Q2 2022 Tyler Technologies Inc Earnings Call
Okay.
Hello, and welcome to today's Tyler Technologies second quarter 2022 conference call.
Host for today's call is Lynn Moore, President and CEO of Tyler technologies.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
And as a reminder, this conference is being recorded today July 28 2022.
I would like to turn the call over to you. Mr. Moore. Please go ahead.
Thank you, Chris 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.
During the course of this conference call management May make statements that provide information other than historical.
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 1095.
Subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K, and other SEC filings for more information on those risks.
Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise Lynn.
Thanks, Brian .
We're pleased with our second quarter results.
Public sector market environment remains strong and RFP and demo activities continue to trend positively.
We leveraged successful multi suite wins and cross selling efforts to deliver a solid quarter and our strong competitive position coupled with an active public sector market drove a 21% increase in bookings.
Overall, we see the challenging broader macro environment as an opportunity to support our clients are replacing aging mission critical systems, and adding advanced digital services to serve the public more efficiently.
Total revenues grew approximately 16% with organic growth of six 2%.
Services revenues were flat on an organic basis exited exhibiting some softness due to labor market challenges affecting our hiring of implementation resources.
Recurring revenues comprised 79, 5% of our quarterly revenues and were led by 28% growth in subscription revenues.
On an organic basis, excluding COVID-19 related revenues subscription revenues grew 14%.
Collecting both are accelerating shift to the cloud and growth in transaction based revenues.
We have now achieved greater than 20% subscription revenue growth and 58 of the last 66 quarters.
We achieved solid revenue growth, even as the shift in new software contract mix accelerates to SaaS from licenses.
In Q2, 74% of our new software contract value will SaaS.
Compared to 65% in Q2 last year.
As expected margins compressed, reflecting the increased in our SaaS new business mix.
And the associated decline in license revenues as well as costs related to the cloud transition.
Along with bookings performance cash flow was a high point of the quarter as both cash flows from operations and free cash flow achieved new highs for our second quarter.
April 21, Mark the first anniversary of our NRC acquisition, and we continue to be excited about their performance and a growing pipeline of joint opportunities for both Tyler and AIC.
Nic's core organic revenue growth was 8%.
During the second quarter, we successfully extended our enterprise contracts in West, Virginia, Vermont, Kansas and Kentucky.
And I see also signed our largest <unk> are contracted the quarter, a new four year arrangement with the state of New Jersey for digital motor vehicle Titling solution, which we estimate will generate transaction based revenues of approximately $5 million per year.
In addition, Nic's signed a new SaaS agreement for our cannabis solution with the states of Alabama, and Illinois, which are both state enterprise clients.
We continue to build momentum with our joint and cross sell opportunities with NFC.
Our active cross sell pipeline doubled in value from Q1, and we closed three new deals with Nic's clients.
Including the state of Utah for <unk> veterans benefits system, and the state of Kentucky for our event engine resident resources solution.
In other Tyler divisions, we signed four additional notable SaaS deals each for different product suites, and each with a total contract value greater than $3 $8 million.
Those include Maricopa County, Arizona for enterprise permitting and licensing solution.
Lancaster, California for our enterprise ERP solution.
Lima, Ohio for Enterprise Justice and supervision solutions as well as our full suite of public safety applications.
In Orange County, Florida for our enterprise assessment and tax solutions.
In addition, we signed six SaaS deals in the quarter with contract values between two and $3 million, each and 14 SaaS deals with contract values between one and $2 million each.
During the second quarter, we also amended our E filing agreement with the state of Washington from a transaction transaction based volume arrangement to a fixed fee contract.
The deal spans nine years for approximately $27 million.
However, due to certain contract terms. The majority of this contract was not included in backlog or bookings this quarter.
The deal adds approximately $2 8 million, an IRR expanding to over $3 million or in the latter half of the agreement.
Our largest new software contracts in the quarter was a license deal with Montreal, Quebec for our enterprise assessment of tax solution valued at approximately $13 million.
We also signed a second deal in Canada for the same solution with the Yukon territory worth approximately $2 million.
In addition, we signed a significant license deal with Dallas County, Texas for Enterprise correction solution valued at approximately $4 $5 million.
Dallas County, which currently uses our enterprise case management solution has the ninth largest jail system in the U S, making it our largest jail clients.
Other significant license arrangements signed in the quarter each with a total contract value greater than $1 million include Charlotte County, Florida, and Huntington Park, California for Enterprise ERP solution.
Fort worth, Texas for our enforcement mobile solution and our Wassa, Oklahoma for our enterprise public safety enforcement mobile and data and insight solutions.
Now I'd like for Brian to provide more detail on the results for the quarter and our annual guidance for 2022.
Thanks Lynn.
Yesterday, Tyler technologies reported its results for the second quarter ended June 32022.
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.
A reconciliation of GAAP to non-GAAP measures is provided in our earnings release, we have also posted on the Investor Relations section of our website under the financial reports tab schedules with supplemental information provided on this call, including information about quarterly bookings backlog and recurring revenues.
Both GAAP and non-GAAP revenues for the quarter were $468 $7 million up 16%, including an IC and our other acquisitions for the last 12 months organic.
Organic revenue growth, excluding COVID-19 related revenues was six 2% on a GAAP basis, and five 8% on a non-GAAP basis.
Nic's COVID-19 related revenues for the quarter exceeded our expectations at $15 2 million.
Revenues from the tour Health initiative concluded in the second quarter and the Virginia rent relief program is expected to be completed in the third quarter with about $8 million of revenues anticipated in the quarter.
As expected license revenues declined 14, 7% as our new software contract mix continued to shift to SaaS.
Software revenues Rose 18, 3%.
Service revenues Rose 18, 3%, but on an organic basis were essentially flat with last year.
Services revenues were impacted by delays in hiring new professional services staff and the current labor market.
While we hired a large class of implemented during the quarter. There is an onboarding period of several months before they will be fully billable, we intend to continue to grow our implementation team during the second half of the year to support delivery of our growing backlog and pipeline that will likely continue to see some pressure on services revenues in the short term as those teams ramp up.
<unk>.
Subscription revenues Rose 28, 2% with strong organic growth of 14, 1%.
