Q3 2023 Tyler Technologies Inc Earnings Call

Hello, and welcome to today's Tyler Technologies third quarter 2023 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.

In order to address your questions and stay within the allotted time. Please limit your question to one question per person and again, we'll send reminders on how to ask a question that the conclusion.

As a reminder, also this conference is being recorded today November 2nd 2023.

I would like to turn the call over to Khalid Al sure Beanie Tyler's senior director of Investor Relations. Please go ahead.

Thank you Erin and welcome to our call with me today is 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 ever result, and provide an update to our annual guidance.

And we'll end with some additional comments and then we'll take 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 1095.

And are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projections.

We 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've 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.

Please note there have been minor re classes between historical SaaS and transaction based revenues on the supplemental schedule as a result of the recent transition to our new financial system.

On the events and presentations tab, we have 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 Ella.

Our third quarter earnings and cash flow surpassed expectations and reflect a continuation of execution at a high level on key operational initiatives.

We achieved strong performance across several of our key metrics with double digit recurring growth and free cash flow growth of more than 40%.

Our recurring revenue mix rose to 83, 4% of our total revenues with SaaS revenues up 26% organically.

This was our 11th consecutive quarter of SaaS revenue growth of 20% or more and exceeded our near term growth expectations of a 20% CAGR and SaaS revenues through 2025 as outlined during our June Investor day.

We also achieved solid growth in our transaction based revenues, which were up eight 5%.

While operating margins this quarter declined slightly from last year as expected due to our cloud transition margins were ahead of plan as a result of our operating efficiencies and expense management, especially around cloud operations. It.

It is encouraging to see margins hold essentially flat with last year, even as we made considerable progress on our cloud optimization and cloud transition efforts, establishing a clear roadmap for operating margin improvement in 2024.

The third quarter presented a very difficult comparison for our new software contract value and mix as last year's third quarter included two very large SaaS contracts that totaled $70 million in contract value.

As we discuss regularly the timing of large deals such as the two signed in last year's third quarter can cause significant lumpiness in our new software bookings.

We're continuing to see a healthy public sector market environment, and our new business pipeline is active.

Leading indicators of Rfps and sales demand has remained strong with deal generally moving through the pipeline at a normal pace, which is often a 12 to 18 months procurement process.

Overall, our competitive position and win rates are strong with growing momentum in cross selling activities, our key value creation lever. Additionally.

Additionally, our transaction business continues to capture higher volumes as we gain traction with our unified payment solution.

I'd like to highlight some of our significant third quarter wins, which included a number of cross sell opportunities.

We continue to build momentum with our public safety solutions key third quarter wins include the Naperville, Illinois Police Department for integrated public safety suite, including CAD Records management and E citations.

Naperville is the fourth largest city in Illinois, a state where we also have a strong presence with our enterprise Justice solution.

We're also pleased to see SaaS adoption growing in acceptance of the public safety market with several cloud contracts signed during the quarter.

We continue to gain traction with cross sell wins under our digital solutions Division, formerly AIC and their state enterprise agreements.

Our state Enterprise agreement in Utah, we want a cross sell opportunity with the Utah Department of corrections for enterprise corrections electronic messaging solution.

We also added deals for application platform, formerly <unk> under our state enterprise agreements in Louisiana and Indiana.

In the federal market, we secured a significant license win with the U S. National Guard Bureau for our turnkey suite of workforce case management applications.

This is our largest workforce case management application within the department of defense and as another marquee win that spans 54 U S States territories and the district of Columbia.

That will be hosted in our fed ramp certified private cloud.

We signed a five year multi suite SaaS contract with Port Angeles, Washington, which includes our enterprise ERP enterprise permitting licensing and cyber security solutions as well as payments.

In the outdoor recreation space, we want a competitive deal for a recreation dynamic solutions with the Minnesota State parks.

In our payments business, we signed a one year extension for enterprise payment processing under our state Enterprise agreement in New Jersey.

And Harris County, Texas, the third largest county in the nation added our digital journey payment solution leveraging the disbursements capabilities that came to us through the rapid financial acquisition last year.

Yeah.

Before I turn the call over to Brian I want to highlight our recent acquisition activity.

As I said at our Investor Day, M&A is part of our DNA and during the third quarter. We completed the acquisition of computer systems innovations for approximately $36 million in cash.

