Q3 2024 Tyler Technologies Inc Earnings Call
Okay.
Unknown Attendee: Hello and welcome to today's Tyler Technologies 3rd quarter 2024 conference call.
Speaker Change: Hello, and welcome to today's Tyler Technologies third quarter 2024 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.
Lynn Moore: Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies.
Unknown Attendee: 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.
Speaker Change: In order to address your questions and stay within the allotted time. Please limit. Your question to one question per person you may get back into the queue for a follow up and as a reminder, this conference is being recorded today October 24th 2024, I would like to turn the call over to Holla L. Sabini Tyler's senior director.
Unknown Attendee: You may get back into the queue for a follow-up. And as a reminder, this conference is being recorded today, October 24th, 2024.
Hala Elsherbini: I would like to turn the call over to Hala Elsherbini, Tyler's senior director of investor relations.
Speaker Change: Of Investor Relations. Please go ahead.
Hala Elsherbini: Please go ahead. Thank you, Rob, and welcome to our call. With me today is Lynn Moore, our president and chief executive officer, and Brian Miller, our chief financial officer.
Speaker Change: Thank you, Rob and welcome to our call with me today is Lynn Moore, our President and Chief Executive Officer, and Brian Miller, Our Chief Financial Officer.
Hala Elsherbini: After I give the safe harbor statement, Lynn will have some initial comments in our quarter, and then Brian will review the details of our results and update our annual guidance for 2024. Lynn 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 company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projections.
Speaker Change: After I give the safe Harbor statement and Lynn will have some initial comments on our quarter and then Brian will review the details of our results and update our annual guidance for 2020 for Lynn.
Speaker Change: Lynn will end with some additional comments and then we'll take your questions.
Speaker Change: During this conference call management May make statements that provide information other than historical information and may include projections concerning the company's future prospects revenues expenses and profits such statements are considered forward looking statements under the safe Harbor provision of the private Securities Litigation Reform Act of 1990.
Speaker Change: Five 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.
Unknown Attendee: We would refer you to our Form 10-K and other SEC filings for more information on those risks.
Unknown Attendee: 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. Every conciliation 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 recurring revenues and bookings. On the Events and Presentations tab, we posted an earning 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.
Speaker Change: 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 every conciliation 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 record recurring revenues and bookings on the advanced 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 corresponding period of last year unless we.
Lynn Moore: Specify otherwise Lynn.
Lynn Moore: Lynn? Thanks, Hala. We carried our momentum from the HR Staff of the Year into the third quarter and delivered remarkably strong results. The quarter was highlighted by strong top and bottom line performance. Even as we saw a more pronounced shift toward SaaS in our new software contract mix, particularly in public safety, where expected on-premise license deals shifted to SaaS contracts in the quarter, resulting in license revenues that were below plan. SaaS and transaction revenues fueled our growth, and both exceeded our expectations. Our non-GAAP operating margin expanded to 25.4%, benefiting from our cloud efficiency initiatives and improved professional services margins, and free cash flow reached a new quarterly high.
Lynn Moore: Thanks Ali.
Lynn Moore: Carried our momentum from the first half of the year into the third quarter and delivered remarkably strong results.
Lynn Moore: The quarter was highlighted by strong top and bottom line performance, even as we saw a more pronounced shift towards SaaS and our new software contract mix, particularly in public safety. We're expected on premise license deals shifted the SaaS contracts in the quarter, resulting in license revenues that were below plan.
Lynn Moore: SaaS and transaction revenues fueled our growth and both exceeded our expectations.
Lynn Moore: Our non-GAAP operating margin expanded to 25, 4% benefiting from our cloud efficiency initiatives and improve professional services margins and free cash flow reached a new quarterly high.
Lynn Moore: As we've discussed in the past, our progress towards our 2025 and 2030 targets will not be linear. But our results through the first nine months of this year bolster our confidence in achieving those top targets. We are beginning to see benefits from our cloud operations initiatives, with efficiencies reflected in our results somewhat ahead of plan. Recurring revenues grew 12.1% and comprised 85% of our total revenues. Our SaaS revenues growth of 20.3% represents our 15th consecutive quarter of SaaS revenue growth of 20% or more, consistent with our target of a 20% kegur in SaaS revenues through 2025. The public sector market remains robust, supported by healthy budgets and an increased focus on modernizing aging, mission critical systems through cloud adoption. The strong market activity we've discussed for the past few quarters, along with excellent execution by our sales teams, is reflected in our new software bookings this quarter, with our new SaaS contract value of approximately $105.6 million, up 78% over last year. Our leading market position, anchored by our deep domain expertise and large install base, forms the foundation of our long term strategic focus on four key growth drivers: executing our cloud first strategy, leveraging our unmatched install base, expanding into new markets, and growing our payments business. Our cloud first strategy is a pivotal driver of our success and continues to shape our future and our cloud living culture. We are leading with cloud across our product portfolio as the public sector market continues to embrace digital modernization and choose Tyler's next generation cloud solutions. Additionally, we've made substantial progress with our cloud optimization efforts, driving efficiencies and scalability while also making solid progress on version consolidation to further accelerate on-premise client migrations and enable clients to easily expand their mission critical applications in the cloud. The pendulum is continuing to shift to the cloud with both new and existing clients, and we are seeing a growing trend of client driven SaaS adoption. This is especially apparent in areas that have previously lagged the rest of our market in terms of cloud adoption, most notably, the public safety market along with the state and federal market with our application platform. Overall, SaaS arrangements comprised 97% of our new software contract value in the third quarter. For the second consecutive quarter, 100% of our public safety new contract value was SaaS, compared to only 28% a year ago. It was also a great quarter for flip signings, as we signed a total of 108 flips of on-premises clients. The total contract value from flips was more than triple that of last year's third quarter, and the average ARR of flips rose 37.2%.
Lynn Moore: As we've discussed in the past our progress towards our 2025 and 2030 targets will not be linear, but our results through the first nine months of this year bolster our confidence in achieving those targets.
Lynn Moore: We are beginning to see benefits from our cloud operations initiatives with efficiencies reflected in our results somewhat ahead of plan.
Lynn Moore: Recurring revenues grew 12, 1% and comprised 85% of our total revenues.
Lynn Moore: Our SaaS revenues growth of 23% represents our 15th consecutive quarter of SaaS revenue growth of 20% or more.
Lynn Moore: Consistent with our target of a 20% CAGR in SaaS revenues through 2025.
Lynn Moore: The public sector market remains robust supported by healthy budgets and an increased focus on modernizing aging mission critical systems through cloud adoption.
The strong market activity, we've discussed for the past few quarters, along with excellent execution by our sales teams as reflected in our new software bookings this quarter with our new source SaaS contract value of approximately $105 $6 million up 78% over last year.
Lynn Moore: Our leading market position anchored by our deep domain expertise and large installed base forms the foundation of our long term strategic focus on four key growth drivers.
Lynn Moore: Executing our cloud first strategy.
Lynn Moore: Leveraging our unmatched installed base expanding into new markets and growing our payments business.
Lynn Moore: Our cloud first strategy is a pivotal driver of our success and continues to shape, our future and our cloud living culture.
Lynn Moore: We are leading with cloud across our product portfolio as the public sector market continues to embrace digital modernization and choose Tyler's next generation cloud solutions.
Lynn Moore: Additionally, we've made substantial progress with our cloud optimization efforts driving efficiencies and scalability. We're also making solid progress on version consolidation to further accelerate on premise client migrations and enable clients to easily expand their mission critical applications in the cloud.
Lynn Moore: The pendulum is continuing to shift to the cloud with both new and existing clients and we are seeing a growing trend of client driven SaaS adoption.
Lynn Moore: This is especially apparent in areas that have previously lagged the rest of our market in terms of cloud adoption.
Lynn Moore: Most notably the public safety market, along with the state and federal market with our application platform.
Lynn Moore: Overall, SaaS arrangements comprised 97% of our new software contract value in the third quarter.
Lynn Moore: For the second consecutive quarter, 100% of our public safety, new contract value SaaS compared to only 28% a year ago.
Lynn Moore: He was also a great quarter for flip signings as we signed a total of 108 flips of on premises clients.
Lynn Moore: The total contract value from flips was more than triple that of last year's third quarter and the average IRR of flips rose 37, 2%.
Lynn Moore: Our course in justice business was very active in the third quarter. Our largest deal of the quarter was a contract with the Kentucky Court of Justice for enterprise justice suite, including case manager, e-filing, and court analytics, in addition to payments. The initial six-year term represents $35 million in total contract value, although only $10.6 million was recorded in bookings and backlog this quarter due to contract provisions. ARR starts at approximately $2.5 million and grows to $6.5 million in year six. In addition to payments processing under a gross revenue model of Note. The first six years of Sassfee's totaling $29 million was prepaid in October using ARPA funds.
Lynn Moore: Our courts and Justice business was very active in the third quarter, our largest deal of the quarter was a contract with the Kentucky Court of Justice for our Enterprise Justice suite, including case manager E filing and court analytics in addition to payments.
Lynn Moore: The initial six year term represents $35 million in total contract value, although only $10 6 million was recorded in bookings and backlog this quarter due to contract provisions.
Lynn Moore: <unk> starts at approximately $2 5 million and grows to $6 5 million in year. Six in addition to payments processing under a gross revenue model.
Lynn Moore: Of note. The first six years of SaaS fees totaling $29 million was prepaid in October using ARPA funds.
Lynn Moore: Other successful Tyler court clients, and in particular, the North Carolina Administrative Office of the Courts, served as strong references in this competitive sales process that spanned more than 12 years. Kentucky is our 17th statewide courts client, and our third statewide Enterprise Justice Solution deployed in the cloud. We also signed a three-year $9.6 million SaaS contract for our Enterprise Justice Suite with the Phoenix Arizona Municipal Court. That agreement includes a cooperative master purchase agreement provision that enabled the Arizona Supreme Court to designate Tyler as a preferred software provider for all 170 courts in the state, including superior, justice, and municipal courts, with the alternative option being the state's aging legacy system.
Lynn Moore: Other successful Tyler court clients and in particular, the North Carolina administrative office of the courts served as strong references in this competitive sales process that span more than 12 years.
Lynn Moore: Kentucky is our 17th statewide courts client and our third statewide enterprise Justice solution deployed in the cloud.
Lynn Moore: We also signed a three year $9 6 million SaaS contract for our enterprise Justice suite with the Phoenix, Arizona Municipal Court.
