Q1 2023 Tyler Technologies Inc Earnings Call

April 27, 2023

Small 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.

In order to address your questions and stay within the allotted time. Please limit your questions to one question per person.

And as a reminder, this conference is being recorded today April 27 2023.

I would like to turn the call over to Hal as Savini, Tyler Senior director of Investor Relations. Please go ahead.

Thank you, Kevin 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 the safe Harbor statement Lynn will have some initial comments on our quarter and then Brian will review the details of our results and provide an update to our annual guidance guidance Lynne.

And we will end with some additional comments and then we'll take your questions.

During 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 1095 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections.

And would refer you to our Form 10-K, and other SEC filings for more information on those risks.

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 the financials tab schedules with supplemental information, 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 will relate to the corresponding period of last year, unless we specify otherwise Lynn.

Thanks Ali.

We began 2023 by delivering strong first quarter results that met or exceeded our expectations for most key metrics we.

We continue to see broad based demand across our product solutions, reflecting strength in the public sector market and our unique ability to support our public sector clients digital modernization needs.

We're seeing a high level of request for proposal and demo activity across our software business with particularly strong activity in the ERP space.

Our mix of new software business also demonstrates how our market continues to embrace the move to the cloud.

Total revenue growth was three 5% with seven 2% organic growth, which also excludes COVID-19 related revenues and.

And recurring revenues comprised nearly 84% of our quarterly revenues.

We're pleased with our solid revenue growth, even as the shift to SaaS and our new software mix continued to accelerate with SaaS deals comprising 87% of our Q1, new software contract value compared to 80% last year.

Most importantly, SaaS revenues grew organically at 24, 4%.

Our sales activity this quarter reflected strong cross selling success, including opportunities driven by leveraging state relationships at our digital solutions Division, formerly Nics and Upsells with our data and insight solutions.

In addition to our current quarter wins, our pipeline of cross sell opportunities continues to grow.

We also continued to execute our growth strategy around our payments business. During the first quarter, we signed more than 120, new payment deals and we're especially pleased with the early traction that we're gaining with our acquisition of rapid financial solutions and their robust payment issuing capabilities.

I'd like to highlight a couple of first quarter deals that illustrate these successes.

In Indiana, we expanded the relationship between Indiana family and Social services administration, and our digital solutions Division with a contract for Tyler's disbursement as a service platform to improve the payment disbursement process for setting its existing childcare and development fund payments to providers.

The purpose of the CCD Federal program is to increase the availability affordability and quality of childcare.

Leveraging the capabilities from the rapid acquisition in combination with our existing state enterprise contract, we will streamline the entire disbursement process from portal setup, including registering users and collecting banking information from providers to virtual account payments across all payment types and channels.

Through rapid robust platform. The solution will also provide reporting and reconciliation features to support complete oversight of the payment program.

In addition.

We signed two payments contracts to provide rapid disbursement solution for CT funds, including Fort Bend County, Texas.

Current user of Tyler's jury management solution, and Shelby County, Tennessee, a current Tyler enterprise <unk> clients.

The quarter's largest SaaS deal valued at approximately $18 $5 million was with the province of New Brunswick in Canada for our enterprise assessment solution.

New Brunswick becomes the fourth Canadian province to implement our flagship property tax solution.

Now I'd like for Brian to provide more detail on the results for the quarter and our annual guidance for 2023.

Thanks Lynn yes.

Yesterday, Tyler technologies reported its results for the first quarter ended March 31 2023.

Total revenues for the quarter were $471 $9 million.

Up three 5%.

Organic revenue growth, which also exclude COVID-19 related revenues was seven 2%.

Last year's first quarter included $26 million of revenues from Covid related initiatives that are digital solutions Division, formerly an IC.

<unk> ended in 2022.

License revenue declined 39% as our new software contract mix continued to shift it to SaaS at an accelerated pace.

Professional services revenue declined 13% due to completion of Covid initiatives, but rose four 7% organically.

Subscriptions revenue increased 14, 3% Inorganically rose 16, 4%.

Within subscriptions, our SaaS revenues grew 24, 4% to $126 6 million and.

And transaction revenues grew seven 1% to $153 9 million.

On an organic basis, which also excludes COVID-19 related revenues and transaction revenues grew 13, 1%.

Yes.

We added 145, new SaaS arrangements and converted 73 existing on premises clients to SaaS.

The total new software contract value of approximately $86 million.

In Q1 of last year, we added 149, new SaaS arrangements and had 88 on premises conversions with the total new software contract value of approximately $76 million.

Our new SaaS bookings in the first quarter added $17 $1 million in new IRR.

Our total IRR was approximately 100, I'm, sorry 158 billion.

Up nine 1%.

And organically grew 11, 5%.

Since Q4 of last year SaaS revenues now exceed our maintenance revenues.

Operating margins in the quarter were once again pressured by the acceleration of the shift to the cloud and the new business.

And the related decline in license revenues.

As we've previously stated we expect operating margin to trough in 2023 and to return to a trajectory of margin expansion in 2024.

As we also discussed last quarter merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins.

In Q1, we paid merchant fees of approximately $42 million.

Those fees were netted out of both revenues and cost of revenues, our consolidated non-GAAP operating margin for the quarter would've been approximately 200 basis points higher.

Cash flow was robust this quarter with cash flow from operations of $74 7 million up 39, 5%.

Free cash flow of $63 6 million.

Up 55, 1%.

As a reminder, cash flow for the balance of the year will be impacted by an estimated $131 million of cash tax payments, resulting from this section 174 tax changes of.

Of which $73 million is related to 2022 taxes and $58 million is related to 2023 estimated taxes.

We continued to strengthen our balance sheet as we repaid $120 million of floating rate term debt during the first quarter.

We ended Q1 with total outstanding debt of $875 million in cash and investments of approximately $174 2 million.

