Q1 2022 Tyler Technologies Inc Earnings Call
Hello, and good morning, everyone and welcome to today's Tyler Technologies first quarter 2022 conference call.
Your host for today's call is Lynn Moore, President and CEO of Tyler technologies.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, today's conference is being recorded today April 28 2022.
And I'd like to turn the conference call over to Mr. Moore, Sir. Please go ahead.
Thank you, Jamie 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.
And with some additional comments and then we'll take questions Brian Thanks Lynn.
During the course of this conference call management May make statements that provide information other than historical information and may include projections concerning the company's future prospects revenues expenses and profits such statements are considered forward looking statements under the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
And are subject to certain risks and uncertainties, which could cause 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.
Brian .
Our first quarter results surpassed our expectations and provided a very strong start to 2022.
Total revenues grew approximately 55% with robust organic growth of 12, 8% the highest in 20 quarters.
And I see continued to perform well in the first quarter with core revenue growth of 13%, excluding COVID-19 related revenues.
And I see the growth was boosted by revenues under the new statewide payments contract in Florida and in particular by revenues associated with corporate filings with the department of state that are concentrated in the first quarter.
And I see it's Covid related revenues were in line with our expectations at $20 6 million.
Recurring revenues comprised 79, 5% of our quarterly revenues and were led by 140% growth in subscription revenues.
On an organic basis subscription revenues grew a robust 33, 8%.
Reflecting both our accelerating shift to the cloud and growth in transaction based revenues.
We've now achieved greater than 20% subscription revenue growth and 57 of the last 65 quarters.
We're particularly pleased with our strong revenue growth, even as we saw an acceleration of the shift in our new software contract mix from licenses to SaaS.
In Q1, 80% of our new software contract value of SaaS compared to 66% in Q1 last year.
As we outlined on our last earnings call, while our move to the cloud builds long term value margins compressed in Q1, reflecting the new business mix shift to inclusion of N I C and in particular their COVID-19 related revenues as well as expenses related to the cloud transition.
As a result, our non-GAAP operating margin declined 250 basis points year over year to 24, 3%.
But increased 70 basis points sequentially from Q4 of 2021 .
We continue to be very pleased with Nic's performance and with a growing pipeline of joint opportunities for Tyler and then I see.
During the first quarter and I see successfully extended our enterprise contracting in Alabama.
And in April we extended our enterprise agreement with New Jersey.
And I see also signed a new five year SaaS deal with the state of Mississippi to provide our N I see cannabis licensing platform valued at approximately $4 $3 million.
We continue to experience success with sell through deals of Tyler products through Nic's state relationships.
In Q1, those deals included sales of our data and insights platform to the state of Vermont and aren't telecheck platform for Veterans Affairs in Alabama.
We also signed agreements for Nic's payments platform with existing Tyler clients in Hillsborough County, Florida, Montgomery County, Maryland, and Glendale, California.
Our largest new deal in the quarter was a SaaS arrangement with the San Diego Association of governments for enterprise ERP powered by munis solution, along with our data and insight solution valued at approximately $4 $9 million.
We also signed five notable SaaS deals each with a total contract value greater than $2 million with Glenn County, Georgia for Enterprise assessment and tax powered by I I S World solution.
The cities of Rialto, California, and Alamogordo, New Mexico for enterprise ERP powered by munis, and enterprise permitting and licensing powered by inter Gov.
And the cities of Mansfield in Burleson, and Texas for Enterprise ERP powered by Munis solution.
Our largest license deal in Q1 was a $2 7 million dollar agreement with the Utah Department of public safety, our first public safety deployment in the state of Utah.
The deal includes enterprise law enforcement Records mobile field mobile enforcement mobile and public safety analytics.
We also signed four other notable license arrangements in the quarter, each with a total contract value greater than $1 million with the St. John at St. Johns County property Appraiser in Florida for our enterprise assessment and tax powered by I S World.
The city of Elmhurst, Illinois for enterprise ERP powered by Munis solution.
St Marys County, government, and Maryland for Enterprise public safety powered by new World and data and insights solutions and the city of Virginia Beach, Virginia for our enforcement mobile powered by Brazos solution.
Now I'd like for Brian to provide more detail on the results for the quarter and our updated guidance for 2022.
Thanks Lynn yes.
Yesterday, Tyler technologies reported its results for the first quarter ended March 31 2022.
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.
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.
Both GAAP and non-GAAP revenues for the quarter were $456 $1 million up 54, 7% with the inclusion of N I C and our other acquisitions from the last 12 months.
Organic revenue growth was the highest since Q4 of 2016 at 12, 8%.
Software licenses and services grew 24, 7% or three 7%, excluding and I see.
Subscription revenues Rose 139, 5% with very strong organic growth of 33, 8%.
We added 149, new subscription based arrangements and converted a new high of 88 existing on premises clients, representing approximately $76 million in total contract value.
In Q1 of last year, we added 84, new subscription based arrangements and had 39 on premises conversions, representing approximately $52 million in total contract value.
Our software subscription bookings in the first quarter added $16 $2 million in new E. R. R.
Subscription contract value comprised approximately 80% of the total new software contract value signed this quarter compared to 66% in Q1 of last year.
Reflecting our ongoing shift to a cloud first approach to sales and increasing client preferences for cloud based solutions.