Lynn Moore: That agreement includes a cooperative master purchase agreement provision that enabled the Arizona Supreme Court to designate Tyler as a preferred software provider for all 170 courts in the state, including Superior Justice and municipal courts with the alternative option being the state's aging legacy system.
Lynn Moore: We're excited about the opportunity to expand our partnership across Arizona courts with significant potential ARR. Other notable third quarter SaaS deals included a $12 million five-year contract with the City of St. Petersburg, Florida, the fifth largest in the state for enterprise permitting and licensing and enterprise ERP utility billing solutions along with payments. We signed six SaaS contracts for our Enterprise Public Safety Solution, including two of the fastest growing cities in the U.S.: the City of Frisco, Texas, Police Department for 750,000 ARR, and the City of Round Rock, Texas, Police for 730,000 ARR. Central to our growth is leveraging our unmatched installed base and expanding our addressable market through strategic cross-sell and upsell activity that unlocks significant expansion opportunities with both new and existing clients.
Lynn Moore: We're excited about the opportunity to expand our partnership across Arizona courts with significant potential.
Lynn Moore: Other notable third quarter SaaS deals included a $12 million five year contract with the city of St. Petersburg, Florida, the fifth largest in the state for enterprise permitting and licensing and enterprise ERP utility billing solutions along with payments.
Lynn Moore: We signed success contracts for our enterprise public safety solution, including two of the fastest growing cities in the U S. The city of Frisco, Texas Police Department for 750000, they are in the city of round Rock, Texas Police for 730 <unk>.
Lynn Moore: Central to our growth is leveraging our unmatched installed base and expanding our addressable market through strategic cross sell and up sell activity that unlocks significant expansion opportunities with both new and existing clients.
Lynn Moore: A key cross-sell win this quarter was a multi-year strategic contract with the Texas Office of Court Administration for our Texas Connected Justice Data Cloud. This includes Alliance Exchange, Enterprise Data Platform, Open Data Platform, and our Digital Solutions Division's Engagement Builder Platform. This integrated solution captures real-time online data across every jurisdiction in the state. This multi-year engagement exemplifies our Connected Communities vision by creating a digital infrastructure for data sharing and decision-useful business intelligence and reporting. The contract adds 1.5 million ARR and is the first of its kind in a large population state, paving the way for additional add-on opportunities.
Lynn Moore: A key cross sell win this quarter was a multi year strategic contract with the Texas office of Quartz administration for our Texas connected Justice data cloud.
Lynn Moore: This includes alliance exchange Enterprise data platform open data platform and our digital solutions divisions engagement builder platform.
Lynn Moore: This integrated solution captures real time online data across every jurisdiction in the state. This.
Lynn Moore: This multi year engagement exemplifies our connected communities vision by creating a digital infrastructure for data sharing and decision useful decision useful business intelligence and reporting.
Lynn Moore: The contract adds $1 5 million in <unk>.
Lynn Moore: And is the first of its kind in a large population state paving the way for additional add on opportunities.
Lynn Moore: Another significant cross-sell win was a contract for the modernization of 18 different boards with the Illinois Department of Financial and Professional Regulation for our state regulatory application platform suite, which also brings in augmented field operations, formally AR Inspect. The three-year contract leveraged our Illinois State Enterprise Agreement and represents 9.2 million in total contract value, with a seven-year option that adds 12.5 million in total contract value. We're pleased to see an increasing number of our clients modernizing their enterprise solutions using our application platform.
Lynn Moore: Another significant cross sell win was a contract for the modernization of 18 different boards with the Illinois Department of financial and professional regulation for our state regulatory application platform suite.
Lynn Moore: Which also brings an augmented field operations, formerly inspect.
Lynn Moore: The three year contract leveraged our Illinois State Enterprise agreement and represents $9 2 million in total contract value with a seven year option that adds $12 5 million in total contract value.
Lynn Moore: We're pleased to see an increasing number of our clients modernizing their enterprise solutions using our application platform.
Lynn Moore: Driving payments adoptions through our differentiated payments business is another key element in our growth strategy. Energy. In the third quarter, we signed 268 new payment deals across Tyler's software clients, representing approximately 8.6 million in projected ARR. Riverside County, an existing property and recording software client, is our first enterprise payments win in California. This collaborative effort expanded from initial property and recording payments contract to processing payments for more than 10 agencies across the county, which is the fourth most populated county in California. In our enterprise portal business, we secured extensions for our digital government and payment processing services in five states, which includes winning competitive rebids for state enterprise portals in New Jersey and Indiana.
Lynn Moore: Driving payments adoption through our differentiated payments business is another key element in our growth strategy in the third quarter, we signed 268, new payment deals across Tyler software clients, representing approximately $8 6 million and projected IRR.
Lynn Moore: Riverside County, and existing property and recording software client is our first enterprise payments win in California.
Lynn Moore: This collaborative effort expanded from initial property and recording payments contract to processing payments for more than 10 agencies across the county, which is the fourth most populated county in California.
In our enterprise portal business, we secured extensions for our digital government and payment processing services in five states.
Lynn Moore: Which includes winning competitive rebids for state enterprise portals in New Jersey and Indiana.
Lynn Moore: We also expanded our scope with the state of Indiana to include resident engagement identity proofing for approximately $1 million in additional ARR. This builds on Tyler's chatbot front-end technology recently deployed, representing the first AI project for Indiana and its residents. This solution was provided through a joint effort with our AI task force and our Indiana State enterprise team in collaboration with the Indiana Office of Technology.
Lynn Moore: We also expanded our scope with the state of Indiana to include resident engagement identity proofing for approximately $1 million in additional <unk>.
Lynn Moore: This builds on Tyler's Chatbot front end technology recently deployed representing the first AI project for Indiana and its residents.
Lynn Moore: This solution was provided through a joint effort with our AI Task force in our Indiana State Enterprise team in collaboration with the Indiana office of technology.
Brian Miller: Now I'd like Brian to provide more detail on the results for the quarter in our updated annual guidance for 2024. Thank you, Lynn. Total revenues for the quarter were $543.3 million, up 9.8%, and organically grew 9.4%. Subscriptions revenue increased 17.6% and organically rose 17.3%. Within subscriptions, SaaS revenues grew 20.3% to $166.6 million and grew organically 19.7% against a tough comparison with last year's company. Keep in mind that there's often a lag from the signing of a new SaaS dealer flip to the start of revenue recognition; they can vary from one to several quarters. Because of this, as well as the timing of SaaS renewals and related price increases, SaaS revenue growth both year-to-year and sequentially may fluctuate from quarter to quarter.
Speaker Change: Now I'd like Brian to provide more detail on the results for the quarter and our updated annual guidance for 2024.
Brian Miller: Thanks, Lynne total revenues for the quarter were $543 3 million up nine 8% and organically grew nine 4%.
Brian Miller: Subscriptions revenue increased 17, 6% and organically rose 17, 3%.
Brian Miller: Within subscription SaaS revenues grew 23% to $166 6 million and grew organically 19, 7% against a tough comparison with last year's third quarter keep.
Brian Miller: Keep in mind that there's often a lag from the signing of a new SaaS deal or flip to the start of revenue recognition. They can vary from one to several quarters.
Brian Miller: Because of this as well as the timing of SaaS renewals and related price increases SaaS revenue growth both year over year and sequentially may fluctuate from quarter to quarter.
Brian Miller: Transaction revenues grew 15.2% to $180.5 million, driven by higher transaction volumes from both new and existing clients, including the August go-live of the California Department of Parks and Recreation. SaaS deals comprised approximately 97% of our Q3 new software contract value compared to 80% last year. During the quarter, we added 181 new SaaS arrangements and converted 108 existing on-premises clients to SaaS, with a total contract value of approximately $141 million. In Q3 of last year, we added 161 new SaaS arrangements and had 79 flips with a total contract value of approximately 71 million. The average ARR from new SaaS contracts increased 38% over last year.
Brian Miller: Transaction revenues grew 15, 2% to $185 million driven by higher transaction volumes from both new and existing clients, including the August go live of the California Department of Parks and recreation.
Brian Miller: SaaS deals comprised approximately 97% of our Q3, new software contract value compared to 80% last year.
Brian Miller: During the quarter, we added 181, new SaaS arrangements and converted 108 existing on premises clients to SaaS with a total contract value of approximately $141 million.
Brian Miller: In Q3 of last year, we added 161, new SaaS arrangements and had 79 flips with a total contract value of approximately $71 million.
Brian Miller: The average IRR from new SaaS contracts increased 38% over last year.
Brian Miller: The average ARR associated with our Q3 flips increased 37% over last year, as larger clients such as Cobb County, Georgia, and Providence, Rhode Island, flipped to the cloud. Our total annualized recurring revenue was approximately $1.85 billion, up 12.1%, and organically grew 11.8%. We entered 2024, expecting operating margin expansion after experiencing the margin trough from our cloud transition in 2023. Our non-cap operating margin in the third quarter was 25.4%, up 60 basis points from last year. The margin expansion reflects the impact of our cloud efficiency initiatives, along with effective operating expense management and improved professional services margins.
Brian Miller: The average IRR associated with our Q3 flips increased 37% over last year as larger clients, such as Cobb County, Georgia, and Providence, Rhode Island flipped to the cloud.
Brian Miller: Our total annualized recurring revenue was approximately $1 85 billion up 12, 1% and organically grew 11, 8%.
Brian Miller: We entered 2020 for expecting operating margin expansion after experiencing the margin trough from our cloud transition in 2023.
Brian Miller: Our non-GAAP operating margin in the third quarter was 25, 4% up 60 basis points from last year.
Brian Miller: The margin expansion reflects the impact of our cloud efficiency initiatives, along with effective operating expense management and improved professional services margins.
Brian Miller: As we discussed on previous calls, merchant and interchange fees from our payment business under the gross revenue model have a meaningful impact on our overall margins as they are passed through to clients and are included in both revenues and cost of revenues. We incurred merchant fees of approximately $42 million in Q3 compared to $36 million last year. Because of strong earnings and effective working capital management, both cash flows from operations and free cash flow reached new quarterly highs at $263.7 million and $252.9 million, respectively, with free cash flow up 55.5%. Cash flow in the quarter was positively impacted by the deferral to the fourth quarter of approximately $14 million a federal tax payment.
Brian Miller: As we discussed on previous calls merchant and interchange fees from our payment business under the gross revenue model have a meaningful impact on our overall margins as they are pass through to clients and are included in both revenues and cost of revenues.
Brian Miller: We incurred merchant fees of approximately $42 million in Q3 compared to $36 million last year.