Our net leverage at quarter end was approximately 152 times trailing 12 months pro forma EBITDA.

Our revenue and non-GAAP earnings guidance for the year are unchanged. Our 2023 guidance is as follows we.

We expect total revenues will be between $1 93, 5 billion and $1 97 zero billion.

The midpoint of our guidance implies organic growth of approximately 8%.

We expect GAAP diluted EPS will be between $3 65, and $3 80, 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 50.

$7 65.

Interest expense is expected to be approximately $26 million, including.

Including approximately $5 million of noncash amortization of debt discounts and issuance costs.

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

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

Thanks, Brian .

Our first quarter results demonstrate the strong momentum we are building across our business.

Our cloud transition initiatives are on track in this pivotal year as we make progress with our move from Tyler's data centers to AWS and manage through expected margin headwinds, resulting from the accelerated pace of cloud adoption as well as cloud bubble costs.

Our successes in the marketplace reflect our unparalleled competitive strength synergistic cross sell and up sell momentum and highly desirable cloud solutions and position us well to execute on our long term strategic growth roadmap.

In the next few days, we will release, our fourth annual corporate responsibility report.

We hope you will take some time to review it and learn more about the progress we've made with our ESG efforts.

To close we're extremely excited to host clients in person that connect our annual user conference, which will take place in San Antonio for May 7th through May 10th.

Registrations are at an all time high and this will be our largest connect ever with some 6000 public sector clients attending.

We also look forward to our upcoming Investor day that will be held in person on June 15th in Frisco, Texas, along with a live webcast.

We look forward to highlighting our differentiated value proposition and our mid to long term strategic plan growth drivers and financial targets supporting our Tyler 2030 vision.

More details will be communicated soon and we hope youll be able to join us in person or online.

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

We will now begin the question and answer session.

<unk> a question into the key question queue. Please press star one on your touch tanks thing.

If youre using a speakerphone please pick up your handset and then press the star and the number one.

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And then the number one again.

As a reminder, please limit your questions to one question. So we may stay within the allotted time.

We will pause momentarily to assemble our roster.

Okay.

And your first question comes from the line of Ryan <unk> from Credit Suisse Securities USA. Your line is open.

Hi, This is Sami badri.

On Ryan's line. Thank.

Thank you for giving me a question. The first question I wanted to kick off with was just about operating margins. It looks like you guys did better than what the street and our models were forecasting and I kind of just wanted to understand.

The mechanism kind of going into the model or into the business, that's allowing you guys to execute a little bit better are you seeing better pricing better cost control.

They're kind of details around the margin beat and then the other question is.

I know that you guys have been messaging about operating margins trough, Inc. In 2023 for the expanded 2024.

But is it possible that we have already seen your operating margins trough and those are very well understood and youre going to be building and expanding from this point forward maybe from a <unk> base.

Can you just give us color on margins. Please.

Sure around the second part of the question I don't think we've seen a drop yet for the full year. We think the consolidated margin for the full year will be lower this year than it was last year.

And our guidance implies that.

I do think and I don't think Q2 will be the point, where you will see year over year margin improvement I think by Q4, we would expect that we would be seeing year over year margin improvement.

At that point.

But.

Not I don't think we've hit the trough yet.

And then in terms of.

The overall margin.

We don't give quarterly guidance. So we didn't have a quarterly margin target out there are earnings and.

Revenue guidance is basically unchanged from where we started the year.

So our expectations at this point are generally consistent.

For the first quarter.

Did have.

Good performance good growth around the.

Subscription revenues as some of those revenues are coming online from deals we've signed in prior quarters.

And the pace at which those those revenues hit.

In effect that somewhat I think.

Subscription revenues were probably a bit above.

Where the street was but generally our expectation for the full year margins hasn't changed yes, I mean, I would add I would add this too.

Yes.

We've talked a lot over the last couple of years about the cloud transition and the impact on on both revenue headwinds in margins, but there's a lot more going on within Tyler and I'd say right now there's there's a lot of intentionality going on it Tyler.

A little bit more than just sort of sitting back and letting the cloud transition run through the financials.

A lot of internal analysis, we have a lot of internal initiatives going on beyond just the cloud transition taking a look deep look at different parts of our business different things that we should be doing and can be doing.

And I really commend our executive team and really our entire staff for the work that's going on right now.

There's a lot of work going on at Tyler for sure.

But I can say that everybody is sort of a line generally with with what our long term goals and our long term vision is and part of that is around margin expansion. So there's just a lot of things going on a lot of intentionality. There is some some bigger pieces there are smaller things that we're doing.

But I think Theres, just a lot of intentionality going on.

Next question comes from the line of Martin.

From Evercore ISI your line is open.

Yes, thanks very much.

Linda given that Youre going into connect next week next week or in the next couple of weeks can you just talk about what youre, hoping clients take away from that and I was just kind of curious if you've seen.

More folks from say state governments, signing up to participate at the conference.

Yes, Kurt that's a good question, we actually are hosting.

Some special events around our state government clients and we're going to have a lot of our key state government stakeholders there.

We're going to have them introduced a lot of our executive team. So there'll be sort of a side path going on with them they'll also be part of the larger form as well.

Just a unique opportunity for us.

We've got so many clients, it's a chance for us to sit down and talk to them talk about our vision, but also listened to them and listen to their needs here what their vision is it's a chance for us to interact it's great opportunity for us to help our clients with more training more information.

Talk about the new offerings that we have things that can make their jobs better and more efficient.

It's a big event. It takes a lot of work our marketing team does an events team just does it's an amazing job.

Anybody hasnt been to it I'd recommend people go it's really done a first class manner is a lot of work that goes into it it's not an inexpensive event, but its something thats very worthwhile.

Not only does this Tyler and executive team get a lot out of it I think our clients get a lot out of it.

Your next question comes from the line of Matthew <unk>.

