio, which also includes our data and insight solution valued at approximately $2 $9 million.

Other major SaaS deals included a $4 5 million dollar contract with Arlington Heights, Illinois for our ERP civic services and payment solutions.

And a $3 $4 million contract with Bayer County, Texas for our Odyssey soft code and supervision Justice solutions.

Our largest perpetual license contract in the quarter was $5 $4 million contract to provide our micro Pak <unk> solution to manage Covid vaccination EDA stations for the U S Department of Justice.

We also signed a two and a half million dollar on premises license contract with the Commonwealth of the Northern Mariana Islands for our munis, ERP and enterprise asset management executive <unk> and <unk> solutions.

We also signed several significant contract renewals with existing clients, including extensions of Nic's State enterprise agreements with the states of Utah, and Oklahoma and a five year renewal of our E filing arrangement with the state of Illinois.

Which was expanded to include applications for Marcia crowded data and insights platform.

On last quarter's call, we reported that Nic's had been selected as one of two vendors to provide the internal revenue service with a digital payment processing solution that would allow taxpayers to securely pay their federal taxes and that revenue under that contract was expected to begin in January of 2022.

Following the award three entities filed protest with the J O.

Prior to any ruling on the protest by the <unk>.

The IRS notified the G O that it was canceling the two awards, including the award to Nics.

While the IRS is not formally terminated nic's contract. It has issued a stop work order under the contract.

The IRS indicated that it will either amend the current solicitation, allowing all bidders to modify their previous submissions and then reevaluate the proposals.

Or terminate the existing solicitation and start the process over with a new procurement in the coming months.

The IRS has not yet stated which of these options it will select and we have no information regarding the potential timing of either option.

Given these recent developments, we do not expect to recognize any revenue under the IRS Award in 2022.

While the specific concerns raised in the protests have not been made public and are not known by Tyler the decision to cancel the awards Nic's was not related to Nic's performance under the contract its ability to successfully perform under the contract or any allegations of misconduct or improper behavior by NSE.

On the M&A front, we completed the acquisitions of <unk> and <unk> during the third quarter.

Then the engine is one of the fastest growing technology companies in North America.

Operating in more than 230 counties in 32 states.

Its leading cloud based platform provides a comprehensive suite of applications focused on the corrections market.

Including deposit technologies for commentary ordering and warehouse management and various informational electronic communications security accounting and financial Trust management components.

Arch is a cloud based software platform, which creates accessible technology to enable a modern day police force that is fully transparent accountable and a trusted resource to the community. It serves.

The acquisition of <unk> allows Tyler to offer a full suite of public safety solutions, including ARX alert and Arts community.

Designed to maximize efficiency and safety for law enforcement officers, while increasing transparency and trust building with communities.

Vintage in Rx have combined <unk>.

Of approximately $17 $5 million and there are additions further strengthen tyler's justice and public safety suites.

Now I'd like for Brian to provide more details on the results of the quarter.

Thanks, Lynn yesterday, Tyler technologies reported its results for the third quarter ended September 32021 in our earnings release. We've included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry are.

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.

GAAP revenues for the quarter were $459 9 million up 69% non.

Non-GAAP revenues were $466 million up 61, 1%.

On an organic basis, GAAP and non-GAAP revenues grew seven 6% and seven 5% respectively.

Software license revenues Rose 13, 7%.

Subscription revenues Rose 183, 3%, excluding the contribution from it I see subscription revenues were still very strong growing 23, 9%.

We added 144, new subscription based arrangements and converted 67 existing on premises clients, representing approximately $84 million in total contract value.

In Q3 of last year, we added 114, new subscription based arrangements and had 46 on premises conversions, representing approximately $56 million in total contract value.

Subscription contract value comprised approximately 74% of total new software contract value signed this quarter compared to 47% in Q3 of last year, reflecting our ongoing shift to a cloud first approach to sales.

The value weighted average term of new SaaS contracts. This quarter was three four years compared to four three years last year.

Transaction based revenues, which include Nic's portal payment processing and E filing revenues and are included in subscriptions were $171 $2 million up more than six fold from last year.

E filing revenues reached a new high of $17 $4 million up 15%.

Excluding at IC Tyler's transaction based revenues grew 24, 3%.

<unk>.

For the third quarter, our annualized non-GAAP total recurring revenue or <unk> was.

It was approximately $1 $5 billion.

Up 79, 2% non.

Non-GAAP <unk> for SaaS software arrangements for Q3 was approximately $330 million up 24, 7%.

Transaction based <unk> was approximately $685 million up 639% and non-GAAP maintenance <unk> was flat at approximately $471 million.

Our backlog at the end of the quarter was 177 billion up 14, 3%.

Because the vast majority of Nic's revenues, our transaction base their backlog at quarter end was only $27 million.