Brian Miller: Because of strong earnings and effective working capital management, both cash flows from operations and free cash flow reached new quarterly highs at $263 $7 million and $252 $9 million, respectively with free cash flow up 55, 5%.
Brian Miller: Cash flow in the quarter was positively impacted by the deferral to the fourth quarter of approximately $14 million of federal tax payment.
Brian Miller: We ended the quarter with $600 million that's convertible debt outstanding and cash and investments of approximately $548 million. Our net leverage at quarter end was approximately 0.1 times trailing 12-month pro forma EBITDA. In September, we replaced our existing $500 million unsecured revolving credit facility with a new facility that matures in 2029, increasing the size to $700 million and improving terms. This new revolver further improves our available liquidity and provides us with maximum flexibility to address potential financing needs.
Brian Miller: We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $548 million or.
Brian Miller: Our net leverage at quarter end was approximately one times trailing 12 months pro forma EBITDA.
Brian Miller: In September we replaced our existing $500 million unsecured revolving credit facility with a new facility that matures in 2029, increasing the size to $700 million and improving terms.
Brian Miller: This new revolver further improves our available liquidity and provides us with maximum flexibility to address potential financing needs.
Brian Miller: Our updated 2024 annual guidance is as follows. We expect total revenues will be between 2.125 billion and 2.145 billion dollars. The midpoint of our guidance implies organic growth of approximately 9%. We expect that merchant fees will be approximately 7% over last year and that implied organic growth excluding merchant fees would be approximately 20 basis points higher. We expect gap deluded EPS will be between $6.13 and $6.28 and may very significantly do the impact of discrete tax items on the gap effective tax rate. We expect non-gap deluded EPS will be between $9.47 and $9.62. We expect our free cash flow margin will be between 21 and 23%, including an estimated impact of approximately $54 million of incremental cash taxes related to Section 174.
Brian Miller: Our updated 2024 annual guidance is as follows we.
Brian Miller: We expect total revenues will be between $2 125 billion and $2 $145 billion.
Brian Miller: The midpoint of our guidance implies organic growth of approximately 9% we.
Brian Miller: We expect that merchant fees will be up approximately 7% over last year and that implied organic growth excluding merchant fees would be approximately 20 basis points higher.
Brian Miller: We expect GAAP diluted EPS will be between $6 13, and $6 28.
Brian Miller: And may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate.
Brian Miller: We expect non-GAAP diluted EPS will be between $9 47, and $9 62.
Brian Miller: We expect our free cash flow margin will be between 21, and 23%, including an estimated impact of approximately $54 million of.
Brian Miller: Rental cash taxes related to section 174.
Unknown Attendee: Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website.
Brian Miller: Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website.
Lynn Moore: I'd like to turn the call back over to Lynn. Thanks, Brian. As we close out another strong quarter, I want to highlight the consistently high level of execution and collaboration across our teams, which is even more critical to our ongoing success as we leverage a fully enabled enabled cloud infrastructure to deliver continuous innovation and enhance client experience. The strength of our one Tyler team is rooted in a shared commitment to excellence and to our mission, vision, and values, which drives our ability to execute at high levels.
Lynn Moore: Now I'd like to turn the call back over to Lynn.
Lynn Moore: Thanks, Brian.
Lynn Moore: As we close out another strong quarter I want to highlight the consistently high level of execution and collaboration across our teams, which is even more critical to our ongoing success as we leverage a fully enabled enabled cloud infrastructure to deliver continuous innovation and enhanced client experience.
Lynn Moore: The strength of our one Tyler team is rooted in a shared commitment to excellence and to our mission vision and values, which drives our ability to execute at high levels.
Lynn Moore: During the quarter, we were recognized by Newsweek as one of America's greenest companies, placing us among the top 500 greenest companies in the United States based on environmental sustainability. We were also named to Newsweek's America's Greatest Workplaces for Parents and Families 2024 list. We're gratified by this recognition of our commitment to fostering a strong inclusive culture with a healthy work-life balance and high-quality benefits.
Lynn Moore: During the quarter, we were recognized by Newsweek as one of Americas greatest companies, placing us among the top 500 greenest companies in the United States based on environmental sustainability.
Lynn Moore: We're also named to Newsweek's America's greatest workplaces for parents and families 2024 list.
Lynn Moore: We're gratified by this recognition of our commitment to fostering a strong inclusive culture with a healthy work life balance and high quality benefits.
Unknown Attendee: Now we'd like to open up the line for Q&A. Thank you. We will now begin the question and answer session.
Lynn Moore: Now, we'd like to open up the line for Q&A.
Speaker Change: Thank you we will now begin the question and answer session. If you will.
Unknown Attendee: If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again.
Speaker Change: To ask a question. Please press star one on your telephone keypad to raise your hand to join the queue. If you would like to withdraw your question simply press Star one again.
Ken Wong: Your first question comes from a line of Ken Wong from Oppenheimer. Your line is open. It's great, fantastic. Thanks for taking my question. Lots of momentum this quarter on the cloud side. I wanted to maybe dive into that 3X on the TCB of flips, up to 36 million, Lane or Bryant.
Speaker Change: Your first question comes from the line of Ken Wong from Oppenheimer. Your line is open.
Ken Wong: Okay, Great fantastic. Thanks for taking my question lots of momentum this quarter on the cloud side I wanted to maybe dive into that three acts on the TCE of flips up to $36 million land or Brian do you think this is a new run rate or is this just more of a one off quarterly dynamic here.
Lynn Moore: Do you think this is a new run rate, or is this just more of a one-off quarterly dynamic here? As we said, these can be a little bit lumpy. This was a strong quarter with some larger flips, but that's a trend that we're seeing. More of our larger customers that have been slower to flip to the cloud, more complicated projects are now starting to move at a faster pace. The progress we've made with version consolidation over the last couple of years has also helped get us in the position to facilitate that as more of those customers are now on current versions of software and have gone through that upgrade process to put them in a position to move to the cloud.
Speaker Change: As we said these can be a little bit lumpy. This was a strong quarter with some larger flips that thats a trend that we're seeing more of our larger customers that have been slower to flip to the cloud more complicated.
Ken Wong: <unk> are now starting to <unk>.
Ken Wong: Move at a faster pace and the progress we've made with version consolidation over the last couple of years has also helped.
Ken Wong: Get us in a position to facilitate that as more of those customers are now on.
Ken Wong: Current versions of software.
Ken Wong: And <unk> gone through that upgrade process to put them in a position to move to the cloud. So I think as we've said in the past we should expect to continue to see.
Lynn Moore: As we said in the past, we should expect to continue to see growth in the flip volume and the size of flips. We envision a bell curve shaped trend of those over the next three or four years, and we're still moving up the left hand side of that bell curve. But it could be lumpy from quarter to quarter, but generally we expect to continue to see this flip growth to achieve the targets we set out for 2030 of 80 to 85% of our on-prem base having moved to the cloud by then.
Ken Wong: The growth in the flip.
Ken Wong: The volume and the size of flips.
Ken Wong: And we sort of envision the bell curve shape.
Ken Wong: The trend of those over the next three or four years.
Ken Wong: Still kind of moving up the left hand side of that bell curve, but it could be lumpy from quarter to quarter, but generally we expect.
Ken Wong: To continue to see that flips growth to achieve the <unk>.
Ken Wong: Targets, we set out for 2030 of 80% to 85% of our on Prem base, having moved to the cloud by them, Yes, just to amplify Ken.
Lynn Moore: Yeah, just to amplify Ken, Bryant's right; it will tend to be lumpy. I don't think I would model this as our quote new run rate, which was your question. But we do expect to see this continue momentum.
Ken Wong: Brian is right. It will tend to be lumpy I don't think I would model. This is our quote new run rate, which was your question.
Ken Wong: But we do expect to see this continued momentum.
Unknown Attendee: Great. Thank you.
Speaker Change: Great. Thank you.
Ken Wong: Yes.
Matt VanVle: Your next question comes from a line up, Matt VanVle from BTIG. Your line is open. Yeah, good morning. Thanks for taking the question.
Speaker Change: Your next question comes from the line of Matt Van Vliet from <unk>. Your line is open.
Speaker Change: Yes. Good morning, Thanks for taking the question.
Lynn Moore: Be curious in terms of what you saw of sales linearity throughout the third quarter and maybe in October. And are you seeing, at least lately, any pressure of maybe decisions not being made until after the election or any impact there? But it's just overall what you're seeing in terms of demand linearity. Yeah, that's a good question. We're actually not seeing any slowdowns or hesitations due to the election. Generally speaking, when you look across all the business units at Tyler and particularly at our flagship products, most of our divisions are either at or exceeding their sales plans for the year.
Speaker Change: In terms of what you saw.
Speaker Change: Sales linearity throughout the third quarter and maybe into October and are you seeing.
Speaker Change: At least lately any pressure of maybe decisions not being made until after the election or any any impact there but.
Speaker Change: And just overall, what youre seeing in terms of demand linearity.
Speaker Change: Yes, that's a good question that we're actually not seeing any.
Speaker Change: Slowdowns or hesitation due to the election.
Speaker Change: Generally speaking when you look across all the business units at Tyler and particularly at our flagship products.
Speaker Change: Most of our divisions are either at or exceeding their sales plans for the year.
Lynn Moore: And so that's been good. The things that we were talking past and the past couple of quarters have continued. And so we're not seeing any slowdown at this point or any pauses due to any macro factors or the election. And really not any changes in linearity are we tend not to be super back in loaded within quarters, and I don't think we've seen any change in that.
Speaker Change: And so that's.
Speaker Change: That's been good.
Speaker Change: The things that we've been talking past in the past couple of quarters have continued and so we're not seeing any slowdown at this point or any pauses due to any macro factors or the election and really not any changes in linearity yard we tend not to be super back end loaded.
Speaker Change: Within quarters.
Speaker Change: I don't think we've seen any change in that.
Unknown Attendee: Great, thank you.
Speaker Change: Great. Thank you.
Alexei Gogolev: Our next question comes from Alain from Alexei Gogolev from JP Morgan. Your line is open. Thank you and hello, Lynn and Brian and Halah. Lynn, I had a question about the incremental competition during the quarter. Are you seeing more pressure from players like ServiceNow in the intelligence analytics, maybe Workday in ERP, or have those competitors satisfied as demand or markets begins to recover? I think generally stepping back, the competitive landscape has been pretty neutral throughout the year. I wouldn't say there's been any significant increased competition or any decreased competition. As you know, all of our, you know, I think when you look at our sub verticals like ERP, we certainly see more competition from players that are more horizontal players like Workday.
