Q3 2022 Tyler Technologies Inc Earnings Call
And instructions will follow at that time as a reminder, this conference is being recorded today October 27.
On page 22, I would like to turn the call over to Mr. Moore. Please go ahead.
Thank you Cheryl and welcome to our call.
With me today is Brian Miller, our Chief Financial Officer.
First I'd like for Brian to give the safe Harbor statement.
Next I'll have some comments on our quarter and then Brian will review the details of our results.
I will then end 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 companys future prospects revenues expenses and profits such statements are considered forward looking statements under the safe Harbor provision of the private Securities Litigation Reform Act of 995.
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.
Thanks, Brian .
Our third quarter results were highlighted by strong execution drove solid organic revenue growth and higher earnings while also advancing our cloud first strategy.
Total revenues grew approximately 3% with organic growth, excluding COVID-19 related revenues of approximately 9%.
Recurring revenues comprised 78, 5% of our quarterly revenues.
On an organic basis, excluding COVID-19 related revenues subscription revenue grew 14, 5%.
Reflecting both our accelerating shift to the cloud and growth in transaction based revenues.
We achieved solid revenue growth, even as the shift in new software contracts mix continued to accelerate to SaaS from licenses.
In Q3, 91% of our new software contract value or SaaS.
Compared to 74% in Q3 last year.
Our largest new software contract for the quarter was with the U S Department of state for our case management development platform, formerly known as <unk>. This.
This five year SaaS arrangement is valued at over $54 million and includes over $5 million in the first year ramping to over $8 5 million of IRR in the fifth year.
However, due to certain contract terms only approximately $8 million of the value of this contract is included in backlog and bookings for the third quarter.
The second largest deal of the quarter was a five year SaaS deal for enterprise supervision solution with the Arizona office of the courts.
Valued at over $15 million.
This arrangement includes two five year optional renewals and with add on components has the potential to grow to more than $82 million over 15 years.
We also signed a notable statewide SaaS deal for enterprise supervision solution with the state of Oregon Judicial Department valued at approximately $3 5 million.
These contracts are great examples of our ability to make a strategic tuck in acquisition and grow the acquired products by leveraging our client base and sales channel.
When we acquired Caseload pro which is now our enterprise supervision product for years ago. Its annual revenues were approximately $2 7 million.
This quarter alone our new sales of enterprise supervision added almost $4 million of IRR.
In other Tyler divisions, we signed five additional significant SaaS deals each for different product suites, and each with a total contract value greater than $2 million.
These include Pierce County, Washington for our enterprise assessment and tax solution.
The city of Abilene, Texas, the Racine Unified School District in Wisconsin, and <unk> County, Florida for our enterprise ERP solution.
Toronto Region Conservation authority in Ontario for enterprise permitting and licensing solution.
In addition.
We signed 12 SaaS deals in the quarter with contract values between one and $2 million each.
We also signed three notable license deals in the quarter for enterprise public safety enforcement mobile and data and insight solutions.
With an Algo County, Texas, which was funded by ARPA.
The combined regional Communications authority in Colorado, and the city of Melbourne, Florida.
Yes.
Also during the third quarter, we successfully renewed our nic's enterprise contract in Alabama.
When a competitive rebid for enterprise contract in Maine.
Subsequent to the end of the quarter in October we renewed our NSE enterprise contract in Oklahoma.
Contract in Pennsylvania is expected to expire in the fourth quarter.
We also converted our state of Iowa data and insights agreement from a third party reseller to the NAC Master contract.
In addition, Nic's signed a new four year SaaS agreement for our medical cannabis regulation solution with the Arkansas Department of health medical cannabis licensing with <unk> of approximately $450000.
Before I turn the call over to Brian I'd like to comment on the rapid financial solutions acquisition, we announced this morning.
We're extremely excited to partner with the innovative team at rapid who will join our payments group.
Rapid as a leader in the payment solutions market with 20 Years' experience and expands our capabilities with best in class digital disbursements.
We will now be able to offer our public sector clients, a reliable scalable and secure platform for disbursing payments.
<unk> has more than 500 customers concentrated in courts and correction facilities, which includes managing disbursements for Vint engine, which we acquired in September of last year.
Combined with our approximately 7200 clients in the payment space. We believe this is a significant opportunity to leverage the full suite of market, leading payment solutions to make customer interaction stronger and more secure.
Now I'd like for Brian to provide more detail on the results of the quarter and our annual guidance for 2022.
Thanks Lynn.
Yesterday, Tyler technologies reported its results for the third quarter ended September 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 financials tab schedules with supplemental information provided on this call, including information about quarterly bookings backlog and recurring revenues.
Yes.
Both GAAP and non-GAAP revenues for the quarter were $473 2 million up two 9% and two 7% respectively.
Organic revenue growth, excluding COVID-19 related revenues was strong at 9% on a GAAP basis, and eight 8% on a non-GAAP basis.
Nic's Covid related revenues for the quarter were $11 7 million.
Compared to $43 3 million in last year's third quarter.
Revenue from the tour health initiatives ended in the second quarter and the Virginia rent relief program has now officially ended with less than $2 million of remaining revenues anticipated in the fourth quarter.
License revenue declined 10, 6% as our new software contract mix has shifted to SaaS, even more rapidly than planned at the beginning of the year.
Professional services revenues Rose 15, 7% and six 3% organically.
