Q4 2022 Tyler Technologies Inc Earnings Call
Hello, and welcome to today's Tyler technologies fourth quarter 2022 conference call.
Your host for today's call is Lynn Moore, President and CEO of Tyler technologies.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference is being recorded today February 16th 2023.
I would like to turn the call over to Hal or else, you're Binney, Tyler senior director of Investor Relations.
Please go ahead.
Thank you Emma and welcome to our call with me today as Lynn Moore, our President and Chief Executive Officer, and Brian Miller, Our Chief Financial Officer.
After I give this a safe Harbor statement and then we'll have some initial comments on our quarter and then Brian will review the details of our results and provide our annual guidance.
Lynn will end with some additional comments and then we'll take your questions.
During this call management may make statements that provide information other than historical information and may include projections concerning the companys future prospects revenues expenses and profits.
Such statements are considered forward looking statements under the safe Harbor provision of the private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K, and other SEC filings for more information on those risks.
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Also in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry.
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 under the financials tab schedules with supplemental information provided on this call, including information about quarterly bookings backlog and recurring revenues on.
On the events and presentations tab, we've posted an earnings summary, slide deck to supplement our prepared remarks.
Please note that all growth comparisons we make on the call today.
They will relate to the corresponding period of last year, unless we specify otherwise Lynn.
Thanks Ali.
Our fourth quarter results marked a solid finish to an eventful year as public sector demand remains strong and SaaS adoption continues at an accelerated pace.
Total revenues grew four 3% with organic growth, excluding COVID-19 related revenues of approximately 6%.
Organic revenue growth for the full year was solid at approximately eight 2%.
Recurring revenues comprised nearly 83% of our quarterly revenues.
On an organic basis subscription revenue grew 14, 3%, reflecting both our accelerating shift to the cloud and growth in transaction based revenues.
Most importantly, SaaS revenues included in subscriptions grew 19, 3%.
We achieved solid revenue growth, even as the shift of new software contract mix continued to accelerate to SaaS from licenses.
In Q4, 86% of our new software contract value SaaS compared to 77% in Q4 last year.
In our digital solutions Division, which is formerly known as Nics, we continued to execute on cross selling opportunities and in Q4, we signed a significant new contract with the Kansas Department of revenue to provide our data and insights assessment connect solution, which will work with our enterprise assessment solution you statewide in Kansas.
Yeah.
We also signed sell through deals for our recreation dynamic solution with the Utah Division of outdoor recreation and the Mississippi Department of Wildlife Fisheries and parks.
Our digital solutions Division also signed notable SaaS software agreements with the state of Nevada, and the Alabama alcohol beverage control Board.
We also signed a payments processing contract with the Wisconsin Department of Motor vehicles, which is our first payments opportunity in Wisconsin.
Finally, our digital solutions Division won a competitive re bid for our master enterprise contract with the state of Colorado statewide Internet Portal Authority board as well as an extension of our Master enterprise contract with the state of Oklahoma.
Yeah.
In other Tyler divisions, we signed seven additional significant SaaS deals each for different product suites, and each with a total contract value greater than $2 million.
Those include contracts with the Cypress Fairbanks Independent School district in Texas for our student transportation solution.
The cities of Prosper, Texas in Glendora, California for our enterprise, ERP and enterprise permitting and licensing solutions.
The Placer County water agency in California, and the city of Helena, Montana for our enterprise ERP solution.
The city of Albuquerque, New Mexico for enterprise permitting and licensing solution and.
And Lucas County, Ohio for our Enterprise Justice solution.
In addition to those deals we signed 12 SaaS deals in the quarter with contract values between one and $2 million each.
In the fourth quarter, we signed 153, new payments deals worth more than $4 $7 million in estimated annual recurring revenue across Tyler divisions other than digital solutions.
The largest of those was the agreement to provide payment processing for the city of Milwaukee, Wisconsin with estimated annual revenues of more than $1 $2 million.
For the full year 2022, we signed 571, new payments deals with more than $13 million in annual recurring revenue.
Many of which we were able to pursue because of the new capabilities that came to us with NFC.
More than 80% of those were sold to existing Tyler software clients.
New payments only agreements typically have a lag of three months to six months between signing and revenue generation, while payments agreements that are embedded in our broader solution such as a new ERP sale may have a period of six to 18 months from signing to revenue generation.
And our Justice group, we signed two notable multi suite license deals in the quarter for our enterprise public safety enforcement mobile and data insight solutions, with Stearns County, Minnesota, and Richland County, Ohio.
We also signed two significant license contracts for our enterprise Justice solution, with Midland County, Texas, and Kankakee County, Illinois.
Which also include our enterprise solution supervision solution.
Now I'd like for Brian to provide more detail on the results for the quarter and our annual guidance for 2003.
Thank you Lynn.
Yesterday, Tyler technologies reported its results for the fourth quarter ended December 31 2022.
Both GAAP and non-GAAP revenues for the quarter were $452 2 million.
Four 3% and four 2% respectively.
Organic revenue growth, excluding COVID-19 related revenues was 6% on a GAAP basis, and five 8% on a non-GAAP basis.
Covid related revenues for the quarter were $3 5 million compared to $16 6 million in last year's fourth quarter.
Revenues from all of our Covid related initiatives have now officially ended.
License revenue declined over 60% as our new software contract mix continued to shift to SaaS at an accelerated pace.
<unk> services revenue rose, two 8% and eight 5% organically and we intend to continue to grow our implementation teams in 2023 to support delivery of our growing backlog and pipeline that will likely continue to see some pressure on professional services revenue in the near term as these teams ramp up to become fully billable.
Subscriptions revenues increased 11, 9% and organically rose 14, 3% we.
We added 140, new SaaS arrangements and converted 82 existing on premises clients to SaaS with a total contract value of approximately $99 million in.