The value weighted average term of new SaaS contracts. This quarter was three four years compared to 4.0 years last year.
Transaction based revenues, which include and I see portal payment processing and E filing revenues and are included in subscriptions, where $152 $9 million up 461%.
Excluding and I see Tyler's transaction based revenues grew nine 8%.
E filing revenues reached a new high of $18 $2 million up 16, 9%.
For the first quarter, our non-GAAP a R. R was approximately $145 billion up 63, 6%.
non-GAAP a R. R for SaaS software arrangements was approximately $378 1 million up 25, 1%.
Transaction based E. R. R was approximately $603 7 million up 461% and non-GAAP maintenance <unk> was down slightly at approximately $468 1 million.
Due to the continued migration of on premises clients to the cloud.
Our backlog at the end of the quarter was $1 $76 billion up 13, 8%.
Because the vast majority of Nic's revenues, our transaction base their backlog at quarter end was only $26 $3 million. Excluding the addition of N. I C. Tyler's backlog grew 12, 1%.
Bookings in the quarter were strong at approximately $419 million up 71%, including the transaction based revenues that I see.
On an organic basis bookings were also quite robust at approximately $283 million up $14 seven per cent.
For the trailing 12 months bookings were approximately $1 $9 billion up 65%.
R and on an organic basis were approximately $1 $4 billion up 21, 7%.
If our weighted average contract term for new SaaS contracts has been the same as last year organic bookings growth would've been 17, 1%.
Cash from operations declined this quarter by 25, 3% to $53 $5 million, mainly due to changes in working capital related to higher payments of accrued incentive compensation and cash tax payments related to stock based compensation free.
Free cash flow declined by 33, 5% to $41 million due to the decrease in cash from operations and somewhat higher capital spending this quarter.
Our balance sheet remains very strong during the quarter, we repaid $20 million of our term debt and since completing the N. I C acquisition, we've paid down $415 million of term debt.
We ended the quarter with total outstanding debt of $1.32 billion in cash and investments of $322 6 million and net leverage of approximately $2. One times trailing 12 months pro forma EBITDA.
As Len mentioned earlier, we're off to a great start in 2022, resulting in an improvement in our outlook for the full year.
As a result, we have raised our 'twenty to 2022 annual revenue and earnings guidance as follows.
We expect both GAAP and non-GAAP total revenues will be between $1 83, 5 billion and $187 billion.
The midpoint of our guidance implies organic revenue growth of approximately 9.5%.
We expect total revenues will include approximately $40 million of Covid related revenues from Nic's Tour health and pandemic rent relief services. The tour health revenues are currently expected to continue through the second quarter of 2022, while revenues from the rent relief program are expected to continue through the third quarter.
We expect GAAP diluted EPS will be between $3 92, and $4 eight and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate.
We expect non-GAAP diluted EPS will be between $7 48, and $7 64.
Based on the updated assumptions regarding additional interest rate hikes. This year, we have increased our estimated interest expense for the year by $3 4 million to $23 million with an impact on non-GAAP diluted EPS of approximately six cents a share.
Other details of our guidance are included in our earnings release.
Finally, before I turn the call back to Lynn I'd like to announce that how long all sherbini will be joining Tyler as senior director of Investor Relations effective may 9th many of you have worked with holiday in the past and we're very excited to have an IR professional with holiday experience and knowledge of Tyler join our team.
Lynn.
Thanks, Brian .
I'm very pleased with our first quarter performance and our outlook for the full year Act.
Activity in our public sector market continues to trend positively and we are well positioned to take advantage of the continued strength in our market.
We remain on track with our strategic initiatives, including our development projects to optimize our products for more efficient deployment in the cloud.
And our cloud first approach to sales, which we believe will create significant long term value for clients and shareholders alike.
Our balance sheet and cash flow remained very strong and we continue to be opportunistic with regard to capital allocation.
We're excited about the acquisition of USC direct in February , which significantly expands our outdoor recreation portfolio, allowing us to offer an extensive all in one outdoor recreation solution that will seamlessly integrate with our NFC payments platform.
While we continue to evaluate strategic acquisition opportunities. We are heavily focused on the integration and execution around the acquisitions. We've completed over the last two years, making the bar on new acquisitions at this time relatively high.
Last Thursday, Mark the one year anniversary of our landmark acquisition of NFC.
As I reflect on the acquisition and all that we've accomplished as a combined entity over the last 12 months I can truly say that it has exceeded our expectations, which were already high.
Our teams have come together as one unified organization and our collective excitement about the opportunities that the combination unlocks has continued to grow.
We've integrated our payments teams and have refined our strategy to pursue what we believe is a huge tam and government payments.
As we've discussed we're winning new business with sell throughs into our respective client bases and this quarter, we doubled the number of sell through opportunities in our pipeline.
We look forward to continuing to report on our progress in the second year of our combination.
The challenges of today's labor market continued to be an area of significant focus for us.
While we added 195, new team members in the first quarter. We currently have a higher than normal number of open positions.
Although our open positions have a short term positive impact on margins, we have aggressive hiring plans for the balance of the year to support our growth.
Finally, we're extremely excited to host clients live and in person that connect our annual user conference, which will take place in Indianapolis for May 15th through May 18th.