We added 167, new subscription based arrangements and converted a new high of 96 existing on premises clients, representing approximately $115 million in total contract value in.
In Q2 of last year, we added 170, new subscription based arrangements and had 62 on premises conversions, representing approximately $73 million in total contract value.
Our software subscription bookings in the second quarter added $27 6 million in new <unk>.
Subscription contract value comprised approximately 74% of the total new software contract value signed this quarter compared to 65% in Q2 of last year.
The value weighted average term of new SaaS contracts. This quarter was $3 seven years compared to four one years last year.
Transaction based revenues, which include the NAC portal payment processing and E filing revenues and are included in subscriptions were $154 4 million up 29, 1%.
Excluding nic's Tyler's transaction based revenues grew 17, 5%.
E filing revenues reached a new high of $18 5 million up 14%.
For the second quarter, our non-GAAP <unk> was approximately $1 $49 billion up 16, 3%.
non-GAAP <unk> for SaaS software arrangements was approximately $405 6 million up 24, 9%.
Transaction based IRR was approximately $617 7 million up 29, 1% and non-GAAP maintenance <unk> was down two 3% at approximately $467 3 million due to the continued migration of on premises clients to the cloud.
Our backlog at the end of the quarter was a new high of 185 billion up 13, 9%.
Bookings in the quarter were very strong at approximately $562 million up 21%, including transaction based revenues.
On an organic basis bookings were also quite robust at approximately $423 million up 16, 3%.
For the trailing 12 months bookings were approximately $2 billion up 53, 2% and an art on an organic basis were approximately $1 5 billion up 21, 1%.
If our weighted average contract terms for new SaaS contracts had been the same as last year organic bookings growth would have been 18, 3%.
As Len mentioned earlier, both cash flows from operations and free cash flow reached new highs for a second quarter.
Cash flows from operations were $76 7 million and free cash flow rose to $60 million.
From negative $33 $5 million last year.
We continue to strengthen our already solid balance sheet during the quarter, we repaid $60 million of our term debt and since completing the NAC acquisition, we've paid down $475 million of term debt. We will also pay down an additional $100 million in term debt at the end of this month.
We ended the quarter with total outstanding debt of $1, $2, 75 billion and cash and investments of $314 million.
As a reminder, $600 million of our debt is in the form of convertible debt with an interest rate of a quarter of a percent and the remainder is in pre payable term debt due in 2024 and 2026.
We also have an undrawn $500 million revolver.
Our net leverage at June 30 was approximately two seven times trailing 12 months pro forma EBITDA and our leverage should be under two times at the end of July .
Interest rate hikes, thus far this year and projected for the remainder of the year have resulted in significantly higher projected interest expense for the year than we anticipated at the beginning of the year. In addition, we have debt discounts and issuance costs related to our term debt that are being amortized is noncash interest expense.
And as we prepay term debt, we are required to accelerate the amortization of those costs.
Accordingly, we have adjusted our earnings guidance for the full year to reflect those changes in assumptions around interest are.
Our current guidance for the full year interest expense of $30 million.
<unk> represents an increase of about $7 million or approximately <unk> 12 per share for both GAAP and non-GAAP EPS compared to our previous guidance.
The $7 million increase includes about $4 million of cash interest on term debt and $3 million of additional noncash amortization of debt discounts and issuance costs.
It is important to note that our revenue guidance has not changed in our expectations for operating margins are generally consistent with our previous outlook.
Our updated 2022 guidance is as follows we expect both GAAP and non-GAAP total revenues will be between $1 83, 5 billion and $1 87 zero billion.
The midpoint of our guidance implies organic growth of approximately 9%.
We expect total revenues will include approximately $44 million of Covid related revenues from Nic's toward health and pandemic rent relief services revenues from tour health concluded in the second quarter, while revenues from the rent relief program are expected to wind down in the third quarter we.
We expect GAAP diluted EPS will be between $3 60, and $3 76 and.
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 36, and $7 52.
Interest expense is expected to be approximately $30 million, including approximately $7 5 million.
Of noncash amortization of debt discounts and issuance costs.
Details of our guidance are included in our earnings release.
Now I'd like to turn the call back over to Lynn.
Thanks, Brian .
Against the backdrop of generally strong public sector budgets supplemented by federal stimulus funds were experiencing a very active market with.
With our leading competitive position and ongoing investments in strategic initiatives, we are well positioned to take advantage of the continued strength in our market.
The acquisitions, we've made over the last 18 months, including <unk> <unk> engine and USC direct are performing well and contributing to our strong competitive position.
The thing is create more cross sell and upsell opportunities with both new and existing clients.
In particular, our enthusiasm around the cross sell opportunities through NFC continues to grow with recent wins across multiple Tyler products and a rapidly growing pipeline of opportunities.
We're also pleased with our progress around our combined payments business as we begin to execute our go to market strategy to pursue a tremendous public sector payments Tam.
We believe Tyler is uniquely qualified to deliver government focused payment solutions, leveraging the strength of nic's payment platform analytics, and reporting and deep domain expertise together with Tyler's broad software portfolio and extensive client base and we look forward to reporting our progress in the coming quarters.
Even as we face an uncertain economic macro environment with rising inflation and interest rates, we have a great deal of confidence in our ability to continue to generate solid financial results and to grow cash flow.
There are a number of factors that make tyler's business resilient and relatively defensive compared to many software peers.
The public sector market is more stable than many segments of the private sector.
We provide solutions that power essential government services, often replacing mission critical systems that are end of life and our clients don't go out of business or get acquired.
Recurring revenues comprise approximately 80% and growing of our total revenues generating highly reliable cash flow.
In addition, the public sector is increasingly focused on moving to the cloud, which we support with our cloud first model.
Our experienced during the recession more than a decade ago supports our confidence in tyler's clearly in a much stronger position today to succeed during an economic downturn.
We also have the advantage of a very strong balance sheet and reliable cash flow, which enables us to continue to invest strategically in growth even if some competitors may be constrained.
We have term and convertible debt associated with the AIC acquisition and had been impacted by rising interest rates. We are modestly leveraged at approximately two times adjusted EBITDA and we expect to continue to Delever.
Accordingly in the near term, we are prioritizing using our cash flow to reduce debt, while retaining the flexibility to pursue strategic acquisitions and investments that provide long term value.