CSI brings AI, driven automation and enhanced document processing technology that can be leveraged across many of tyler's vertical applications.

It is primarily serve the core technology space for many years and we're excited about the opportunity to combine our expansive footprint with CSI has expertise in AI and machine learning applications to elevate several of our other solutions.

Earlier this week, we completed two other tuck in acquisitions.

<unk> is a leading provider of AI powered machine learning and data driven solutions for public sector field operations.

<unk> advanced AI solution expertise extends our applications platform with intelligent edge technology that can be leveraged across our state and federal verticals.

Yes.

Resource X as priority based budgeting solutions to our entire ERP portfolio to address to address key challenges our clients face traditional budgeting process.

The total purchase price for these two acquisitions was approximately $38 million in cash and stock.

We're thrilled to welcome each of these companies and their team members to Tyler.

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

Thanks Lynn.

Total revenues for the quarter were $494 $7 million up four 5%.

Organic revenue growth, which also excludes the COVID-19 related revenues was 6.0%.

Last year's third quarter included $11 $7 million of revenues from Covid related initiatives at our digital solutions Division all of which ended in 2022.

Subscriptions revenue increased 16, 1% and organically rose 14, 7%.

Within subscriptions, our SaaS revenues grew organically, 26% to $138 $5 million.

It is important to note that as our new software contract mix continues to shift towards SaaS, our growth rate may vary from quarter to quarter due to the lag in time from contract signing to the start of revenue recognition, but we remain on track with our near term growth expectations of a 20% CAGR and SaaS revenues through 2025.

Transaction revenues grew eight 5% to $156 $7 million up 6% on an organic basis.

License revenue declined 47, 9% as our software business continues to shift to SaaS.

SaaS deals comprised 80% of our Q3, new software contract value compared to 91% last year.

As we noted earlier last year's Q3 included two large SaaS deals totaling $70 million in contract value.

Professional services revenue declined 14, 9%, primarily due to the absence of Covid related revenues and was flat organically.

We added 161, new SaaS arrangements and converted 79 existing on premises clients to SaaS with a total contract value of approximately $71 million in.

In Q3 of last year, we added 153, new SaaS arrangements and had 70 on premises conversions with a total contract value of approximately $149 million.

Overall, our pace of on premises conversions to SaaS continues at a steady pace with 246 slips year to date, and we expect Q4 conversions will be 100 or more.

More importantly, the total contract value associated with Philips has increased year to date to $58 million.

As we've discussed conversions are a significant growth driver over the next several years.

As we accelerate the pace of flips.

Including transaction revenues expansions with existing clients and professional services.

Total bookings increased 10, 3% on an organic basis.

Our total annualized recurring revenue was approximately $1 65 billion.

Up 11% and organically grew nine 8%.

Operating margins were better than expected despite pressure from our ongoing cloud transition our non-GAAP op margin was 24, 8% down only 10 basis points from Q3 of last year as.

As we discussed in prior quarters merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins in Q3, we paid merchant fees of approximately $36 million.

If those fees were netted out of both revenues and cost of revenues, our consolidated non-GAAP operating margin for the quarter would have been approximately 190 basis points higher.

Both cash flows from operations and free cash flow were robust this quarter at $177 5 million and $162 $7 million respectively.

Primarily driven by higher revenue collection.

Cash flow in the quarter was impacted by approximately $22 million of incremental cash taxes due to section 174 on.

On a pro forma basis, excluding the incremental section 170 forecast taxes of 120 $112 million our year to date free cash flow would be approximately $300 million.

Up 41% over last year.

We continue to prioritize repayment of our term debt is the use of our cash flow and in Q3, we reduced our term debt by $135 million.

We ended Q3 with total outstanding debt of $740 million in cash and investments of approximately $153 million.

Our net leverage at quarter end was approximately 124 times trailing 12 months pro forma EBITDA.

Our updated 2023 guidance is as follows we expect total revenues will be between $1 94, 2 billion and $1 962 billion.

The midpoint of our guidance implies organic growth of approximately seven 5%.

We expect GAAP diluted EPS will be between $3 82, and $3 96.

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 66.

$7 80.

Interest expense is expected to be approximately $24 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 in the Q3 earnings deck posted on our website.

In conjunction with our guidance for the full year I would like to remind you of the seasonality around our transaction revenues, while transaction revenues will grow year over year as expected. They declined sequentially in Q3 and will decline sequentially again in Q4 historically.