In Q4 of last year, we added 135, new SaaS arrangements and had 71 on premises conversions with a total contract value of approximately $74 million.
Our software subscription bookings in the fourth quarter added $21 $4 million in new IRR.
Subscription contract value comprised approximately 86% of the total new software contract value signed this quarter compared to 77% in Q4 of last year.
The value weighted average term of new SaaS contracts. This year. This quarter was $3 nine years consistent with last year.
Transaction based revenues, which includes state enterprise portal payment processing and E filing revenues and are included in subscriptions were $146 5 million up six 9%.
E filing revenue reached a new high of $19 8 million up 12, 7%.
Our non-GAAP <unk> was approximately 150 billion Im sorry, $1 5 billion.
Up seven 5%.
non-GAAP <unk> for SaaS software arrangements was $440 6 million up 18, 5%.
<unk> transaction based on IRR was $586 2 million up six 9%.
And non-GAAP maintenance <unk> was slightly down at $469 1 million due to the continued shift of new clients and migration of on premises clients to the cloud.
Operating margins in the quarter were pressured by the acceleration of the shift to the cloud and new business and the related decline in license revenues as well as by an increase in R&D expense as certain development costs that we had expected to capitalize where expense.
Our backlog at the end of the quarter was a new high of $1 $89 billion up five 2%.
Bookings in the quarter were approximately $464 million, which was flat with last year.
On an organic basis bookings were approximately $354 million up 2%.
For the trailing 12 months bookings were approximately $1 9 billion up nine 5%.
And on an organic basis were approximately $1 4 billion up one 6%.
Capital expenditures for the year totaled $50 1 million below our Q3 guidance of $58 million to $62 million.
Primarily because of the reduction in capitalized software development that drove higher R&D expense.
Cash flows from operations were $121 9 million up 6% and free cash flow was $114 7 million up 26% both.
Both represented a new high for the fourth quarter.
We continued to strengthen our already solid balance sheet throughout 2022.
During the fourth quarter, we repaid $90 million of our term debt and since completing the Nics acquisition, we've paid down $755 million of debt.
We ended the year with outstanding debt of $995 million and cash and investments of approximately $229 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 $395 million 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, our exposure to floating rates is limited.
Beginning in February 2023, so far has replaced LIBOR as our reference rate.
We also have an undrawn $500 million revolver, our net leverage at quarter end was approximately 164 times trailing 12 months program.
Ida.
We've also issued our initial guidance for 2023.
Please keep in mind that our outlook for 2023 includes no COVID-19 related revenues as those initiatives were completed in the fourth quarter for.
For the year 2022, Covid related revenues totaled $51 million with $10 $8 million in subscriptions and $40 2 million in professional services.
In addition to another revenue headwind that is factored into our guidance is the shift of two of our digital solutions state enterprise agreements from the gross to net model for payments, resulting in a $10 $5 million reduction of revenues, although with a positive impact on margins.
Our 2023 guidance is as follows we expect both GAAP and non-GAAP total revenues will be between $1 93, 5 billion and $1 90 $701 billion.
The midpoint of our guidance implies organic growth of approximately 8%.
To add more color to our revenue expectations, we expect growth by revenue line to be in the following approximate ranges.
Subscription revenues will grow in the mid teens.
Professional services revenues will decline in the high single digits, but excluding COVID-19 revenues will grow in the high single digits.
License and royalty revenues will decline approximately 30% or more.
Maintenance will decline in the low single digits.
<unk> services will grow in the high single digits and hardware and other revenue will be relatively flat.
We expect GAAP diluted EPS will be between $4 10, and $4 25, 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 $57 65.
While we don't give quarterly guidance, we do expect first quarter EPS to be in the range of Q4, 2022, Etfs with a significant sequential increase in Q2.
Interest expense is expected to be approximately $26 million, including approximately $5 million of noncash amortization of debt discounts and issuance costs.
Other details of our guidance are included in our earnings release.
And finally, while we don't give specifically guidance on free cash flow, we want to point out a change in taxes that we expect will have a significant impact on our cash taxes, and therefore, our free cash flow.
Tax cut and job the jobs act required that starting in 2022 research and experimentation expenditures known as section 174 costs are.
We are required to be capitalized and amortized over either five years for expenditures in the U S or 15 years for those incurred outside the U S for tax purposes.
Since the enactment of the TC JA businesses, including us have been monitoring congressional actions around this rule and there was a strong expectation that section 174 would be repealed or delayed.
However, Congress has not yet taken action, while the section 174 change has a slight favorable impact on our tax rate is significantly.
<unk> accelerates the timing and amount of our cash tax payments.
Now I'd like to turn the call back over to Lynn.
Thanks, Brian .
During 2022, we achieved notable milestones towards several key strategic initiatives we.
We made meaningful progress on our cloud journey through continued investment in cloud optimization and moving to cloud only deployment for many of our core solutions.
Our intentional innovation is based on knowing our clients and anticipating their future needs.
As you recall in 2019, we launched the strategic shift from a cloud agnostic model to a cloud first model to deliver secure scalable dependable and compliant digital infrastructure.
We're pleased to see the accelerated pace of cloud adoption amongst our new clients as well as the steady increasing pace of cloud migrations migrations of on premises clients.
Additionally, we integrated our Tyler in an icy payments teams and launched significant go to market strategy for payments with a growing and active pipeline.
During the year, we added 571, new payments clients with the vast majority at the local level.
We leveraged our strong relationships across state and local agencies, including the Nic's state enterprise contracts to expand our cross sell opportunities with significant multi solution deals that demonstrate the power of our one Tyler approach.
We're still in the early stages of cross sell and its exciting to see tremendous momentum and collaboration taking place since.
Since completing the acquisition of Nic's synergies between Nics, Tyler have delivered 19 cross sell transactions worth $9 $5 million in total contract value.
Overall, the year was highlighted by significant wins highly successful upsell efforts and state renewals and expansions.