Finally, I'm happy to report that we remain on track with our major strategic initiatives, including projects related to optimizing our products for efficient deployment of the cloud moving.
Moving from our proprietary data centers to AWS and ultimately accelerating the migration of our on premises clients to the cloud and driving long term margin expansion.
With that we'd like to open the line for Q&A.
We will now begin the question and answer session to enter a question into the question queue. Please press star one on your Touchtone phone.
If youre using a speakerphone please pick up your handset unimpressive Starkey and the number one.
To withdraw your request please press star one again.
Also please limit your questions to one and one follow up and then place yourself back in the queue for additional questions.
We'll pause momentarily to assemble our roster.
Yes.
Our first question is from Sami Badri with credit Suisse. Your line is open.
Hi, Thank you for the question.
First I just wanted to ask about the sales cycle that you guys saw sorry going back looking at the large deals that you guys announced there were several this quarter.
Was the sales cycle for these are sales cycles tightening elongate Inc are they in line with prior.
Lengths.
Any color on that and then the second kind of question.
To that is we are seeing a strengthening state and local budget spend environment and I think one question. We do get from a lot of investors is how do you connect those revisions and those state and local budgets and how did those end up making their way into companies like yourselves could.
Could you kind of give us an idea from what you guys see in the field from the state budgets are announced to the date that they are actually translated into actual bookings or revenues on your side.
Yes, sure Sam Ensslin, I'll start and I'll, let Brian jump in.
I think right now our sales cycles are pretty normal.
<unk>.
I think we've experienced times if you go back to the recession in <unk>, that's where you started seeing things push out and get delayed we saw a little bit of that during COVID-19.
But I think the key is we continually talk about the fact that what we provide is essential functionality in the software that we we do provided are things that are needed and they are often replacing at a date or systems and so right now the market looks good the sales cycles are pretty typical for a normal healthy time.
Even with even with respect to those large deals.
Sales cycles will vary a little bit across our different divisions, some some have longer than others and.
Sometimes a larger deals do take a little bit longer, but I think across the board across our different product suites.
Sales cycles are pretty much on track.
When you talk about state level state and local government spending environment.
What we're seeing right now really is pretty healthy I agree their budgets are in good shape.
<unk> made comments before that I think coming out of Covid. They were not hit nearly as hard as a lot of people anticipated some of the journal reports and other things that we've read.
So with the infusion of some stimulus and I know Brian has got some.
Some numbers and thoughts around ARPA.
But I think right now.
What we're seeing in our pipeline.
All our leading indicators around rfps and demos.
Things like that you are seeing it a little bit in some of our bookings.
This quarter is that things are things are things are well right now in the state and local government.
Just to add a couple of things.
Clearly on the larger contracts typically do have a longer sales cycle and.
And.
Some of these very large ones.
Sales cycles can be.
Sometimes measured in years from the time, we start talking to someone about a solution.
And the timing of when those actually.
Show up in a signed contract.
Can be somewhat unpredictable and I'd say, that's the case with a couple of these larger deals.
The Montreal deal in the Dallas deal that we talked about both.
Pretty long cycles, but.
Persistent.
In terms of the timing of how something makes it into the bookings that can also vary quite a bit.
Some jurisdictions will.
Start the process of acquiring a solution.
Before they have it budgeted.
Knowing that it's a mission critical solution in replacing it is somewhat non discretionary so they may start the sales process or the buying process well in advance of.
That actually showing up in a budget and be prepared then when its funded to sign a contract and move forward pretty quickly.
As may get it in our budget and then.
Start a process are really accelerated process.
So.
It can take place.
Placed in a variety of ways, but.
So the fact that new budgets are rising doesn't immediately.
Result in sort of a flood of new.
Pipeline activity.
Those don't always perfectly match up.
Got it thank you.
Your next question is from Matthew Van Vliet with BTG. Your line is open.
Yes. Good morning, Thanks for taking the question.
And you mentioned on the professional services side and overall implementation.
We're a little bit limited both from a head count perspective, and the ability to hire new.
New head count to add to that just curious in terms of.
How thats progressing both through July and what expectations, how those have changed through the end of the year and then secondarily.
This increase your appetite to look to external partners to help with some of.
At least the more straightforward implementations or some of the more blocking tackling components of the deployments.
Sure. Thanks, Matthew and I guess I would just say that.
The labor market challenges that are out there we talk about a lot of things in our business, where we may be a little bit of immune to some of the external macro factors.
But the challenges in the labor market.
We're not unique there and so we've been experiencing this for some time.
It has been a challenge both in terms of.
The hiring and recruiting and we're also seeing it with a little bit higher.
Early retirements and things like that.
The impact.
As we're seeing it right now and we've got a lot of business, we want to execute on and deliver on but our services revenues are off a little bit.
I would probably expect some of that to carry through throughout the year, we do we do.
Generally make sort of large hiring classes you take for example, our our enterprise ERP group. They hired a very large class back in February I think we're looking at hiring another very large class in the next few weeks.
But even when you hire those large classes. It it takes time for them to get up to speed and get to a point, where they can go out and become fully billable on client implementation. So it can take 456 months, so theres a little bit of delay there. So.
So theres a little bit of impact that will happen, even as our margins as we bring these people on but it takes a little time for them to start becoming billable.
As it relates to external partners.
I think historically we've.
We've always wanted to keep our services in house.
It's certainly not a big.
Margin advantage to have them in house, but we think from a professional and competitive in and client ownership advantage. It really has been has played out and did a lot of value to us really for the last 25 years. The thought of always having the touch point from initially from our sales handing it off to our implementation team handing it off to our support team.
That client relationship and client experience.
As part of what drives our success in the market.
So as of right now, we're not really looking to do that it's such a unique business.
I think we just want to keep these things in house at least for the time being.
Okay very helpful and then as you look at.
The state hunting license agreements that <unk> has in place how do you feel you are progressing in terms of getting through any demand associated with those customers.
Making their way into I guess sort of the local level that roll up through those statewide purchasing agreements.
Have you captured a lot of the sort of low hanging fruit that nic's just didn't have the product to sell through or are we still very early stages of the.
The overall opportunity that those present for you. Thank you.