Excluding the addition of Nic's Tyler's backlog grew 12, 6%.

As Lynn noted our bookings in the quarter were very robust at $601 million up 105, 7%.

And includes the transaction based revenues of Nics checks.

On an organic basis bookings were strong at approximately 4400 $44 million up 51, 9%.

Fueled by the renewal of the state of Illinois fixed fee E filing arrangement of approximately $63 million and the addition of the two Delaware appraisal deals totaling $19 million.

For the trailing 12 months bookings were approximately $1 6 billion up 31, 3%.

And on an organic basis were approximately $1 4 billion up 10, 8%.

Our software subscription bookings in the third quarter added $19 million in new annual recurring revenue.

Cash from operations and free cash flow were both record highs for the third quarter at $205 4 million and $192 8 million respectively.

Our balance sheet remains very strong during the quarter, we repaid the outstanding balance of $65 million on our revolver and paid down 57, and a half million dollars on our term loans for a total debt reduction of $122 5 million.

We ended the quarter with total outstanding debt of one 4% to $8 billion in cash and investments of $348 4 million and net leverage of approximately two three times trailing pro forma EBITDA.

We expect the net leverage to be approximately two times by year end.

We have raised our revenue and EPS guidance for the full year 2021 to reflect our strong year to date performance and our expectations for the fourth quarter.

We expect 2021 total GAAP revenues will be between one five to $7 7 billion and $1 $5 97 billion.

And non-GAAP total revenues will be between one 580 billion.

And $1 6 billion.

We expect total revenues will include approximately $72 million of Covid related revenues from Nic's two.

Your health and pandemic unemployment services that are expected to wind down in the first half of 2022.

We expect 2021, GAAP diluted EPS will be between $3 55, and $3 63.

And may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate.

We expect 2021, non-GAAP diluted EPS will be between $6 94 and $7 in <unk>.

Other details of our guidance are included in our earnings release.

Now I'd like to turn the call back over to Lynn.

Thanks, Brian.

Im extremely pleased with our third quarter results, both from Tyler's core operations and from NSC in its first full quarter as part of Tyler.

When we spoke to investors in June we discuss four priorities around the NYSE acquisition for 2021.

First don't mess up the business.

Second achieve our 2021 plans for both businesses.

Third retain Nic's staff and established a long term leadership team.

And fourth identify and launched joint strategic initiatives and get our sales teams aligned.

I'm happy to say, we are executing on all of those objectives.

Both businesses are executing at a high level and are exceeding our 2021 plans.

The Nic's team under the leadership of Elizabeth profit is enthusiastic about the combination and the opportunities ahead with Tyler.

And we've hit the ground running with teams actively working on integration and go to market strategies.

We're showcasing Tyler products to Nics entire state General manager team and Nic's General managers are providing detailed reviews of the Nic's state enterprise contracts and relationships for Tyler's team.

We've also established a payments technology integration plan and are in the process of finalizing the joint Tyler Nic's payments organization.

We've already had some early success and join opportunities such as our contract with the Colorado Department of regulatory agencies that includes Nic's payment processing, Tyler's <unk> regulatory solutions, and our <unk> data and insights platform.

As well as the recent Nic's contract with Virginia for a solution for the rent relief program, which also includes Tyler <unk> applications.

We have a current pipeline of more than 40 qualified sell through opportunities with Nic's state enterprise market across multiple Tyler solutions.

And have identified Tyler sales opportunities leveraging nic's state enterprise contracts to speed up the time from award to contract.

We're also beginning to build our combined payments pipeline with early sales in Florida and Louisiana.

We continue to see positive trends in public sector market activity.

Indicators, such as proposals sales demonstrations and pipelines are all up significantly from 2020 and are generally at or in some cases above pre COVID-19 levels.

Our competitive competitiveness remained strong as reflected by high win rates across our major applications.

While not yet a significant factor we're starting to see purchasing activity that has identified is being funded through the federal stimulus under the cares Act and the American rescue plan.

We expect that the $350 billion of <unk>.

Aid to state and local governments and $167 million of aid to schools under the American Rescue Plan Act will provide a significant measure of relief to budget pressures faced by many of our clients and prospects and potentially provide a tailwind over the next two to three years.

A survey by the National Association of Cio's indicated that most states <unk> expect that remote work will continue and the need for digital services will increase.

CIO has also said they plan to modernize legacy systems in the next two years with human services and public welfare labor and employment and health services noted his priorities.

Tyler is well positioned to help public sector leaders address those needs.

We also remain on track with our R&D projects around our cloud initiatives and with our progress toward hosting new SaaS implementations in on premises conversions and AWS.

Our cloud operation team is engaged in 2022 planning with a focus on continued product optimization datacenter migration and operations maturity.