We intend to continue to grow our implementation team during the fourth quarter to support delivery of our growing backlog and pipeline, but will likely continue to see some pressure on professional services revenue in the near term as those teams ramp up to become fully billable.
Subscriptions revenue was just slightly above Q3 of last year due to the expected $37 million decline in COVID-19 related subscription revenue, but organically rose 14, 5%.
We added 153, new subscription based arrangements and converted 70 existing on premises clients, representing a total of approximately 100 $149 million in contract value.
In Q3 of last year, we added 144, new subscription based arrangements and had 67 on premises conversions, representing a total of approximately $84 million in contract value.
Our software subscription bookings in the third quarter added $28 $1 million in new IRR.
Subscription contract value comprised a new high of approximately 91% of total new software contract value.
<unk> this quarter compared to 74% in Q3 of last year.
The value weighted average term of new SaaS contracts. This quarter was three eight years.
Impaired to three four years last year.
Transaction based revenues, which include Nic's portal payment processing and E filing revenues and are included in subscriptions were $148 9 million down 13%, but excluding COVID-19 related revenue grew 11, 1% E.
E filing revenue reached a new high of $19 7 million up 13, 3%.
Our non-GAAP <unk> was approximately $1 $49 billion, which was flat with last year, but up 11, 2%, excluding COVID-19 related revenues non-GAAP <unk> for SaaS software arrangements was $421 7 million up 27, 7% track.
<unk> based <unk> with $595 6 million down, 13%, but up 11, 1%, excluding COVID-19 related revenues.
non-GAAP maintenance <unk> was flat with Q3 last year at $469 4 million due.
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 $1 88 billion up six 3%.
Bookings in the quarter were approximately $499 million down 17% on a difficult comparison to Q3 of last year for three main reasons.
First Q3 of last year included the state of Illinois fixed fee E filing renewal of approximately $63 million.
Second Covid related revenues and bookings were approximately $43 million in Q3 last year versus $11 million in the current quarter and finally, most of the federal Department of State deal signed this quarter was not included in backlog or bookings.
Normalizing for these items bookings grew seven 7% on.
On an organic basis bookings were approximately $364 million down 17, 9%, but grew seven 7% on a normalized basis.
For the trailing 12 months bookings were approximately $1 9 billion up 18, 1%.
And organic basis were approximately $1 4 billion up two 1%.
As a result of an increase in our estimated research tax credit our annual GAAP and non-GAAP effective tax rates were positively affected.
Our non-GAAP annual effective tax rate is now 22, 5% down from the 24% previously used in.
And the non-GAAP effective tax rate for the third quarter was 19, 6% to adjust the year to date tax rate.
This resulted in an 11% uplift to our third quarter non-GAAP EPS for the full year. We expect this tax rate change to impact non-GAAP EPS by approximately <unk> 14.
Cash flows from operations were $129 4 million.
Down, 37% and free cash flow was $115 6 million down 40%.
Mainly due to the timing of working capital items, such as payroll accruals remittance of portal fees and taxes, and we expect to see positive impacts of these timing items in the fourth quarter.
We continue to strengthen our already solid balance sheet during the quarter, we repaid $190 million of our term debt and since completing the Nic's acquisition, we have paid down $665 million of term debt.
We ended the quarter with total outstanding debt of 1.085 billion.
And cash and investments of $247 9 million.
As a reminder, $600 million of our debt is in the form of convertible debt with a fixed interest rate of a quarter of a percent.
The remaining $485 million is in pre payable term debt due in 2024 and 2026.
With interest at floating rates based on LIBOR, plus a margin of 125 or 150 basis points. So our exposure to floating rates is limited.
We also have an undrawn $500 million revolver.
Our net leverage at quarter end was approximately $1 seven nine times trailing 12 months pro forma EBITDA.
Looking forward, we have adjusted the upper end of our full year revenue guidance to reflect lower license revenue as a result of a higher SaaS mix as well as the timing of new license contracts in our public safety and federal divisions, along with ongoing pressures on professional services revenue adjusted.
Adjusted for the change in our effective tax rate the mid point of our non EPS guidance is unchanged.
Our updated 2022 guidance is as follows.
We expect both GAAP and non-GAAP total revenues will be between $1 $83 7 billion and $1 $85 7 billion the midpoint of our guidance implies organic growth of approximately 8% we.
We expect total revenues will include approximately $49 million of Covid related revenues from Nic's Tour health and pandemic rent relief services revenue from tour health ended in the second quarter, while revenue from the rent relief program is expected to end in the fourth quarter.
We expect GAAP EPS will be between $3 89 and $4 five.
And may vary significantly due to the impact of stock option activity on the GAAP effective tax rate.
We expect non-GAAP diluted EPS will be between $7 51, and $7 65.
Interest expense is expected to be approximately $28 million, including approximately $7 million of noncash amortization of debt discounts and issuance costs.
For the full year, the net impact of the change in our tax rate offset by increases in estimated interest expense resulted in a <unk> <unk> net reduction in non-GAAP EPS compared to our initial guidance.
Other details of our guidance are included in our earnings release now.
Now I'd like to turn the call back over to Lynn for his comments.
Thanks, Brian .
We're encouraged by continued strength in the public sector markets as reflected stable or increasing RFP and Dan will activity across our business units and a strong competitive position that continue to drive high win rates.
A key characteristic of the public sector market is its relative stability across economic cycles.
Given the ongoing need to upgrade and replace aging mission critical systems with next generation applications.