Yes Matthew.
I think I made a comment in our last call that we.
We're probably in the first inning of the of our.
What we can do with NFC and maybe even just the top of the first inning.
I wouldn't say that.
No.
The reality is they didn't really have.
Some of the local relationships, we're still learning about each other and the fact that this soon we've already.
Done a number of deals that we've done I think we've closed 15 deals already.
Our active pipeline is around 100 deals.
North of $30 million, that's pretty exciting in such a short period of time, while we're still doing just our normal integrations with with Nic's. We've won some pretty significant contracts I think last quarter. We talked about then the engine won a contract with the Arkansas Department of corrections.
As mentioned in my comments earlier, another been engine comment contract with Kentucky.
Our intelligence veterans' benefits contract with Utah.
That's pretty exciting staff, particularly with <unk>.
Mentioned.
A deal between Nic's <unk> engine and something I've said internally is these are both acquisitions that we brought on in the last year and.
And in different parts of the business and to see that coordination already and to be able to leverage their relationships that nic's got those deep state relationships as well as those enterprise contracts.
It's pretty exciting stuff.
And I would just add that specifically on hunting and fishing.
We're still integrating USA direct with.
The Nics outdoor recreation platform.
But really a significant increase in our capabilities there, but I'd say, we're in the very early stages of being able to to drive that down more broadly both within.
Local government and state and federal levels, but.
But that is one of the product areas that.
On a combined basis, we've got a lot of strength in the <unk>.
Looking for big things out of I apologize, Matt if youre asking about hunting if I heard state we call those I would say no I was talking about the NFC deals.
Those agreements.
Thanks for the extra color, Brian I appreciate it guys.
And the next question is from second to Keller with Barclays. Your line is open.
Okay, Great Hey, good morning, guys. Thanks for taking my questions here.
Yes.
Glenn maybe maybe just for you.
Can you just talk a little bit about what product areas are having the most success in converting maintenance customers to SaaS I know there were a lot more.
A lot more in TCE converted this year, then or this quarter versus last.
Q2 of last year.
Or do you feel like you're having that success and then related to that how do you think about that base moving over to SaaS in the coming years.
Yes sure. Thanks for the question, it's a good question.
I think right now probably are the primary areas where.
We're seeing the most flips is in our ERP side, a suite of business. So both our enterprise ERP and our ERP Pro solutions.
And coincidentally those are the areas, where we actually have the most customers thats our largest customer base.
I think in our top and our enterprise ERP.
We're already well ahead of our plan for the year and flips or about 35% ahead through the first half in the lower end at our at our ERP Pro solution, which is our formulary <unk> solution. We plan to do about 188 year down in that in that.
And that product suite.
Obviously seeing in other businesses, but that's that's probably our highest volume.
And as we continue to move forward.
Youre going to see that increased not only there.
But across all of our product suites.
As we model out and look forward, we're starting to do some internal modeling around what we call Tyler 2030, and a big part of our growth strategy is converting that very high customer base from on Prem over into the SaaS World.
I'm not prepared today to sort of give you a <unk>.
Projection of how many per year and how much that's going to grow but I would expect over the next five years to seven years Youre going to continue to see momentum and increased movement in that area.
Got it that makes sense, Brian maybe for you as a follow up.
And maybe this is related to some of the hiring common.
Commentary that you folks had mentioned on services, but can you just talk a little bit about the software and services bookings. It's been a couple of strong quarters of bookings are stronger in bookings then done on revenue frankly, so can you just talk about what's driving that strength and just maybe anything different this year about the conversion to revenue here versus prior years.
Well I think on the second part of the question. The conversion to revenue is just that more of it is.
SaaS or.
And so.
You don't necessarily get a revenue hit and in fact, you typically don't get a revenue hit immediately.
Often it's a quarter or two after the signing before their environments stood up and we start to recognize revenues.
Even with the SaaS cuts or Theres, a lag and then of course, you've got to a recurring revenue stream that you are starting to grow.
So it may start in the third month of the quarter and so you get a month's worth of revenues in the next quarter, you get a quarter's worth and so forth and so that ongoing change in the mix.
It's been a part of that with less licenses.
Which are typically recognized mostly upfront.
<unk> talked about a little bit of a service pressure as well so.
That also.
As with our.
A little bit below planned head count there are.
I think not ramping up as those new signings as quickly as we might.
Once were.
Fully staffed with.
With our billable implementation teams.
<unk>.
So I think thats the biggest thing I think in terms of just driving higher bookings. We've always had bookings can be somewhat lumpy from quarter to quarter, especially around those big deals in this quarter. A couple of those big deals that did have long sales cycles.
Got to contract.
But generally I would say, it's sort of a combination of.
<unk>.
Those factors, we pointed out.
Pretty strong economic backdrop.
And budget situation around governments.
It's certainly aided by.
The ARPA funds the federal stimulus that's available to them.
As we've talked about on prior calls sometimes it's it's.
Not clearly identifiable that a deal was funded with ARPA funds.
Sometimes it is.
There are some of those in this quarter.
Other times ARPA funds are used for something else, but it frees up money that that helps perhaps making incremental purchase or an add on sales, we're seeing real strength in our.
Our inside sales selling additional products to.
To existing customers and we believe some of that is is driven by by the federal stimulus.
But as we've said in the past that that sort of a long term tailwind they've got until the end of 2024 really to commit those funds in and through 2026 to spend those.
We saw a study by by Brookings indicated that at least as of the end of 2021, only about 40% of the stimulus funds had been committed yet by.
By cities and counties. So we think there is certain ongoing tailwind there so strengthening the market and then our competitive position is really strong we continue to invest at a high level.
We've got multiple products that we've added through acquisitions and internal build so our average sales are often bigger than they would have been in the past because we've got more products that are bundled together things like our data and insight solution, that's often bundled.
And a new sale.
A number of our public safety products that now.
Are often in a new sale that then make that bigger so there are a number of factors.
Contributing to that but but yes, there is typically a lag from bookings growth to revenue growth.
Got it very helpful guys. Thanks, very much sure.
The next question is from Michael <unk> with Wells Fargo Securities. Your line is open.
Hey, Thanks, Good morning, I appreciate you taking the questions.
There were several comments throughout the prepared remarks around the strength and resilience of the demand environment.