Finally, I want to welcome the newest member of Tyler's Executive leadership team, Kevin Iverson, who joined Tyler earlier this month as Chief Information Officer.

Kevin is a seasoned leader with experience managing technology infrastructures for corporations statewide judicial courts statewide executive government agencies and U S. Military organizations, most recently, serving as CIO for the Idaho Judicial branch.

Kevin will work closely with our former CIO, Matt Berry until matched retirement early next year.

I'd also like to express our deep appreciation to Matt for his tremendous leadership of our it and hosting organization over the last 11 years and wish him the best in his retirement.

With that we'd like to open up the line for Q&A.

We will now begin the question and answer session.

To ask a question you May press Star then one on you touched on phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.

Please limit yourself to one question and one follow up if you have further questions you may reenter the question queue.

Our first question comes from Matt Van Vliet from BTG. Please go ahead.

Hey, good morning, guys. Thanks for taking my question and nice job on the quarter.

I guess pertaining to the commentary that was in both the press release and you've talked about this morning in terms of some of the stimulus funding finally sort of making its way into the market I'm wondering if you could give us some additional color in terms of where youre seeing some of that.

Coming through now where some of the newer sales activities pertaining to two jurisdictions that feel like they have more budget to spend and maybe you are looking at nice to have types of projects.

And anything additionally around types of products that they're most interested in terms of using that funding.

Yeah.

Yes sure Matt. It's a good question, it's something that we're starting to track a little bit more.

I'd say, if youre seeing it really across a lot of our solutions, but I think we've seen a lot really on the enterprise side. We're.

We're seeing a little bit in schools and we've seen some overruns.

I think right now if you look at Q3 and Q4 there are a few dozen deals out there that are certainly being spurred right now through some of that federal stimulus spending and I would expect some of that to continue.

Yeah.

Great. Thanks, and then following up I guess on the exact sort of contribution of what the NSE business.

Is looking like in the guidance for kind of the full year, what the contribution looks like understanding that some of that was one time, but Brian if you could help us just kind of what the underlying core business is contributing there and kind of what the growth continues to look like on a forward basis. Thanks.

So.

Excluding an IC.

The current guidance would.

Have.

Tyler's forecast I guess the.

The midpoint of our guidance would be.

Around the $1 billion $2 24 of revenues.

And that would be.

The midpoint around.

95% growth for the full year and that would imply again at the midpoint of our guidance around 11% growth for the core Tyler operations in the fourth quarter.

And NIH.

As we had discussed the.

Covid related initiative revenues have continued beyond.

When we bought even at the end of last quarter, They would wind down we have.

At the end of last quarter, our guidance had about $17 million for the.

Second half of the year, and we did $43 million under those initiatives in Q3 and.

I expect a full year to be about $72 million, so about another $13 million or so in the fourth quarter.

And some of that then continuing on into next year, but.

Core growth, excluding this quarter COVID-19.

Covid initiatives was around 5% in the fourth quarter I'm, sorry in the third quarter.

And there is some seasonality in their fourth quarter core operations, particularly around the holidays.

Some of the transaction volumes tend to fall in the fourth quarter. So.

Their fourth quarter probably is.

Our guidance reflects that in the fourth quarter numbers.

Alright, great. Thanks for all the color I appreciate taking the question.

Yeah.

The next question comes from Scott Berg from Needham <unk> Company. Please go ahead.

Okay.

Hi, Lynn and Brian Congrats on a really good quarter here I guess against several questions is.

Bookings were quite strong in the quarter, especially excluding NAC.

Lynn if we dissect those a little bit how much of the bookings in the quarter or maybe catch up deals that were pushed from the earlier stages of the pandemic just into the current period or are you kind of seeing more of a return to a normalized deal cadence here, which had been enjoying for the last decade or so.

Yes, I think it's a combination of a couple of things Scott.

Did have a couple of very large deals that we signed in the quarter, which obviously were absent in Q3 Q3 was difficult last year.

But I think as I mentioned in my comments.

When you look at the market activity.

I've talked about over the last several quarters over the last 18 months or so the pandemic has sort of affected different parts of our business a little bit differently.

Some were hit a little bit harder and I think I've mentioned before that if you look at for example, our mid to higher end financials or munis or munis product that.

One area that was hit a little bit harder than what Youre seeing there for example is.

Youre seeing awards in deals.

That are actually exceeding pre COVID-19 levels and I think Thats. The example of what you just mentioned, which is it's really the example that both pent up activity.

As well as I think sort of validate some of the investments in some of the strategy that we've been doing over the last couple of years.

Excellent. Thanks, and then from a follow up perspective, Brian on the guidance for the year, if I back out the <unk>.

Revenue is expected from it I see it.

It looks like your core Tyler guidance is roughly flat for the year.