Speaker Change: Your next question comes from the line from Aleksey <unk> from Jpmorgan. Your line is open.
Speaker Change: Thank you and Hello.
Speaker Change: And Brian on pillar.
Speaker Change: When I had the question.
Speaker Change: Incremental competition during the quarter.
Speaker Change: Are you seeing more pressure from players like service now and intelligence.
Speaker Change: Thanks, maybe workday and our ERP or have those competitors.
Speaker Change: Subsided.
Speaker Change: Demand in their core market begins to recover.
Speaker Change: I think generally stepping back the competitive landscape is has been pretty neutral throughout the year I Wouldnt say theres been any significant increased competition or any any decreased competition.
Speaker Change: As you know all of our.
Speaker Change: I think when you look at our the sub verticals like ERP, we certainly see more competition from.
Speaker Change: The players that are that are more horizontal players like workday.
Lynn Moore: You know, we see them; I don't know that we see them a significant amount more than we have in the past. You know, when you talk about ServiceNow and in our, you know, against our platform solution, you know, we see them in that space, but we're kind of a different offering. And, you know, a lot of the things that were the application platform plays best is our areas where ServiceNow is really probably a little bit bigger and heavier. So overall, I think the competitive landscape is generally the same. I think our, you know, when I look at wind rates, they've generally been consistent, and we're consistent in Q3 with what we've been experiencing over the past several quarters in probably a couple of years.
Speaker Change: We see them.
Speaker Change: We see them a significant amount more than we have in the past.
Speaker Change: When you talk about service now and are.
Speaker Change: Against our platform solution, we see them in that space, but we're kind of a different offering.
Speaker Change: And.
Speaker Change: A lot of the things that we are the application platform plays best as are areas, where our service now is really probably a little bit bigger and heavier.
Speaker Change: So overall I think the competitive landscape is generally the same I think are.
Speaker Change: I look at win rates they have generally been consistent and we're consistent in Q3 with what we've been experiencing over the past several quarters and probably couple of years.
Alexei Gogolev: Thank you, Lynn.
Ken Wong: Thank you Lynn and Brian a quick question on <unk>.
Unknown Attendee: And Brian, a quick question on 2025 guidance that you provided last year.
Speaker Change: 2020 guidance that you provided last year.
Brian Miller: Directionally, would you be able to adjust if you think you could see top-line growth acceleration next year versus this year? And how are you thinking about free cash flow margin that you provided considering the network and capital improvements that you've just reported? Sure. Well, we're obviously not ready to give our 25 guidance shed, and we're in our planning process and kind of in the early stages of that. I think what we've talked about is that we're probably a little bit ahead of where we targeted 2025 along the path to our 2030 targets, but we said it's not linear.
Speaker Change: Directionally and would you be able to suggest that you think you could see.
Speaker Change: Top line growth acceleration next year versus this year and how are you thinking about free cash flow margin that you provided that we can be.
Speaker Change: Net working capital improvement.
Speaker Change: Mr reported.
Speaker Change: Sure well, we're obviously not ready to give our 25 guidance yet.
Speaker Change: In our planning process and kind of in the early stages of that I think what we've and we've talked about is that we're probably a little bit ahead.
Speaker Change: Of.
Speaker Change: Where we are.
Speaker Change: Our targeted 2025, along the path to our 2030 targets.
Brian Miller: And being a little bit ahead doesn't necessarily mean where we finish up 2025 or 2030 will be significantly ahead of those initial targets. So we're confident around those. I think specifically on the cash flow side, we're certainly well ahead of that. We're above where we targeted 2025 already. There are some things that have been. I'm affected this year that are a little bit more one times, but I think generally this would be a level we've looked to build off of for 2025. So I do expect that 25 our cash flow will be at least kind of consistent with where we are this year.
Speaker Change: But we said, it's not linear and.
Speaker Change: Being a little bit ahead doesn't necessarily mean, where we finish up 25%.
Speaker Change: Or 2030 will be significantly ahead of those initial targets. So.
Speaker Change: We're confident around those I think.
Speaker Change: Specifically on the.
Speaker Change: The cash flow side, we are certainly well ahead of that.
Speaker Change: We're above where we targeted 2025 already.
Speaker Change: There are some things that have been.
Speaker Change: Affected this year that are a little bit more one times, but I think generally.
Speaker Change: This would be a level, we'd look to build off of for 2025. So I do expect that 25, our cash flow.
Speaker Change: B at least kind of consistent with where we are this year.
Unknown Attendee: Thank you, Brian.
Ken Wong: Thank you Brian.
Michael Turrin: Our next question comes from a line of Michael Turrin from Wells Fargo Securities. Your line is open. Hey, great. Thanks. Appreciate you taking the questions. On the transaction business, ARR, they're up meaningfully. We're used to seeing that maybe down sequentially in 3Q, and it was up this year. I know you had a comment on a go live, but anything else you'd point us towards. And drivers of the transaction revenue base and as the seasonality, their battle changing. I don't think there's really a change in the seasonality, and typically the last half of the year is slower in terms of volumes, but that's been offset really by a couple of things.
Speaker Change: Our next question comes from the line of Michael <unk> from Wells Fargo Securities. Your line is open.
Speaker Change: Okay great.
Michael: I appreciate you taking the questions.
Speaker Change: On the transaction business.
Speaker Change: Or are there up meaningfully we're used to seeing that may be down sequentially in <unk> and it was up this year I know you got it.
Comment on go live, but anything else you would point us towards.
Speaker Change: And drivers of the transit transaction revenue base and is the seasonality there at all changing.
Speaker Change: I don't think Theres really a change in the seasonality and typically.
Speaker Change: The last half of the year is is slower in terms of volumes.
Speaker Change: But that's been offset really by a couple of things one is that the revenues from new.
Brian Miller: One is the revenues from new payments clients that we've added over the course of the last year. We've been disclosing those numbers and consistently, you know, close to a couple hundred this quarter, significantly above that in terms of the number of new payments customers that we're adding within our software client base. And we're also having a better experience in getting those clients live faster and getting those revenues flowing faster from the time we sign them to the time that they're on boarded. And that's having a positive impact. And then within the transactions business in general, what we alluded to in terms of some new customers to the California State Parks contract that we signed late last year went live this quarter.
Speaker Change: Payments clients that we've added over the course of the last year.
Speaker Change: We have been disclosing those numbers and.
Speaker Change: Consistently.
Speaker Change: Close to a couple of hundred this quarter significantly above that in terms of the number of new payments customers.
Speaker Change: We're adding within our software client base and we're also having better experience in getting those clients live faster and getting those revenues flowing faster from the time, we sign them to the time that they are on boarded and thats, having a positive impact and then within the transactions business.
Speaker Change: In general what we alluded to in terms of some new customers to the California State parks.
Speaker Change: On the contract that we signed late last year went live this quarter that added about $3 million of revenue, although it wasn't a full quarter impact.
Brian Miller: That added about three million dollars of revenue, although it wasn't a full quarter impact. The various things like in Florida with our payments contract, the Florida Turnpikes with SunPass went live during the quarter and that added a couple million dollars of new revenues. So it's really a combination of new business as well as increased volumes.
Speaker Change: Various things like in Florida, with our payments contract.
Speaker Change: The Florida Turnpike with Sunpass went live during.
Speaker Change: During the quarter and that added a couple of million dollars of new revenues. So.
Speaker Change: It's really a combination of new business as well as increased volumes. So we're seeing greater adoption.
Lynn Moore: So we're seeing greater adoption through our client base, and we're working with our clients to help them get more of their citizens doing things online and running through our systems. Yeah, and amplify that a little, Michael. I mean, Brian's right. We are starting to experience; we're learning better. The onboarding efficiencies is bringing revenue recognition faster, which is great.
Speaker Change: Through our client base, and we're working with our clients to to help them.
Speaker Change: Get more of their citizens doing things online and running through our systems.
Lynn Moore: To amplify that a little Michael I mean, Brian right.
Lynn Moore: We are we are starting to experience, we're learning better the onboarding efficiencies as is bringing revenue recognition faster which is great.
Lynn Moore: The California State Go Live, I want to emphasize that for a minute because that's a big deal. I mean, we signed this contract late last year in less than three quarters. We were up and live. And remember, this is the largest contract in Tyler's history. And we've talked about this sometimes on the call, and it gets lost sometimes in the numbers. But, you know, the really the secret sauce of Tyler is our execution. And it's our sales execution. It's our implementation execution. It's our support. It's management. And it just takes a lot to do what we do.
Lynn Moore: The California State go live I want to emphasize that for a minute because that's a big deal I mean, we signed this contract late last year in less than three quarters, we were up and live and remember this is the largest contract in Tyler's history.
Lynn Moore: And we've talked about this sometimes on the call and it gets lost sometimes in the numbers, but really the secret sauce of Tyler is our execution and its our sales execution. It's our implementation execution, it's our support its management and it just it takes a lot to do what we do and we signed over 200, new deals 100 flips a quarter.
Lynn Moore: And, you know, we signed over 200 new deals, 100 flips a quarter. That's a lot of a lot of business that's going on. And it's the work of our teams, and the execution is what provides that reference ability that keeps the engine running. And to get a big goal live in California to go basically on time and on budget is really a great accomplishment for our teams and sets us up not only well to execute on that contract. But then, to for others to look at that success and duplicate that in other jurisdiction. that colors are super helpful.
Lynn Moore: That's a lot of a lot of business, that's going on and it's the work of our teams and the execution.
Lynn Moore: Is what provides that reference ability that keeps the engine running in and to get a big go lives in California to go basically on time and on budget is really a great accomplishment for our teams and sets us up not only well to execute on that contract, but then to for others to look at that success and.
Lynn Moore: Kate that in other jurisdictions.
Speaker Change: That color is all Super helpful. Just a small follow on clarification, if I may on the <unk>.
Unknown Attendee: Just a small follow-on clarification, if I may, on the prior question. I think the primary question we're getting is just on the free cash flow performance.
Speaker Change: Prior question.
Speaker Change: I think the primary question. We're getting is just on the free cash flow performance. So Brian just summarizing some of what you said previously it sounds like is there anything you can do to help quantify anything that would fall into the more one time basket and it sounds like while youre not updating 2025 targets here. There is no reason to.