<unk> from <unk> Your line is open.

Good morning, Thanks for taking my question.

I guess Glenn.

Back to the last question there you referenced a number of.

Central pipeline opportunities around from the state level contracts I'm curious if you could give us some sense of sort of the magnitude of how much you feel like is in sort of the near term pipeline.

Where you are actually discussing specific deal terms and things of that nature, and maybe just compared to sort of how much upsell cross sell has come through those contracts since the acquisition closed.

No.

I guess, maybe it boils down to sort of what what inning or what percentage of those potential opportunities do you think you've realized so far what's what's on sort of the near term and then what's maybe more long term in terms of mix. Thanks.

Sure Matthew I think we are.

Part of your question I think we're still in the early innings I.

I'd say, we're still in the early innings with everything we're doing with NSE I've, probably talked a year ago about being in the first thing we might be in the top of the second.

The cross sell opportunities continue to grow.

We take a very deliberate approach around that we've instituted this year. We've been doing these strategic account management meetings, where we're getting the the Tyler salespeople together with state Gms in and really sort of doing what we call sort of a state of the state baseline, where we're sort of taking a deep dive and look into what are the objectives in that particular state what's what are the.

<unk> ships that and I see our digital solution divisions brings whereas whats the Tyler product footprint, what's the terms of the contract vehicle, how can we easily get products into those clients hands.

When we talk about what those near term opportunities are we do qualify and then we have a number of opportunities that we think are more longer term, but what we call more qualified leads were up around sort of in the 170 580 range right now on all different types of plays that we're looking at there.

Probably somewhere around 50 $50 million in IRR is what we would consider more qualified qualified pipe to me is not something that's going to close in the next month.

A month or two but it's something that I think has got a pretty viable horizon on it.

Your next question comes from the line of Joshua Reilly of Needham <unk> Company. Your line is open.

Hi, yes, thanks for taking my question.

You mentioned from ERP results in the quarter and the pipeline for the rest of the year can you just speak to what's driving that pipeline and the visibility that you have in Europe .

For the rest of 2023, thank you.

Yes, I think what I would say Theyre Joshua is that what we're seeing in terms of the sales indicators. The RFP volume. The number of demos that were doing is really at almost all time highs now thats now going to turn into business for several quarters, but it's very encouraging to see.

I don't really can't really put my finger on what's driving that right now other than the fact that demand remains high and our clients' budgets remain solid.

Next question comes from the line of Terry Tillman of Securities. Your line is open.

Yes, good morning, Lynn, Brian and Halle. Thanks for taking my question or question with a slight follow up I guess on the conversions what I'd be curious Lynn has anything evolved or changed in terms of as you're doing these flips or conversion the propensity to maybe do multi suite, then and or just think much more strategic and broader with the broader product.

Foot print that you've evolved and then the second part of this is just with rapid financial solutions. It sounds like it's really interesting in terms of kind of one plus one three anything on the quant quantifying the size of that business now. Thank you.

Sure I think.

We certainly use the flips and conversions as an opportunity to upsell.

That is part of our strategic direction.

We're still going at a pretty healthy pace I think.

When we when we get to Investor day in June you'll probably give us, we'll probably hear a little more guidance on the pace of our conversions and where we think will be over the next 456, all the way up to Tyler 2030.

But you're exactly right, it's an opportunity for us to once again reach out in and upsell other products around and then help incentivize flips too.

As it relates to rapid.

This is a transaction that we're pretty excited about.

It's a capability that we didn't have in house capability that now I see you didn't have in house the whole, bringing in the whole issuing side of disbursements in the fact that.

We closed that deal at the end of November .

And so we've owned this company for just a little over about five months now not quite five months and already the synergies and working with the.

Digital services team.

And I see these deals that we've already got signed I think this early is something a little unusual for us with acquisitions. It normally takes a little bit of time.

There's a lot of roadmap going looking out on the disbursement side of payments as you know their primary focus right now sort of in the.

The justice space, but there's a possibility across all of our product lines that again is going to take years to develop but its pretty exciting the early momentum we've seen.

And we don't disclose the revenues for rapid separately, but when we acquired them they were in the.

Kind of $14 million to $15 million annual revenue range.

Yes.

Your next question comes from the line of Tahira Afzal.

From Wolfe Research your line is open.

Hey, guys. This is Alex.

I guess maybe.

Just a quick question on another quick question on the demand environment. It does seem Lynn.

Linda.

Youre seeing literally every company kind of talk about the strength in state and local is there obviously the budgets have been on a relative basis better than other sectors is there anything unique or special going on.

And kind of if you look at your own pace.

Of new SaaS.

Bookings has that changed at all as it is the environment better on a relative basis than where you thought it was going to be is it as good as you thought it was going to be love to get color. There and then just one for Brian around.

Appreciate the commentary on operating margin trends through the year.

Is there anything you can help us with on free cash flow, specifically I think.

The 130, how that propagates those cash tax payments through the year and as Youre looking at cash conversion on an annual basis, where that falls out.

Yes, I think when we talk about what we're seeing in the market. It's a couple of things probably I mean.

It certainly reinforces the principle that the things that we're providing our essential functionality I think it reinforces the principle that we went through some periods of time, where there might have been a little pent up demand coming out of Covid.

And also the continued shift towards modernization and Digitization of local government, we also see where.

We've.

About the labor markets for example, and how the labor markets are affecting different companies, but they are also affecting our clients and as there is labor shortages in turnovers with our clients. It's also creating challenges for our clients, which is having them really point to and use technology to help help bridge that gap.

So theres just a lot of things going on right now.

It's a good market right now and I don't know, how I'd characterize my expectation, but I'm pretty happy with where the market is right now.

And on.

The free cash flow.

And in.

I think a little bit on the bookings growth that Lynn was just mentioning it's interesting our overall bookings growth was.