How are you thinking about kind of deal mix around subscription versus license deals because bookings were strong I guess it would have maybe expected a little bit more increase in kind of the core Tyler revenues, but that's probably related to that maybe stronger subscription bookings mix than maybe what you were previously expecting yes, I'd say that's accurate we're generally expecting.

The mix to continue to trend towards.

An increasing percentage of SaaS.

Now the fourth quarter as you know.

Typically is a strong quarter for public safety, which still is primarily on premises.

And.

So that tempers that a bit but that also was the case last year.

But in general we expect an ongoing.

Continuation of the trends, we've seen where a higher percentage of the mix.

As SaaS.

I think I'd add there Scott.

The amount of SaaS is actually even exceeded our going into your expectations and while we expected the market to be moving this way we've talked before the pandemic has certainly accelerated that in.

You look at you look at areas I'll mentioned munis again, I mean, we're north of 85% of our deals are SaaS now.

You look at our lower end financials and encode.

North of 80% where last year. They were 50%. So there is some of that headwind.

I think as the model continues to play out we'll get on the other side of that.

Excellent thanks for the color great quarter guys.

The next question comes from Ethan <unk> from Wolfe Research. Please go ahead.

Hey, guys.

I think this is.

Alex here from from Wolfe.

So a couple of questions for me.

First if we think about the.

I wanted to ask about the maintenance revenue in the quarter. The maintenance revenue was I think down.

Down a bit sequentially are you starting to see is that conversion.

Activity, starting to pick up a little bit and how should we think about it.

In Q4 and beyond.

Yes, I think thats accurate, but each of the last couple of quarters have been new all time highest for us.

In terms of the number of conversions and certainly when you look back at the last four quarters, which all kind of filter into the maintenance growth.

The last four quarters.

Well exceeded the.

But the flips or conversions that we saw in the prior year end.

As the new business is shifting towards more SaaS. There is an increasing interest in on prem customers flipping so that does have.

A.

<unk> effect on maintenance, but generally there the revenues that are going into the subscription side as they flip is about <unk>, what the maintenance was so that's a component.

On the other side of the high growth in subscriptions.

And.

And then you look at the mix of new business over the last year as it continues to shift towards more SaaS and less license that has an effect on the growth as well.

And then the <unk>.

Last thing is.

Some.

Attrition around.

Our legacy product.

At.

In the federal business.

Where the federal government has mandated some states to move off of.

Our product and onto it.

Federal provided product.

<unk> had a bit of an impact there as well so but the flipside say are the biggest impact is ongoing conversions and that'll continue to be the case.

And at some point.

Over the next couple of years, the likely be a significant acceleration of those as we have the ability to.

To accelerate that through moving those customers into AWS.

Thank Alex to I guess to summarize if you look out over the next couple of years Youll see that subscription revenue line continuing to grow at an increasing pace, Conversely, youll see licenses contract.

Proportionately in maintenance.

We'll probably continue to flatten out as Brian mentioned is as those annual increases started getting offset by flips, which are flips are up significantly year over year.

Last quarter.

Perfect and I guess, maybe.

Maybe on the Nic's side so as.

You talked a little bit about the increasing.

Increase in synergy opportunities that you are starting to.

Let's see in the base when should we think about like when we think about that 5% growth for the core NSE business that you talked about is that something like how should we think about that trending.

Yeah, because there is an acceleration that is going to be you guys think is sustainable from that level from here kind of ex the one time revenues from Covid and then on the Covid impact is there any reason why we do think that they end in the first half next year or.

Are there any of those that actually have the potential to be more durable given the.

The variability of mandates.

Yeah, I'll start with the last one.

I guess I would say it was.

On a personal note I think I've said before I would I wouldn't be I'd be happy if it ended that means that COVID-19 is getting further in our rearview mirror.

It's our expectation that revenues right now are primarily out of three areas three areas. It's out of the state of South Carolina, where there the primary.

Doing the primary testing also the state of Nevada, and then we've mentioned the Virginia.

Unemployment release stuff.

Expectation is I mean it is.

It is a little bit of a guess, but it's an educated guess and we are assuming that that will wind down.

What's interesting about the South Carolina revenues is that we will move from a from a contractor role to a subcontractor role. So while those revenues will still continue and eventually taper off I think our margins on those.

We will increase I.

I think what's important about the Covid initiative, though is it really shows the ability of nic's team to innovate and it shows their agility and it also shows the relationships that they have with their with their state enterprise contracts that they could spend these things up quickly and create new solutions and I think that's that's what's exciting.

When you talk about I think your first question was about growth rates going forward.

We're excited.

I can't tell you how excited our sales teams are as they meet they get together I think as we as we move forward, we talked about selling all other different products through to Nic's sales channels and Conversely, what we can bring to and I see what you think about with Tyler payments and we're already seeing a lot of our <unk> data and insights and telecom and <unk>.