Our deep domain expertise combined with the breadth of our product offerings underscores our unique ability to deliver scalable and innovative digital solutions to meet these mission critical needs.
Our industry, leading competitive position remains high.
In part due to our integrated solutions and our ability to expand existing client relationships as we leverage our installed base the largest in the public sector market.
Our cross sell pipeline continues to grow, particularly as we begin to gain momentum with our Nic's go to market strategy and leverage our strong sales organization and client relationships.
Our pipeline of sell through opportunities with Nic's state enterprise relationships expanded approximately 16% in the third quarter with emerging opportunities across multiple solutions with many influenced by our enterprise data and insights offering.
Additionally, we are seeing larger deal opportunities in the pipeline that require longer procurement cycles.
Our cloud first strategy is also tracking well as we continue to invest in optimizing products for more efficient cloud deployment and has higher cloud adoption is reflected in the mix of our new business pipeline.
Our expectations of the SaaS mix for new business for this year and 2023 have increased since the beginning of the year.
We've talked about the impact of our accelerated move to the cloud on our margins in 2022, and the expectation that we will see further margin contraction in 2023 before rebounding in 2024.
In addition to impacting margins the accelerated pace and the shift in new business mix towards SaaS puts pressure on revenue growth as we now expect 2022 license revenue to decline more than previously expected we.
We expect that trend to continue into 2023, and we are pleased that our early planning for next year indicates that SaaS adoption should increase even faster than previously expected.
Even in our public safety and federal divisions.
As a result, we expect to see license revenue decline, even more previously than anticipated with the license decline in the 40% range.
Also a reminder, that with Nic's COVID-19 related initiatives now finished $49 million of 2022 revenues of which $11 million arent subscriptions and $38 million from professional services will not be present in 2023.
Despite current macroeconomic uncertainty we continued to execute against our long term growth strategy capitalizing on the durability of our recurring revenue model and solid financial position.
We have a proven and successful track record of strategic opportunity mystic acquisitions that support our growth priorities expand our product portfolio and extend our Tam.
As we've commented in the past we have the benefit of reliable cash flow, enabling us to aggressively manage our debt profile and impact from rising interest rates.
We expect to continue to de lever and use excess cash to reduce debt, while still taking advantage of strategic acquisitions at reasonable valuations such as rapid which further enhances our ability to address the significant public sector payments Tam.
Our business is resilient and while we are not immune to the effects of inflation. The long term capital investment decisions. We've made in strengthening our products and shifting to a cloud first approach are foundational to driving sustainable growth and delivering stakeholder value.
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.
You are using a speaker phone. Please pickup your handset then press the star key and the number one to withdraw Euro request again question. Snarky then the number one please limit yourself to one question and one follow up and then place yourself back into the queue for additional questions, we will pause momentarily to us.
<unk> roster.
Your first question is from Sami Badri of Credit Suisse. Please go ahead. Your line is open.
Hi, Thank you I have a couple of questions.
First one is there was a mention of the ARPA project that was funded using federal funds could you kind of give us a characterization of what you guys see as the pipeline of potential projects and opportunities that are coming directly from federal funds.
And on the second question. My next question would be on the comment regarding longer procurement cycles.
I think.
A little bit intriguing about you guys, making this comment is that it seems to be that there is a significant amount of federal funds being allocated to local government federal government and several other branches and you'd think that with those funds being allocated and the speed of those allocations that are now.
Starting to accelerate you'd think that lead times and procurement cycles would actually start to either stay the same or compress. So I was hoping you could just kind of explain to us what's going on.
Regarding longer procurement cycles.
Yes, sure Sami, let me start and Bryan jump in <unk>.
First on the ARPA deal that was a really nice nice deal for a lot of reasons.
I mentioned in my comments that was Hidalgo County, Texas. It was a full enterprise public safety suite deal.
Unfortunately mobile civil process ARPA funds were certainly a factor in and getting that deal signed and funded its about a million a quarter license deal in about a $450000 deal I think also whats interesting about that is.
That's a deal that also where our Tyler Alliance story really helped close the deal.
Some of the strategic things that we've been talking about are again are continuing to resonate with our clients. It's also interesting because it's a it's an AWS gov cloud deployment.
Is continuing I think our comments around the what we're starting to see is more and more receptiveness in public safety to potentially move into the SaaS world.
But yes. It was funded by ARPA, we track ARPA funds. It's it's sometimes it's not easy to always identify specific deals tied to ARPA funds.
Because a lot of times. These funds may be used for other things, which then free up funds for for deals that we're pursuing we see we see ARPA funds more often in areas, where theyre more like singular purchases, we expect to see some for example in.
School bus transportation deal, where they're purchasing a large amount of hardware or something like that.
Comment on longer procurement cycles, I don't want that to be taken out of context really.
I think our cycles generally are on track with where they've been I think the comment was really meant to say as we're looking at more and more cross sell opportunities through nics and as those deals are getting larger some of those larger deals are taking a little bit longer, but I wouldnt characterize procurement cycles across the.
Tyler portfolio of products is actually getting longer so if we miss spoke there I want to make that clarification.
Got it thank you maybe just.
Maybe double clicking on the procurement cycles, excluding nics big deals are you starting to see an acceleration of deals getting signed as a function of federal funds or has that not translated or is not is that not really kind of going through the way maybe some people thought it would go through in 2022.