On an organic basis around 7%, but our subscription bookings on an organic basis were almost almost 24%.

Very close to the same number our revenue growth was.

So the.

The real strength is in the bookings.

<unk> and <unk>.

Transaction bookings.

On the free cash flow, yeah, the $130 million $131 million estimated incremental cash taxes. This year.

Related to section 174 is a bit higher than.

Then we had talked about in the fourth quarter calls, we've got more information and gotten into the calculations more.

That impact is a little bit higher this year.

I think it's.

$73 million of that applies to really.

The deposit for last year's taxes about $58 million. This year. So that impact has continued to decline each year, but we have a two year impact or catch up in this year.

On the free cash flow, yes, the $130 million $131 million estimated incremental cash taxes. This year relative related to section 174 is a bit higher than.

But that that impacts should decline year over year until after five years that sorted.

Neutral.

We made.

The biggest piece of that in.

Mid April .

I think it was around $85 million and then I think the impact is.

Around I think in the $15 million range.

Or is it roughly equal.

In each of the last three quarters.

On a free cash flow basis overall, I think our our free cash flow margin excluding.

The section 174 impact is.

I would say the range is in.

Kind of 18% to 20% margin range.

And including the impact of the free cash flow I'm, sorry, more of the mid teens range and including the impact of the section 174 change.

It's.

Kind of high single.

Low double digit.

Free cash flow margins, so the impact is pretty meaningful this year.

Okay.

Your next question comes from the line of <unk> Kalia from Barclays. Your line is open.

Okay, Great Hey, good morning, Lynn Good morning, Brian Thanks for taking my question here.

Brian maybe maybe for you.

I appreciate the additional disclosure I think gone on SaaS bookings AOR I think that was I think that was what we called in the supplement and I think that grew mid single digits.

This quarter off of.

<unk>.

Tough compare I was just wondering if you just talk a little bit about how how that sort of how you sort of think about that trending through the year and maybe just to introduce us to that metric a little bit and then just relatedly on disclosure can you just talk about some of the other changes here like I think appraisal.

Is the metric that we used to get before I think thats gotten consolidated somewhere else just talk to us a little bit about some of the disclosure changes here and what you want us to focus on in terms of the new.

Yes appraisal is certainly a much smaller piece of our business appraisal services, it's an important.

Service that we provide often to customers that we also have sold or will so we'll sell a property tax system too.

But it's a.

Now well under 2% of our revenues and so.

We've consolidated that line into the professional services line.

And again the focus as you've seen from some of the things we've talked about really is around subscriptions.

Revenue growth of recurring revenues.

And we've given some detail breaking that out between the SaaS revenues and the transaction based revenues, which would be things like payments.

Our digital solutions portals.

Filing those sorts of things.

In the SaaS bookings detail.

Youre correct it grew.

Sort of mid single digits, but.

That's really just referring to basically new logos SaaS deals.

So there is additional SaaS bookings in the.

Okay.

Upsell.

Pricing increases.

<unk> sales of additional products to existing customers.

<unk>.

The metric we really think is important is the bookings growth number four.

For subscriptions overall, which are the transactions and SaaS revenues and that was.

23, 6% this quarter.

Okay.

Your next question comes from the line of Peter Heckmann of D. A Davidson your line is open.

Thank you. Good morning, just a couple of quick questions that you've done a fabulous job of reducing net leverage post the acquisition and then how are you thinking about that.

The potential for M&A, how does that landscape look at it as well as valuations and then.

Really get focused mainly on deleveraging.

So much on the share repurchase plan I mean, what are your thoughts there in terms of <unk>.

Resuming share repurchases at some level.

Leverage.

Yes, sure Pete I think.

Youre right our focus still continues to be a reduction of debt.

Sure.

That's our primary focus with our use of capital. It's interesting our term debt now is getting closer to <unk>.

30% of our overall debt it started off more at 65% so about a third.

The potential for M&A, how does that landscape look at it as well as valuations and then.

Kind of flip that model.

Still look at M&A, we still evaluate a lot of M&A opportunities clearly, we just did this rapid solutions deal last fall.

If we see an acquisition we've seen opportunities like that where we really believe in the long term strategic value, we're going to pursue it.

I think thats been our take really even when we had a lot higher net leverage profile.

That being said.

That's our primary focus with our use of capital. It's interesting our term debt now is getting closer to <unk>.

We've got a lot of initiatives going on at Tyler and we've got a lot of our hands full with a lot of different things in and I could see us continuing to do acquisitions like rapid but in terms of a larger sort of more transformational or entering into a whole new space, that's probably not on the near term horizon.

30% of our overall debt it started off more at 65% so about a third.

Kind of flip that model.

We still look at M&A, we still evaluate a lot of M&A opportunities clearly, we just did this rapid solutions deal last fall.

If we see and we see an opportunity like that where we really believe in the long term strategic value, we're going to pursue it.

Next question comes from the line of Charles Stressor Seeds Js Securities Inc. Your line is open.

I think thats been our take really even when we had a lot higher net leverage profile.

Hi, good morning, Brian .

Brian on the last call you talked about Q1 being some of it in Q4.

That being said.

EPS.

But the big ramp in Q2.

With the full year guidance essentially unchanged should we use.

Soon that the ramp in Q2 will be less given that Q1 results were better than expected.

Good.

Well I think.

Okay.

We'd still be in the same range for the full year.

Next question comes from the line of Charles Stressor as seeds J S Securities Inc. Your line is open.

We're increasingly confident of that range and we may be.

Trending a little bit.

Hi, good morning, Brian .

Brian on the last call you talked about Q1 being similar to Q4 in terms of the EPS.

More to the upper end of the range at this point, although it's still early in the year.

But.

EPS.

But I think that yes, maybe the ramp is.

The big ramp in Q2.

With the full year guidance is essentially unchanged.