Brian Miller: So, Brian, just in summarizing some of what you said previously, it sounds like, is there anything you can do to help quantify anything that would fall into the more one-time basket? And it sounds like, wow, you're not updating 2025 targets here. There's no reason to expect margin to go down next year, relative to what you're delivering. You're just kind of working through plans. Is that the right takeaway for us at this point? Yeah, I think we're kind of at a little bit higher level than we've initially planned. I don't know that we would grow in terms of a margin significantly from where we are right now.
Speaker Change: Expect margin to go down next year.
Speaker Change: Relative to what Youre delivering youre, just kind of working through plans is that the right takeaway for us at this point, yes, I think we're kind of added.
A little bit higher level than we had initially planned I don't know that we would grow in terms of our margin significantly from where we are right now.
Brian Miller: But again, that's ahead of where we planned to be.
Speaker Change: But that again Thats ahead of where we had planned to be the biggest one time thing.
Brian Miller: The biggest one-time thing, which will be reflected in the fourth quarter that's reflected in our full year guidance, is what Lynn mentioned around the Kentucky courts contract where they are prepaying or prepaid in October six years of SaaS payments. So, there's a $29 million bump. That's not a typical situation that we see. We're happy to accept that payment, but it's not typical. So, that's the biggest one-time thing we're seeing that pull forward. Okay, super helpful.
Speaker Change: Which is really will be reflected in the fourth quarter. That's reflected in our full year guidance is what Lynn mentioned around the Kentucky courts contract where they.
Speaker Change: Are prepaying are prepaid in October six years of SaaS payment.
Speaker Change: So there is a $29 million bump that's not a.
Speaker Change: A typical situation that we see.
Speaker Change: We're happy to accept that payment but.
Speaker Change: It is not typical so that's the biggest one time thing we're seeing.
Speaker Change: That pull forward.
Terry Tillman: Thank you. Your next question comes from a line of Terry Tillman from Truist.
Speaker Change: Okay Super helpful. Thank you.
Speaker Change: Your next question comes from the line of Terry Tillman from Truest. Your line is open.
Lynn Moore: Your line is open. Yeah, thanks. Hey, Lynn, Brian, and Hala. It's great to hear the call out from my home state, Kentucky, multiple times. I have one question that's a multi-parter, though. I think, Lynn, you've talked in your prepared remarks, and it's in the press release around cross-selling success. What I'm curious about is, you know, have you done things go to market kind of organized to kind of drive more of that pattern recognition? And what are some common plays you see for kind of the cross-selling? Like, what product in particular seems to stand out? And the second part of this question is, is the reality?
Speaker Change: Yes. Thanks.
Speaker Change: Brian and Halle.
Terry Tillman: It's great to hear the call up for my Homestay, Kentucky multiple times.
Terry Tillman: Hi, Yes, I have one question, that's a multi parter, though.
Terry Tillman: I think Glenn you talked in your prepared remarks, and it's in the press release around cross selling success, what I am curious as you.
Terry Tillman: Have you done things go to market kind of org wise to kind of drive more of that pattern recognition and what are some common plays you see for kind of the cross selling like what products in particular seems to stand out in that.
Terry Tillman: Second part of this question is is the reality there is another milestone here for cross selling success. Once you get these flips kind of stood up and so maybe we could see a step up even in more cross selling what's their kind of stable on new kind of cloud technology. Thank you.
Lynn Moore: Well, there's another milestone here for cross-selling success. Once you get these flips kind of stood up, and so maybe we could see a step up even in more cross-selling once they're kind of stable on new kind of cloud technology. Thank you. Yeah. Good question, Terry. I'll start with the second one. The answer for that is yes. I think part of the equation of doing flips is it brings actually the option. We call it more upselling. But yeah, that is part of that equation. And I do think it's something. It's another opportunity for us to be in front of the client.
Yeah, good questions Terry I'll start with the second one.
Speaker Change: The answer to that is yes, I think part of the.
Speaker Change: Part of the equation of doing flips as it brings actually afternoon, we call it more upselling.
Speaker Change: But yes that is part of that equation and I do think it's.
Speaker Change: Something it's another opportunity for us to be in front of the client another opportunity to add additional products as their as they're making another decision.
Lynn Moore: Another opportunity to add additional products as they're making another decision on cross-selling. You know, there's a lot of things that go into that. And I would say things that we have done internally over the last year, 12, 18 months have played a significant role in that. I think I've talked about that on some prior calls, things that we've done around how we comp our salespeople, how we comp the different divisions, what that basis is. And we've moved to a more, for example, a more of a one-tiler compensation level so that basically, you know, if there are multiple divisions that are contributing to a sales process, we don't have to fight over who's getting the credit because the credit, it shouldn't really matter.
Speaker Change: On cross selling.
Speaker Change: There's a lot of things that go into that and I would say things that we have done internally over the last year 12 to 18 months have played a significant role in that I've talked to I think I've talked about that on some prior calls.
Speaker Change: Things that we've done around how we comp our salespeople, how we comp the different divisions, what that basis is and we've moved to a more for more of a one tyler compensation level, so that basically.
Speaker Change: If there are multiple divisions that are contributing to our sales process. We don't have to fight over who's getting the credit because the credit it shouldn't really matter, it's Tyler wins and so we've done things internally that I think in broken down internal internal barriers that are just sort of I think grease, the wheels, a little bit more.
Lynn Moore: It's Tyler Wins.
Lynn Moore: And so we've done things internally that I think have broken down internal barriers that have just sort of, I think, greased the wheels a little bit more. In terms of product suite. It's funny, yes; some tend to go a little bit more than others. Sometimes you may get some courts and justice products that tie well with our public safety products. Sometimes, for example, we did a significant deal this quarter in Kenosha, Wisconsin. That was our ERP full suite. It was also included enterprise, appraisal and tax, included our municipal justice, big integrated story, Gartner-led procurement, about a 1.6 million AR.
Speaker Change: In terms of product suites.
Speaker Change: It's funny, yes, some some tend to go a little bit more than others.
Speaker Change: Sometimes you may get some.
Speaker Change: Some courts and justice products that tie well with our public safety products sometimes.
Speaker Change: Sometimes it for example, we did a significant deal this quarter in Kenosha, Wisconsin that was our ERP full suite. It would also included enterprise appraisal and tax included a municipal justice.
Speaker Change: Big integrated story Gartner led procurement.
Speaker Change: $1 6 million and they are so whether there are products that sort of sometimes naturally seem to go together our integrated story in the Tyler story.
Lynn Moore: So while there are products that sort of sometimes naturally seem to go together, our integrated story and the Tyler story tends to also sometimes bring products together in deals that you might not necessarily think on the face of it, that that would have been an inclusive sale, but we're seeing that. We also saw that in St. Petersburg, Florida. I think I mentioned that in my prepared remarks. That was enterprise permit and licensing, but it also brought in our utility billing and payments. That was almost a $2 million ARR deal. So we're seeing progress, and a lot of it is the result of some internal initiatives, and it's just the more success we're having in the market and selling that sort of integrated story of Tyler is resonating.
Speaker Change: Tends to also sometimes bring products together and deals that you might not necessarily think on the face of it that that would have been.
Speaker Change: And inclusive sale that we're seeing that.
Speaker Change: We also saw that in St. Petersburg, Florida, I think I mentioned that in my prepared remarks.
Speaker Change: Enterprise permanent license, but it also brought in our utility billing and payments that was almost a $2 million a deal. So we.
Speaker Change: We're seeing progress and a lot of it is the result of some internal initiatives and it's just the the more success, we're having in the market and selling that that sort of integrated story of Tyler.
Speaker Change: Resonating.
Joshua Riley: Thanks a lot. Your next question comes from a line of Joshua Riley from Needham & Company. Your line is open. Great. Thanks for taking my question. So after being at the IACP event here, one of the topics that came up was where customers are at in terms of version consolidation. Just wanted to get an update on some of the key product areas where we are at with that. I believe public safety is at around 30%, which might be a bit behind some of the other larger products. And how do you think about the benefit to margins over the next several quarters as you get more up to date there?
Speaker Change: Thanks for that.
Speaker Change: Your next question comes from the line of Joshua Reilly from Needham <unk> Company. Your line is open.
Speaker Change: Great. Thanks for taking my question so after being at the ICP event here one of the topics that came up was where.
Joshua Reilly: They are at in terms of Virgin consolidation just wanted to get an update on some of the key product areas, where we where we are at with that I believe public safety is at around 30%, which might be a bit behind some of the other larger products and how do you think about the benefit to margins over the next several quarters as you get more up to date bar.
Lynn Moore: Thanks.
Lynn Moore: Now a good question, Josh. I think I've talked about the last call. Version consolidation is a big piece of what we call phase one of our cloud transition, and each of our flagship products have been going at different paces because they have different starting points. I would say, generally speaking, sitting here in the fall of 2024, I'm pleased with where we are at version consolidation. I think we're ahead of where I thought we would have been looking back two or three years ago. And you know some of our products; this is a heavier lift. But if you look, for example, at our courts and justice, our enterprise ERP solution, we have an overwhelming number of clients now that are down to one or two versions, far removed from the days of having five, six, seven versions out in the field.
Speaker Change: Thanks.
No a good question Josh.
Speaker Change: Yes.
Speaker Change: I think I've talked I think I talked about on our last call version consolidation is a big piece of what we call phase one of our cloud transition and each of our flagship products have had been growing at different paces, because they have different starting points I would say generally speaking sitting here in the fall of 2024, I'm pleased with where we are at <unk>.
Speaker Change: <unk> consolidation I think we're ahead of where I thought we would've been looking back two or three years ago.
Speaker Change: And some of our products. This is a heavier lift but if you look for example at our courts and Justice our enterprise Justice solution you look at our enterprise ERP solution. We have an overwhelming number of clients now that are down to one or two versions far removed from the days of having $5 67.
Speaker Change: Versions out in the field.
Lynn Moore: I think that's part of what you're seeing with our outperformance this year. We talked about our margin out performance being driven in part by some of our cloud efficiencies. Those cloud efficiencies are our products are getting more optimized to be run in AWS, but we're also seeing the benefits of that version consolidation. It takes a lot less people to maintain and support fixed bugs on a single version, even two versions, than six or seven versions.
I think thats part of what Youre seeing with our.
Speaker Change: Our outperformance this year, we talked about.
Speaker Change: Margin outperformance being driven in part by some of our cloud efficiencies.
Speaker Change: Those cloud efficiencies are we are as our products are getting more optimized to be run on AWS, but we're also seeing the benefits of that version consolidation. It takes a lot less people to to maintain and support fixed bugs on a single version or even two versions than six or seven versions and that's part of what we're looking at.