Just wondering if there's any more color you can add around what youre seeing from public sector customers currently and how the RFP volumes youre referencing compare to what you're used to generally seeing this time of year.
Yes sure Michael.
Okay.
We the last few years have been a little bit.
A little bit rocky with Covid and everything else, what we're seeing right now is really a return to pre COVID-19 levels generally across the board.
Our rfps are up our demos are up.
And I'd say the market looks pretty strong in some parts of our business the pipeline is growing.
Even beyond those levels in some parts, it's sort of returned back to sort of pre COVID-19 level. So.
Right now what we're seeing.
Out there in the market all the leading indicators is.
Budgets budgets are strong and healthy and the demand is there.
That's helpful. Bryan Bryan you provide us with a lot of useful detail around segmentation and various splits of the business.
In terms of where you're focused lives could you help level set what you view as the true north metric for topline.
Or a couple of metrics as youre working through the transition is it backlog that the SaaS AAR metric or something else that I think it would be useful to hear you talk through just given the moving pieces of the model and the macro we're all working through here. Thank you yeah, we recognize that.
Our businesses is maybe a little bit more complicated given the transition.
From license.
License to the cloud and the addition of Nics in their transaction based revenue streams and our plans to grow.
What already is a pretty sizable payments business through NFC to grow that significantly so.
We gave a lot of metrics and we recognize we probably give too many metrics.
But I'd say, if youre looking for kind of the North star and what's what's really important is as our model evolves.
It would be those metrics around <unk> and particularly.
We do give the breakdown of those different components of IRR, but particularly.
Particularly software subscription and transaction IRR, and we expect that maintenance will.
Yes.
It's kind of flat right now will start to decline.
As more of those customers.
Flip to the cloud.
So really that.
So the things that.
Probably the most important metric would be around those.
Recurring <unk> for the subscription and transactions.
Nice job here. Thanks.
The next question is from Joshua Reilly with Needham Your line is open.
Hey, guys congrats on the quarter. Thanks for taking my question.
How should we think about the seasonality if any around the payments business now including E. Both from the portal revenues from core Tyler and IC.
Yes typically.
The fourth quarter is lighter there.
Less activity through the portals.
Less.
Maybe slightly less in terms of payment volumes that are often associated with this portal.
Transactions.
So around the holidays and as.
People get to the end of the year. There is just a little bit lower activity there the.
The other thing that we talked about last quarter.
Which is sort of new to us is in the Florida contract with the revenues around the.
The payments for the department of state in there they are corporate.
Licensing activity, which is almost all in the first quarter, a little bit of legs into the second quarter.
And I think they were around $6 million of revenues associated with that thats seasonally towards the beginning of the year.
But other than that it's primarily.
<unk> fourth quarter slowdown around the payments.
Got it that's helpful. I think to Josh was as we continue to grow that payments business.
And we are as you know we already growing it within Tyler as you extend it beyond just some of the NFC things around outdoor activities and stuff as we look out several years I think youll see that as the volume gets bigger and it's across a larger base and its across.
Using more products and more constituents youll see that I think over time flatten out but that will take some time.
Got it and then just one other follow up on the on the NSE.
E business, what are you seeing in terms of that driver history record revenue.
From that segment is that recovering it you would have expected and how much could that could potentially positively impact revenue throughout the rest of the year.
Yes, I'd say the HR right now it's kind of on our internal plan for the year.
Really essentially sort of flat with very little growth and I think that's one of the areas in our business when we talk about being.
Recession resistant.
Area, where I think we're seeing a little bit of impact in the <unk>.
Business.
At the same time THR used to be you go back several years. It was a very big substantial piece of the AIC businesses. As we are starting to grow. These other streams I'm expecting the impact of <unk> and the percentage of that business to somewhat decrease within that business unit I think right now it's about.
17% of their total revenues, maybe 19% outside of Covid in and I think thats trending towards maybe down in the 15% range as we are starting to.
Some of these other state interactive government services revenues payments revenues and some more products going through their systems, specifically this quarter they were down about 2%.
Sure.
Recovering a bit but still softness there in.
That's one also that we believe has affected indirectly by supply chain and some of that's tied to new vehicle sales.
Those are the broader economy, there's no cars out there.
Yeah.
Got it thanks guys.
The next question is from Kirk <unk> with Evercore ISI. Your line is open.
Yes, thanks, very much and congrats on a really nice bookings quarter Lynn I was wondering can you just talk a little bit about.
What's your discussions like with customers today in terms of consolidating the number of vendors. They are working with I was just kind of curious you obviously have a much more expansive product portfolio than you did 10 years ago. How much is the is the ability to sort of take wallet share a bigger part of the story today than it was say five.
10 years ago.
And is that accelerating is that conversation accelerating I'm just sort of wondering about thinking about you all more in sort of a net revenue retention basis, meaning the ability to expand.
Sort of cross and up sell versus just be as reliant as you are on sort of net new again five to 10 years ago.
Yeah sure good question.
Part of our strategy has always been.
To have a comprehensive suite.
And compete that way in and sell our products as a suite as opposed to single point solutions I still think thats a significant competitive advantage.
There are there are some.
Consultants and things out there that are that are sometimes suggesting to go the other way I am not really quite sure why because.
Having do a bunch of extra integrations trying to get multiple vendors just seems to me to be more of a headache, rather than going to a single vendor and youre right.
I think one of our I've said it a lot of times are our greatest assets our customer base.
Sure.
I've used the term it doesn't take years to develop it takes decades to develop and so when you look at cross selling and up selling back into that base. That's also a big a big strategic driver for us going forward.
Every quarter the reports I'm seeing our inside sales channels are continuing to to outdo themselves each and every quarter and as we continue to do tuck in acquisitions and broadened our portfolio I think youre going to continue to see that and I do think it's one of our competitive advantages in the market.
And Brian just on the on the ramp and sort of your services business and bring out more billable or more head count on that side, yeah. How should we think about that sort of impacting margins as we think a little bit ahead to 'twenty. Three I realize you guys are expecting margins maybe start picking up again in 'twenty four not next year, but is there anything that.
We should be aware of as meaning maybe a little bit heavier weight on the first half of the year next year is that as people get ramped up versus the back half any just color on that would be helpful. Yes.