With that we'd like to open up the line for Q&A.
Okay.
Ladies and gentlemen at this time, we will begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone to withdraw. Your question you May Press Star two if you are using a speaker phone. We do ask that you. Please pick up the handset prior expressing the numbers to ensure the best sound quality.
Once again that is star and then one to join the question queue.
Our first question today comes from Jonathan Ho from William Blair. Please go ahead with your question.
Hi, good morning, and congratulations on the strong quarter I just wanted to maybe start out with your thoughts around just the win rates that you're seeing and potentially whether the investments that you've made over the past few years are now starting to have an impact.
I'll have to look at the state of competition.
Yeah, sure Jonathan and I think that's right.
The markets right now are really strong I'd say, there's probably about as strong as I can remember and our competitive position is really high really across the board.
Right.
Covid, we went through a significant period of elevated investments and I think that's really paying off right now across all of our all of our lines of business.
Our win rates are strong our final rates are strong.
It's really setting us up well for the next few years.
So I appreciate that comment.
Got it got it and then just as a follow up how should we think about sort of the pace of integration that we're seeing with AWS and maybe what customers want.
<unk> had some discussions with them you know what's the reception been like in terms of potentially shifting from Tyler posted to your AWS. Thank you.
Yes, I think that's going real well Jonathan.
You know AWS is going to be a great long term partner for us.
We're already starting to move our customers into the AWS cloud.
We're working on plans right now to exit the Tyler data centers over the next couple of years and move them into AWS, they're a great partner.
Where we're going with our with our cloud initiative lines up well, our cultures line up well and our clients see that our clients see the benefits they see the future roadmap that we've laid out and our clients are excited about it.
And our next question comes from Pete Heckmann from D. A Davidson. Please go ahead with your question.
Good morning, everyone. Thanks for taking the question just two.
Two questions on the annual guidance.
You're very strong organic subscription growth of the first quarter.
To argue that the.
The way I look at my model I have something more in the mid to high teens embedded for organic growth.
Subscription revenue for the rest of the year I'm getting it to the top end of your revenue guidance and are there. Some other considerations, we should think about why subscription road.
Description revenue growth Wouldnt continue to run at this elevated rate for the rest of the year.
Well, Pete I think the biggest factor there and we mentioned it in the in the remarks is.
There is some seasonality around some of the transaction based revenues around payments.
There's I think two things around that one as we pointed out.
The Florida contract for statewide payments within I C, which is a new contract is.
<unk> is ramping up but there was some.
Revenues in Q1 that are specific to Q1 around filings.
The revenues associated with corporate filings with the department of state in Florida.
And that added.
I think roughly six close to six and a half a million dollars of revenue and subscriptions in Q1, and so actually accounted for a couple hundred basis points of of overall growth in the quarter that.
Really arent expected to be there throughout the year and then seasonally in Q4 some of the transaction based revenues around the portals.
Tend to be a little lighter as well so.
I think those are the biggest factors, but certainly we have an opportunity to.
Continued to.
Our subscription revenues as we move through the year, but I keep those seasonality factors in mind and I think Pete I'd, just add that the thing about the the secretary of state filings and Florida is it was a little bit somewhat unexpected as we entered the year and I think it shows the potential of not just the Florida payment contract.
And extending it beyond what I think probably nic's original expectations, where before they joined Tyler, but really the things that we can do across the country and so while there's some seasonality to that to me its an exciting indicator of things that we can that we can achieve a down the road.
Right right now that and that that helps I missed the significance of that and then just in terms of the expense ramp we talked about last quarter. That's embedded in your annual guidance, you talked about maybe hiring running a bit behind schedule.
But generally we would you say that that expense.
Expense levels in the first quarter were <unk>.
Have your expectations, a little bit below I'm, just trying to figure out if they can.
We did do the the upside is from our forecast to the earnings number in the quarter.
Yeah, I'd say as it relates to head count Pete It is probably a little bit below and that's been really the case for probably at least a year or so and in and my sense is thats. The case generally across all industries right now, there's certainly a lot of labor market challenges.
It certainly helps with margins in the short term, we want to be a little more aggressive.
And we are aggressively our HR department is working hard.
But so that we can deliver on a lot of the sales the good sales activity that we've had.
Over the long run them being able to get these installations deployed continuing to keep our customers happy.
It's going to require getting some of those heads in.
Okay. Thanks, I'll get back in the queue.
And our next question comes from Josh Reilly from Needham. Please go ahead with your question.
Hey, guys. Thanks for taking my questions Congrats on the strong quarter here.
How would you characterize the impact of the stimulus funds benefiting the 13% organic growth rate in the quarter and how much of a tailwind can this be over the next couple of years is it closer to a one to two point benefit or could it be up to a five point benefit to sales.
Yeah, Josh it's a it's a good question. It's it's at times, it's hard to sometimes to isolate them I think what I would say I'd go back to my comment.
To jonathan's question about the budgets overall.
From what I'm seeing right now our clients' budgets are as healthy as they've ever been.
Leading up 2018 2019, the economy was really good that the budgets were really strong there was anticipation of a negative COVID-19 impact that that prediction really didnt come through and since then as you mentioned, we've we've lumped on a lot of stimulus money.