Lynn Moore: And that's part of what we're looking at when we start talking about phase two of our cloud strategy, which is what we call Cloud Living. It's getting all of our clients onto that single version, getting them on really short release cycles, less disruptive large versions out in the field, higher clients at. So I think we're making really good progress there. I do expect that to continue to help gross margins as we look towards our Tyler 2030 goals. That's where some of that gross margin improvement is going to come. And again, I'm pleased with what we're at right now on burgeoning consolidate.
Speaker Change: We start talking about phase two of our cloud strategy.
Speaker Change: Which is what we call cloud living it's getting all of our clients onto that single version getting them on really short.
Speaker Change: Release cycles less disruptive large versions out in the field higher client set so I think we're making really good progress there I do expect that to continue to help.
Speaker Change: To help gross margins as we look towards our top Tyler 2030 goals, that's where some of that gross margin improvement is going to come in.
Speaker Change: And again I'm pleased with where we're at right now on version consolidation.
Unknown Attendee: Thank you.
Speaker Change: Thank you.
Gabriela Borges: Our next question comes from a line of Gabriela Borges from Goldman Sachs. Your line is open. Hi, good morning. Thank you for taking my question. How should we be thinking about the sustainability of some of the healthy demand that you're seeing? And maybe just level set us on the art of funds. How much of a benefit do you think that you're seeing today versus how much could you see in 2025 and 2026 as the funds that are committed actually get spent? Thank you.
Speaker Change: Our next.
Speaker Change: Question comes from the line of Gabriela Borges from Goldman Sachs. Your line is open.
Gabriela Borges: Hi, Good morning. Thank you for taking my question Lynn and Brian I wanted to ask given your experience in the space.
Gabriela Borges: Clearly in a really healthy part of the budgeting cycle and the willingness to spend cycle across state and local governments, how should we be thinking about the sustainability of some of the healthy demand that youre seeing and maybe just level set us on the ARPA funds how much of a benefit do you think that youre seeing today.
Gabriela Borges: Versus how much could you see 2025 and 2026 of the funds that are committed actually gets done. Thank you.
Lynn Moore: Yeah, Gabriela, I think overall, I mean, budgets have been at a pretty good level for, I'd say a couple of years now, and I can't predict what's going to happen three or five years from now. I can't even predict what's going to happen in two weeks with the election. But I think our outlook right now and what we're seeing in leading sales indicators is we see that continue in that level staying for the foreseeable future. Our RFP counts, our demo counts, all those leading sales indicators are strong and are consistent with prior quarters and really the last couple of years.
Speaker Change: Yes, Gabriel I think overall.
Speaker Change: I mean budgets have been at a pretty good level for I'd say a couple of years now.
Speaker Change: And.
Speaker Change: I can't predict what's going to happen three years or five years from now I can't even predict what's going to happen in two weeks with the election.
Speaker Change: But I think.
Speaker Change: Our outlook right now and what we're seeing in leading sales indicators as we see that continuing that level staying for the foreseeable future or our RFP counts our demo counts all those leading sales indicators.
Speaker Change: Our strong and are consistent with.
Speaker Change: Prior quarters and really the last couple of years and so those are those are really the data points that I look at most I'm sorry, I forgot the second question telephone ARPA funds.
Lynn Moore: And so those are those are really the data points that I look at most.
Gabriela Borges: I'm sorry, I forgot the second question. Oh, ARPA funds. You know, ARPA funds have been an interesting topic over the last several years. There are certain deals that were clearly driven by ARPA funds. We talked about the Kentucky Enterprise Justice deal where they prepaid that all up front. We also had a significant deal of Arizona Supreme Court deal that I mentioned in my prepared remarks was also funded by ARPA funds. We don't always know, and we haven't always known when ARPA is the trigger. And what we've said over the past, sometimes it's not the direct trigger, but it may have freed up other opportunities.
ARPA funds have been an interesting topic over the last several years.
Speaker Change: There are certain deals that were clearly driven by ARPA funds.
Speaker Change: We talked about the Kentucky Enterprise Justice deal, where they prepaid that all upfront.
Speaker Change: We also had a significant deal the Arizona Supreme Court deal that I mentioned in my.
Speaker Change: In my prepared remarks was also funded by ARPA funds, we don't always know and we haven't always known.
Speaker Change: When ARPA as is the trigger and what we've said over the past, sometimes it's it's not a direct trigger but.
Speaker Change: It may have freed up other opportunities there's been a hesitate see sometimes in our business to use ARPA funds given the recurring nature, sometimes tend to have been used more on one time things we saw that sort of in our student transportation business, maybe four large purchase of hardware.
Lynn Moore: There's been a hesitancy sometimes in our business to use ARPA funds, given the recurring nature; they sometimes tend to have been used more on one-time things. We saw that sort of in our student transportation business, maybe for large purchase of hardware, something like that. I think they've been helpful over the last few years. I don't think that's been a major tailwind to growth and sales. That's not what we're hearing from our sales folks. It does do you get until the 26 to spend those dollars. Some of those things that ARPA funds will be used for may not even have started.
Speaker Change: Like that.
Speaker Change: I think they have been helpful. Over last few years I don't think thats been a major tailwind to growth in sales and that's not what we're hearing from our sales folks.
Speaker Change: It does yes.
Speaker Change: Good morning, guys until the 2006 to spend those dollars to some of those.
Speaker Change: Things that ARPA funds will be used for may not even have started they may have been committed but internally, but havent even started the buying process and just for example, like with the Kentucky deal, even though they are using ARPA funds to pay six years of SaaS.
Lynn Moore: They may have been committed, but internally, they haven't even started the buying process. And just for example, like with the Kentucky deal, even though they're using ARPA funds to pay six years of staff, that was a 12-year sales process from the time we started talking to them. So the deal didn't materialize because of ARPA funds, but it affected. So we wouldn't say that that deal just happened because of ARPA and wouldn't have happened without it, but it certainly benefited the timing of.
Speaker Change: That was a 12 year sales process from the time we.
Speaker Change: Started talking to them. So the deal didn't materialize because of ARPA funds, but.
Speaker Change: It affected.
Speaker Change: We wouldn't say that that deal just happened because of ARPA and wouldn't have happened without it.
Speaker Change: But it's certainly benefited.
Speaker Change: The timing of it.
Unknown Attendee: Thank you for the call.
Speaker Change: Got it thank you for the color.
Saket Kalia: All right, the next question comes from a line of Saket Kalia from Barclays. Your line is open. Okay, great. Hey, morning guys. Thanks for taking my question here.
Speaker Change: Your next question comes from the line of second Kelly from Barclays. Barclays. Your line is open.
Speaker Change: Okay, Great Hey morning, guys. Thanks for taking my question here.
Lynn Moore: Lynn, maybe for you, just to hit on a little bit of a different topic, you know, Tyler's services have always been really important for your government customers, but it's been interesting to see that business over time grow just a little bit slower than the rest of the software business. So maybe the question is, could you maybe speak to how the services intensity in the business is changing as Tyler becomes more of a SaaS company and maybe, relatively, Brian, for you, maybe touch on how that impacts margins over time. Yeah, that's a good question. And, you know, I actually, I'll start a little bit too with what you asked. Brian is part of our performance this year has been our services gross margins.
Speaker Change: Yes.
Speaker Change: And then maybe for you just to hit on a little bit of a different topic.
Speaker Change: Tyler is services has always been really important for your government customers, but it's been interesting to see that business over time grow just a little bit slower than the rest of the software business.
Speaker Change: Maybe the question is could you maybe speak to how the services intensity in the business is changing as Tyler becomes more of a SaaS company and maybe Relatedly, Brian for you maybe touch on how that impacts margins overtime.
Speaker Change: Yes, that's a good question and.
Speaker Change: Actually I'll start a little bit to what would you ask Brian as part of our outperformance. This year has been our services gross margins.
Lynn Moore: And that has been something that we have focused on at a management level over the last couple of years, and you're starting to see some of that, so that it's good management focus and attention. It's also been a function of the labor market. So the labor markets have really stabilized. We're seeing a lot less turnover, and, you know, high turnover in our services areas creates a lot of inefficiencies. It takes a long time for people to get onboarded, up to speed, and out and billable, but we've had some other internal initiatives that really help drive those professional services as we look out over the next several years.
Speaker Change: And that has been something that we have focused on at a management level over the last couple of years and Youre starting to see some of that so it's good management focus and attention. It's also been a function of the labor market. So the labor markets have really stabilized we're seeing a lot less turnover.
Speaker Change: And high turnover in our services areas create.
Speaker Change: Creates a lot of inefficiencies it takes a long time for people to get on boarded up to speed and out in billable, but we've had some other internal initiatives that really help drive those professional services as we look out over the next several years I.
Brian Miller: I would expect our services to remain relatively flat. In fact, next year they may actually decrease a little bit. That's a function of a couple of things. I think it is a function of efficiencies and how we can onboard clients. We've done some internal initiatives around that. It's also a function of, in our, some of our really large implementations like in courts and justice. And a lot of customization work. We're moving away from that. We don't have as many of those on the horizon. And the whole concept of clients having one-off custom applications is something that we are removing.
Speaker Change: I would expect.
Our services to remain relatively flat and in fact next year. They may actually decrease a little bit that's.
Speaker Change: That's a function of a couple of things.
Speaker Change: It is a function of efficiencies and how we can onboard clients we've done some internal initiatives.
Speaker Change: Around that.
Speaker Change: It's also a function of some of our really large implementations like in courts and justice.
Speaker Change: And a lot of customization work, we're moving away from that we don't have as many of those on the horizon and the whole concept of of clients, having one off custom.
Speaker Change: Applications.
It's something that we are we're moving it's part of our cloud living.
Brian Miller: It's part of our cloud living goals as we move forward. So it's a number of factors there. It is something that's been a focus of it, but you're right. It has been declining as a percentage of revenues. And as I look out, I would expect it to stay flat to decline as compared to other growth in our revenue lines. So just as Lynn said, less services in the mix; services are our lowest margin. And in fact, historically, we've had a negative margin. So the combination of less services in the mix from all those factors that Lynn mentioned, combined with improving margins on the services we are doing, should continue to have a positive impact on our margins.
Speaker Change: Goals as we move forward. So it's a number of factors there. It is something thats been a focus of it but you are right. It has been declining as a percentage of revenues and as I look out I would expect it to stay flat to decline as compared to other growth in our revenue lines.