I mean, I think we're still in the ballpark, we did $1 66 last year at <unk> 76 in the first quarter, but I think that.

Soon that the ramp in Q2 will be less given that Q1 results were better than expected.

Jump up.

In the Q2, and Q3 and Q4 would be.

Well I think.

Okay.

Maybe a little less pronounced.

We'd still be in the same range for the full year I'd say were increasingly confident of that range and we may be.

Again.

<unk> pretty much in the same range.

Trending a little bit.

As Michael Cherny from Wells Fargo Securities. Your line is open.

More to the upper end of the range at this point, although it's still early in the year, but.

Hey, great. Thanks. Good morning, appreciate you taking the question.

But I think that yes, maybe the ramp is.

The commentary around the demand environment.

I mean, I think we're still in the ballpark, we did $1 66 last year, we did $1 76 in the first quarter, but I think that.

RFP volume.

Remained consistently upbeat.

I realize there are some moving pieces, but the organic growth number of 7%.

Jump up.

In the Q2, and Q3 and Q4 would be.

Towards the lower end of the target range. So can you just help us square those things what is what is the organic growth number not entirely reflecting relative to demand backdrop, whether it's pipeline bookings or just general mix and transition impacts I mean any context you can provide.

Maybe a little less pronounced but again, we're in the <unk>.

Pretty much in the same range.

As Michael churn from Wells Fargo Securities. Your line is open.

Just around your view on that number is helpful. Thank you.

I'll take that.

Stab at that I think most of its around the lag between the time that we sign a new deal and when revenue start to hit the income statement.

So when we've talked about are in our SaaS bookings over recent quarters and this quarter in particular being very strong.

<unk>.

There's typically a lag whether it's a new software deal where it might be a quarter to two quarters, maybe a little bit longer lag from the time, we signed the contract to when the client is environment is set up and we're able to start recognizing revenues.

Okay.

Stab at that I think most of its around the lag between the time that we sign a new deal and when revenues start to hit the income statement.

And really the same sort of things and many of our transaction based revenue contracts.

We signed a new deal for payments for example, and there might be perhaps a quarter or so between the time those revenues start to get recognized.

So.

We've talked about are in our SaaS bookings over recent quarters and this quarter in particular being very strong but.

The same time.

We see the impact of <unk>.

Lower licenses immediately because if those were license deals.

We would have recognized all of that revenue or the <unk>.

Majority of that revenue pretty much upfront when the.

Very soon after the contract sign.

So.

And really the same sort of things and many of our transaction based revenue contracts.

That would be the biggest factor there and its the same thing with flips from on Prem to the cloud.

We signed a new deal for payments for example, and there might be perhaps a quarter or so lag between the time those revenues start to get recognized at the.

We may sign it now, but theres a period of time, where that transition takes place. So we don't get the uplift in the revenue immediately.

Same time.

Your next question comes from the line of Jonathan Ho.

We see the impact of.

Lower licenses immediately because if those are license deals.

William Blair <unk> Company your line is open.

Hi, Good morning can you talk a little bit about the data insights opportunity that you referenced in the script and perhaps what kind of upsell opportunities youre seeing in and around that product grouping. Thank you.

Would have recognized all of that revenue or the majority of that revenue pretty much upfront when the.

Very soon after the contract sign.

So that would be the biggest factor there and its the same thing with flips from on Prem to the cloud.

Yes, Jonathan I think I mean data insights is something that.

When I look out in the future of public sector.

There's we may sign it now, but theres a period of time, where that transition takes place. So we don't get the uplift in the revenues immediately.

To me as an offering that I can see every single public sector agency needing.

It is a very unique offering we're in a unique position given our big foot, our large footprint and our ability to surface data across so many different <unk>.

Your next question comes from the line of Jonathan Ho from William Blair <unk> Company. Your line is open hi.

Solutions, not only our own but even even non Tyler solutions.

I think it's something that look we made that investment now five six years ago.

And I think we're starting to see more and more demand for it. What we've also seen is internally, we've actually sort of deconstructed the DNI.

Yes, Jonathan I think I mean data insights is something that's.

I look out in the future of public sector. That's to me is an offering that I can see every single public sector agency meeting.

Former division within Tyler and we now have it.

Integrated with each of our divisions, so that we're aligning more product with the individual demand. So it's something that I think is a differentiator for us I think it's always been a differentiator for us we've seen it even in the last year or so it's been a differentiator for NSE.

It's a very unique offering we're in a unique position given our big foot, our large footprint and our ability to surface data across so many different.

Solutions, not only our own but even even non Tyler solutions.

I think it's something that look we made that investment now five six years ago.

Talk about a year ago, we were talking about the South Carolina rebid or the early.

Early renewal of the Texas payments contract those were done in part are primarily are a major factor was our data and insights. So it's something that we're going to continue to leverage I think we're in a unique position within it and it's.

And I think we're starting to see more and more demand for it. What we've also seen is internally, we've actually sort of deconstructed the DNI.

Former division within Tyler and we now have habit.

It's something that the public sector really needs.

Integrated with each of our divisions, so that we're aligning more product with the individual demand.

Okay.

Your next question comes from the line of Robert Baird. Your line is open.

It's something that I think is a differentiator for us I think it's always been a differentiator for us we've seen it even the last year or so it's been a differentiator for NSE we.

Great. Thanks, Good morning, guys, Brian one for you.

I know last quarter. It seemed like a couple of big deals that slipped out of the quarter and.

Talk about a year ago, we were talking about the South Carolina rebid or the early.

The early renewal of the Texas payments contract those were done in part are primarily are a major factor was our data and insights. So it's something that we're going to continue to leverage I think we're in a unique position within it and it's.

The deal sizing I think was a bit.

More moderate and just curious if you saw some of those deals closed this quarter.