In addition to that and I think I mentioned on the last call, perhaps we all see what's going on out there in the real estate market and the and the boom that's going on there, which is driving appraisals and valuations up which further then drives up assessments and property taxes, which is a big funder of a lot of our particularly with our local government clients.
We're seeing we're seeing the impact it's sometimes hard to track individual deals.
But we're certainly seeing the impact and the fact that I think it's a very robust market right now.
And then you've got somebody that you know all I would add is that the stimulus money is available.
Available through the end of 'twenty 'twenty four for them to make commitments around spending that and so I'd say we're still.
We believe a lot of governments haven't certainly haven't fully spent their funds are still in the process of determining where those will be spent so we believe it's a.
Potential tailwind through.
In the next two or three years, but but I'd say right now it's probably if.
There is an impact there, it's probably fairly modest it's not five points of growth.
But it's certainly part of that.
Very active market we're seeing.
Got it that's helpful and then.
Just curious on the U S E. Direct acquisition is there anything specific in terms of the functionality that you acquired there that's different than what you had internally for parks and recreation. Thanks, guys.
Yeah sure and.
I'd say the answer to that is yes, we are really good complement I mean that the outdoor market is something that we believe is a good growth opportunity. We believe the Tam is there there is demand for this sort of all in one solution and really what NSC brought was really a first in class solution around hunting and fishing fishing licenses.
And USC direct really was a leading outdoor reservation platform. So it's sort of combines that enter.
Enter into creating as we said, it's sort of an all in one opportunity we've seen the pipeline already just this year.
Most significantly in.
And in that space and I think one of the things that we're excited about is not just combining the NFC technology with USC direct which is which is also by the way deployed in AWS.
But our ability to go out and sell it. So it's a it's a solution when you're talking about outdoor reservations and stuff. It's not just going in the states, which will be through an IC sales channels, but we also have the ability to go sell it more locally through some of Tyler sales channels.
And our next question comes from Terry Tillman from <unk> Securities. Please go ahead with your question.
Yeah. Thanks for taking my questions and I Echo the congrats on the first quarter results up maybe a couple of questions for me and one of them a follow up to a prior question on the stimulus dollars.
What about on the enterprise ERP business side. So those are longer sales cycle type deals big transformation projects I think maybe you mentioned San Diego, but how is that sales pipeline playing out and you see like a quarter, where if the pipeline is building where you see a lot of conversions or do you think that's going to be more smooth over the next couple of years, two or three years on the enterprise.
Our pizza hut.
Yeah, I think generally speaking what we're seeing on enterprise ERP is the market is and the deals that we're signing each quarter really reflects sort of pre COVID-19 levels. So that's very encouraging.
We have identified a handful of deals that were that are specific.
That can be tied specifically to.
The ARPA funding and things like that.
But again, sometimes it's hard to it's hard to know specifically, where we're a jurisdiction how they allocate those funds we don't normally.
So to get that one to one right.
You know our growth.
Our deal volume is an enterprise ERP is good.
We're really focusing on expanding payments through that customer base. As you mentioned, we're focusing on expanding our flips which are continuing to increase it.
And at a faster rate quarter by quarter.
Our installed client sales continue to be really strong there. So it's a it's a very healthy business that that's continuing to grow and we're pretty pleased with the outlook.
Got it thanks for the answer on that on the state of Utah that was great to see that the state wide public safety deal.
Maybe and maybe easier said than done, but it seems like a great rinse and repeat opportunity across the broader and I see customer base with all these public safety solutions you have.
And I'm trying to put you on the spot, but could we see more.
And more quickly with a repeat of what we saw the state of Utah and the public safety side. Thank you.
Well I guess I'd add I'd step back and just say, yes, we're excited about all of our cross sell opportunities through and I see base.
The Utah deal was a great win for our public safety team a very large contract.
You know what I think it's early to say that yeah. I mean, obviously the part of our sales plans is to is to repeat this type these types of wins.
That's part of our playbook.
I would say that where those can happen relatively quickly sales cycles still sort of take a life of their own but we're excited the way our teams are working together.
Across all of the all of our products and the potential within IC.
Thank you.
Our next question comes from Matt Van Vliet from BTG. Please go ahead with your question.
Yeah. Thanks for taking the question guys nice job on the quarter Lynn wanted to follow up on something you mentioned at the end of your prepared remarks, and maybe it's a bit of a follow up to Terry's last question. There, but you mentioned that the pipeline for sell through opportunities has doubled.
Curious if you look at the assessment of kind of all of the N I see our customer portfolio. How far along are you in terms of kind of following up with with those potential sell through opportunities as you've doubled that have you sort of gotten to all of those customers or is there still more that can be added to the pipeline.
In the near term.
Yeah, I would say you know, we're a year now into the NSE acquisition.
Standing here a year later.
More than pleasantly surprised at how the teams are working in a number of opportunities that have already surfaced.
Stepping back looking at maybe at 20000 foot level, where we may still be in the first inning of this deal. We've got a long way to go we're still learning about each other.
We're still learning what we spent a lot of time last year educating both teams on on products and sales channels, and and and and the ways to go about addressing the market.
We're just barely scratching the surface of what we can achieve together.
Alright, very helpful. And then I guess, maybe thinking about the stimulus and the ARPA funds from a little different angle.