Yes, I don't think right now it's necessarily accelerating deals.
We've talked before about our public sector clients their budgets already healthy the ARPA funds are there and as you know some of them have had.
Limits on when those funds need to be spent I don't think we're seeing that right now as a sort of a sense of urgency or emergency that they've got a flush all that through and then <unk>.
Now now will that change over the next 12 months.
But we're not seeing that right now.
Got it thank you.
Your next question is from Kepler.
Heckman of D. A Davidson. Please go ahead your line is open.
Good morning, Thanks for taking the question could you just revisit that.
Piece, you mentioned there towards the end of your prepared comments regarding the continued shift to software.
And potentially an acceleration of the decline in software license fees.
Could you repeat that comment and then just specifically kind of what time period are you looking at or is it just reflecting next year or.
I guess.
Is that a onetime event or would you expect related to software.
The remaining software revenue to decline faster than you had originally expected.
Yes, Thanks Pete.
So.
I think what we're seeing is different divisions different product suites have been moving at different paces to the cloud.
We've talked before like this year, our enterprise ERP solution is almost exclusively this year than we budgeted this year to move to the cloud are lower and.
Our formulary LGD, but our ERP pro solution has continued to grow at accelerated rates.
What we're seeing is in areas for example, like our enterprise permitting and licensing solution. We budgeted this year that all new deals there would be 75% SaaS and what we're seeing is there are 100% SaaS, we're starting to see it in our property and recording solutions and particularly our recording solution that we budgeted this year at 60% SaaS, it's 85% SaaS.
What we're starting to see now also in the market and as we look into next year is.
Two divisions, which have had really more to add.
A dependency on licenses, particularly in the last couple of years has obviously been public safety and Tyler Federal.
Federal has been moving I think a little bit faster to SaaS and we've talked before in the past about public safety has lagged, but public safety, what we're seeing now and as we're looking into next year. We're looking at it a lot higher subscription based arrangements.
Probably more so than we anticipated earlier in the year and so as we look into 2023, we're seeing the effects now, but as we as we preliminarily model and again. This is not a 2023 call, but as we preliminarily look out to 2023.
We see the licenses declining at a faster rate than we anticipated.
And it's just a little bit shorter timeframe.
Mhm, okay, and but as an offset perhaps because youre not seeing necessarily a slowdown in contracting activity.
Subscription backlog should grow and potentially.
Bode for subscription revenue growth on an organic basis several quarters out continue to be in the mid to high teens does that seem accurate.
Yes, I think so I mean, our market activity.
I'll dovetail or the market activity is strong right now we're not seeing any impact of economic factors that may be affecting other industries all.
All our leading indicators rfps demos, they've already been elevated there either continuing to increase or those elevated levels are being are stable right now.
So we signed and in Q3, we actually signed a record number of deals.
With our enterprise ERP and enterprise permitting and licensing solution. So the activities there the market's there our clients' budgets are healthy and so I think your comments are spot on.
Okay I appreciate it I'll get back in the queue.
Your next question is from Kirk <unk> of Evercore ISI. Please go ahead. Your line is open.
Yes, thanks, very much Lynn in the cross sell pipeline. When you think about the deals with NFC that are starting to come about or are there any specific tyler products that are sort of merging together with nic's better than others, meaning.
Excuse me it makes sense to see the ERP ERP might not make a ton of sense and statewide deals, but I assume maybe courts and justice can you just give a little bit more detail about what product categories, where maybe.
Catching with Nic's really well and some of those state deals.
Yes sure.
It's a good question I think out of the gate.
And insights our analytics product has been something that has been extremely well received and that's still.
We've got a lot of the opportunities we are seeing a lot of areas in courts and justice.
Cross selling our payment our payment solutions.
Tyler federal as well.
And I think Youll see youll see as time goes on probably areas like our permitting and licensing products, but the top three or four right now are really our analytics courts and justice federal and payments.
Okay. That's helpful and Bryan as we start preliminarily looking forward to 'twenty. Three can you just remind us of some of the puts and takes from a margin perspective for you guys next year I know, there's a lot going on with the transition to AWS, but.
Some of the covenant related revenue has gone away, which I assume is pretty high margin for you. All can you just give us some puts and takes maybe where you're going to have some pressure on margin, but maybe some offsets to that.
Yes.
Biggest factor in terms of pressure on margins.
Downward would be around the decline in licenses.
As we talked about in earlier question during the prepared remarks.
A very early look at next year's revenue plans would have licenses declining perhaps around 40%.
And as you know licenses are very very high margin. So.
And that the time it takes.
The offsetting subscription revenues for those same deals and assume description for them to ramp up.
Theres a lag there so.
That would be the biggest downside pressure.
The COVID-19 revenues going away generally the COVID-19 revenues at <unk>.
Least early on that the tour health revenues were at lower than our average margins.
The Virginia Red leaf program margins were more in line with our overall margins so.
Less of an uplift from those going away but.
There may be overall a slight.
Slight positive impact.
And then subscriptions revenue services revenue as we've talked about being under some pressure.
Mostly from us still ramping up staffing.
Does the services revenues typically are.
Low to no margin revenues.
And so the absence of those in the short term has a positive impact.
But.
But.
Again, we expect to ultimately build those back up so.
Probably not as much of an overall impact from those but potentially a slight positive impact from those being a little lighter.
But certainly the license decline around that shift is going to be the biggest factor by us taking a big step forward with that next year.