And what Youre seeing in terms of deal sizing and then just a quick follow up just on the on the free cash flow just to understand that better is that is the <unk>.

It's something that the public sector really needs.

Okay.

They are all of the catch up from 'twenty, two where there is or is there anything else on the tax side thats impacting free cash flow. Thank you.

Your next question comes from the line of Rob Oliver of Baird. Your line is open.

Great. Thanks, Good morning, guys, Brian one for you.

Yes.

Sure Yes.

Yes on the free cash flow.

I know last quarter. It seemed like a couple of big deals that slipped out of the quarter and feel.

That impact is really pretty much all from.

The catch up of.

The deal sizing I think was a bit.

Section 174.

It's a complicated calculation that's still evolving.

More moderate and just curious if you saw some of those deals closed this quarter.

The overhead you have to add into it and some of those things but.

And what Youre seeing in terms of deal sizing and then just a quick follow up just on the on the free cash flow just to understand that better is that is the impact there all of the catch up from 'twenty, two where there is or is there anything else on the tax side, that's impacting free cash flow. Thank you.

The impact is higher than we initially impacted expected, particularly related to.

The 2022 amounts.

Yes, the average deal size this quarter was a bit bigger than the average deal size in the first quarter of last year a.

Yes.

Sure.

A couple of those half of those deals that we referred to.

Yeah on the free cash flow.

That impact is really pretty much all from.

We always have deals slip from quarter to quarter.

The catch up of.

With the subscription model is less impactful, but we did have a couple of license deals that.

Section 174 than.

It's a complicated calculation that is still evolving.

We talked about.

The overhead you have to add into it and some of those things but.

In Q4.

We referred to not by name.

The impact is higher than we initially impacted.

That did close this quarter, we had two really nice license deals.

<unk>, particularly related to.

The 2022 amounts.

With the <unk>.

Yes, the average deal size this quarter was a bit bigger than the average deal size in the first quarter of last year.

For our property or.

Recording product.

With two large counties in North Carolina, Wake County, in which is Raleigh in Mecklenburg County, which is Charlotte.

A couple of those half of those deals that we referred to.

We always have deals that slip from quarter to quarter.

And then we had a.

With the subscription model is less impactful, but we did have a couple of license deal that we.

Yes.

Public safety deal with the Virginia State police.

Closed this quarter as well so generally we've seen those deals.

We talked about.

In Q4.

We referred to not by name.

The timing shifted a bit we've seen those come in.

That did close this quarter, we had two really nice license deals.

With the <unk>.

Your next question comes from the line of Gabriela Borges from Goldman Sachs. Your line is open.

For our property or.

Recording product.

With two large counties in North Carolina, Wake County, in which is Raleigh in Mecklenburg County, which is Charlotte.

Good morning. Thank you I wanted to follow up on some of my commentary on margin expansion.

And then we had a.

Brian as you think.

The longer term trajectory for margins I know, you've given us some qualitative color and a little bit of quantitative color as well.

Yes.

Public safety deal with the Virginia State police.

Closed this quarter as well so generally we've seen those deals.

Expectations on that margin progression. After this year is likely to be linear.

You see a period of time when maybe it does.

The timing shifted a bit we've seen those come in.

Alright, and structuring for margins. Thank you.

Okay.

Yes.

Your next question comes from the line of Gabriela Borges from Goldman Sachs. Your line is open.

I don't expect it will be linear and certainly margins and our targets.

Good morning. Thank you I wanted to follow up on some of the commentary on margin expansion.

Broadly how we view the trajectory of the one of the topics, we'll be looking to address at the Investor day.

Lynn and Brian .

The longer term trajectory for margins I know, you've given us some qualitative color and a little bit of quantitative color as well.

But the things are rarely linear.

I do think around the timing of flips over the next few years.

Expectations that margin progression. After this year is likely to be linear.

We.

Celebrate the move of our.

Our clients from on Prem to the cloud.

You see a period of time and maybe does it accelerate a trajectory for margins. Thank you.

The timing.

Okay.

It's a J curve or an S curve or how that works.

Yes.

It will be a factor in that margin trajectory.

I don't expect it will be linear and certainly margins and our targets.

I think the.

We're more certainty around the timing of the closing of our data centers.

Broadly how we view the trajectory of the one of the topics, we'll be looking to address it at the Investor day.

And we've talked about that in 2024 and towards the end of 2025 closing those two data centers and being able to reduce those bubble costs.

But things are rarely linear.

I do think around the timing of flips over the next few years as we accelerate the move of our.

And so those will have.

More of an impact in those years.

So don't expect it to be linear.

Our clients from on Prem to the cloud.

We really can't give much color beyond that right now, but it is something we'll continue to.

The timing.

It's a J curve or an S curve or how that works.

To refine our outlook for and we'll be talking about.

He will be a factor in that margin trajectory.

I think.

Margins will certainly be.

The.

We're more certainty around the timing of the closing of our data centers.

Significant topic at Investor Day.

And of course the.

And we've talked about that in 2024 and towards the end of 2025 closing those two datacenters and being able to reduce those bubble costs.

As we as we grow out through Tyler 2030, and we.

We talk about our growth in our SaaS and our flips, but at the same time, we are actively growing our transaction business in our payments business, which will have a somewhat of a negative effect depending on the growth rates between those two businesses.

And so those will have.

More of an impact in those years.

So don't expect it to be linear.

You really can't give much color beyond that right now, but it is something we'll continue.

Have some impact on overall margins.

To refine our outlook for and we'll be talking about.

Your next question comes from the line of Keith <unk> of Northcoast Research. Your line is open.

Margins will certainly be.

A significant topic at Investor day.

Morning, guys, Hey, Brian I know in quarters past, we've talked about the servicing revenue and the staffing up of that unit can you perhaps talk about the.

And of course the.