Transaction revenues are driven by two primary factors.

<unk> determined deadlines like corporate filings and hunting seasons, and the number of business days transaction revenues are typically at the highest in Q2, coinciding with peak outdoor seasons and tax deadlines.

Transactions are at a seasonal low in the fourth quarter with fewer business days and less activity around the holidays.

As we noted previously we are also seeing the revenue impact of midyear contract of mid year contractual changes in one of our state enterprise agreements that includes a move from a gross to net model for payments.

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

Thanks, Brian.

We're making solid progress every quarter to deliver our near and long term objectives that we discussed in detail at our Investor day earlier this year.

Consistent with our track record, we continue to scale, our enterprise, while capturing more efficiencies as we transform into a largely pure cloud business supported by a unified one Tyler strategy.

Our strong year to date performance is underpinned by our powerful financial algorithm strong balance sheet and our unique ability to deliver mission critical software solutions, enabling the public sectors ongoing digital transformation.

We're also proud that 11 of our state partners. One E Republic government experience awards are clients in Utah, Mississippi, Indiana, Arkansas, and Virginia swept the top five spots in the <unk> Awards.

Our momentum continues to build as we conduct this pivotal year in our cloud transition. Our team is excited about the tremendous opportunity ahead of us and we look forward to sharing our continued progress as we finish out 2023.

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

Yes.

Thank you we will now begin the question and answer session to enter a question into the question queue. Please press star one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset and then press the star key followed by the number one to withdraw your request press the star key.

And then the number one.

As a reminder, please limit your question to one question per time, so that we can stay within our allotted time today, we will pause momentarily to assemble our roster.

Our first question for today comes from the line of Matthew Vanvliet with BT IAG.

Your line is live.

Hey, good morning, Thanks for taking the questions.

I guess when you look at the the ongoing portfolio of company of customers that are looking to make cloud migrations and the overall flips there and then some of the net new business I know you've highlighted public safety in the past as probably being a laggard longer term, but it seems like the momentum of cloud deals. There is starting to pick up do you anticipate.

That encouraging more of your existing customers to make those flips how are those conversations going and ultimately how much upside do you feel like there is still left on the public safety side as you get more momentum in the cloud there. Thank you.

Yes, that's a good question and you're right historically public safety has been a little bit slower to adopt we're seeing that change.

I hesitate to say rapidly, but we are starting to see the momentum shift in the pendulum change a little bit we're seeing it in the deals that we're doing.

We're seeing it in the acceptance of our clients.

I'd say more so still on.

<unk> the record side.

Mobility is already there, but youre seeing a little bit of on the cat side.

Just this past quarter, where actually we we did a deal with Manassas, Virginia, where we they were non camp on Prem CAD RMS client and we flip them over to SaaS. So I think just like the rest of the business businesses that.

As the market continues to gain acceptance the momentum will continue to grow and we're pretty optimistic as we look out into 2024 that the number of flips in the number of SaaS deals.

We will continue to grow.

At a faster pace, albeit still.

Not a majority of the business yet.

Great. Thank you.

Thanks for your question.

Our next question is from the line of Kirk <unk> with Evercore ISI.

Your line is live.

Yes, thanks, very much congrats on the quarter guys.

Lynn can you just give a little bit more color on what youre seeing sort of across some of the product categories in terms of SaaS bookings, meaning active.

Activity levels, maybe on ERP versus courts, and justice versus public safety I'm, just kind of a little bit more color on that might be helpful. Just trying to get a sense of where you are saying.

And any color I guess on public safety end of the fourth quarter. Two would also be helpful. Thanks.

Yes, I think generally speaking across our entire portfolio.

With the exception of public safety, and probably our platform solutions, but all our other ones or we're pretty much leading first with SaaS.

The deals are.

Our budgets around SaaS or Hyatt ERP, I think we're north of 90%.

Courts and Justice is high.

The two the two market areas that are that are a little bit slower still or public safety.

Platform solutions, which is our federal which is our federal space.

But even there the modernization efforts that are going on at the federal government is really starting to ship that pendulum to SaaS as well.

The overwhelming majority of our business, where the demand is there in the market Receptiveness is there and it's starting the momentum for those other two pieces are starting to go forward. When you look at our licenses and the licenses now or about 2% of our total revenues most of that license a lot of those license deals are coming out of of those two other divisions, even as they are still there.