<unk> platform in public safety and civic and munis all those deals are in the pipeline and I don't know that going forward, we'll always be able to sort of segregate. All of these were nic's deals because these are tyler products going through them.

Probably at some point won't continue to isolate the NSE revenue growth, but what we see overall with Tyler is in as part of this acquisition and part of the underlying rationale is that we believe it will help drive Tyler's overall revenue growth at a higher level than it would have on its own.

That's super helpful. And then the last question I wanted to ask about the IRS contract is there a way to.

Dimensionalize at least what the expectation may have been for that revenue stream in 'twenty two before the cancellation of the agreement and any thoughts for us in terms of how we should think about modeling that for next year.

I'll start my own if you have the number but.

The revenues in 'twenty expected revenues in 2022, we have a number Brian will get it but a little bit a little bit was uncertain, because how fast we could get up and running and with the payments starting early in the year. The real revenue I think expansion was going to happen in the later years of the contract.

There are some significant revenues expected.

And to be honest, it's my expectation that this that this procurement will come back out in the sometime this year.

We'll beat it again and for the reasons. We won the first time, we should be extremely competitive going forward Brian.

<unk> talked about that.

Last quarter.

When we had gotten the award and I believe the number was.

There were multiple providers I believe the number was 42.

$60 million in gross revenues.

And something more I think in the $5 million to $6 million range on a net basis.

After.

All of the interchange fees.

But we currently expect that well.

Virtually certain that there won't be any revenues in 2020 to that.

While the IRS works through this.

Procurement process that the existing vendors will be held in for another year. So.

Those werent in a.

None of those revenues have started already so there was nothing in our in our current base that goes away but.

<unk>.

It's pretty clear that that will be.

A 2022 impact at this point.

And we'll see how.

Yes.

The new procurement takes place.

Got it thank you guys congrats.

The next question comes from Charlie Strausser from C. J as Securities. Please go ahead.

Hi, good morning.

Quick question for you I know you don't like.

If you can give out formal 'twenty two guidance until the next call, but maybe some early thoughts on that.

What are you thinking about for next year.

Well Youre right, Charlie we don't like to get out ahead of ourselves.

Right now we are where we are.

Well into our 2022 planning.

There's a lot of there's a lot of variation as a lot of factors that go into that we're still in the early stages.

I'd say, we're kind of on track with our normal planning process I would really expect to have better information later this year.

I think it's just a little too early right now to go ahead and forecast 2022.

No problem and then just looking at the labor side, a lot of companies I mean labor issues trying to find new qualified people.

I'm sure.

Immune to that as well, maybe you can talk a little bit.

On the labor side.

Any difficulties, you're having there, causing wage inflation et cetera. Thanks.

Yeah, Charlie I think that's a.

That's a good point.

We're all reading in the news whats going on across multiple industries.

The labor market is certainly evolving right now.

Staffing pressures, there's wage pressures in Tyler hasnt been immune to that.

I think there is still a little to figure out about how the.

How permanent this is versus how transitory is.

Youre seeing people.

Leaving careers for lifestyle changes, we call them sort of Covid casualties.

We're seeing competition for wages and more people are now being more accepted to flexible work and work from home that Youre seeing.

People come in and go into markets that they may not have traditionally tried to to hire people from them and we're dealing with that as well.

I think if you look across a lot of our business units.

We're staffed a little bit under plan or <unk>.

Our team and our recruiters are doing a really good job responding to this working really hard but but it is something that's top of mind, it's something that we discussed at the executive level and you're right Tyler has not been immune to it.

And just picking up a little bit more when you look at your current employment base.

Asking people to kind of move back on site into the offices. This fall.

Yes, so we're on track to sort of.

We've taken our faith based approach and we've taken a locally based phase based approaches.

As the duress each jurisdiction has a little bit different in the way they've handled it.

And so essentially we're on track right now to sort of come back to what we would call.

Full back in the office at the first of the year.

What that means is probably not exactly what it meant before COVID-19.

There will be a little bit more flexibility.

That's part of the market today.

And so I would expect some of that going forward.

Alright, Thank you very much.

The next question comes from Rob Oliver from Baird. Please go ahead.

Great. Thank you guys. Good morning. My question first question is Lynn on public safety, just wanted to dive into that a little bit. It sounds like you guys are excited about arch deal in terms of the.

<unk> suite of products that it gives you guys for a police.

Wanted to ask about that and whether we would expect that to be available.

In the bag of solutions for your public safety.

Sales folks that are closing deals in the all important Q4 here and then just a broader question about what you guys are seeing and hearing from customers in public safety I mean, it's really.

Band Circuitous type of year, where we went from Dupont and now it seems like we're in fund environment and just curious what that means for you guys relative to the pipeline and your confidence levels on public safety into Q4, and then I had a quick follow up.