As we as we grow out through Tyler 2030, and we we talk about our growth in our SaaS and our flips, but at the same time, we are actively growing our transaction business in our payments business, which will have a somewhat of a negative effects. So depending on the growth rates between those two businesses and we will have some impact on overall margins.

The staffing levels are currently either satisfy them and if you have those people now they are actually able to contribute to the bottom line.

Yes, I think.

<unk> continued to hire new staff and as well as.

We're seeing.

Okay.

Attrition slow.

Which is not surprising given some of the shifts in the broader employment markets.

Your next question comes from the line of Keith Suzman of Northcoast Research. Your line is open.

So.

As we've talked about over the last few quarters we've added.

Good morning, guys, Hey, Brian <unk>.

<unk> past, we've talked about the servicing revenue.

New people new classes on the pro services side and those people are becoming billable.

Staffing up with that unit can you perhaps talk about the.

The staffing levels are currently Irish satisfy them and if you have those people now they are actually able to contribute to the bottom line.

I think youll see.

In Q2, and beyond Youll see more of the impact of that.

Yes, I think.

So we will likely see.

<unk> continued to hire new staff and as well as.

Nice growth in services revenue, which will also help lead most importantly.

We are seeing.

Attrition slow.

Which is not surprising given some of the shifts in the broader employment markets.

Test, bringing subscription revenues or SaaS revenues online.

At a faster pace so.

So.

I think youll start to see that it really be impacted those people, becoming fully available in Q2 and I think we are.

As we've talked about over the last few quarters we've added.

New people new classes on the pro services side and those people are becoming billable.

We're.

Pretty well on plan with our efforts.

I think youll see.

To staff up to the capacity, we want to have and I think to be clear we've talked historically over the years about services and our margins on services.

In Q2, and beyond Youll see more of the impact of that.

So.

We will likely see.

Nice growth in services revenue, which will also help lead most importantly.

Services historically is and is.

Is not accretive to margins.

That's bringing subscription revenues or SaaS revenues online.

Talked in the past about it maybe in breakeven are really more of a loss leader.

At a faster pace. So I think youll start to see that really the impact of those people becoming fully available in Q2 and I think we are.

It's likely not to change going forward I think when I talked earlier about intentionality around other things that we're doing within the business part of that is as things around what we can do to to minimize the negative impact of services on overall margins.

Sure.

Pretty well on plan with our efforts to.

To staff up to the capacity, we want to have and I think to be clear we've talked historically over the years about services and our margins on services.

Okay.

Yeah.

Okay.

Your next question comes from the line of Clarke Jeffries.

Services, historically is and is not accretive to margins.

Your line is open.

Hello, Thank you for taking the question.

We've talked in the past about it maybe even breakeven or really more of a loss leader.

Brian I just wanted to ask was there any restatement of SaaS revenue in 2022.

That's likely not to change going forward I think when I talked earlier about intentionality around other things that we're doing within the business part of that is is things around what we can do to minimize the negative impact of services on overall margins.

As I just look to Q4 as an example, it seems like we were talking about $110 million of last quarter and that was $120 million in supplemental so is there any change here.

There's not a.

Yes.

There is a very small re class I think of some revenues from.

Okay.

Your next question comes from the line of Clarke Jeffries.

From transaction revenues the SaaS revenues.

Your line is open.

So getting those kind of in line with our current reporting.

Hello. Thank you for taking the question Brian I just wanted to ask was there a restatement of SaaS revenue in 2022.

But.

Not a significant one and thats reflected in the supplemental data.

As I just look to Q4 as an example, it seemed like we were talking about a $110 million last quarter and now it's $120 million in supplemental so is there any change here.

Okay.

Your next question comes from the line of Joe Goodwin with JMP. Your line is open.

There's not a.

Yes.

Great. Thank you for taking my question.

There is a very small reclassify think of some revenues from <unk>.

Lynn and Brian how different of the product and technology level would you say the current payment portfolio is so enticing rapid everything you have there now, but it's built for governments versus other players in the space.

From transaction revenues the SaaS revenues.

So getting those kind of in line with our current reporting.

But.

Turning to differentiate beyond your existing relationships and market presence or is there some differentiation.

But.

Not a significant one but that and thats reflected in our supplemental data.

On the technology level as well.

Yes.

Okay.

We believe the technology is meaningfully differentiated from the more horizontal payment providers.

Your next question comes from the line of Joe Goodwin of JMP. Your line is open.

So whether it's the different types of.

Great. Thank you for taking my question.

I guess Lynn and Brian how different of the product and technology level would you say the current payment portfolio is so enticing rapid everything you have there now, but it's built for governments versus other players in the space and when you say you differentiate.

Payment channels, we can offer.

Now really robust disbursement capabilities, adding to the payment of acquiring side.

And then really around the reporting the integration to Tyler's backend systems that makes reconciliations easier.

On your existing relationships and market presence or is there some differentiation on.

On the technology level as well.

That makes the.

Yes.

The clients job easier and it's a meaningful differentiator for for us and in fact it.

We believe the technology is meaningfully differentiated from the more horizontal payment providers.

So the.

It enables us in many instances to be.

Either it's the different types of pain.

Payment channels, we can offer.

To have really solid pricing and in some cases premium pricing.

Now really robust disbursement capabilities, adding to the payment of acquiring side.

Because we provide additional value around that so.

And then really around the reporting the integration to Tyler's backend systems that makes reconciliations easier.

Rapid was a nice addition to those capabilities, but nic's already had very very robust capabilities and continues to invest in that payments platform and enhance those and today, we have a lot of.

That makes the.

The clients job easier and it's a meaningful differentiator for for us and in fact it is.

Processes underway to further.

Integrate that payment platform into the Tyler backend systems to create more and more of a competitive edge.

It enables us in many instances to be.

Because of that integration and John I think you can expect at the Investor day in June for Us to provide a little more color maybe in a little more detail around some of those topics specifically the topic around differentiation in the market and what we why we're different and the opportunities that we have in front of us.