Throughout the year, we also demonstrated a balanced yet opportunistic approach across our business and with respect to capital allocation.
We maintain a strategic lens toward acquisitions and closed three transactions that bring innovative and robust offerings to elevate our digital solutions payments business.
And our integrated solutions and add new technology.
All three acquisitions, Quadriad, USC direct and rapid financial solutions support a unified client experience and further our connected communities vision to support thriving communities through a common digital foundation for better data access engagement and transparency.
As we move into 2023, Ive never been more confident about tyler's long term prospects.
This is an important year in our cloud transition and we are tracking well with our cloud optimization product development efforts and the planned exit from our proprietary data centers in 2024 and 2025.
We expect to reach an inflection point in our cloud transition in 2023 with a significant decline in license revenues that are being replaced by valuable long term recurring SaaS revenue.
As a result of the short term revenue headwinds from this mix shift together with bubble costs related to SaaS transition, including duplicate costs of operating our propriety data centers, while moving our hosting to AWS operating margins are expected to trough this year.
The estimated impact of bubble costs on our 2023 non-GAAP operating margin is approximately 130 basis points.
We are committed to returning to a trajectory of consistent operating margin expansion beginning in 2024.
In fact, you'll see in our upcoming proxy statement that we have added operating margin expansion as a second metric for our long term incentive plans for our senior leadership.
Our move to cloud first builds long term value and supports multiple long term growth drivers in the mid term over the next five years to seven years, we've talked about annual organic revenue growth in the 8% to 10% range with consistent long term margin expansion of at least 50 to 100 basis points a year beginning in 2000.
24.
Excluding the impact of merchant fees from payments expansion.
We continue to refine our Tyler 2030 plan and look forward to sharing our longer term vision and clearly defined targets for revenue margin and payments growth during an investor day planned for mid year.
Look for more details on that soon.
When we look at our operating margins. It's also important to consider the impact that growth in our payments business has on margins, we recognize revenues for payment processing under multiple revenue models.
Our gross model for agreements, where we are responsible for merchant fees on the transactions, our net model, where the client assumes direct responsibility for merchant fees and a revenue sharing model similar to the net model, where we are effectively reselling a third party processor services.
The majority of Nic's payment processing is under the growth model and in 2022, we paid total merchant fees of approximately $145 million with a small margin earned on those fees.
If those same contracts were on a net basis, our consolidated non-GAAP operating margin would've been approximately 200 basis points higher.
Our operational and financial discipline, coupled with a strong balance sheet and ample liquidity allow us to aggressively manage our debt profile and moderate the impact of rising interest rates and delevering continues to be a priority for capital allocation.
While the bar is high for acquisitions, we continue to have the flexibility to evaluate M&A prospects that present compelling strategic growth opportunities.
To close I'm proud of our team's Tyler team and what we continue to accomplish every day, even amid macroeconomic uncertainty.
As you've seen in our press releases, we received many industry and regional accolades, which is a testament to our work ethic, our culture and our tireless efforts to support our clients' needs.
We also received gratifying recognition for our environmental social and governance practices being named to the Dow Jones Sustainability Index North America for the second consecutive year.
The DJ ESI cited our notable gains in it security and risk analysis privacy protection and human capital development.
In addition, we were recently named to Newsweek's list of America's greatest workplaces for diversity.
We're proud of these recognitions and remain committed to sustainable business practices.
With that we'd like to open up the line for Q&A.
We will now begin the question and answer session.
So Andrew a question.
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We will pause momentarily to assemble our roster.
Your first question comes from the line of Jimmy <unk> with Credit Suisse. Your line is now open.
Alright, Thank you very much and I had a question about the margin trough, Inc. In 'twenty three and maybe you could just give us color on the ramp on from the bottom in 'twenty three what.
What should we be thinking about where margins could go in 'twenty four and.
I think the big thing here is maybe you could give us color on like what are some reasons why.
The bounce off the trough could be faster versus slower and what are some things that could influence the speed of the margin movements.
Yes.
I think.
It's still a little early for us to give much color around.
Sort of how we see that.
Trajectory playing out in 2024 and.
And over the mid term say over the next five to seven years as.
As we mentioned in the prepared remarks, we expect to have an investor day around mid year and provide more detail on that.
But we're still.
Refining those models, so not really able to give a lot of color around that.
As we've talked about.
Some of the factors that give us confidence.
That.
We do return to margin expansion in 2024, particularly around the.
The wind down of some of the bubble costs as we exit.
Our first data center.
We think that this year actually.
Sort of reach that inflection point, where the impact of.
Declines in licenses are offset by the.
The current stream of.
Recurring revenues from subscriptions.
I think in terms of the factors that that could make that go faster or slower.
Certainly one of those is there.
The speed at which our payments business grows and Lynn talked a little bit about.
The impact that has on our blended margins, but on the software side.
I think that the.
<unk>.
The trajectory around.
The speed of the slips from our on premise customers will have an impact on that.
Some of the other.
Efficiency gains and product optimizations.
As we wrap those up.
To improve lower hosting costs I think.
The speed at which those work their way into the model will also be a factor in how that trajectory.
How fast that trajectory plays out.
I think just to amplify on that we've talked over the last couple of years, we're about three or four years or so into this cloud transition and we've talked about sort of the two pieces of it the getting to the other side on the revenue side, and then sort of getting the other side on the on the cost and expense side and as Brian mentioned on the revenue side, where we're seeing that sort of inflection point is going to.
Take place probably later this year in the last couple of years the loss licenses has been a significant impact.
Our internal models are now showing that really to the new flips the gains from flipped as well as the SaaS business over the last couple of years.
Is going to is it later this year sort of.
Past that point of where loss licenses remember back in 2019, we did we did just over $100 million in licenses. So it is a significant change that we've been running through the financials and then when you look on the cost side as well.