Yes, I think the.
The margin impact is more what we're seeing this year because you bring those people on obviously you are paying them. They are in your expenses, but it's.
Maybe at six.
Six months kind of a ramp up to become fully billable. So initially you get a margin hit.
Having the cost without the revenues associated with it and then.
So from a negative impact you will see that more this year and then as they become billable and they're starting to generate revenues.
And help us deliver that backlog.
Then.
You see a positive impact services arent, a high margin business for us.
As it is but.
I would expect that as you get into the early part of next year through.
Through the middle of next year, you'll start to see.
A positive impact.
From those employees being being.
Being productive.
And we hired.
It is a.
Pretty big class.
Classes cumulatively pretty large across Q2.
And have pretty strong hiring.
Hiring plans in the second half of the year. So assuming we can execute on those and in turnover seems to be settling down a bit.
Then.
We will have those resources billable.
In the first part of next year.
Okay. That's helpful. Thanks for taking the questions.
The next question is from Charles <unk> with CJS Securities. Your line is open.
Hi, good morning.
Picking up on that last question there about the labor hiring.
Looking at the gross margin on a percentage basis in Q2 it was down.
Difficulty year over year.
Down a touch sequentially, while SG&A was lower.
It was that kind of the main driver behind that.
Yes, I think the margin there is a combination of professional services as part of that.
As I just described.
We're certainly seeing.
As we talked about as we headed into the year with our guidance a return of some of the I would say COVID-19 cost savings.
Some of those are in the SG&A line. Some of those are in cost of sales, particularly billable travel so while we still.
Currently and expect in the future to deliver a significant amount of services remotely as we did during COVID-19.
There is billable travel.
Returning across some segments of our business and.
So that's having an impact from margins, which we expected.
And then we've talked about some of the.
Transaction costs, the bubble costs associated with our cloud transition and specifically with the move from.
And from our proprietary data centers to AWS and so those things are generally in line with what we expected.
We did have also a bit higher.
Revenue stream from the Covid related revenues at Nics checks.
Those.
Have typically a bit lower margin than tyler's overall margin so.
The.
Sort of over performance in those revenues had a negative margin impact and as we've said we expect those to the <unk>.
For those to go away at the end in the third quarter. So.
That will be a positive from a margin perspective.
That's helpful. Thanks, Brian and just staying on the AWS transitions, there, where where do you think you are in terms of.
Your expectations for it.
That transition.
Tracking ahead behind on schedule that kind of thing.
Yes, I think Charlie.
We're on track with our internal plans.
Both in terms of where we are with our product investments.
What we've outlined for plans to exit our data centers.
And when we talk about sort of getting to the other side of this.
Bubble costs so.
Right now internally I'm pleased with where we're sitting.
Great. Thank you.
And the next question is from Rob Oliver with Baird. Your line is open.
Great. Thanks, guys good morning.
<unk> been a lot of commentary on public safety on the call. So I thought I'd ask about got it.
Was it a bit of a focus.
Indianapolis and for the last couple of years, you guys certainly have begun to see some nice success in cross sell.
Public safety into your core so.
Just be curious to know how you characterize that market right now and when you are.
Look at the components of that RFP activity and pipeline.
How does public safety fair in there.
Win rates and then how it sets up for that sort of all important back half of the year in Q4.
Yeah sure Rob I appreciate that comment.
I would say public safety right now the market has moved back to sort of pretty much back to normal.
Our competitive landscape I like our position there.
There is a couple of those with strong competitors, we've talked about them before.
Also note that there is.
Some competitors out there that are in that space that are carrying a lot of debt, which I think will probably with the change in rates might be impacting their ability to execute well.
We've seen some reports on some smaller competitors, who may be going through a little bit more difficult time and seen some layoffs and things like that.
But right now we're <unk>.
Pretty pleased with where we said we made a big investment years ago.
Into things like mobility and that continues to be a significant competitive edge for us along with as you mentioned leveraging a lot of these other acquisitions, we've done in our Tyler Alliance story I mentioned in my opening comments the contract with Lima County, Ohio.
Which was principally we sold our enterprise courts <unk> Justice product.
And some things on the Sanjay side, but also the public safety side and that Alliance story really resonated with the clients. So we're we're starting to see good things there.
The market is still I think somewhat resistant to the cloud, but where we.
We're starting to get some SaaS deals done we're looking at potentially getting our first beta client in the AWS cloud maybe later this year early next year.
So theres some theres some exciting things going on in that market.
Great. Okay. Thanks, guys, that's really good color and then.
Brian just a quick one for you just on the Capex.
Production and I apologize if I missed it if you could just talk a little bit about what the components of.
Thanks.
On the Capex.
Nothing really significant.
Just some tweaking of the timing of some of the things, particularly around our.
Some of our facilities and that.
We are.
And I see for example is moving into a new facility.
In the Kansas City area and the timing of some of those things has just shifted around a bit. So I don't think theres anything terribly notable in our in our Capex right now relative to what we thought at the beginning of the year.
Okay, well then thank you Angela.
Minor changes to an art.
Capitalization around.
Some of our internal software development efforts most of that being associated with that.
Cloud.
<unk> of some of our products so <unk>.
Sometimes there's a little bit of difference.
How we originally estimated it will fall and how the accounting rules ultimately end up with what we capitalize and what runs through expense.
Okay. Thanks, again I appreciate it guys.
The next question is from Alex Zukin with Wolfe Research Your line is open.
Hey, guys. Thanks for taking the question. So just maybe a few for me it sounds a lot of this has been asked but it sounds like.
The bookings were really strong this quarter and if you adjust for the duration.
The contracts, it's even better.
If you think about the headwinds just SaaS revenues, particularly that youre seeing from that services hiring challenge that you've talked about.
Would it be is it Buffalo know like where SaaS revenues would be if you didn't have that challenge and then I've got a few more.
Yes, I'm not exactly sure how we would translate that I think that the lag in the start as well.
Pretty modest but.
I think we would be seeing a little bit higher level, but I don't know that it's sort of a double digit affected I think it's pretty modest now.
And like I said, we have pretty aggressive hiring plans.
For the rest of the year.
To get our teams up to full strength and.