Yes, Thanks, Rob that's a that's a good question <unk>.

We are excited about arch it was.

The small acquisition you know on.

<unk> really it's a database solution that really helps the chief of police helps the command staff helps supervisors really have more insight in the activity of the law enforcement that are on the job.

With compliance issues helps promote officer wellness by doing things like identifying stress.

Risk mitigation and Youre right.

There has been sort of the.

Talk around the public safety area and a lot of different areas and a lot of focus lately.

<unk> has been on law enforcement reform and this was this was something that was missing in our product suite.

<unk> is a company that's based in Detroit, which is close to our public safety office and Troy. They had been a partner of public safety and a number of deals. This solution had been sought at more and more and youre right. It really rounds out our.

Our portfolio of public safety solutions I'd expect it to be something like we do a lot of acquisitions that is something we are going to sell in our inside channels and it's also going to become a differentiator in new deals youre seeing more and more public safety entities looking for these types of solutions for the reasons you just talked about.

When you talk about the funding for public safety.

I mentioned earlier that different parts of our business were impacted differently and public safety is not suggesting it wasn't impacted by it.

It's still going pretty good.

The number of license deals that it's got this year, they're expected licenses are up over 35% year over year.

We've talked a lot before about the investments we've made there and the number of deals that will be.

Plus in license will be will be more than we've ever had before.

I think the funding is there the initiatives are there and we've been making a lot of investments and we've done some acquisitions.

Around mobility and things like that that make us even more competitive so I am pretty still I'm still very excited about where we stand with public safety and where the futures for that.

Great I appreciate it that's great color. Thanks, Lynn and then just one follow up I know, Matt ask that first question about.

The stimulus funds and you touched on that but I just did want to follow up just briefly because you know you guys said in both the press release.

In your comments here that you're you know you're starting to see some.

<unk>.

Specifically related to that funding it and you mentioned I think the pipeline, but I think it doesn't spurred by fed federal stem just just curious what youre hearing from customers you mentioned, a pretty wide swath of Tyler products.

Can we assume that that that the bulk of <unk> products would qualify and are available under that and you know and then if not you I think you mentioned kind of potential tailwind over many years.

So while there are two ways to think about this is one way to think about it yes federal stimulus dollars are going to be flowing to Tyler clear positive another would be that budgets being shored up also creates opportunities for more confidence in spending.

That kind of the right way to think about a couple of different buckets I appreciate it.

Yes, I would say and to clarify my comments earlier, if you look at the deals in Q3 and Q4 I'd say, there's probably a few dozen deals where they are being impacted I'm not suggesting that they are being fully funded but there.

Maybe partial funding or part of the equation.

I think your comment is around confidence.

It's something that I've touched on before and I believe the confidence of having that blanket behind them along with generally what's been going on in the market.

It is helpful for all of the deals.

We are seeing.

Stimulus when I talk about these few dozen deals they are across different different products of Tyler.

That <unk> necessarily single out more than others. Although there are some stimulus dollars that are specifically tied to schools.

So I think I think generally it's it's a positive.

It's something that is still a lot of our clients and prospective clients.

Still a lot of them still trying to figure out how do we access them, which which dollars are actually there and it's something that our marketing team in conjunction with our sales teams are putting together materials to help educate our clients and help navigate them where we can.

But yes, it's it's a tailwind.

Generally speaking, it's hard to quantify at this point.

But overall I think it's part of our as part of the reason for optimism we Havent Tyler.

The American rescue plan.

Theres not much restrictions on what they can use it for us So I'd say generally almost anything Tyler.

Has in our portfolios.

Be available.

B B.

Be purchased or.

Acquired through through the <unk>.

AARP funds.

And they have until the end of 2024 to spend those funds.

And the indications we have is that it's a very small percentage of those funds that have so far been spent or even allocated there.

There is still a lot of.

Work going on in governments around determining how they're going to spend those but.

It's there's a lot of flexibility around what they can spend those on.

Yes, I think theyre trying to route one or two school buses for our whole district. So.

I ask those guys to give you guys a call. So hopefully you got that and my friend here from here in Connecticut. Thanks, guys I appreciate it.

The next question comes from Kirk Mattern from Evercore ISI. Please go ahead.

Yeah, Thanks, very much and congrats on a good quarter Lynn I was wondering if you could talk or Brian. If you could talk about just sort of the bookings level for NAC on our organic basis I know obviously the core Tyler bookings were up a lot, but nic's growth that 5% is the book ahead of that rate right now I realize there's some rent.

Rack things that probably makes it a little tricky, but but are you pleased with sort of the the bookings trends and I see right now.

Because they are mostly transaction base their bookings and revenue are pretty aligned yet.

They have some software business.