I'd also heard Kirk.
Talked about it a lot back in February I call I think.
Just sort of the ongoing bubble cautions.
As we make this transition as we're running dual dual data centers and also moving into AWS. So that put some pressure, but I would say as you step back and you look at.
Sort of has how we've been modeling out the next few years.
We've been doing for some time.
This is this is all expected. This is this is what we expected 2023 to sort of be the.
The highest the year with the most margin pressure I think the the impact on revenue growth is a little bit more than we expected in the beginning of the year and I think that's a function of what we were talking about earlier some of these other.
Divisions, probably moving quicker to subscriptions is that Brian just referenced.
Got it thanks, guys congrats on the quarter.
Your next question is from Michael <unk> of Wells Fargo Securities. Please go ahead. Your line is open.
Hey, great. Thanks. Good morning, appreciate you taking the question.
It's pretty clear just in the commentary the move to subscription and SaaS is happening a bit quicker than expected subscription T. C. V metric looks great can we just spend I. Appreciate just the categories you've mentioned, but if you had to characterize why this is happening now is there anything you'd add anything else you'd add just around how much has been fine tuning the <unk>.
<unk> set your own go to market versus just customer interests and comfort levels with the cloud picking up and making this conversation a bit more palatable.
Yes, I think it's I think it's all of the above Michael and we talked about.
What we saw as the changing landscape coming out of Covid. Fortunately, we had internally made this decision before COVID-19 a lot of it is around sales how we're incentivizing sales some of it now.
Announcements, we've made around products.
Now.
We have various product lines that are over time as that started this year that are going to be basically selling a cloud only version.
And so its market receptiveness things, it's improvements in our product and our what we've been doing and it's what we're doing internally to drive that subscription growth.
That's helpful. Bryan just one on the financials, if I may the transaction based revenue.
Ticked down a bit sequentially can you remind us as to how much of that is tied to nic's seasonality.
Or just volatility versus some of the onetime impacts there and maybe how we should think about just the seasonal profile of that line on a go forward basis that line does tick down more so in the fourth quarter around seasonality of Nic's transaction based.
Revenues theirs.
Typically.
Around the holidays as you move to the end of the year, there's just fewer transactions flowing through there.
There also was.
Year over year of $37 million reduction in the transaction in the Covid revenues that are included in those.
Transaction based revenues and that is also ticked down from from Q2. So there is an impact there and of course those are.
Going away permanently.
But yes seasonality.
A little bit in Q3 more so in Q4, yes, I think the.
For NFC their state enterprise transactions, which is a growing revenue line and it's something that we're looking to grow.
While it was up in Q3 year over year, it was down a little bit from Q2. So as Brian mentioned Q2 is really the strongest for them seasonally and it goes down a little bit in Q3, and it's expected to taper in Q4, but that's that's to be expected.
That's helpful. Thank you.
Your next question is from William <unk> Nomura.
Please go ahead your line is open.
Yes. Thanks, This is Matt van Vliet.
I guess first on the services capacity that Youre seeing.
Talking about trying to catch up on hiring and having a little bit of a I guess a backlog of services to be deployed. So I guess two part question. One when do you expect to feel like you're sort of caught up there from both ramping the ones you've hired now and continuing to hire.
And then second part how much of that is limiting.
The subscription deployments and with that the revenue recognition that might've missed or caused a little bit of a shortfall in the subscription growth versus what most of us were modeling.
Yes.
There definitely is a little bit of that there.
As you noted it.
It's not a lack of services revenues coming in.
Or are the contracts being signed.
And then getting to the related.
Initiation of the subscription.
<unk> revenues.
There have been delays around that.
And we added.
A significant class or classes.
The late Q2 in Nevada continued to hire in Q3 and Q4, it does seem that turnover.
Which has been at an elevated level with us as with many companies.
It does seem to be moderating somewhat so that's a positive.
But we think it's still.
We'll take Theres roughly call. It a six month lag time from the time, we hire someone to the time. They are really fully trained and available. So this is a multiple quarter.
Sort of exercise to catch back up.
And it probably in some of the subscription deals is causing us to be.
Maybe like a quarter or so behind when we might otherwise have started.
Recognizing those revenues.
I guess two offsetting.
Factor to some extent.
Our clients have often had.
Elevated turnover as well and so some of it is around client readiness to begin a project and so.
Some of these projects are delayed slightly because clients need to staff up before they are ready to.
Launch into an implementation so.
We've seen it effects from both sides in that but there is some lag.
In the the startup of subscription deals that are in backlog.
Okay helpful. And then looking at the State Department deal that you announced can you maybe just walk through some of the mechanics of why only a portion of that can be recognized in bookings and backlog.
It's something you have to sort of earn your way into those other years on the contract or how should we think about that going from 8 million to the 50 plus million that's in the headline number yes.
It's really pretty simple I mean, there are.
Effectively termination for convenience provisions.
There that we certainly don't expect to be.
To come into play but.
When contracts have those terms under the accounting rules, we can only recognize in backlog and bookings therefore the.
Sort of the first year revenues.
We certainly expect that the full five years of the contract and potential extensions beyond that would be realized.
And that will get that full contract value, but those contract provisions limit as to what we can put it into backlog.
Alright, great. Thank you.
Your next question is from Joshua Reilly of Needham. Please go ahead. Your line is open.
Yeah, Thanks for taking my questions.