Each years go by as time goes by we're getting better and better visibility, where we are making progress on optimizing our products, we're making more progress on our plans to exit our proprietary data centers were getting better data on how our products are actually operating within the public cloud.
And so a lot of that stuff gives us that confidence that 2023 is that margin trough.
As we look out farther there's other things that we're doing as well we have a lot of internal initiatives around efficiencies things like consolidating just some of our internal it.
We have other sort of satellite data centers that we're looking to collapse.
As well as things like looking at real estate and stuff like that so there's a lot of initiatives around that which I think give us that that confidence when we talk about 'twenty three being sort of the margin margin trough.
Got it thank you for that color.
<unk>.
I wanted to shift gears, a little bit and just talk about your end market customers. The funding flywheel. We are clearly starting to see some companies that are index to federal state and municipal budgets start to see the benefit of funds flowing again that could be coming in from ARPA. Some of them are still coming in from the cares Act and just in general state and local budgets.
Our app.
Or up a lot I guess in 2022 fiscal 2022 and looks like theyre going to be up low single digits in fiscal year, 'twenty, three which means like the base level of state and local budgets are just much higher than what we've really seen before have you been able to identify some of those incremental lifts in those budget allocations are federal funds start to come into the business in the form of contracted revenue.
Our bookings.
I think the answer is probably similar to what we said in the past I would say as I look at our at our clients' budgets. They are generally very healthy.
As I've mentioned before that were not as impacted by Covid.
As people thought they are having access to federal funds some of it Brian the timetables are wanting that they still have a couple of years I think you spend that.
So we're just generally seeing.
Healthy budgets healthy buying seasons.
Just a really good robust market in terms of identifying specific deals there.
There are occasions for that but.
But I think really what it does is it's more it's more about just overall confidence in our clients.
Being willing to spend money.
Got it thank you.
Your next question comes from the line of Rob Oliver with Baird.
Your line is now open.
Great. Thanks, guys. Good morning, Lynn one for you you mentioned.
The milestones on the cloud side since 2019, when you pivoted to the cloud first approach and.
Certainly it seems like those are paying off, particularly with with new business around subscription definitely felt that among your customers in Indianapolis last youre talking to them about their readiness for cloud.
Wanted to ask a little bit about you talked about new flips.
How should we think about the pace of conversions. This is clearly going to be.
Jordan.
The driver here they are up modestly from last year nothing to really write home about so can you just help us understand how you're thinking about.
Maybe success relative to conversions and migrations of existing customers. This.
This year and then I had a quick follow up for Brian .
Sure Robin.
I think youre right, our flips actually I think there are quite a bit year over year I think this year. We did about 336 flips last year, we did about 239 flips give or take so.
Roughly 40%.
I see flips being.
A significant driver of revenue growth over the next five years to seven years.
See them continuing to grow at a healthy pace.
And I don't really I'm not in a position you can tell you that we're going to grow another 15% to 20% each year, but we have a we have a.
A wide and deep customer base that has become a priority and we are prioritizing our flips internally.
Great. Okay excellent Thanks, and then Brian .
One on the Q4 operating margin was a bit below our expectations.
That could be driven indeed by by those flips or by any and I see but just wanted to get a little bit more color on that thanks.
Probably the two biggest factors there were one that licenses.
Declined pretty significantly and we've talked about that.
Expectation kind of going into 2023, but.
Q4.
Tad a bit of a deeper decline.
From the mix of new business life.
Licenses were relatively low number.
And.
Again, most of that is a.
A shift in the mix as opposed to less new business.
We did as we typically have.
With our more license heavy products in public safety and <unk>.
Platform technologies.
Some slippage out of the quarter in terms of timing, but that's pretty typical so I'd say that the light the lower licenses were a big factor and then.
Probably the other factor is the higher R&D expense that we mentioned were.
Some expenses that we had expected to be capitalized.
We're actually expense because of the nature of that.
The development efforts and so that impacted our margins as well.
Got it okay. Thanks, guys appreciate it.
Your next question comes from the line of Matthew <unk> with BP.
Your line is now open.
Hey, good morning, Thanks for taking the questions.
I guess looking at the margin guide for 'twenty three Brian .
Just trying to reconcile kind of where we were previously to maybe some of the moving parts I know you just mentioned.
The R&D coming in higher on the expense level than capitalized wondering if you could sort of quantify how much of that sort of changed versus what you were previously expecting it looked like around maybe $6 million.
Lip from from capitalized to expense in the fourth quarter curious if you have a general sense of what that level will be in 'twenty three.
And then secondarily just how much of the compression on the EBIT or on the operating margin side is from the declining license mix versus the bubble costs versus those R&D expenses. Thanks.
Yes, so yes for the full year the difference in the capitalized.
Versus expense to R&D versus our expectation was.
Close to $9 million.
We gave guidance for R&D for next year.
In the range of $108 million to $110 million that's expense.
<unk>.
Our capitalized R&D in 2023.
<unk> is expected to be in the high Thirty's.
They were around $37 million.
So capitalization is a little bit higher but R&D expense is higher in 2023.
If you look at the.
The.
So the midpoint of our guidance it implies I'd say somewhere between 60, and 100 basis points of operating margin compression.
And in total and.
We mentioned that the bubble costs.
Our estimated to be.
Be about 130 basis points of.
Of.
Impact on the 2023 margins, so new level costs, new bubble costs.
So and Thats higher than the impact was in 2020.
<unk>, we talked about those as being a little less than 100 basis points.
But impact and thats to be expected because we continue to move more customers into the public cloud.
While we still operating our two datacenters and so.
So.
Duplicate costs.
<unk> this year and we've talked about an expectation in.
The first half of 2024 that will be out of the first data centers and that will start to mitigate.
Okay very helpful.
And then looking at just trying to square together some of the numbers with the commentary it sounds like the subscription side and certainly SaaS.