Some licenses.

Pockets of licenses around the rest of the business.

Thanks, I'll hop back in the queue.

Thanks for your question.

Our next question is from the line of Joshua Reilly with needle him.

Your line is live.

Thanks for taking.

My question nice job on the quarter here, our checks indicated that the micro pack business had a pretty strong pipeline coming into Q3 year, which makes sense.

<unk> fiscal year end for the federal government can we just get some more color on how these deals close and how anything to note on the cross sell.

Into the Nic's day contracts that might be.

And with the micro pack business.

And is there any more of these deals that potentially fell into the fourth quarter. Thank you.

Yes ill startup I didn't quite hear all that Brian So I'll, let you jump in but yes. So.

Platform solutions Q3 is normally their strongest quarter they.

They have that really strong deal with the National Guard Bureau, there was.

Really significant license deals that slipped and probably got pushed 24 and it was really around.

Some uncertainty with the federal government funding.

Q3 was coming to a close in sort of the move of some funds to two what the feds considered to be more mission critical the number of deals that we're doing in the pipeline of deals that we're doing at federal continues to grow but there still are some very large deals that sort of.

Can swing quarter to quarter.

A lot of times once that once that sort of window passes in Q3. There is still there is still a volume of deals that happened in Q4, Q1 Q2, but the sense of urgency is probably not quite the same as it is as you get into late Q2 and into Q3.

Yeah and on the cross sell.

The opportunities with our our application platform.

Formerly called micro packed.

<unk> product.

Remains one of the strongest opportunities and one of the areas, where we're seeing the most activity.

In terms of.

Leveraging the.

Digital solutions state contracts.

To sell that into those states and we had.

A couple of deals this quarter that we mentioned in the prepared remarks.

In different kinds of applications, I think in Louisiana and Indiana.

Where we've seen progress and we've seen a number of those deals.

Since the acquisition of Nics and that continues to be.

An opportunity that we're pursuing actively yes the synergy.

Between what we do at federal and the state market is really strong as Brian mentioned, we're seeing more and more pipeline there and really because when you think about the state government and what Theyre doing a lot of what Theyre doing as case management and our application platform really sort of serves those modernization needs.

It's less expensive it's nimbler.

It's built for government.

It is enhanced by our mobility, our DNI our payments. So we do see that synergy and I think thats something thats going to become a more of a focus for us as you look into $2004 25.

Thanks, guys nice job on the quarter.

Thank you for your question.

Our next question is from the line of Rob Oliver with Baird.

Great Hi, Thanks, good morning.

Letting the prepared remarks, you called out the Naperville, Illinois win.

In public safety and it sounds like that was a cross sell.

On courts and Justice. So just curious if that's a path you guys or you called out because youre seeing success there obviously.

One vision, that's being tied together would make a lot of sense, but is that a go to market play that you see driving increased wins for public safety.

In the future here. Thank you.

I do I think.

We talk about it with our connected communities vision and sort of the leverage and power. We can create between our public safety and our enterprise Justice visions Naperville wasn't really good when it was a good win because it was it was a very competitive deal as you'd imagine it was a license deal of over $1 million.

So those are always going to be competitive.

And.

<unk> part to you to your point as well, we actually did a smaller deal in California. This past quarter. It was with a mere posted a county sheriff's office out.

Out in California, and that was really leveraging the enterprise justice contract to bring Tyler corrections, they're important deal because we hadn't we hadn't really had a win in California in a little bit of time in and leveraging our relationship with on the courts <unk> Justice side and leveraging that contract was something that got us in the door and I think some opportunities.

To expand not only in that department, but also in California.

Great. Thanks for the color I appreciate it.

Thank you for your question.

Next question is from the line of Terry Tillman with Truth Securities. Your line is live.

Great. Good morning. This is Scott <unk> on for Terry I. Appreciate you taking the question.

Curious on the payments business and how we should be thinking about organic growth going forward in that segment and then also just on the payment disbursement use cases that have progressed since the acquisition of rapid financial last year. Thank you.

Okay.

I'll start with the use cases right now.

Rapid when we bought them they were <unk>.

Primarily in the court space and Thats, our primary focus right now.

We're in the process, we're early in our 2020 for budgeting.

Thinking about the investments and the various other disbursement cases that we want to put our money towards so.

Not going to give you our R&D timeline, right now where our properties, but we're in the process of doing that.