Have you seen sales cycles shorten at all or do you feel like some deals have gotten pushed through maybe a little more quickly because there's more budget dollars available and would you allocate some of that rationale to having more of a stimulus funds out there.
Or has there not been any kind of consistency across the time to contract.
Yeah, I would say that you know on one level it's.
You know I've talked about the robust market.
You know I think my comment there would be some of it is still just release of pent up demand during COVID-19 .
I do think we're seeing a little bit maybe quicker sales cycles in some of our inside sales and.
And that may be a little bit more directly tied to some ARPA funding.
But we're also you know one thing I didn't mention earlier is one of the things that we're doing across Tyler is we're being pretty proactive about marketing you know the availability of the ARPA funds and how our clients can use them we've done.
Several webinars and podcasts and blogs and emails to sort of stimulus helped stimulate that use in and hopefully direct some of them Tyler.
Wonderful thanks for taking the questions.
Our next question comes from Kit <unk> from Barclays. Please go ahead with your question with your question.
Okay, Great Hey, guys. Thanks for taking my questions I appreciate you having me on the call.
Yeah.
Maybe maybe maybe first for you Brian actually just to just maybe mix it up.
It felt like like software and services bookings were maybe stronger than what we've seen historically.
And SaaS was maybe a little bit more in line and again, that's on a bookings perspective part of that I think you called out is rightfully duration, but curious if you saw anything in mix or preference for on Prem versus SaaS and how are you sort of thinking about that for the rest of the year.
Yeah, I think it was an interesting quarter from a new business perspective, because even though.
SaaS as a percentage of the new deal volume increased pretty significantly over last year from 66% to 80%.
And.
We also saw growth in license revenues.
<unk> had several pretty decent sized not super large, but several decent sized license deals, including the Utah public safety deal and some ERP deals.
So we saw a little bit of both.
In our or on a broad basis, our expectation for the year is around.
80.
<unk> to the low eighty's percentage of our new contract volume.
Coming in and SaaS. So we're generally.
Generally on line with that but we would expect that we continue to see them.
The ongoing shift towards that preference for new customers to come to us through the cloud.
And as we talked about at year end part of that is reflects the change in our approach to sales.
And including a number of significant products that are now only available.
Through the cloud that are no longer being offered in a license model in new proposals.
So so yeah, we would expect that that trend to continue through the year.
Got it got it and then maybe that's a good segue for my question I had for you.
We've talked about some tools that were offered both on prem and SAS, but but might phase out you know on Prem. This year I think we've talked about maybe one or two the ERP products. As an example can you just recap that for US and then without pre announcing anything of course.
But are there other products, where that makes sense to do as well in terms of leading with SaaS and maybe not even offering on prem anymore does that makes sense yeah.
I understand your question and you're right so coming into this year and we announced.
I think maybe in Q3 of last year is certainly on the Q4 call. Our enterprise ERP powered by Munis solutions or are now really just being offered in a SaaS model I have made the comment that they will you should expect to see more of our core flagship products move in that direction.
<unk>, probably one later this year and moving into next year I'm, a little hesitant to outline some of that right now because.
We haven't even notified all of our customers yet of our future strategy or our clients generally know that we are going cloud first that's not a surprise to anyone but in terms of specific timelines.
Rather sort of keep that messaging.
Within US right now until we're ready to do that but that's our that's our strategic direction, it's not a surprise to anyone where we're making progress on our cloud cloud initiatives and we will reach the point.
Generally across our portfolio with perhaps the exception of a parts of public safety, which will be a little bit which will be market driven and then we talked before they've been a little bit slower to move to the cloud.
Got it that makes sense thanks, guys.
Yeah.
Our next question comes from Michael <unk> from Wells Fargo. Please go ahead with your question.
Hey, guys. This is David Unger filling in for Michael carrier. Thanks, very much for taking the question I just wanted to focus on free cash flow margin, Brian I know you mentioned there were some.
Some things that happened this quarter, you mentioned cash taxes, and working capital, but I just wanted to get a sense for I mean, historically, you do like 22% free.
Free cash flow margins of the past five years, so I just want to get understanding of the.
The seasonality of that and what you know.
How that will work itself out over the course of the year. Thank you.
Yeah.
Generally expect that our free cash flow margins, there's a lot of puts and takes there.
But generally you know as we move through this year probably in line with that historical.
Historical number very seasonal in terms of.
Being weighted towards the third quarter.
A lot of that has to do with the vast majority of our maintenance renewals.
Which are you know 400 and around $470 million a year of maintenance revenues. The vast majority of those renew as of.
July one and so we typically build those in Q2 and collect them in Q3.
So that drives.
Really strong growth in <unk>.
Our cash flow in Q3.
And other than that.
Transaction revenues, we've talked about some seasonality around those.
Being a little lighter in Q4, but as.
As we continued to expand the subscription business that tends to smooth out the cash flow. So Q3 Q1 is typically the lightest Q3 is.
Very much the strongest.
But I think the margins you can expect to be fairly consistent.
Okay. Thanks for that and I know there are several questions asked about the fiscal stimulus and this is sorry for beating the dead horse on this but I think.
Cause maybe a couple of quarters ago, you mentioned.
A couple of dozen or so.