To have really solid pricing and in some cases premium pricing.

Because we provide additional value around that so.

Rapid was a nice addition to those capabilities, but nics already had very very robust capabilities and continues to invest in our payments platform and enhance those and today, we have a lot of.

Your next question comes from the line of Catherine.

Processes underway to further.

Integrate that payment platform into the Tyler backend systems to create more and more of a competitive edge.

<unk> ICR your line is open.

Yeah, Hi, guys, just a follow up Lynn do you comment on sort of payments and maybe I guess I'll drag Brian and cause this as well just on the gross revenue recognition.

Because of that integration.

John I think you can expect at the Investor day in June for Us to.

I assume you all have no rail.

To provide a little more color, maybe even a little more detail around some of those topics specifically the topic around differentiation in the market and what we why we're different and the opportunities that we have in front of us.

Ability to pick what you want do you want to go with meaning I assume that would be easier, but I assume your grosses are required by accounting rules.

Is there a certain scale that payments gets to that where the drag from a mix shift perspective becomes less meaning Brian I. Appreciate you calling out the 100 bps this quarter.

Your next question comes from the line of Turpentine of Evercore ICI. Your line is open.

We expect that to get incrementally better as it just grows in scale. So I was just kind of curious about that.

Yeah, Hi, guys, just a follow up Lynn do you comment on sort of payments and maybe I guess I'll drag Brian into this as well just on the gross revenue recognition a I assume you all have no rail.

Any flexibility to maybe get to that and then sort of how we should think about sort of the drag is that part of the business gets bigger.

There's not really a lot of ability to.

Ability to pick which one do you want to go with meaning I assume that would be easier, but I assume your grosses are required by accounting rules and is there a certain scale that payments gets to that where the drag from a mix shift perspective becomes less meaning Brian I. Appreciate you calling out the 100 bps this quarter.

To pick and choose how its accounted for the difference is really whether we assume the responsibility and the risk for paying those.

Merchant fees and interchange fees, which can vary depending on the type of credit card, whether it's amex visa whether it's.

Should we expect that to get incrementally better as it just grows in scale. So I was just kind of curious about.

A business card or personal card and so in most cases, our clients prefer for us to handle that so that they know what their fee is so we have a percentage of the transaction.

There's any flexibility to maybe get to that and then sort of how we should think about sort of the drag is that part of the business gets bigger.

There's not really a lot of ability to.

Sure.

That we charge.

To pick and choose how its accounted for the difference is really whether we assume the responsibility and the risk for paying those.

Let's call it 2%.

<unk>.

We pay out the merchant fees.

And interchange fees and those might be say, 175%, but they can vary around that number.

Merchant fees and interchange fees, which can vary depending on the type of credit card, whether it's amex or visa whether it's.

And generally we also get a per transaction charge as well.

A business card or personal card and so in most cases, our clients prefer for us to handle that so that they know what their fee is so we have a percentage of the <unk>.

And so we do get a margin on the merchant fees.

But its pretty slim margin and then we also get a transaction fee.

<unk> generally.

And our net model we would.

Transaction.

The customer has chosen to pay those merchant fees.

That we charge.

Let's call it 2%.

Change fees directly.

<unk>.

Sure.

We pay out the merchant fees.

We're just getting a generally a per transaction charge for the services that we provide.

And interchange fees and those might be say, 175%, but they can vary around that number.

And in most cases, the client prefers for us to take that risk.

And generally we also get a per transaction charge as well.

But if we are paying those fees and we have to do gross accounting. So so we think it's important even though there is a margin on those.

And so we do get a margin on the merchant fees.

But it's a pretty slim margin and then we also get a transaction fee.

We sort of put it back.

<unk> generally.

In a net model.

To give you what that impact is on a net basis. So if you take those fees out.

The customer has chosen to pay those merchant fees.

As we talked about if you take those out of both revenues and expenses and just sort of leave what we keep.

Change fees directly.

<unk>.

We're just getting a generally a per transaction charge for the services that we provide.

It would it's 200 basis point.

<unk> overall operating margin impact on Tyler as a whole so depending on how fast those grow relative to the rest of Tyler that impact could be bigger or it could be smaller.

And in most cases, the client for first for us to take that risk but.

But if we are paying those fees and we have to do gross accounting. So so we think it's important even though there is a margin on those.

And Thats one of the reasons why we would expect to continue to sort of give you those numbers. So that you can see the impact.

We sort of put it back.

To give you what that impact is on a net basis. So if you take those fees out.

Of.

And how that might be trending over time.

As we talked about if you take those out of both revenues and expenses and just sort of leave what we keep.

And just to be clear Kurt.

It is customer driven as Brian said and the gross model, while lower margin actually produces higher free cash flow.

It would.

It's a 200 basis point.

Overall operating margin impact on Tyler as a whole.

So it's a benefit to our free cash flow.

Depending on how fast those grow relative to the rest of Tyler that impact could be bigger or could be smaller.

And that was the last question we had for today, so I'd like to hand back to Lynn Moore for closing comments.

And that's one of the reasons why we would expect to continue to sort of give you those numbers. So.

Thanks, Kevin and 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.

So that you can see the impact.

Of.

Okay.

And how that might be trending over time.

That does conclude our conference for today. Thank you for participating you may now disconnect.

And just to be clear Kurt.

It is customer driven as Brian said.

Gross model, while lower margin actually produces higher free cash flow.

So it's a benefit to our free cash flow.

And that was the last question we had for today, so I'd like to hand back to Lynn Moore for closing comments.

Thanks, Kevin and 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.

Okay.

That does conclude our conference for today. Thank you for participating you may now disconnect.

Please wait the conference will begin shortly.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

Yeah.

Q1 2023 Tyler Technologies Inc Earnings Call

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