<unk> within that continues to perform quite well and youre seeing not only new customers, but the flips at elevated rates, but then when we look at the backlog numbers on the subscription side.
There was a slight decline quarter over quarter.
While maintenance continue decline so just curious if there were.
Any mix of some of the renewals that maybe were anticipated.
Flip that maybe didn't in the quarter or anything on that front that would sort of lead to the optics of the subscription backlog declining slightly while the sort of looking ahead version and the <unk>.
Qualitative commentary around strong bookings.
Would push more to the subscription side, maybe in 'twenty three than what we saw in Q4, yes.
Yes, I think one of the bigger factors around backlog I think backlog is probably.
Becomes maybe a little less meaningful.
Little less of a full picture when you look at it.
Is.
Really around how the the accounting drives what goes into backlog and what does it so.
Transaction revenues.
Don't sit in backlog, so as we add new payments or new portal revenues those typically.
Arent under.
Fixed arrangement so.
Even though they may be highly predictable and recurring.
So theyre typically wouldn't be an addition to backlog for those and then we've talked in the past as well about sometimes the terms of our contract agreement.
Dictate how much goes into backlog. So for example, a termination for convenience provision can significantly limit that we saw that with the really large contract last quarter.
There was a $50 million contract that only $8 million went into backlog because.
As a termination for convenience provision so.
I think theres a lot of factors that.
That start to make the backlog number.
Maybe less of an important metric to.
To look at how we.
Expect to perform going forward.
Okay.
Okay very helpful. I appreciate the answers thank you.
Your next question comes from the line of Pete Heckman with D. A Davidson your line is now open.
Good morning, Thanks for taking the question.
A few just clarifications, there and I may have missed some detail. So forgive me if im repeating myself, but.
The.
When we look when we look at bookings.
Yes.
We typically see this quarter's a big public safety bookings quarter can you talk about how they are receiving.
Is it the idea of converting to.
Subscription and then just clarifying where there any deals.
Continuous and bookings in the quarter that were greater than $5 million of PCB.
Yes.
Yes.
Yes sure Pete on.
On the public safety side.
It is typically a little bit larger quarter.
Typically talk about deals that we've awarded but not signed I will say that we had a couple of deals that were of significance that that pushed for the quarter.
We are continuing to see.
More and more acceptance on the public safety side to the SaaS model and to subscriptions and I think we're going to continue to see that going forward Youll see youll, it's part of our actual in our budget process. If you look generally across Tyler I think for next year on a sort of an overall weighted weighted value average we expect.
North of 991% of deals next year.
To be in SaaS.
A significant increase on the public safety side is still less than half of half on the public safety side, but it.
It is something that we're doing some some modeling and some things that we're trying to do to to sort of push that model with our clients.
Yes in this quarter.
We did not have any <unk>.
Individual contracts that were more than $5 million in total contract values. We had a couple of in the $4 million range.
Sure.
On the software side, we did.
Have a competitive rebid win with our state enterprise agreement.
In Colorado, which is one of our bigger states.
And certainly the total value of that contract over the five year term is is well above $5 million.
On the software side no.
No individual deals more than $5 million.
It was more of a.
High volume.
Sort of more mid range deals this quarter.
Got it and so to your point that bookings might be to come up with slightly less useful metric given how you.
Gross up the <unk> related to variable revenue streams and contracts.
I missed what you said when the on the 500.
Payments deals what was the <unk> related to that and then can you give us an approximation of how much of that was included in full year bookings what it would have just been youre asked during the first year.
Yes, and actually on the <unk>.
Payment deal that there really wouldn't be anything that in the bookings number only the actual revenues as they come through.
In a.
In a given quarter.
Basically run through bookings and revenue at the same time so for payments. We don't include again, because theyre not a fix.
Fixed amount we don't include those.
In bookings and backlog.
<unk>.
Payments deals for the full year.
We.
Estimate that they will add more than $13 million in annual recurring revenues.
And there is a mixture of contracts there that are.
Either gross or net processing through.
Our platform and still some deals that are through our reseller arrangements, where we have our revenue sharing.
Arrangement. So the revenues are lower but the margins are higher on those.
Right right. Okay. That's helpful. I appreciate it.
Your next question comes from the line of Alex Zukin with Wolfe Research. Your line is now open.
Hey, guys.
So maybe just two for me I guess first of all in the past similar to one of the questions I think thats been asked but maybe on a slightly different metrics again, the subscription <unk> added in the quarter this quarter seemed to be lower sequentially than the last two so just maybe clarifying what what drove that.
Bookings perspective, and then more broadly as we as we are much more geared towards subscription and SaaS. How should we think about at least how are you guys thinking about tenant net new SaaS. They are net new kind of subscription bookings growth for 'twenty three and then I've got a quick follow up on cash flow.
Well, we expect clearly we expect that subscription booking in subscription AAR will.
Accelerate from 2022 and 2023.
On the transaction side and the.
The software side.
Part of that in the the change in the.
The mix accelerating in a more significant decline in licenses.
This year with that being replaced by by new subscription arrangements.
I think the.
The question about just the.
<unk>, new subscription IRR again that number really just relates to new software deals and as we said there werent any mega deals in this quarter.
But.
A good volume of.
<unk>.
Sort of mid size deals I think more of that is just around the.
The timing.
We've said that.
Pipeline continues to be very strong RFP activity remains.
Generally stable at pretty elevated levels.
So the market activity supports that expectation that we will continue to see an accelerating rate of new software a R.
Okay, perfect and then.
I guess, Brian from a free cash flow perspective, when you think about the lag or.
Or the delta between operating margins and free cash flow for this year, it's obviously a little bit higher.
And then in previous years, given some of the items you mentioned around tax and expense.
Yes.
Our capitalization versus some R&D.
Expenses as we think about it for 2003 and more and even more so for 'twenty for what's the right expectation.
Our free cash flow margins versus operating margins is that delta specifically.