How much of the decline at the high end of the guidance for the year on revenue is due to customers and public safety increasingly choosing subscription versus license here in the short term because we know that Q4 is typically.
Our seasonally strong quarter for public safety and then how should we think about the implied impacts you license versus services revenue here in Q4.
Yeah, Hey, Josh Let me start and then Brian will jump in.
What we're seeing is like.
Like I said, we're seeing them.
More interest in moving to subscription based models at public safety.
A lot of the deals that we still have identified in Q4, our license deals we have a lot of deals you're right. Typically Q4 is a strong quarter. We've got a lot of deals identified and we've actually been we don't talk a lot about our selections, but a lot of selections.
What we're seeing and what we're sort of.
Forecasting is that some of those deals will actually.
Slip into next year.
So I think that's the majority of that there, yes, it's more around the timing of deals.
Done getting done.
And whether that falls in Q4 Q1 versus the mix right now as we look forward into next year as Lynn commented earlier.
We do believe that a.
A higher percentage of that public safety deals will be subscription deals.
But I don't think that's really the case as much in Q4 as it is.
Looking into next year.
Got it that's super helpful.
And then just a follow up.
Our work in this space.
I think others have been doing as well indicate that the competitive landscape in public safety for RMS and CAD is becoming more favorable for you guys can you speak to the opportunity there.
Given your redesigned user interface and non cloud ready offerings.
Where the opportunity to gain further market share there over the next few years, thanks, guys, yet, yes, Joshua thanks.
We like where we sit competitively.
As you know you follow US you follow.
Followed some other players in this space, we've made a lot of investments there.
We are winning deals against.
Probably our top competitor there. We just came out of the ICP conference, which was here in Dallas a couple of weeks ago.
There were some interesting things that we saw or didn't see there some.
Some of those smaller competitors.
We're sort of grab some attention a couple of years ago. There was one that actually didn't have a presence at all.
Another competitor had.
Had a significantly reduced presence.
We've got another one who is carrying significant debt debt load and we don't believe they are investing at the rates that they may we'd like to certainly not the rates that we've been investing so.
We like where we sit the investments we've made are paying off we're still in the process of implementing a lot of deals and these things take time. When you go through this but we're getting through that cycle and getting those verifications in getting those references gets stronger and stronger and I like where we sit with public safety going forward from a competitive.
Standpoint.
Okay.
Your next question is from Alex Zukin of Wolfe Research. Please go ahead. Your line is open.
Hey, guys. Thanks for taking the question so I guess.
Just a few modeling ones and then there's been a high level one.
Ryan given the variability in kind of some of the line items on the cash flow statement on a quarterly basis. It would be helpful. Just to better understand kind of where you guys are thinking of landing for free cash flow.
For the fourth quarter.
And then also understanding a little bit more about the impact to maintenance revenue.
For next year, and and consequently kind of how youre thinking about.
Next year from a cash flow growth standpoint, assuming of course that kind of the margin step down is about 100 to 150 basis points from where we would have this year.
Yeah.
Again, we're not giving 2023 guidance yet we've had.
More work around the revenue side and then on the.
The other side so we're not.
Really in a position to talk about.
Other than that we do expect further compression about the.
The extent of that next year on the margin perspective, I'd say next year.
On maintenance weed.
Expect that to be down.
Probably low single digits.
Based on that.
The normal increases the shift in.
New business more towards the cloud and then the lower level of licenses. Both this year and of new licenses. Both this year into next year.
But I think it's still probably a low single digit decline.
The cash.
Our cash flow, yes, I'd say, probably our expectations for this year have ticked down a bit around that timing, we do believe that a lot of these.
Sort of timing changes that impacted this quarter versus the same quarter last year turnaround in the fourth quarter.
For example, accrued payroll we had an extra payroll.
That ran through cash this quarter compared to last year.
I think that turns around in Q4, but payroll for us today is close to $30 million. So thats.
Shift from what we see in Q3 to what we see in Q4.
Last year some of that.
The timing of.
And I see revenues.
The.
The flow of cash around their portals.
Caused.
A bigger sort of a shift from Q2 last year to Q3 of last year.
So it skews the comparison for this year a bit.
And.
So I think probably our expectation has come down a bit but that a lot of this.
Lightness in Q3 moves the.
The other way into Q4.
And as we said on the tax side.
With the change in our tax rate that's not just a.
Our booked tax rate those are also cash taxes and so.
We expect to have lower cash tax payments actually no federal tax payment in Q4, and a much lighter tax payments next year as well.
Okay.
And I.
I'd say that the overall mix on.
Of revenues and margins for next year.
Probably.
Net net we probably come out pretty similar to this year's cash flow.
With.
Maybe.
Maybe our increases a bit less than we previously expected but.
But we still expect cash flow to grow in and part of that also of course.
Interest will be significantly lower next year as a result of the.
The the debt payments, we've we've made this year.
Understood.
And then maybe just.
So are you, saying that cash flow margin for next year is going to be similar to this year or the cash flow growth or the dollar cash flow for next year.
Cash flow margin would be similar.
Similar.
Okay.
And then I guess when you're looking at the acquisition you guys made can you maybe just talk on where what were the incremental functionality or features that you guys saw an opportunity to add and doubled down on here that you didn't have or didn't have.
If you think about the general M&A landscape should we expect more in payments should we expect less in payments going forward do you have what you need here now.
Yes, Thanks, Alex I'm glad you asked that question because we're pretty excited about this acquisition.