Deals that are in the pipeline that are sourced from fiscal stimulus is that still roughly a similar type.
Type number just kind of got it. Thank you.
Yeah, its probably similar but as Lynn said, it becomes harder and harder to identify deals that are.
Specifically funded by stimulus in and there are certainly some of those.
But in a lot of cases the stimulus may.
May be used for something else, but frees up funds that are then used to.
Move forward with something there they're purchasing from us so it's.
Not exactly a science trying to.
Pin down that number, but but I'd say, it's it's probably a fairly consistent number of deals that we're seeing which is consistent with what we're saying that we expect this not to be a big.
Big flood of new business.
At one time, but to be somewhat of a tailwind over the.
The next.
Call It three years.
Great. Thanks, very much of the detail.
Yes.
And our next question comes from Charles <unk> from CJS Securities. Please go ahead with your question.
Hi, good morning.
Maybe you can help me with this done looking at Q2 other than the continuation of the Covid revenue what are the.
Those factors should we think about when we build out our model for Q2.
There's I don't think there's anything particularly unusual.
Think about in the in Q2.
We would expect I think.
<unk>.
To likely be at a fairly similar level to what we saw in the Q1.
Subscriptions should continue to grow I think maintenance.
<unk>.
As we've said in the past for the year is likely to be.
Flat to down low single digits, and I think we'll continue to see that trend as we have more and more on prem clients moved moved to subscription.
But I think there's broad ranges of our of our growth that we talked about on the.
The year end call.
Are still generally true when we talk about you know, we don't give quarterly guidance, but when we talk about the full year.
I think licenses will likely see a mid single digit decline.
Services are likely to be around a mid teens kind of growth subscriptions.
We expect to remain really solid growth in the 25% to 30% range for the year.
Maintenance is I said flat to down low single digits.
<unk>.
Is seeing a nice resurgence in activity after some slowdowns during COVID-19 and.
Expect to see high teens growth there and in hardware.
A much smaller piece of our business with connect coming back in person. This year those revenues fall there. So expect to see kind of mid 30% growth on a relatively small base of revenues and hardware. Another yeah, then I'd probably add to that Charlie I think we mentioned earlier, but you know the Covid the tour health revenues out of Nics.
Our expectation that those pretty much wind down in Q2.
Great. That's very helpful. Thank you for all that extra color there and then just lastly for me.
Cash flow side.
I was still kind of in your top priority for use of cash.
I'm sorry.
Oh, Yeah, So yes, Charlie I think right now our our priority is to pay down the debt, particularly as interest rates have continued to increase.
With the softness in the market, we will continue to evaluate repurchase.
Opportunities versus the paying.
Paying down the debt, but I'd say right now that's our that's our priority.
Just as a reminder, as Brian mentioned, we paid down $415 million of the debt and.
Of our outstanding debt about 600 is sitting in a convertible which right now is about 45% and that's sort of that's at a fixed rate 25 basis points.
Not maturing until till 'twenty, six I'd like to see us get some of that bank debt pay down, but again, if if opportunities.
He's present themselves, we'll probably move on those as well.
Great. Thank you very much.
Our next question comes from Kirk <unk> from Evercore ISI. Please go ahead with your question.
Great. Thanks.
And when you look at the sort of organic Tyler business and you think across your ERP and munis courts <unk> Justice public safety My sense listening to you is that the pipeline is pretty balanced and youre seeing a nice sort of rebound or a growth in all of those areas are there any sort of points of strength versus.
Maybe not as strong yet.
Curious, how we should think about that if there is any one product that kind of lead you out of a downturn or if they're all pretty balanced right now.
I'd say generally they are pretty balanced.
Like I mentioned earlier, our enterprise ERP are powered by Munis solution. You know that market is is we're seeing the deal volume that similar to pre COVID-19 really at the lower end, we continue to see deal volume and growth higher than pre Covid, which is great and thats, our ERP pro our old <unk> solution.
You look at our appraisal and tax solutions, we started to see some increasing sales momentum late last year and we're seeing that start to continue.
You look at courts and Justice, we've made a number of acquisitions in the last couple of years and we're pretty bullish on on expanding those markets, whether it's our vendor engine our corrections.
There's a lot of opportunity there we're seeing that we're also.
I think we sort of referenced it R. E filing is back to pre pandemic levels, which is which is good to see and public safety as continues to to do the things that we expect it to do with out of these investments there they sign another large deal there.
Our competitive position is strong.
They've done a good job with their clients on some of these new products getting them live getting them settle and get them reference level so across the board.
It's pretty good across the board, maybe a few places a little bit better than others, but generally speaking I'd say, it's pretty healthy.
That's helpful and Brian you know with any you know around 80% of the book.
Software in the quarter being more subscription based yeah. If it continues at this rate is the overhang on margin in terms of the conversion.
Essentially start to drop off a little bit I am just trying to get a sense on how much of sort of the overhang on margins. If we're looking ahead just on the on sort of that the business model conversion versus more discrete items.
Yeah, I think that kind of fits in with what we talked about at year end is kind of what we expect to see with margins over the next couple of years and we've talked about.
The pressure on margins from.
Not just the bubble costs associated with the cloud transition and moving from Tyler data centers to AWS.
But the impact.