We've talked before.

I think the opportunities across the Tyler solutions is pretty expansive on the disbursement side, we've talked before I think as big as on the acquiring side, but currently right now the focus is primarily still in the courts area yes.

And on the expectations for growth rates around payments at Investor Day, we broadly talked about.

An expectation of transaction revenues growing in the 10% to 13% range.

And and expanding margins there over the next several years.

As we've said we're in the.

Very early innings of <unk>.

<unk>.

Executing on the cross sell opportunity.

Driving payments more deeply into our local government customer base.

And so we're still.

Ramping that up.

<unk> seen good success in.

In expanding those numbers of new deals each quarter, but generally that 10% to 13% CAGR where transaction revenues as our expectation over the next few years.

Great. Thank you.

Thank you for your question or.

Our next question is from the line of Alex Zukin with Wolfe Research. Your line is live.

Hey, guys. Thanks for taking the question I guess maybe.

Just two quick ones for me bookings looked like it took off.

This quarter after I.

Frankly over the last couple of quarters. So I wanted to just understand the outperformance there is not accomplish here where incremental momentum.

And then same question, obviously cash flow looked like a meaningfully outperformed at least our estimates on I think consensus. So just to understand was there anything one time, there and how should we think about it for for.

For Q4, and then just any color Bryan on the specific elements around some of the cloud SaaS restatement.

This quarter.

What drove that and how should we think about that going forward.

Yes.

Things their cash flow.

Most of the outperformance was.

You see it in the working capital side, and just really strong collections around.

R.

Our revenues driving good performance around our receivables.

I think we're continuing to think the impact of more and more recurring revenues and the positive cash flow characteristics around that.

Not really any one time things there.

But I think that our expectation for the year has ratcheted up a little bit.

I think right now even after the impact of the section 174 cash taxes, which.

Biggest impact was in the.

First half of the year.

I think we said there is $22 million impact on cash taxes this quarter.

Around 15 $15 million incremental taxes in Q4, but I think our expectation for the full year now.

As more in the $220 million to $240 million range for free cash flow, which is up from where we thought last quarter.

We did make some minor re classes in the historical data.

The split between.

Subscription so all in the subscription category on the face of our income statement, but in the breakout of those between.

Transaction revenues and SaaS revenues.

As we transitioned to a new financial system. This quarter, we had better clarity on.

Some of the mapping of the revenues primarily from acquisitions since then.

And reclassified those.

Somewhat between transactions and SaaS.

So.

Just sort of cleaned up some of those historical numbers.

We expect any more changes going forward.

Got it and what about on the booking side.

Yes, the booking side.

As we talked about those can be kind of lumpy.

But generally.

The really a reflection of kind of a combination of all the new SaaS business the new.

Increases in the transaction business.

Which kind of run through bookings at the same time as they run through revenues.

And just the combination of all of that led to it.

A stronger quarter. This this quarter, we didn't have any of the mega deals.

But we did have a really solid flow of.

New SaaS deals.

Some couple of not not.

Not super large, but meaningful license deals this quarter.

And then.

Pretty good activity around the.

Expansions with existing customers as well.

So it's pretty broad based.

But again, not driven by super large contracts, but.

Nice growth across all of our revenue streams.

Perfect. Thank you guys.

Thank you for your question.

Our next question comes from the line of Kelly <unk> with Barclays.

Your line is live.

Okay, Great, Hey, land, Hey, Brian Thanks for taking my question here.

Brian maybe maybe for you I'd love to dig into the Restatements, just just one level deeper.

So can you just walk through what some of the I guess, what some of the items were from the Nic's business that are now SaaS versus versus transaction.

And maybe the follow on is how would your SaaS revenue growth have looked I guess, excluding the restatement.

I know that I think it's about 26% year over year growth this quarter, what would that have been under the old convention, which is what our models kind of currently are based on and that makes sense.

Yes.

I don't have that number in front of me and they are not restatements.

In the financial statements they were always all in subscription revenues.

It's in the three class.

Clarify that's a request under restatement right.

Some of those were when we originally acquired in IC.

<unk>.

Before we.

We basically had almost all of their revenues classified in our transaction category.

And some of their revenues from an existing from a contract can have.

Sort of a blend of some software revenues and transaction revenues around those so they're providing some software services.

But getting paid with transaction fees.

<unk> system, sometimes there is some blurring between that also when we acquired the vend engine acquisition.