Speaker Change: As Lynn said less services and the mix services are our lowest margin in fact, historically have had a negative margin. So the combination of less services in the mix from all those factors that Lynn mentioned combined with improving margins on the services we are doing.
Speaker Change: Should continue to have a positive impact on our margins and we pointed that out as one of the.
Brian Miller: And we pointed that out as one of the, not the biggest, but one of the factors in driving towards our 2030 margin targets. Very helpful guys.
Speaker Change: Not the biggest but.
Speaker Change: One of the factors in driving towards our 2030 margin targets.
Speaker Change: Very helpful guys. Thank you.
Charlie Strother: Thank you. Your next question comes from a line of Charlie Strother from CJS Securities. Your line is open. Thank you. Good morning.
Speaker Change: Your next question comes from the line of Charlie stronger from CJS Securities. Your line is open.
Charlie stronger: Hi, Thank you good morning.
Brian Miller: Brian, when you talk to clients who are, you know, somewhat hesitant to flip, what are some of the reasons why they're so cautious and ultimately, how do you convince them otherwise? Thanks. I think some of the reasons are just some of the historic reasons, the control. You've got people maybe who are not have been there a long time. They're used to having control of their systems, control of everything. I think what happens is, you know, we've talked about, you know, aging technology, but also aging infrastructure starts to lead to more and more openness to flips.
Charlie stronger: Lynn, Brian when you talked to clients, who are somewhat hesitant to flip.
Charlie stronger: What are some of the reasons why they are so cautious and ultimately ultimately how do you convince them otherwise.
Charlie stronger: Thanks.
Charlie stronger: Okay.
Speaker Change: I think some of the.
Speaker Change: I think some of the reasons or just some of the.
Speaker Change: Historic reasons control.
Speaker Change: <unk> got people, maybe who are not have been there a long time they are used to having control of their systems control of everything.
Speaker Change: I think what happens is we.
Speaker Change: We've talked about aging technology, but also aging infrastructure starts.
Speaker Change: Starts to lead to more and more openness to flips I think you also see the increase in cyber attacks.
Brian Miller: I think you also see the increase in cyber attacks, creating a different sort of demand and new demand for flips. But I think also, you know, we talk a lot about how everything we do is public. Every implementation we do, every county, every city looks to their neighbors, looks across jurisdictions to see what's going on. And whatever hesitancy that people may have felt five years ago, seven years ago, as they see their neighboring jurisdictions make those decisions and the success that they're having. And I go back to what I've come in earlier about our success and executing.
Speaker Change: Creating a different sort of demand and new demand for flips, but I think also.
Speaker Change: We talk a lot about how everything we do is public every implementation we do all the every county every city looks to their neighbors looks across jurisdictions to see what's going on in whatever hesitancy that people may have felt five years ago seven years ago as they see their neighbor neighboring jurisdictions make those decisions.
Speaker Change: <unk> and the success that they're having and go back to my comment earlier about our success in executing and they see us being able to get them.
Unknown Attendee: And they see us being able to get them up and live and running in a better environment. I think that starts to break down those barriers as we move forward.
Speaker Change: Up and live and running and in a better.
Speaker Change: Better environment.
Speaker Change: That starts to break down those barriers as we move forward.
Rob Oliver: So our next question comes from a line of Rob Oliver from Beard. Your line is open. Great. Thank you, guys. Good morning, Lynn. I just wanted to go back quickly to the question earlier regarding the ARPA funds. We, you know, given the fact that we have a deadline now to obligate these funds. I know you guys have been hesitant to draw, you know, a direct line between them and the actual deals. And, you know, you alluded to the Kentucky win, which is obviously exciting and courts and justice. But you noted that you know it was over a decade in the hopper.
Speaker Change: Our next question comes from the line of Rob Oliver from Baird. Your line is open.
Rob Oliver: Great. Thank you guys. Good morning, Lynn I just wanted to go back quickly to the question earlier regarding the ARPA funds.
Rob Oliver: Well given the fact that we have a deadline now to obligate. These funds I know you guys have been hesitant to draw.
Rob Oliver: Correct line between them and the <unk>.
Speaker Change: Youll deals and you alluded to the Kentucky win which is obviously exciting a courts of justice, but you noted that it was over a decade in the hopper.
Lynn Moore: What if anything is your sales force doing and now at state local to be in front of your customers to talk about that commit process and how Tyler products could be useful. I know the vendor decision doesn't need to be made necessarily by the end of December. But it just, you know, I guess another way of asking the previous question from Gabrielle in terms of, you know, confidence that we might see more deals that could be supportive of that. That 25 and 26 progress, the deadline by which they need to spend it. Thank you. Yeah, Rob, I don't know that we're doing anything different than we've done the last couple of years.
Speaker Change: What if anything is your sales force doing now.
Speaker Change: The state and local.
In front of your customers to talk about does that commit process on how Tyler products could be useful I know the vendor decision does it need to be made necessarily.
Speaker Change: By the.
Speaker Change: The end of December but it just.
Speaker Change: I guess another way of asking the previous question from Gabrielle in terms of confidence that we might see more deals that could be supportive of that 20% to 26 progress.
Speaker Change: A deadline by which they need to spend it. Thank you.
Speaker Change: Yeah, Rob I don't I don't know that we're doing anything different than we've done the last couple of years all of our sales teams have been armed with.
Lynn Moore: All of our sales teams have been armed with information on ARPA funds. They're armed with the right marketing materials. They generally know what's around. They've got their talking points. But I'll reiterate, I don't think I can draw a direct correlation over the last few years of ARPA funds to Tyler's performance in a material way. It has definitely been part of the overall environment. But again, as I said, I look at indicators going out, you know, into the future. The things that we track that sort of help us, you know, track demand. and budgets. Those are remaining pretty consistent right now.
Speaker Change: Information on ARPA funds, they are armed with the right marketing materials. They generally no.
Speaker Change: Whats around they've got their talking points.
Speaker Change: But I'll reiterate I don't think.
Speaker Change: I can't I can't draw a direct correlation over the last few years of ARPA funds to Tyler's performance in in a material way.
Speaker Change: It's definitely been part of the overall environment.
Speaker Change: But again as I said, even as I look at indicators going out into the future.
Speaker Change: Things that we track that sort of help us.
Speaker Change: Track demand in and budgets. Those are those are remaining pretty consistent right now so I'm not suggesting that ARPA hasnt been helpful. I, just I have not been able to really draw a material one on one direct correlation to that other than obviously some deals, but the Kentucky deal I think the interesting about that is.
Lynn Moore: I'm not suggesting that ARPA hasn't been helpful. I have not been able to really draw a material one-on-one direct correlation to that other than obviously some deals, but the Kentucky deal. I think the interesting thing about that is it highlights really sometimes the long nature of these sales processes and the tenacity of us and the long-term nature of everything we do and our long-term vision. And staying power, that there was 12 years later, and we benefited from cashflow with ARPA funds, but we were going to get that deal whether ARPA funds were available or not.
Speaker Change: Sometimes it highlights really sometimes a long nature of the sales processes and the tenacity of us in the long term nature of everything we do in our long term vision and staying power.
Speaker Change: 12 years later, and we benefited from cash flow with ARPA funds, but we're going to get that deal whether ARPA funds were available or not.
Unknown Attendee: Okay, helpful. Thank you.
Speaker Change: Okay helpful. Thank you.
Jonathan Hope: Our next question comes from a line of Jonathan Hope from William Blair. Your line is open. Hi, good morning. Can you give us a little bit of sense around the AI opportunity? I think you referenced one large deal and how your customers are maybe thinking about leveraging AI over time and what that could mean from an upsell perspective. Thank you. Yeah, Jonathan, you know, we're starting to see a little bit of questions in RFPs around AI and what AI technology we're using, how we're leveraging it. I don't think anything right now has changed from what we said over the last couple of quarters.
Speaker Change: Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.
Jonathan Ho: Hi, Good morning can you give us a little bit of sense of around the AI opportunity I think you referenced one large deal and how your customers are maybe thinking about leveraging AI over time, and what that could mean from an upsell perspective. Thank you.
Speaker Change: Yes, Jonathan.
Speaker Change: We're starting to see a little bit of questions and rfps around AI and and what AI technology, we are using how we're leveraging it.
Speaker Change: I don't think anything right now has changed from what we said over the last couple of quarters.
Lynn Moore: We're focusing our efforts on sort of right now, you know, trying to decide where exactly we want to put most of our resources behind AI, you know, internal versus external facing solutions. I still continue to believe that there's a lot of applicability pointing inward in things that we can do on repetitive type activity that some of our employees do. But we have seen an uptick. I mean, we made the acquisition of CSI last year. AI is a deeply embedded part of that solution. It is having a lot of success in the market. AI has some AI tools, and I mentioned the air and spec deal and the portion of the Illinois deal that I talked about earlier.
Speaker Change: We're focusing our efforts on sort of right now.
Speaker Change: Trying to decide where exactly we want to put most of our resources behind AI.
Speaker Change: Internal versus external facing solutions I still continue to believe that there's a lot of applicability.
Speaker Change: Pointing inward and things that we can do on repetitive type.
Speaker Change: Activity that some of our.
Speaker Change: Some of our employees do but we have seen an uptick I mean, we made the acquisition of CSI last year.
Speaker Change: AI is a deep deeply embedded part of that solution is having a lot of success in the market.
Speaker Change: <unk> has some AI tools and I mentioned, the <unk> deal and the portion of the Illinois deal that I talked about earlier so.
Lynn Moore: So, you know, we're doing things around AI. Customers are starting to be more open about talking about it. I think a year ago, clients were probably really hesitant. It's not a driver right now in deals, but their curiosity and their interest is starting to surface.
Speaker Change: We're doing things around AI customers are are starting to be more open about talking about it I think a year ago clients were probably really hesitant.
Speaker Change: It's not a driver right now in deals, but their curiosity and their interest is starting to surface in and my guess is we'll hear more about it when we get together connect next year and probably even more about it in the following year.
Unknown Attendee: And my guess is we'll hear more about it when we get together, connect next year and probably even more about it the following year. Thank you.
Speaker Change: Thank you.
Keith Housum: Your next question comes from a line of Keith, who's from North Coast Research. Your line is open. Good morning, guys. Appreciate it. In terms of like the acquisition front, you know, you've got, you know, favorable debt terms, you're generating a good amount of cash. How are you guys thinking about acquisitions now? And then in terms of, you know, more specifically, is there specific end markets within your business that you're thinking that could benefit from acquisitions more than others, and perhaps what would they be?