These two years as we kind of trough margins in transition to SaaS.
Yes, I think generally we would expect.
That.
And we talked about what are our capitalization, our capex both software and.
Non software Capex is for 2023.
It's a bit higher.
And.
Some of Thats related software Capex and some of it's related to.
Facilities.
Investments that were making in a couple of particular locations.
<unk> and 'twenty for that that Capex would decline.
In general I think our cash or cash flow margin would grow.
In line with or faster than our operating margin.
Once that.
Capex starts to.
To normalize.
The impact of the section 174, which is still a bit unclear.
It will be significant on cash flow in 2020.
Three.
Because.
If it stands if it's not repeal door and we're not the first company or the first software companies talk about this youre starting to see more of it I know Microsoft talked about.
Sure.
More than $1 billion impact on their taxes.
But if it stands and isn't repealed or.
Or delayed.
Our cash tax payments will be significantly higher this year, because we will have the impact of both.
Catching up the 2022 taxes under that assumption.
And making cash tax payments related to 2023, so it could be in the $100 million range of additional.
Cash taxes this year.
Which would really as I said be two years impact.
Roughly $50 million related to 2022, and 50 related to 2023.
In round numbers.
So we'll see how that plays out, but that's sort of the current current expectation.
And.
Given the way that.
Tax change works it will impact cash taxes for five years until it normalizes and youre, putting on the same amount that youre amortizing.
Understood. So I guess is it fair.
Once we get through 'twenty three capex starts to trend out would you expect that to kind of go back to that historical.
Yes.
Two to 300 point Delta between margins and free cash flow margins operating margin I think as Mark and I think Thats fair.
Okay perfect. Thank you.
Your next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is now open.
Hi, good morning, Thank you.
Ill follow up with one of your comments on <unk>.
On environment.
I think last quarter, you talked about procurement uncle touching on a little Paul maybe just give us an update there.
Any issue positive or negative let's talk it's negative.
Bottlenecking on procurement.
A quick question when you talk following our adoption of technology.
Okay.
Yes, Thanks, Gabriel I don't.
Right now our procurement cycles are pretty normal.
They are going in line with with our clients' budgets are healthy.
We're not really seeing delayed procurement cycles right now again from our perspective.
The market is relatively healthy and their budgets are healthy and our competitive position remains strong so.
We're seeing a pretty a pretty normal really above normal market.
Okay and my follow up is on component.
Thank you Paul.
The progress we've made with our cloud transition and really running and plot.
Is there a scenario where you see a pace of short pulse.
Thanks, Matt.
Excellent.
For something you're already seeing that.
Hum.
A little bit on how advantages nickel parlophone. Thank you.
I'll take I'll start on that and Lynn can add to that.
We do think that in our space that.
The shift to the cloud.
Our cloud strategy gives us a competitive advantage.
As you know we compete across products with different competitors in generally in each of our product suites.
And those range from some very large companies to a lot of.
Smaller more niche companies and we think that.
Where we are in the cloud transition.
Is.
Yeah.
Well in advance of where a lot of our <unk>.
Competitors are and that is that desire on our client base to move to the cloud.
To accelerate that.
That gives us an advantage and an ability to.
Increase our share.
Because of where we are in our cloud transition.
Then.
As we've talked about in the past our connected communities vision and the fact that we have this broad suite of products that work.
Increasingly well together.
<unk> to provide us with a competitive advantage there and clients that are looking for.
Suite solution.
And we think that that's clearly one of our strengths.
Thank you.
Your next question comes from the line of Jackie Calia with Barclays. Your line is now open.
Okay, Great Hey, good morning, guys. Thanks for taking my questions here.
Len, maybe it is maybe to start with you.
That was helpful detail in your prepared remarks, just on the composition of.
And ICEE or digital payments.
When it comes to gross versus net maybe the question is could you could you put a finer point just on how much of that digital payments business or the transaction revenue line.
As is gross versus net and then Relatedly, how you maybe think about that mix going forward.
Yes, I'll start and Brian has probably got better numbers.
Okay.
I see which is now our digital solutions Division I would say the overwhelming majority.
Their payments business was on a gross basis I would say on the Tyler side beforehand more of its been on the net basis.
That's actually not a lever that we fully control is generally controlled by the customer and whether or not the customer.
Wants to take the risk and on the interchange fees or if not theirs.
There is a number of factors that go into there, but as of right now a substantial part of Tyler's overall business is on the is on the gross model because of NFC in NSE was and how mature and invest that business was.
We've got.
The number for merchant fees that we pass through last year was about I think on the NSE side was about $142 million.
And maybe just a handful of $345 million on the Tyler side.
And looking into next year I think nics side is probably more around 145 ish million again with the same few million dollars more on top for from Tyler.
Yes.
They have a lot to add to that is.
It clearly is the vast majority we did mentioned that a couple of our.
State enterprise agreements that digital solutions are shifting in 2023, two net from growth and that's got about a $10 million impact.
But as Lynn said, we don't really.
Fully control that in.
So I would expect that still going forward.
The majority of the business comes to us through the gross model, where we're paying the merchant fees.
Which is why we wanted to sort of give you the apples to apples comparison of.
The margin impact of a couple of hundred basis points, if all of those net ones were on the gross.
Gross model and you took the merchant fees out of.
Out of.
The revenue side.
So yes.
I would say that is more Tyler customers.
They have traditionally been on a sort of a reseller with third party.
Payment processors, where we get a revenue share which is a net accounting.
As more of those over time migrate to our proprietary platform.
We could have a shift with from those customers that are currently.
On a net basis moving to.
Our gross basis with.
With Tyler.
The net result is we keep more of the transaction so we make more money.
Higher revenues, but it would have a negative impact on margins.
And we will attempt at the.
At our Investor day to provide more.
Color on on how those work and how we see that playing out because clearly.