We initially.

<unk> made an additional.

<unk> judgment from their financials of how those revenues should be spread and with a deeper understanding of those and as we start to map those to a new financial system.

We just found that.

Some of those were more appropriately classified a different way.

So those are all relatively minor reclassifications as well so I don't think Theres, a big change in the trends.

Got it and having gone back, but maybe maybe just.

Just to maybe understand that a little bit better because 26% growth is quite a bit higher than what we were seeing before.

Nick.

The newly added revenue there was that growing significantly faster than than than sort of what I'll call. The old SaaS revenue that was in there because it is.

It is quite a bit higher than what it was before so I just wanted to make sure I just kind of flush that out no. No. There is not a significant change from from that that's not really accelerating that 26%.

As is.

Actually an acceleration this quarter, but again, we've said that will.

It may move around from quarter to quarter, but generally we expect this around the 20% CAGR over the next couple of years since SaaS revenues some quarters it may be higher and as we talked about some of that.

Variability from quarter to quarter has to do with.

The lag from when we signed the new SaaS deal to win those revenues hit which can be a quarter or two occasionally longer.

Got it very helpful. Thank you.

Thank you for your question.

Our next question is from the line of Jonathan Ho with William Blair.

Your line is live.

Hi.

Good morning, and thank you for taking my question just wanted to better understand sort of the AI opportunity that youre seeing out there and sort of the rationale for making the acquisitions at this time.

Just given state and local governments typically adopt technology in a little bit more slowly.

Do you think about sort of.

Driving these types of solutions, what does the opportunity look like just want to get the broader color. Thank you.

Yes, sure Jonathan obviously, it's a it's a pretty.

Rapidly evolving landscape there is a lot lot that's in the news so maybe a little more hype, but it's real and.

We see AI benefits within Tyler, we're kind of looking at it two different ways, we're looking at it sort of pointing it internally.

Things that we're doing.

Can we make ourselves more efficient by using AI, because I think one of the biggest benefits around AI really is.

You are talking about sort of high volume.

Repetitive tasks, which there are pieces of our business that do that whether it's some software coding.

It may be some things around some support.

Like that the other side of it is how do we make our products more competitive and differentiate them more.

What we've done internally is we've we've organized a working group that's been in place for several quarters looking.

Looking at all the various opportunities there's pockets of AI going on all around Tyler right now we want to take a not surprisingly what we always do at Tyler sort of a deliberate targeted approach.

Sort of we're in the process of identifying what are the couple of key areas that we want to focus on in both of those scenarios, whether we're pointing it internally.

And creating more efficiencies or adding more competitiveness to our products.

The CSI acquisition is a great example of that.

It really started off.

Sort of a document redaction sort of extraction leader.

Recently they've.

They've added some.

Machine learning and robotic process automation. This is something that all of our core clients need.

And some of our core clients were already using Tarrant County, which is here out in Fort worth.

They've utilized the CSI acquisition and what it saved in their personnel costs. This is their numbers not mind, theyre, saying they've cut their labor costs by 50% by sort of automating. Some of these more repetitive things around around the documents, which of course, there's a lot there so even the CSI acquisition.

We're just talking earlier.

About the rapid acquisition initially it's in the court space, that's what we're pointing it but we also see a lot of places of leverage it across other platforms and Tyler whether it's things in our ERP space like invoice processing.

Things like that so a lot of that a lot of applicability youre right states and clients are they're taking different approaches and we're going to take that deliberate approach with our clients.

Okay.

Thank you for your question.

Our next question is from the line of Clark Jefferies with Piper Sandler.

Your line is live.

Hello. Thank you for taking the question I apologize, maybe going to beat a dead horse and ask a little bit more questions about the re class, but specifically.

Looking at SaaS.

Either pre re class or post re class.

This mid single digit sequential growth.

A dime and what stood out was.

And acceleration to maybe a high single digit.

Sequential growth in IRR and so.

Ryan I wanted to ask.

Is this a reflection of maybe the good bookings you had last year and some of those deals finally, reaching a timing where they would be going live in revenue terms.

Or was there a change being made in the business either on a capacity level or.

Our new bookings level that we may not appreciate that contributed to an acceleration in AOR growth. Thank you.

Clarke I think its more the ladder so it's more of that timing so.

Good bookings.

It could be as much as a year ago or longer.