Couple.

Nice deals this.

This quarter.

And our biggest software deal across Tyler.

Came through NFC, but generally.

Fast majority of their revenues are coming to transactions they are pretty much aligned.

They are pretty reliable, but like I said, theres, a little bit of seasonality.

So we saw higher growth last quarter, a little bit lower growth this quarter.

One of the areas.

<unk> been impacted in their business more.

By Covid as the driver history Records, which is a significant part of their business and the growth there.

As a little slow right now, but expect this to rebound as things get back to normal but.

Offsetting that is that transaction volumes were generally up.

Given that people are.

Yeah.

Doing more.

Business digitally with.

State governments so.

But generally those bookings and revenues would be pretty similar okay. That's helpful. Thanks, Brian and then Lynn as you look ahead to 'twenty. Two you obviously have a much broader product portfolio at this point in time, what sort of your temperature on in terms of.

So we're focusing on what you have already harmonizing technology go to market versus doing any other deals I know you did a couple of smaller tuck ins this quarter, but you know you have a huge product portfolio.

Assume the focus is going to be on more just sort of again harmonizing. The technology of what you have in go to market is that sort of the way we should be thinking about the strategy in the next year.

So I think.

Youre right, we do have a lot of initiatives going on we do have a lot of larger portfolio than we did even 345 years ago.

We are focused on we did spend over $2 billion.

We are clearly focused on that.

We're also clearly focused on our cloud initiatives.

And things that we need to do to continue to optimize our products and do some things with our internal operations as we move there.

I've talked before about how we approach M&A generally and we've done a little bit this year and I think earlier when we're talking about in Ics. We may go back to a couple of years ago. When we have a little bit deliberate pause. We did have a couple of other deals this year than the engine.

Data spec. These were deals that were sort of in the works.

Though as we go into next year.

We're going to remain opportunistic we're going to continue to look at deals that I continue to look at deals today I've been looking at deals over the last couple of months, even though while we still have all this activity going on in and when the right deal is out there if it fits a need.

Whether it's small medium or large.

We're definitely still in a position to execute on that and then I would expect that we would.

That's helpful. All right I'll leave it there thanks guys.

The next question comes from Keith <unk> from Northcoast Research. Please go ahead.

Good morning, guys and I'll Echo the quarter was great for you guys. Congratulations.

Got it.

Visits in just revisiting the prior question.

Seems like lead driver history record for ISC has not been up to par since really Covid began is there anything structurally has perhaps changed that that driver history records, perhaps might not grow back to previous growth trajectory.

Congrats you they had.

Yeah.

I didn't quite hear the question.

I don't we're not aware of anything structurally or fundamentally that's changed around that.

We expect that those will rebound back to normal levels.

Certainly.

No change in the way insurance companies are getting their information.

But and there hasnt been any change in our pricing at least no negative change and I know in some of our renewals.

Been able to get increases in pricing so.

Don't think there's any fundamental change around the <unk> side.

Got you Okay I appreciate it.

Well thanks for your contracts, obviously three four years on average this quarter was very good.

If you remember back to previous conversations the idea was you assure the time span of more opportunity you have to raise prices on our contract renewals can you talk about the success you guys are having in terms of pricing changes as contracts are coming up for renewal.

I think in the last.

There hasn't really been a change through through Covid, we've been.

Generally.

Maintenance agreements, we've we've targeted kind of in the 4% to 5% annual increases in on subscription renewals.

Targets are generally in that same range.

And as you said.

<unk> the initial terms because those revenues are straight lined over the term of the agreement gives us the opportunity to realize the benefit of those increases sooner.

And generally we're leading with shorter terms in this quarter.

<unk> had success with that.

Occasionally, particularly on some of the large contracts like I think back to the North Carolina of course.

And justice.

We have a 10 year agreement, so that can bounce around a bit but.

We do prefer to have shorter agreements and the pricing has been in line with.

What we have historically tried to achieve.

Great. Thanks.

The next question comes from.

Jonathan Ho from William Blair <unk> Company. Please go ahead.

Hi, good morning, Congrats on the strong results.

Wanted to maybe start out with some additional color on the vent engine, then arcs acquisitions that you've made recently made and just potentially understanding what the opportunity is to upsell these types of opportunities.

There.

Yes, sure Jonathan <unk>.

<unk> engine, but we're pretty excited about that acquisition. It was a little bit larger we're excited about both had had it didn't mean to imply we werent excited about Rx I think I've just talked about <unk> a little bit.

But then the engine corrections in the corrections market for US was something that we've really seen as a significant growth opportunity we have.

Investing in some in our core corrections product for some time.

Key part of our Tyler Alliance, which our connected communities vision, and it's really sort of the corrections areas sort of the crossover points between courts and public safety and it's probably the largest market in the US is white space that we didn't really have a leading product in.