Significant growth in the payments business is an objective of ours and something that we are.
Having a lot of success with and expect to continue to.
Got it that's very helpful. Brian maybe for my follow up and apologies I think this question has been asked a couple of different ways I, just I want to I want to I want to try Troy one one other way.
Sure.
The question is if maybe how SaaS AAR did.
Did versus your own expectations this quarter.
You said that maybe it was timing we expect SaaS AAR to accelerate next year I think it grew about 19% this quarter.
I know last quarter had some big deal activity that maybe makes it a tough sequential compare but I'm just kind of curious how you think about sort of that.
SaaS AOR growth trajectory this year and if theres anything that we should keep in mind for how that debt.
For how that performed this quarter versus your expectations.
Yes, I think it was generally in line with our expectation I don't know that it was.
Significantly varied from plan I guess, one other factor that.
That plays into that is.
The lag between when we sign a SaaS deal and when we.
Start to recognize revenues and that can can vary but it can be.
Typically the implementations are quicker or the time from signing to starting to recognize revenues as quicker on SaaS deal then.
On the on Prem deal, but that can vary and that can typically be say six months that can be longer.
And.
So I think when I talk about timing, it's more around the difference between when we sign something and when we are starting to recognize revenues I'd say theres two things around timing one is just as Brian mentioned, yes.
The old days when you sign an on Prem license you recognize the entire license upfront on a SaaS deal, particularly when we're doing multi suite multi module deals.
We're generally going to start paying those when those particular module surge or pieces go lives. So you've got a delay from the time, you signed or you get first parts of the customer up live but as you continue that implementation and other pieces go live then you'll get that buildup.
I'd say the other side I was wondering when you look at flips.
There's things around flips that while long term, obviously provide really great long term value in the short term, sometimes we're providing some services.
<unk> at no discount or no charge.
There also might be some concessions depending on.
How long the customer has had their license and where they sit and so to sort of incentivize. The flip there is sometimes some sort of upfront concession, which can then create another lag factor before you get the full value of that flip.
Got it very helpful. Thanks, guys.
Your next question comes from the line of Jonathan Ho with William Blair. Your line is now open.
Hi.
Good morning, just wanted to I guess touch a little bit about cross sell activity, which you spoke about quite a bit is there anything that we could expect to see either inflect or grow even more for 2023.
Relationship that's had a little bit more time to mature and with some of the new acquisitions.
Yes, Jonathan I mean cross.
Cross selling is one of our major mid to long term growth drivers, it's something we're talking about internally.
And as you look out over the next.
708 years to about Tyler 2030, and things that can really move the needle.
It's these things like flips, it's payments, it's cross selling it's also a lot of other things that we do really well.
We talk about areas of our business like supervision, where that where the market is good.
Or the Tam is good and we're making really big gains there.
Cross selling is something that we're prioritizing.
Across all of Tyler we've actually started.
Some new sort of strategic account management approach within NSE and bringing other resources getting even further exposure to our sales channels. Our sales leads theres things that we will be working on in terms of internally around.
How we recognize revenue.
Revenues from cross sells and how we incentivize things and structurally internally things that we need to sort of clear out some of those barriers to sort of unleash that power even even more.
We're pretty excited about it I mean, we we had probably this past quarter.
Probably one of the best stories, we've had in a long time in terms of both cross selling and sort of connected communities, which was the the Kansas Department of revenue.
Sorry that I mentioned in my in my opening remarks, this was a deal where.
Took place because of our our DNI solution around assessments and the fact that we had such a broad footprint and presence within the state of Kansas from our enterprise assessment.
Didn't happen without NFC and their contacts at the state and utilizing that state master contracts. So that was three different pieces of our organization coming together to.
To create a really great result, and something that I think we can replicate across other states that deals are $600000 deal really of DNI deal.
But really took the efforts of multiple divisions to do that and I think thats sort of an example of what we're looking to do in the future.
Great. Thank you.
Your next question comes from the line of Kirk <unk> with Evercore. Your line is now open.
Yeah, Hi, guys. This is actually Peter broke ground for Craig I.
I appreciate you taking the questions.
So maybe Brian just just one for you.
Just curious are we at the point where you.
Thanks, just to kind of be more stability in terms of the impact of the subscription transition on revenue versus your guidance.
I think we all get the moving target, but just curious if the level of brokerage and is likely to go down from here on that in that sense.
Yes, I think so.
There is.
We certainly expect.
Bigger decline in license revenues this year.
Licenses are always the most or the least predictable of our revenue streams at least in the short term.
And so now with.
Well into the <unk> as a percentage of our revenues that are recurring.
There is much less.
A much higher level of predictability, so I think.
We're definitely.
Kind of around that corner in that.
This should be.
And increasingly higher level of confidence around.
Our.
Our outlooks.
Versus what we actually.
Our results come in.
So that's helpful. Thanks, Brian .
Your next question comes from the line of Terry Tillman with tourists Securities. Your line is now open.
Hey, good morning, Thanks for fitting me in and Unfortunately for you all still have some of my questions, even though a bunch have been answered.
The first question for you.
It's kind of a twofold first question and then Brian I was going to ask you about payment. The line in terms of those couple of larger public safety deals that slipped into the first half do you expect those to close in the first quarter.
And then the second part of that first question for you as you all have a great deal of last quarter with the department of state and I know, it's still small in terms of the federal sector for you all but just anything you can share about optimism and more we get here. This year in that side and then I wanted to ask you about payments Brian .
Yes, my expectation is that at least one of those larger deals is on track to close in in Q1.
As it relates to Tyler federal.
I think youre right.
Things that im, saying thats coming out of that division in terms of sales indicators the pipeline.
The volume of deals.
Is up significantly since a year over year, we're also seeing interestingly that more and more movement in the federal side.
<unk>, which is.
Good to see it's something that we've put an internal focus on in the last two years and we're starting to see more of that Receptiveness there. So.