That where we signed new SaaS deals that some of those.

Our now more fully reflected in the revenue run rate as well as flip.

So obviously the pace of flips is then accelerating.

Over the last couple of years continues to accelerate but again from the time the numbers, we announce each quarter the contract signed for flips this quarter.

That revenue uplift shifting from maintenance to.

SaaS it typically call it a one seven multiple.

There is a lag from that so the flips we signed last year.

Or last quarter or the quarter before some of those are now seeing the revenue uplift. So so there is just sort of a lag from.

Which is different than some SaaS companies that lag from the time a contract signed to the time that.

Those revenues start to hit our income statement so.

I think thats more of that acceleration and as we continue to increase the pace of flipped.

And.

Grow move more.

The.

New business to SaaS Youll continue to see that accelerate although with a lag.

Thank you.

Thank you for your question.

Our next question is from the line of Gabriele <unk> with Goldman Sachs. Your line is live.

Hi, This is Kelly Valencia on for Gabriela.

One from maybe last quarter, you made very specific comments on RFP and demo activity at or above pre COVID-19 highs and it sounds like top of funnel remains strong what are you seeing in the back half of this year compared to that dynamic that you were seeing in the first half and then are there any any any idiosyncratic <unk> of the government end market that are making you more.

More or less bullish on RFP and demo activity next year. Thank you.

Yes, Thanks, Kelly I would say it's.

It's been a strong year and I would say we characterize that in the first half of the year is very strong and I would say its right now its steady at that pace.

Overall, the markets just seem healthy budgets are still strong.

The activity is strong and our our win rates are good so.

I don't see any real meaningful change across our business lines from comments, we've made in the first couple of quarters.

Yes.

Thank you for your question.

Once again, ladies and gentlemen to ask a question remember you need to hit Star one on your Touchtone phone.

To withdraw your question hit the pound key and then the number one.

Our next question is from the line of David Unger with Wells Fargo.

Your line is live.

Great. Thank you guys.

Because we've been net leverage coming down.

Two five times pro forma EBITDA can you just remind us how you guys like to think about that message back.

And maybe some color around private market valuations.

Yes, Thanks, David.

Sure.

<unk> bin.

We've been prioritizing debt paydown.

At the same time, while still looking at other deals.

I am excited to once we dropped under one five net leverage our rate and our bank changed and we were able to achieve that at the at the end of Q3. So that's encouraging we've paid over.

About $1 billion of debt down.

Brian talked earlier about the impact of section 174 taxes.

And the pro forma free cash flow, we'd actually be out of term debt or pretty close to out of term debt right now absent that.

Which is encouraging as it relates to private market valuations there.

I would say there.

We're starting to see.

In the market and the deals and the things that we're hearing that expectations are finally, starting to change its always been a little bit amazing to me that when you see things going on in the public markets and yet the private sector deals or people.

People are still think that the.

Market should be where it was a couple of years ago.

We're still pretty disciplined in how we look at acquisitions. So.

Areas, where and when private expectations still are too high we will simply pass on the deal.

We're pretty excited to get these three deals done one in Q3 and the ones that we announced earlier this week.

Good deals there is a good business deals things that can help drive our growth things that will leverage the growth drivers that we outlined in Tyler 2030 in and Theyre going to be accretive to revenues and margins over in pretty short order. So.

It's interesting too there is a lot of a lot of companies went private equity in the last few years and I think we're going to start seeing a time when those are going to start spinning back out and historically I think they paid pretty high premiums, it's going to be interesting to see what happens in the markets, but our disciplined approach to how we do things isn't going to change.

And just to add to Lynn's comment about.

Leverage in <unk>.

Our comfort level, we've never been highly leveraged and don't see a scenario, where we really would be given the predictability and the strength of our cash flow, especially around our recurring revenues.

When we did the Nic's acquisition, we were I think around or maybe above three times.

Leverage and certainly very comfortable their lenders are very comfortable there.

And.

As we said we focused on deleveraging, especially as interest rates rose and have done that very rapidly.

But.

But I think we have a lot of capacity as well.

Got it.

Within that sort of band up to the kind of three to three five times, where we're very comfortable.

I appreciate it thank you gentlemen.

Thank you for your question.

Once again, ladies and gentlemen, if you do want to ask a question. It is star one on your Touchtone phone.

Our next question is from the line of Pete Heckman with D. A Davidson.