As you know, we we view payments is really a significant long term growth driver in and just a little history. If you remember we were already in payments. We've made the <unk> acquisition, because they were the leader in public sector payments.
Really our expertise was on the acquiring side of payments.
We had on our road map to get more involved on really the issuing side generating the payouts and we actually believe the issuing side of payments is about the Tam is about the same size as the acquiring side.
When you're talking about issuing side of payments you monetize it by things like transaction load fees. There is interchange revenue Theres account fees and rapid was already currently in courts and corrections on.
On the issuing side. That's again, that's an area. We did not have expertise in but something that we would have tried to build out some time over time.
Our focus still was on the acquiring side.
We think in the near term we can we've already proven it because they were partner <unk> engine that we can in the near term expand.
Expand that presence in courts and corrections given our footprint, but then as we look across our tyler's in Tyler portfolio and market presence, we see a lot of opportunities other opportunities in the justice space, where it's juror payments or inmate work release or things like that on the state side unemployment unclaimed property tax refunds.
Parks and outdoor enterprise Federal's, social services Theres, all kinds of avenues that I think we can build this out across our portfolio of existing products.
Caution is always as we do acquisitions they take time.
But bringing that expertise is something that gives us the full end to end cycle with respect to payments that we didn't have before.
And so we're pretty excited about this opportunity obviously, we've got a we've got a lot of work ahead of us I'll have to go execute on but.
It really it really rounds us out in the complete cycle, where I don't think anybody else has the ability to play in that cycle and the only thing I'd add there is on the issuing side versus the acquiring side of the processing side.
Our margins are better.
So that's also positive.
Perfect. Thank you guys congrats on a great quarter.
Your next question is from Charles Strausser of CJS Securities. Please go ahead. Your line is open.
Hi, Good morning, just a quick.
Circle back on the staffing topic when you look at the I know, Brian you talked about you know turnover moderating.
A little bit easier to find head count are you seeing any moderation too on the wage inflation.
Yes, Charlie it's a look.
We see we say we have a little moderation there is a little moderation, but where the labor challenges out there are real and they are present.
And it's not just us now historically, our turnover rates had been lower than others in the tech industry and we track that.
We look at turnover and we're down probably from Q1, our turnover is down about 10% from where it was in Q1, but it's still quite elevated from our historical levels.
There are continuous pressures on on wages.
We're trying to address that where we can but but the labor market is tough right now.
We're trying to keep our people we've got really good benefits. We've got a really good culture people love to come to work here generally we have pretty high engagement, we do internal surveys around that.
But it's just it's just a difficult market right now and we're trying to address it the best we can.
Great. Thank you. So just a quick question kind of picking up back on the pipeline I know that.
Very robust right now.
<unk> seen excellent activity, but are you hearing any trepidation from your clients at all.
With all of the recession talk.
We haven't seen it and then we just came out of our quarterly management meetings last week and.
Obviously that was a question I asked each of our managers and right now we're just not seeing it.
And we have to remember that even though we've got what I call choppy waters out there and the economic world our clients' budgets are still real healthy.
They've been healthy for some time and thats, excluding any ARPA funding or things like that.
So right now we're not seeing it it's something we continue to ask and probe into but we're not seeing it right now.
Great. Thank you very much.
Question is from socket caveat of Barclays. Please go ahead. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here.
Brian maybe maybe I'll start with you I was curious if you could talk a little bit about how bookings did did versus your expectations great to see the SaaS mix go over 90%, maybe a little curious how the denominator in that equation did in and what whether we stay at that 90% mix in future quarters.
I don't think we stay at the 90% mix at least near term in future quarters that was.
Skewed by the Department of state contract, we talked about 90% of that.
90% to 90 and that 90% of the value in terms of the number of deals.
It was.
74% subscription and 26%.
On Prem.
I'm, sorry, 8%, yes, 78%.
And.
So I don't think we stay at 90% of the value because it was a bit skewed by that $54 million deal.
In with the department of state.
The total value though.
Really.
Grew nicely.
So it was the highest.
It grew sequentially from last quarter to 126 million to $145 million double what the first quarter total contract value was.
So net net we feel really good about it the.
The comparison to last and and.
We feel good about the.
The continued trend towards more and more cloud in the new bookings.
Comparison, as we said was very difficult because we had a big.
Well.
Overall bookings last year, it wasn't a software booking but the E filing in Illinois was a $63 million.
Value.
And then of course the <unk>.
Covid revenues flow through bookings and the reduction there affected it as well, but that was certainly expected. So I would say in an overall sense.
Probably the number of contracts and the value of those contracts was a bit higher than than we expected coming into the quarter.
And skewed a bit by that.
The department of state deal.
Got it got it that makes a lot of sense Lynn maybe maybe just a higher level question on this topic.
In your prepared remarks, clearly this year you and the team have made changes to to encourage SaaS adoption, whether it was sales incentives or end of life ing. Some perpetual skews to the extent that you can are there any levers that you can talk about that that that the team can maybe pull or sort of tweak next year.
To continue that momentum.
Well I think we've already got those levers in place as it relates to the new business market.
There's other levers around flips.
Obviously come with added expense.
We're still again early in our planning for 2023, and what we're going to target for flips, but I'd say, that's probably an additional lever, but on the new business market. The things that we've done with product as you said the announcements we've made the clients are things we're doing around sales.
We're all working in that direction and part of it to us.