And.

Inmates services is becoming increasingly important to that opportunity there is more and more requirements and rfps around there.

<unk> partnered with Vista engine over over the years in a number of deals and they're really just a leader there.

I expect that their revenue this year will be somewhere in the $20 million all IRR and it's been growing at 30% for last few years.

I do think we have enough opportunity to sell that into our existing client base, but also it will help us lead with our corrections in Standalone deals.

So we're pretty excited about that deal and similar with ARX I talked a little bit about for about the focus on law enforcement reform in and that was a bit of a hole in our portfolio again almost similar playbook.

Work with them, some really liked them really liked the product good cultural fit and.

And we really think it will round out our portfolio and as you mentioned selling back into our base our existing customer base something that say all the time, it's our it's our greatest asset and the more solutions. We have the more that we can we can push through there and drive growth.

Got it and on that multi product sale point can you maybe give us a sense of how to better understand how some of these incremental products have been uplifting your deals I think in the examples that you cited you did mention a number of multi product opportunities.

What should we think about in terms of maybe net expansion rates or the ability to cross sell more into the base over time as well as multi product on yourself. Thank you.

Yes, we're seeing it across all of our all of our solutions and we talk about some of these smaller tuck in deals.

Those are deals that actually are really are being sold quite a bit now across our product lines. You look at you look at public safety. For example, we've talked about deals where we sell out of our core Cat Our court records, but it also includes things like <unk> and you probably heard US mentioned data and data insights is becoming a differentiator for us across many many product line.

But we also talk about mobility, and Brazos and soft coat and mobilized. These are all products that were done through acquisitions in the last 345 years or so you see the enterprise side.

Things like executive time time, and time and attendance management.

We've seen it in the in the court space and it is part of our overall strategy.

It makes us that much more competitive as we have a wider range of solutions and a sort of an enterprise suite as we as we compete against people, who don't have such a diverse set of solutions to fit the client needs.

Great. Thank you.

The next question comes from Peter Heckmann from D. A Davidson. Please go ahead.

Hey, Thanks for taking my call I appreciate it.

Okay.

I'm trying to figure out on just appraisal I know, it's not a big part of the business, but it seems like there had been some notable wins there do we expect a real step function change in the size of that appraisal business or our other older contracts rolling off and doing appraisals.

Kind of continued to be a pretty consistent contributor.

I'd say broadly it's pretty consistent we have these projects often are.

Multiyear projects.

Sometimes two or three years, sometimes longer.

Some of them are driven by legislative cycles in certain states like Indiana, and Ohio that have regular cycles.

Where we have.

Almost like recurring appraisal projects others are more one off.

Three.

Counties in Delaware that comprise all of Delaware that were getting ready to start with.

A court ordered reappraisal so sometimes.

The courts get involved when.

It's determined that appraisals or out of date and and maybe contributing to unfair.

Fair distribution of taxes so.

That's the case with these.

We're.

Pretty uniquely positioned.

To be able to have a strong competitive position in those large deals, but there's one off kinds of deals.

They can be a little bit lumpy.

And but I would say.

Generally in a range, we're probably on a more active period right now, particularly coming out of Covid, where some of these projects may have been delayed.

But I wouldn't say it would be a step function where there is.

The big step up.

But we're doing really well in that business right now.

That's fair and then just thinking about.

The Nic's business, and you've announced some renewals of state contracts that appear to be far ahead of their actual exploration date and so as you go through and start talking to these states are you trying to get them to renew early and opt up for additional years.

And just as regards to that we certainly with the change in Texas, and Deloitte kind of getting back into the market. How are you thinking about some of their more mid sized state renewals here over the next 18 months do you expect any changes in competitive dynamics or just kind of your base case.

<unk> with the ability to upsell some some additional tyler applications.

Yes, I think I would say my outlook is pretty optimistic.

I'll talk about the tax thing first are our payments business or their NFC payments business, Texas is one of our strong outperformers this quarter when you talk about.

Mentioned in Utah, and we mentioned, Oklahoma. These were early renewals.

And part of that actually the reason for the early renewal with some of the excitement that's been generated.

And I see with the customer about what the combined entity of Tyler and I see can bring we've talked about our connected communities vision, we've talked about the different products and offerings that we can bring and I think both of these states where were areas, where they're seeing that future and they wanted to they wanted to go ahead and jump in early which gives me optimism for what I think we'll see.

Going forward in the market.

Okay. That's good to hear that's all I have for now thanks.

This concludes our question and answer session I would like to turn the conference back over to Lynn Moore for any closing remarks.

Great. Thanks, Jason and thanks, everybody for joining US today, we hope you stay safe and healthy and if you have any further questions. Please feel free to contact Brian Miller or myself.

Have a good day everybody.

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

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