Your line is live Hey, good morning. Thank you. Good morning, just wanted to see if you had any preliminary thoughts on the potential for the federal reserve.

Interchange and whether it based on kind of a convenience fee model that <unk> had.

They were a lower interchange rate be a benefit to margins.

Margins.

I think the short answer is no I don't have any preliminary thoughts on it.

Obviously, we watch all of these types of things that are going on in the markets.

Particularly as we.

Think about our long term plans and views.

I'm certainly not in a position to.

I think one way or the other of where what anybody in Washington is going to do let alone the fed.

But so I'd say right now I don't I don't have any real comment on that.

Okay, and then just a housekeeping item Brian.

Were there any single deals above, let's say $10 million in PCB in the quarter.

So I think we had anything.

$10 million in contract value.

Our biggest SaaS deal was around $5 $5 million in contract value that was the Minnesota.

Park deal.

And.

Our biggest license deal was.

Was under $5 million total contract value, although it has a lot of.

Options that could drive that significantly higher.

But the booked amount was less than $5 million so no no.

Nothing in that.

Really large size this quarter a lot of good mid size.

Volume of kind of bread and butter deals.

Yes, just a lot of things singles and doubles, Okay. I appreciate it thank you.

Thank you for your call.

And your question. Our next question is from the line of Alexia <unk> with JP Morgan.

Your line is live.

Hi, This is Alan Smith on for Alexia <unk> from Jpmorgan. Thank you for taking my question.

So my first question revolves around your private data centers at your Investor Day, you talked at length.

One data center will be closed in 'twenty four and the other 25 do you have any updates on that front.

Yes, I'd say right now we're on track for what we outlined we expect our our Dallas center to shutdown sort of middle of 'twenty, four and yet we're still on track for evacuating the other one by the end of 'twenty five.

Great. Thank you so much and my second question revolves around security there have been some pretty high level.

Security breaches recently outlined core ops MGM Caesars I was wondering if this has changed the way.

That youre working with your customers or if your customers have brought forward any thoughts or concerns.

Well, yes, I mean security is always an issue, particularly in our business and our clients.

I think the thing about about what's been going on with cyber security is it really highlights the need for our clients.

To move away from their traditional on Prem type environments moved to the cloud move to the modernization in Digitization efforts.

And I think it contributes to that we've seen clients were.

I talked about it I think a couple of quarters ago, we had a client that we were trying to move to SaaS flip.

For out in Arizona for for quite a long time and unfortunately, they had a ransomware attack and it wasn't shortly after that we were able to flip them to the cloud.

There was a triggering point for their decision so.

It's a reality that we all have to live with and our clients are acutely aware of it.

There are a lot of public sector clients our targets.

But I do think it does help with the sales and understanding.

About about where we need to go in the future together with our clients.

Great. Thank you so much.

Thank you for your question. Our next question is from the line of second Calia with Barclays.

Your line is live.

Okay, Great Hey, guys. Thanks.

Thanks for taking the follow up question here, Brian One follow up question for you if I may.

Can we just talk a little bit about the blended duration.

SaaS bookings this quarter, a little bit putting aside the re class.

I think if we look at the SaaS bookings.

That expectedly faced right the tough comp that we were talking about earlier right. So that was down year over year pretty decently, but SaaS PCV was was actually pretty decent.

In terms of total bookings I, just wonder if duration was anything to consider there and how you thought about that.

Not really actually the the average term of our new SaaS contracts. This quarter was exactly the same as third quarter of last year at three eight years.

We've said we generally.

We've tried to bring that down over recent years.

And generally lead with a three year initial term, we certainly have some clients who.

One of the longer term.

And so that blended term or that average duration has generally been in that.

Three five to four.

Over the last couple of years, but this quarter.

That wasn't a factor at all.

Got it that's very helpful. Thanks.

Thank you for your follow up ladies and gentlemen that does conclude our question and answer session I would like to turn it back over to Lynn Moore, President and CEO for closing comments.

Thanks, Darren and thanks, everybody for joining us today, if you have any further questions. Please feel free to reach out to Brian Miller or myself have a great day.

Thank you and ladies and gentlemen that does conclude today's Tyler technologies third quarter 2023 conference call have a great rest of your day.

Please wait the conference will begin shortly.

[music].

Yes.

Yes.

Okay.

Yes.

[music].

Thanks.

[music].

Yes.

Yes.