On margins and revenue from sort of the run off of the licenses.
And as those.
As that business continues to shift towards a higher percentage.
Coming in as SaaS, and and we said really by the end of both of those have impacts over the next couple of years.
But we think that sort of that inflection point, where licenses or the run off of the remaining licenses or the shift of those into SaaS model no longer has a negative impact on margins because.
We have built up that run rate of subscription revenues.
And we really believe that 2023 is sort of the trough on margins and that after that and part of that is the.
Lessening of the impact of the mix shift.
So what we're seeing this year is pretty much in line with how we.
Looked at the the estimated mix going in but we do expect that percentage at 80% to continue to grow.
Okay, that's great. Thanks, Scott.
Our next question comes from Alex Zukin from Wolfe Research. Please go ahead with your question.
Hey, guys. Thanks for taking my question, So I guess I'll.
Wanted to drill into a figure that youre that you.
Give us into the supplemental disclosures on that.
Calculated SaaS net new IRR.
I'm trying to square the commentary around the strength of the subscription business as a percentage or a SaaS contracts as a percentage of the total going up year over year, but then when I look at SaaS net new IRR.
6 million, it's down pretty substantially year over year and sequentially and I know, that's a very volatile seasonal metric, but just help us understand why that is.
Also.
You think about the year in terms of the mix between new core Tyler business license versus that.
Or are we thinking about that meeting.
What type of net new IRR growth should we kind of think about this year.
Versus the kind of license decline or his license is going to be flat I think that'd be a good thing to just explore.
Yeah.
There is.
Lumpiness in and the growth in and they are all around.
As there is.
With our license in our in our bookings.
We do expect for the full year licenses to decline.
And to be down likely sort of in the mid single digits and we expect subscription revenues to grow in the 25% to 30% range and we would expect.
That I'm new.
New.
They are our would also grow.
In that.
25% to 30% range.
Got it okay, and so I guess from a is there anything that was just different seasonally from a deal construction standpoint.
This quarter versus maybe previous.
Last year's Q1 or or anything to read into.
Not that I'm aware of them I think it's just a little bit of the lumpiness of the.
The structure of the contracts, but I'm not aware of anything that's particularly notable.
Notable in terms of a difference from the prior year.
Got it and then I guess are there do you do you feel like it sounds like you were a little surprised at the strength of the license business.
In Q1 is there do you feel like those changes, it's going to be the changes in the incentive structures or in the product.
That's going to drive that.
Reis changing mix in the second half work.
What where could you be wrong with respect to that.
I'd say there that.
For the year I think our licenses are sort of on track with our plan they were a little higher in Q1 than our expectations.
Some of that comes through our robust inside sales.
Some of those are tend to be.
Trying to be more license than our expectation.
Our new business jet.
Generally is in line with our expectation.
I think our licenses outlook for the year is in line, but it was it was higher in Q1.
Which obviously helped with our our organic growth number.
Perfect and then just the last one on cash flow I guess, Brian if you think about it as we progress through the year given those given some of those mix shift dynamics, what's the right way to think about the free cash flow progression through the year.
Yeah, I still think.
That again, we still have a big base of maintenance that a lot of that cash flow comes in in Q3. So.
Still expect that the progression would probably be similar to what we saw last year that Q3 would be.
You know by far the the.
The peak of cash flow, but Q4 should be.
Relatively strong as well.
But I think we still sort of followed the historical seasonality of cash flow or capex.
Should be.
Fairly consistent across the year end.
The.
Obviously, the recurring revenues with a much bigger base of transaction based revenues.
Help.
Smooth out the seasonality around that.
That piece of our revenues.
Perfect. Thanks again guys.
Our next question comes from Keith Howlett from Northcoast Research. Please go with your question.
Good morning, guys, Hey, just following up on that last question actually I was going to ask the same thing, but more from a booking standpoint, the bookings in the core of $419 million were the lowest of the past four quarters.
It's just a matter of more timing in terms of the pipeline is healthy but it gives them a close is given your optimism or hearing here or a duration playing a part of it where that durations attributing to I guess lower bookings amount this quarter than it was in the past.
Yes, durations is certainly a part of it.
Quarter with the 3.4 years duration of our new subscription deals.
Is much closer to what we're trying to drive to.
With a sort of a standard of three years on most of our new subscription deals.
So that certainly played a part in it it's down from four years last year and I think that also would be the lowest average duration we've seen over call.
Call it for the last the last year or so so I think that's playing a part in it.
Bookings growth on an organic basis was still pretty solid at <unk>.
North of I think the number was 14%.
So so.
Duration, certainly would be one of the factors there.
But we feel pretty good about bookings growth actually being on organic basis being ahead of of where revenue growth currently is.
Okay.
Great.
In terms of the.
One other thing.
Again.
On maintenance because those.
Bookings come in when those renewals happen in Q2.
Q2, typically is a stronger seasonal bookings quarter, just because of where the maintenance falls in Q1 is pretty light there. So.
It's.
Subscription bookings were.
You know.
Certainly the strongest point of.
The bookings growth this quarter, which is what we'd like to see.
Okay I appreciate that.
In terms of the.
Employees.