I think theres, a theres positive things coming out of the federal space.
And I like our position there right now.
That's great to hear and then Brian we've gotten a lot of data points on payments and there's lots of puts and takes though particularly the gross to net or when there's a rev share, but could you just like really tried to help boiler down in terms of for 23, the payments revenue business I mean would that grow at about a similar rate in 'twenty, two or just anything you can share.
There are about the growth rate on the recognized revenue for payments. Thank you.
Yes, I think the growth rate on payments is going to be.
Above tyler's overall growth rate is going to be a positive contributor.
I expect that in general that will be accelerating from 2022, both from adding new customers through the cross sell motion, which we've talked about.
Integrated our payments teams we've.
<unk> really got the.
The go to market strategy down and now we're starting to execute on it.
Whether it's using the expanded capabilities around that Nic's platform brought us.
Two to drive that business down into the local level.
Continuing to have a focus on.
Penetrating more of our customer base.
With.
Payments, either with our platform or partner platforms.
Driving more adoption.
The customer base.
And.
And then the addition of rapid so giving us capabilities on the disbursement side and we've got some really interesting opportunities around that and think thats going to be a nice growth driver. So I'd say, we generally expect the payments business to grow faster than.
Sort of Tyler's topline revenues at least in 2023, yes, we have and we have our inside sales focusing on that existing customer base. When you look at areas like our.
Rise side, whether it's enterprise ERP, we're including payments and an all new response at all new deal responses that doesn't mean that they're getting and every new deal, but we are we are pushing payments and all of our new deals.
That's great color. Thank you.
Your next question comes from the line of Joshua Reilly with Needham. Your line is now open.
Hi, Thanks, guys for squeezing me in I'll, just ask one question here since we're running overtime.
Software development costs were only $2 million in the quarter, which is obviously below what we were expecting can you just discuss the impact of the accounting changes at year end.
Our guidance of $37 million for 2023 is the proper amount, implying an increase given.
Given the accounting changes that we have here.
Yes.
The guidance for 2023.
Of $37 million in capitalized software development encompasses.
How we expect those projects to be accounted for us. So thats reflect the impact of that change is reflected there.
As well as.
Other capitalized development projects that.
That are either starting or ramping up during the year.
So thats fully encompass there but.
The change.
In <unk>.
Expensing versus capitalizing.
For the full year of 2022 had about a $9 million impact versus.
What our initial guidance for.
Capitalized software and R&D was.
And was that just reflecting in that Q4 number then.
$9 million impact or why was that only $2 million in the quarter. It impacted the full year, but most of that.
The impact was seen in the Q4 results.
So.
That resulted in a much lower number in Q4 versus the rest of the year.
Got it thanks guys.
Your next question comes from the line of David <unk> with Wells Fargo.
Your line is now open.
Thanks, very much for squeezing me in I appreciate it just one from me Bryan I heard in your comments.
Our prepared remarks, you're touching on.
Growing the implementations team in 2023.
Log.
Can you just talk about the labor market trends you're seeing.
Do you stand currently in terms of higher as well.
We are seeing in terms of wage inflation et cetera. Thank you.
Yes, there continues to be.
Challenges in the in the labor market is definitely mitigating from what we saw last year.
Obviously.
It's been very common.
Across multiple industries, but certainly in technology, where youre seeing layoffs hiring freezes and.
So there is less pressure I think.
On on us in terms of.
Turnover, which is moderating.
And there is less pressure than we saw last year on.
On wage increases.
So each of those are working.
In a positive manner for us I'd say David.
If you go back 12 months ago.
We're still experiencing really pretty high elevated turnover still lower than industry, but higher than our norms, which as you know all companies. We're dealing with is as we progress throughout the year.
Things started I think.
I've talked a lot about the pendulum in the labor market pendulum is another one that I talk about <unk> and its definitely starting to swing back.
We fell back into sort of.
November December I would say, our turnover has actually come back down to sort of pre COVID-19 levels.
Still early to see if that's where it stays.
I like that trend.
As it relates to things like.
Brian mentioned, our services and implementation that was an area that was that was hit particularly hard over the last couple of years and we've won a lot of business we.
We do have to do some hiring to ramp up to to deliver that deliver on that business and we're doing that.
Also creates a little bit of margin pressure in the near term because it.
When we hire large classes of Implementers it normally takes.
456 months before we get them out billable on the road.
Most of the growth in our head count this year will be in revenue generating positions.
That's excellent color thanks, very much I appreciate it.
Your last question comes from the line of Keith Houston with Northcoast Research. Your line is now open.
Hey, guys. Thanks for squeezing me in here I am just unpacking the payments just a little bit further to 571 wins is obviously.
Im no number for the year are these mostly agencies are taking on payments for the first time or are these actually competitive with what do you see the trajectory I guess.
2023 for that same question I'd.
I'd say the majority of that number although not the majority of the dollars, but the majority of the number would be.
Yes.
Certainly new payments for.
For most of those customers. So a lot of those are existing Tyler customers, where we're adding payments to a utility billing system or a.
Licensing and permitting system so.
We may be adding capabilities. They may have only taken checks before and now we're providing online payment capabilities or credit card payments.
And.
A number of those are still under Rev share agreements so.
The revenue generated is on an individual.
Payment opportunity may be relatively small but.
At at good margins.
But some of the more significant wins, our competitive wins like we mentioned the city of Milwaukee.
That's a.
A full enterprise payment processing contract.
We're replacing another vendor there so.
I would say the larger wins tend to be competitive wins, the smaller ones tend to be.
More first time payments.
Thank you.
Yes.
This concludes our question and answer session for today I'll turn the call back over to you Lynn Moore.
Great.
Thanks, everybody for joining us today, if you have any further questions. Please feel free to contact Brian Miller or myself have a great day everybody.
This concludes today's conference. Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
Yes.
<unk>.
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