So I think it's a.
In a relatively short term impact we will see how it plays out through the balance of the year.
It could create some softness but.
On that services side, but.
Yes, I think at this point it is not.
The big impediment to two growth in the subscription revenues, but certainly there is some sort of a factor there.
Got it and then the other question is I mean with all the headlines around inflation and software companies raising price.
Can you remind us what are kind of the inflation adjustments or pricing vectors that you have in your model with customers and particularly I know that annual maintenance.
Upticks are a part of part of that so as you've seen more customers converting to SaaS. How do you make sure that you continue to capture those unit economics on on the subscription contracts.
On the SaaS contracts.
Yes sure Alex.
And you're right most of our maintenance contracts are annual agreements.
Would you have a few multi year ones.
A small percentage of those have built in escalators, but generally most of them have the ability to adjust pricing on an annual basis.
Some of those are tied to CPI.
That's probably not the majority.
But there is some flexibility there and we took a look at that this spring.
Still a majority of our maintenance contracts are on the sort of the June 30 July one cycle and it's something that we talked about internally.
Back in March and April before we went out as it relates to SaaS contracts with similar things.
These are.
After you get through the initial engagement.
You do have.
The ability to start.
Putting in price increases a lot of our initial SaaS deals are multiyear terms some of them are.
They may be built in escalators, but the way. The revenue recognition has worked historically is that we actually have had been recognizing them on more of a flat rate. So they can be a little bit of a declining margin. It's one of the reasons why we've take tried really hard to shorten the length of those initial contracts, but we're also looking at doing some things with contract terms.
So that we will be able to get those built in escalators, we do we do price them and so we're getting the cash.
And those agreements and then as they roll off and we move into either annual renewals, we will have the ability to change to change that pricing even more but there are obviously some existing agreements that are out there.
That had pricing that was built in a year or two ago that we can't adjust at this point and then in some of our products.
<unk> did implement.
Our above normal maintenance increases this year and we've also taken a look at our professional services billing rates and in some cases made adjustments there too to account for inflation.
Perfect and then I guess on the topic of cash in the door.
If you actually look at you guys as model every two years your free cash flow seasonality in the first half.
Jumps surround it goes from like 23% to 24% of the total year to.
10% to 12% of the total year.
So first of all just help us understand.
It looks like we're in one of those years, where it could be more like the 20 plus percent year, but I just want to understand the seasonality from a free cash flow perspective, as we look at the second half specifically in.
The full year and then just tie that in with capital allocation you talked about wanting to pay down the debt, which makes perfect sense given the the raising interest rate.
Expenses in environment, but also maybe comment given where the stock is given where the fundamentals are around your the possibility of a of an increased buyback.
I'll take the first part of that.
The cash flow it does.
Typically the third quarter and I think Thats every year is.
The strongest quarter.
<unk>.
Primarily because of those maintenance billings, we have close to $470 million a year in maintenance.
Not all of it but the biggest chunk of that is renewed as of July one so typically build.
Late in the second quarter and collected in the third quarter.
So they are.
Typically.
Don H. So those are paid relatively promptly so that drives that third quarter cash flow growth I think.
Some of there was a little bit of an anomaly last year in the second quarter around an IC.
Shortly with because they were only in for part of the quarter.
And.
There was some sort of unusual dynamics around the timing just from when we acquired them.
They happen to have a fair amount of I guess, what I'd describe as customer cash that sort of passing through that.
From their transaction based revenue streams that was on.
Their balance sheet that then with paid out.
I made it onto the customers after the acquisition. So it created sort of an anomaly. There this year, it's sort of a normal full quarter.
And Nic's cash flow is more consistent across the year given the transaction base.
Nature of most of their revenues so I think.
Youll see that.
Start to even out a little bit more.
But I still think you'll probably see.
Certainly more than half in.
Or more in the kind of that two thirds of our cash flow for the year in the second half of the year.
But.
But I think there was sort of unusual situation last year.
Yes.
On the second question around.
Use of cash Youre right, our priority is still as debt pay downs, but we're still actively looking at acquisitions. We're not it's not like we've closed the door. We're not answering calls we've been actively looking with.
<unk> participated in a couple of processes. This year, obviously, we purchased USC direct early in the year.
But we need something compelling and something that's really at a reasonable valuation what we've seen in the acquisition front at least even recently is even as the broader markets.
<unk>.
<unk> gone through a little bit of turbulence in the last few months.
Expectations for some of these private companies.
<unk> has not changed and in fact in some cases is almost exceeded.
People pitch deals, where they tell me that I need to be paying higher valuations in Tyler.
And that's a little bit hard for me to understand it's a bit of a head scratcher.
Our debt right now is our blended rate is about after we make this payment. This month it will be about 2%, but that's really a function of the fact that we've paid so much debt down.
When we first took out our debt I think our convertible was about 34% of our total debt. After this payment. This month it will be just over 50%. So as we continue to pay our term debt down.
We wont be as impacted by interest rates as we look out over the next year, which is which is which is nice.
As it relates to share repurchases.
I think right now.
I agree with you of is that when I look out five years or seven years from now.
Can look pretty attractive.
I think in <unk>.
Yes, we're really wanting to do a significant move I'd, rather just pay pay down the debt in the near term.
The next question is from Terry Tillman with <unk> Securities. Your line is open.
Yes, Hey, Lynn and Brian I'm still I guess unfolded tankers were gone past an hour, but I can't help myself since I have you I'm going to ask you a couple of questions first I do want to use some French because of the Montreal deal for <unk>.
I guess the <unk>.
First question just relates to we talked to one CT system. They had a 25 year plus old case management system.
I know you've talked about your high end ERP business European ERP Pro business and then somebody asked about Matt asked about public safety Health case management opportunities right now in terms of how how would that stack rank versus some of this other kind of cloud replacement opportunities and then a quick follow up thank you.
I didn't quite get the court case management.
Case management is one of our most I'd say, probably our most dominant products in the marketplace.
Probably one of our biggest market shares so.
Our enterprise case management, formerly Odyssey is I think north.
North of 55% of the courts in the U S. G is that solution.
I think it's eight of the 10 largest counties in the country.
Something like 17 statewide implementation so it's a very strong product for us.