I appreciate the commentary that theres, some more hiring that needs to be done, but can you speak a little bit about I guess, the turnover and inflationary cost pressures, obviously, it's been a very dynamic quarter in terms of inflationary pressures, but as the years developing is it worse than you expected in terms of what you guys are having to pony up for new employees or just any commentary on that matter.
Yeah. So.
There's a lot there's a lot there.
Keith to talk about.
Yes, we mentioned I think in our last earnings call that <unk>.
Part of our Oh P pressure. This year was the fact that we were generally increasing our budget for employee compensation, a little higher than we had traditionally.
The labor market challenges are out there our turnover is higher than it than historic but from what we see and the studies that we look at we still believe it's lower than most in the tech industry and the competition stuff out there right now.
I, sometimes look at it however in terms of you know.
When I think about external factors would be at inflation or recession concerns or the labor market is what are we doing within Tyler how does it impact us versus our competitors.
People like to come to work here and we've got a good culture I like to think that some of these things may disproportionately affect some of our maybe perhaps smaller competitors.
As it relates to inflation and pricing.
As you know most of our agreements our annual agreements are multiyear agreements with some the ability with escalators, we have the ability to adjust those.
Adjust pricing on our Ars are services that we send out there so.
Think we're in a position where we can we can attack inflation.
Inflationary pressures.
Our people are working hard to staff and higher we've got we've done a lot of business in the last year and we need to go execute on some of it.
And that's part of it is we need to get some some people in here to go execute on some of these deals we sold.
Alright, thank you.
Our next question comes from Brent <unk> from Piper Sandler. Please go ahead with your question.
Thank you good morning.
I wanted to double click into the payment business.
In particular, just revisiting the upside in the quarter from the Florida state wide contract pretty meaningful contribution that begs the question how much.
Any other states are you active in discussions with.
Replicating what you did in Florida.
No.
And then could you maybe talk about the five year opportunity do you think this is an opportunity where you could get a dozen states that potentially could could look more like that Florida contract or is it a bigger opportunity than that thanks.
Yeah. So you know with the Florida upside in the first quarter around the secretary of state filings, we anticipate it to have the secretary of state filings.
The manner in which the.
The revenue model turned out to be a little bit different than we had anticipated and we were able to.
Go with a convenience fee as opposed to a a per click per payment.
<unk> and.
And that drove significantly higher.
Dollars to us.
It's in my comments are really about the fact that the extension of what we can do with Tyler.
We've talked about being able to go into local markets in Florida, our ability because of our robust payment engine to be able to do things that certain other payment providers can't do that our focus on the government space drives that as you look out towards you know other states and other localities like payments is one of our big future growth.
Drivers, it's something that all of our divisions are focusing on.
And I think its something that youre going to see drive growth over time, it's going to like a lot of our long term growth drivers. It will it will ramp up over time, and if you say well where are we out five years from now we think the market's pretty big Tam for prepayments as I think well north of $500 million and.
Where we're positioned and are targeting to go get a vast majority of that.
Helpful Color and then Brian just as a follow up on the maintenance side of the business certainly encouraged to see the SaaS mix increasing.
Like 80% of new contract volumes are going to be SaaS related.
That is maintenance maintenance.
Expect at some point would decline at a steeper pace would that mix shift, but it hasn't yet and it's still in a slow decline what's the offset there.
Is there you know annual price escalators that are helping insulate maintenance.
I understand it's a slow decline here, but.
What's the offset that maybe we might see a steeper decline.
Preventing a steeper decline in maintenance, yes, the offset really as annual increases in most of our maintenance agreements. The vast majority of them are annual agreements, so renewable annually with pricing adjustments annually and historically.
I'd say across most of our customers were typically in the 4% to 5% annual increase on a pretty consistent basis over a number of years and in that that hasnt changed.
So yeah on the on the base, we we typically get that.
At least low single digit.
Annual increase.
As you know have very very low attrition in terms of customers, leaving us.
In terms of dollars probably around 1% and then.
Certainly, but as fewer new customers come to us in a license model with maintenance that there's there's a smaller and smaller number of new ads, but we have that 20% of our new business that is coming in may in license does generate new maintenance and then the bigger impact that is likely to accelerate.
Great.
Over the.
The coming years as the the.
Flips or the migrations of those on premise customers that are currently paying us maintenance moving into the cloud and shifting to subscription so it's changing and what revenue line they come on.
But those typically.
Rough numbers double what they are paying us over maintenance so.
While we lose maintenance revenues we gain.
Close to two X that on the subscription line and I'd add there Brent that while we talk about our flips and our flips continued to increase quarter by quarter, I think our flips or year over year up maybe about 125%.
Much like my comment on and I see we're still in the very very very early innings on flips. That's a that's a long roadmap and a long tail tailwind.
And as our as our products continue to get more cloud efficient more cloud optimized as we as we develop more systems to make that a little bit more of an efficient process, that's something that will be a tailwind for the next several years.
Great to hear it looks like that cloud strategy is resonating out there. So it sounds good. Thank you.
Thank you.
And ladies and gentlemen, with that we'll be ending today's question and answer session. Mr. Marr I'll turn the call back over to you for closing remarks, great. Thanks.
Thanks, everybody for joining us today, if you have any further questions. Please feel free to reach out to myself or Brian Miller.
Good day.
Ladies and gentlemen, with that we'll be concluding today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.