Going back as well.
We're taking a very solid but traditional Tyler deliberative approach to this end and some of this has been around timing of when some of the products have been more cloud efficient ready to be.
Pulling those levers.
Very helpful. Thanks, guys.
Your next question is from Terry Tillman of true with <unk> Securities. Please go ahead. Your line is open.
Yes, thanks for fitting me in as well and taking my questions I guess the first question is.
We've got some research that we've been.
Gathering in terms of the federal business is really interesting incremental opportunities for you all going forward. It was good to see this deal. This large deal in the quarter. What can you say about what's going on on the federal side, whether its case management with Intel a track or other areas do you feel like there's an inflection point and potentially a step up in federal business and then I had a follow up.
Yeah, that's a great question Kerry I'm I'm actually very encouraged with what I'm seeing in our federal business.
The number of deals that we were chasing this year over last year. The size of the deals that we were chasing this year over last year and highlighting mostly Q3, although its thing spillover into Q4.
The opportunities have grown.
The deal size has grown we've got excellent sales staff.
This is just a fabulous job out there.
And I'm I'm I'm bullish on where they are going in the future.
That's great and maybe just a follow up for you or Brian .
As we think into 'twenty, three and really over a multi year period.
How do we think about the mix of SaaS and try and transaction revenue in that subscription line item I know, there's some noise still that we have to grapple with COVID-19 related maybe transactional.
Revenue, but just in 'twenty, three and beyond do you see a market shift between those two line items and what would be the gross margin implications if any thank you.
Well at a really high level, taking out the the short term impact of next year, there being none of the Covid related revenues in there and this year there being a significant amount.
Generally we would expect to see really good growth there mostly around the payment side.
We believe that over time.
The portal revenues will continue to trend upward as more and more and more citizens.
Look to do more things digitally with government that they used to do.
Through another channel in person or through the mail.
And that governments look to be able to provide more of those services digitally.
Digitally to citizens, but I think.
The big growth there we've talked about we expect.
To continue to see our payments business grow meaningfully.
Through things like with the rapid acquisition getting more into the disbursing side.
And.
Driving the NFC payments platform. That's currently primarily at the state level down.
Down into our local government customers.
And we expect to start to see.
The fruits of that next year.
In general.
The margins on payments are a bit lower were particularly where we have growth contracts.
There is a mix of gross and net but.
Generally the margins are a bit lower there.
But as far as incremental growth opportunities.
We do expect to see if youre, if youre looking out say over the next five years to seven years, a significant growth around the payment side, Yes, I think I think it's a little early to sort of.
Forecast margins on the transaction side because of what Bryan just said on the payments and the arrangements and how these things go.
For example, as we announced last quarter, we won a competitive rebid for South Carolina in.
In the past that was a gross revenue payment contract that's actually shifting to our net revenue. So that will have actually a revenue headwind next year, but it will be a more positive margin headwind. So as we as we sort of map out our payments future.
And figure out exactly where where we think we are going to be growing gross side, where we'd be growing net side, we'll probably be able to get a little better color there.
That's great. Good luck in <unk>. Thank you.
Your next question is from Keith some of Northcoast Research. Please go ahead. Your line is open.
I appreciate it good morning, guys just a follow up on the rapid financial acquisition. Brian You mentioned the margin profile was better I can elaborate was that better than the acquiring side are better than Tyler's general operating margins.
It's better than the acquiring side I was just talking about.
On a relative basis.
Disbursing side or the issuing side has better overall margins in Macquarie.
Gotcha Gotcha, and then some of the department of State contract. You mentioned you guys growing your recognized $8 million 54 in backlog.
I think over time, we've heard that same comment about other contracts. If you look at similar contracts.
One is that true and then two how is that growing over time in terms of the contracts are signed that you just can't recognize all of that in the backlog.
It's pretty rare.
It's not in a lot of contracts.
We've seen it in.
I think we've had.
Similar thing with E filing contracts.
They werent.
Have a multiyear contracts that if they weren't.
Our fixed fee there were times when we couldnt put the whole contract in value and there are occasionally, but I'd say, it's a handful of times within a year and generally not on contracts of this size.
But.
We fully expect that.
The department of state will.
We will fully.
Utilize this contract there already an existing clients. So this represents a big expansion from what we've already done for them.
We have a multi year relationship with them already.
So we certainly don't expect that the termination for convenience.
<unk> would come into play, but from an accounting perspective.
They do govern how we can recognize in backlog.
Great. Thanks, I appreciate it.
Your last question is from Joe Goodwin with JMP Securities. Please go ahead. Your line is open.
Great. Thank you for taking my question is there any update on the NAC contracts with the IRS that was put on pause about a year ago.
Yes, we did well there is no meaningful update that.
We submitted our rebid were expecting the IRS to award.
Think sometime in the next month or so we're fully expecting to get that award, but there is no material update that im aware Brian .
No.
Expected.
The notification in the fourth quarter that.
Unfortunately, it hasn't happened, yet and that that would be.
Start at the beginning of 2024, so there'd be a full year.
The ramp up and set up from the time The award takes place until the revenues would actually start.
Understood. Thank you.
Okay.
There are no further questions at this time I will now turn the call over to Lynn Moore for closing remarks.
Alright, Thank you Carol and thanks, everybody for joining US today. If you have any further questions. Please feel free to reach out to myself or Brian Miller. Thanks, everybody have a good day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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