But it's also it can be somewhat of a lumpy business, particularly with.
With respect to those really big contracts because it is not unusual for us to see $25 30, I think we've replaced.
Couple of 40, plus year old case management systems that were custom written and then in the Seventy's and some of these large counties.
And.
So there's sort of some long term activity and the backdrop, we see more of the kind of mid range deals.
That are that are more currently active in the pipeline, but I don't think there are any big statewide deals or that are.
Sort of currently actively in the market.
So we do have a very high success rate as those come along.
And then as we've been able to build on that really very strong position, we have in the case management space.
Most of our growth and courts is coming from now is from those products that we have in that suite around it. So we mentioned on the call today, one of our bigger deals.
Dallas County, Dallas County has been a long time, it's a top 10 county been a longtime case management customer, but now we were able to add our jail solution.
So the products that they use.
Building on that relationship and we've done a number of acquisitions in.
In that space probation jury prosecutor.
Process service solutions that that broaden our offerings, there and enable us to grow there, but but I would say.
<unk>.
Certainly a solid business and we still have a very strong competitive position, but the right now.
Not as much new activity, but as it comes along we are well positioned and just to add to that Jonathan.
Last point that Brian said, I think it's worth emphasizing.
Using leveraging our our strong position in the it is still an anchor it's still the still the gateway.
And the ability to take some of these other investments we've done whether it's around corrections like the Dallas County jail deal, but even supervision if you remember a few years ago.
I think it's about four years ago, we did an acquisition of a company called Caseload Pro and.
We won this we signed this in Q2.
County for enterprise supervision supervision, that's pre trial, we talked about the different areas and even in supervision.
Whether it's juvenile adult and things like that and we think we're going to be adding those additional solutions to la County, which is.
The largest criminal justice.
Departments in counties in the United States.
That's great congrats on the quarter.
The next question is from Jonathan Ho with William Blair. Your line is open.
I'll keep it to one question with the upcoming quarter can you remind us whether there are any large deals in terms of maybe some tougher bookings comparisons. Thank you.
Uh huh.
Segment.
Yes last year in.
Q3, we didn't really have any.
<unk> is our biggest SaaS deal was.
About a $5 million contract value with Lawrence Kansas.
We had a handful of license deals the biggest of which was less than $3 million. So.
I'd say, it's a pretty normal comp coming up.
Thank you.
The next question is from Keith <unk> with Northcoast Research Your line is open.
Good morning, guys I'll keep my questions Ron already running late here.
Brian maybe just touch on the NAC acquisition your ability to retain employees over the past year and how that affects the business going forward.
Yes, it's Ben.
Really solid.
Both at the senior management level and the.
And the staff level I think we've had very solid retention I think for all the reasons that the acquisition made a ton of sense.
Created.
Opportunities for <unk>.
Growth at Nics, as well as Tyler and I think their teams have recognized that I think it has been.
As we look back over the last year, a smooth smooth integration for a deal of that size, particularly one that was completed while we were still.
Almost all remote during COVID-19.
We've got some new.
Not new to Nics, but people and new senior leadership roles there, particularly.
Elizabeth profit.
President and Liz Thomas.
And they've done a great job of.
Managing that team and.
And working with the integration. So I think we're very happy with the retention.
In.
And the opportunities that it has created across.
Across an ICM Tyler their payments team for example, our Tyler payments team has joined with Eni payments team.
And.
They've taken the leadership there.
So.
Yes, we're really pleased with it.
The retention there, yes, I think the excitement that we see in the cross opportunities and the things that we can do together that just naturally flows up and down the organization and I think that helps with retention.
Great. Thanks.
Okay.
Our final question is from Clarke Jeffries with Piper Sandler Your line is open.
Okay.
You for taking the question I'll keep it brief I just wanted to get a sense of what your rough range of organic or core growth expectations are for nics considerations in terms of.
How the revenues are being driven today and sort of how the macro is impacting that so from the 8% today, what's the general range you should expect going forward.
Yeah, I mean historically.
And it was about an 8% grower on average looking back over several years to sort of pre COVID-19.
Around their what they call same state growth so.
Sort of.
The proxy for organic growth.
And so that's I think is sort of our baseline.
We we.
They've seen pretty strong growth over the last couple of years with all of the.
The shift towards.
Okay.
Citizens and businesses doing more business with government digitally and so higher transaction volume. So they are really growing off of this 8% growth. We think is really pretty impressive this quarter given that its off of a very strong.
Base that was established over the last couple of years, but I'd say, that's kind of the baseline and that as we continue to drive more.
More cross selling and so more opportunities, particularly in the payment space and.
Through things like the USC direct acquisition, which is now a part of NFC.
There's certainly an opportunity to move up into the.
Even into the low double digit range, but for right now I think 8% is kind of a good baseline and Oliver.
Initiatives around.
The combination.
With Tyler should ultimately drive that higher I think Clark, obviously, taking out the near term growth headwind of Covid, which I assume that that was part of your question that you had taken that out but as we go forward. It's like a lot of acquisitions I mean, there's a big Standalone division within Tyler, but to Brian's point.
A lot of the cross sell opportunities.
Whether or not internally, we recognize those on a different divisions P&L.
P&L versus Nics P&L I think as you go over time, we don't really report on specific organic growth within our within our business units and Youll see some of that just the opportunities are there and as payments grows some of that payments business may may go to our ERP because its going to their client base, but nic's played a significant hand.
Like the vent engine deal in Arkansas, Kentucky that revenue.
Doesn't happen without an IC yet it's sitting on the books over in our courts and Justice Division. So I think as we go forward, you'll probably see us less comment on their specific.
Revenues in growth as they just become more integrated within IC, we've kind of thought it was appropriate really for the first year or so but it will be like the rest of our other divisions because theres so much.
As we talked about a lot of our opportunities are through cross sells and how we leverage each other and so to us at one point it just becomes all Tyler.
Nuclear <unk> helpful color. Thank you.
At this time there appears to be no more questions. Mr. Marr I'll turn the call back over to you for closing remarks.
Okay, great. Thanks, Chris and thanks, everybody for joining US today, if you have any more questions. Please feel free to contact Brian Miller or myself. Thanks, everybody have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Please wait the conference will begin shortly.
Okay.
Sure.