Speaker Change: Your next question comes from the line of Keith <unk> from Northcoast Research. Your line is open.
Speaker Change: Good morning, guys I appreciate it in terms of the.
Keith <unk>: Acquisition front, you've got favorable debt terms you generate a good amount of cash how are you guys thinking about acquisitions now and then in terms of.
Keith <unk>: More specifically is there a specific end markets within your business that you're thinking that could benefit from acquisitions more than others and perhaps what would they be.
Lynn Moore: Yeah, Keith. We're viewing it similarly. I mean, I've talked about the last, you know, couple of years. Our priority is debt paydown. Our cash balances are approaching what our convertibles do in about 16, 18, 17 months. And so we're looking; we always look. We've been looking; I look at deals every quarter. We're probably a little pickier right now than we might otherwise be. But I do think as we go into 2025 and then into 2026, we're not going to change our standards. We're not going to change our valuation approach. But I do think you'll see us.
Speaker Change: Yes, Keith.
Speaker Change: We're viewing it similarly.
Speaker Change: I've talked about the last cut.
Speaker Change: A couple of years, our priority is debt paydown.
Speaker Change: Our cash balances are approaching what.
Speaker Change: What our convertible is due in about 16 17 months.
Speaker Change: And so we're looking we always look we've been looking at I look at deals every quarter.
Speaker Change: We're we're probably a little pickier right now than we might otherwise be but I do think is as we go into 2025.
Speaker Change: And then into 2026, we're not going to change our standards, we're not going to change our.
Speaker Change: Our valuation.
Speaker Change: Approach, but I do think Youll see us.
Lynn Moore: I'll probably evaluate more, and maybe a deal that, you know, we might have said, hey, maybe we don't do it right now, that might tip in that direction.
Speaker Change: I'll, probably evaluate more and maybe maybe a deal that we might have said hey, maybe we don't do it right now that that might tip in that direction. We don't have anything specific right now in the hopper.
Unknown Attendee: We don't have anything specific right now in the hopper. We do talk internally about really, you know, what's the best area for us to go get our bang for a buck, and should we start to be start being a little more proactive as opposed to reactive. Those are discussions we're having internally. But generally, as it relates to capital, our stance is kind of the same right now. But I can see that evolving over the next 12, 18 months. Thanks. Great, thank you.
Speaker Change: We do talk internally about really.
Speaker Change: What's the best area for Us to go get a bang for a buck and should we sort of be start being a little more proactive as opposed to reactive.
Speaker Change: Those are discussions we're having internally.
Speaker Change: But generally as it relates to capital our stance is kind of the same right now, but I can see that evolving over the next 12 to 18 months.
Speaker Change: Great. Thank you.
Mark Schappel: Your next question comes from a line of Mark Schappel from Loop Capital. Your line is open. Hi, thank you for taking my question.
Speaker Change: Your next question comes from the line of Mark Chapelle from Loop capital. Your line is open.
Mark Chapelle: Hi, Thank you for taking my question John a question for you are building on the earlier question on version consolidation, which has been somewhat of a gating item to get customers to migrate to the cloud could you just discuss some of the characteristics that you're using to encourage customers to move to the latest product release.
Lynn Moore: John, a question for you: building on the earlier question on version consolidation, which has been somewhat of a gating item to get customers to migrate to the clock. Could you just discuss some of the carrot sticks that you're using to encourage customers to move to the latest product release? Well, it's, you know, there's a combination of things, and each of our products are in different stages of using those combination of things. Some of them have been, you know, maybe some minor financial considerations. Some of them have been, you know, only new features will be available in the cloud.
Speaker Change: Well, there's a combination of things and each of our products are in different stages of using those combination of things.
Mark Chapelle: Some of them have been.
Mark Chapelle: Maybe some minor financial considerations some of them have been.
Mark Chapelle: Only new features will be available in the cloud some of it will be.
Lynn Moore: Some of it will be, you know, we're no longer going to support a version of the cloud. We haven't drawn a lot of those hard sticks yet, particularly with our flagships. But, you know, it's a variety of things that's going on. I think clients also are starting to realize the benefit and the need to get upgraded. Part of what happens is when, particularly when clients have multiple products of ours and those products are on multiple different years of versions, it's really hard for those products to talk. And I think you also see it with support calls.
Mark Chapelle: We're no longer going to support a version of the cloud we haven't drawn a lot of those hard sticks, yet, particularly with our flagships.
Mark Chapelle: But it's a variety of things thats going on.
Mark Chapelle: I think clients also are starting to realize the benefit and the need to get upgraded.
Mark Chapelle: Part of the what happens is when when particularly when clients have multiple products of ours and those products are on multiple different years aversions, it's really hard for those products to talk.
Mark Chapelle: And I think you also see it with support calls you know you've got clients, who who might have been on a version that's four or five years old and they are having issues, but they didn't realize is that those issues were corrected and emerging three years ago. They just didn't take the upgrade.
Lynn Moore: You know, you've got clients who might have been on a version that's four or five years old, and they're having issues, but that what they didn't realize is that those issues were corrected in a version three years ago; they just didn't take the upgrade. So it's a sales pitch. It's things we're doing internally. It's a variety of things. It's not one thing, and each one is in a different stage. I've talked before. We're doing multiple cloud transitions, which means, you know, we're doing multiple version consolidations at the same time.
Mark Chapelle: So it's sales pitch it.
Mark Chapelle: It's things we're doing internally.
A variety of things, it's not one thing and each one is in a different stages I've talked before we're.
Mark Chapelle: We're doing multiple cloud transitions, which means we're doing multiple version consolidations at the same time.
Lynn Moore: But with respect to version consolidation, specifically that I guess you call it stick, is that we actually are sunsetting older versions and giving clients certainly ample notice, but letting clients know that the version they're on, the oldest versions will no longer be supported after a certain day and working with them. To move them to the current version before that date. And we've done that with multiple products. We've sunset the multiple old versions of our enterprise ERP solution, our enterprise justice solution, and it made significant progress in moving those customers to current versions as we discontinue support of the older versions.
Mark Chapelle: But with respect to Virgin consolidations specifically.
Mark Chapelle: I guess you'd call it a stick.
Mark Chapelle: Is that we actually are sunsetting older older versions, and giving clients certainly ample notice, but letting clients know the version there on the oldest versions will no longer be supported after a certain date and working with them to move them to the current version before that date and we've done that with <unk>.
Mark Chapelle: Multiple products we have.
Mark Chapelle: Sunset multiple old versions of our enterprise ERP solution, our enterprise Justice solution and have made significant progress in moving those customers.
Mark Chapelle: To current versions as we because we discontinued supported the older versions.
Unknown Attendee: Great.
Unknown Attendee: Thank you.
Speaker Change: Great. Thank you.
Clark Jeffries: Our next question comes from a line of Clark Jeffries from Piper Sandler.
Speaker Change: Our next question comes from the line of Clarke Jeffries from Piper Sandler Your line is open.
Brian Miller: Your line is open. Hello. Thank you for taking the question. The question is for Brian on the sort of the pace of the SaaS revenue. I know you had quoted that the volatility of SaaS revenue, the timing of the go lives from booked to a live system can be variable, but I just wanted to ask, you know, we have two years now where the sequential growth in Q3 is the highest. I wonder if that's purely circumstantial, if there's any emergencies and all of each of those go live, any, you know, prerogative of these governments to get live on on a Q3 or is that just really reflective of typically high Q4 bookings activity.
Clarke Jeffries: Hello. Thank you for taking the question a question for Brian on.
Clarke Jeffries: Just sort of the pace of the SaaS revenue.
Clarke Jeffries: I know you had quoted that the volatility of SaaS revenue the timing of the go lives.
Clarke Jeffries: From booked to our life system can be variable, but I just wanted to ask we have two years now where the sequential growth in Q3 is the highest I.
Clarke Jeffries: I wonder if you're seeing if that's purely circumstantial if theres any emerging seasonality to those go lives any.
Clarke Jeffries: Yes.
Clarke Jeffries: Prerogatives as these governments to get live on a Q3 or.
Clarke Jeffries: Is that just really reflective of typically high Q4 bookings activity. Thank you.
Brian Miller: Thank you. Yeah, it's probably more the latter. I don't think there's any certain characteristic or something that's causing that. It's probably more around the timing, especially bigger customers. And it varies by market. For example, in the school's market, which is smaller for us, they typically have a big push more in Q2 because they want to have new systems live before a new school year starts. This school years don't really have as much to do with it. So I think it's more circumstantial.
Speaker Change: Yes, it's probably more of the latter I don't think theres any any.
Speaker Change: Certain.
Speaker Change: Characteristic or something that's causing that.
Speaker Change: It's probably more around the timing, especially a bigger customers and it varies by market for example in the schools market.
Speaker Change: <unk> for us but.
Speaker Change: They typically have a big push more in Q2, because they want to have new systems.
Speaker Change: <unk> before a new school year starts.
Speaker Change: Yeah.
Speaker Change: Fiscal year's don't really have as much to do with it. So I think it's more circumstantial.
Unknown Attendee: Thank you very much.
Speaker Change: Thank you very much.
Alina Aleksukin: Your next question comes from Alina of Aleksukin from Wolf Research. Your line is open. Hey guys, thanks for taking my questions. Congrats on another solid quarter.
Speaker Change: Your next question comes from the line of Alex Zukin from Wolfe Research. Your line is open.
Alex Zukin: Hey, guys. Thanks for taking my questions. Congrats on another solid quarter I'll ask maybe a longer term question I think it's been alluded to a little bit but.
Lynn Moore: I'll ask a maybe a longer term question. I think it's been alluded to a little bit. But again, as we think about AI, both agentic, copilot, system, and you think about the customers that are starting to ask those questions, you think about the breadth of solutions that you're offering both to your customers and across the portfolio of products. As we think about that monetization pathway, is that something we should think about maybe on top of the long-term guidance that you've provided at the last annual stay through 2030? Or is that embedded in there? I asked because it seems like the pace of the innovation way that's moved so fast since you guys probably were even able to contemplate that.
Speaker Change: Again, as we think about AI co.
Speaker Change: Co pilot since then and you think about the customers that are starting to ask those questions. You think about the breadth of solutions that you're offering alright.
Speaker Change: To your customers and across the portfolio of products.
Speaker Change: As we think about that monetization pathway is.
Speaker Change: That something we should think about maybe on top of the long term guidance that you provided.
Speaker Change: Last analyst day through 2000.
Speaker Change: 30 or is that embedded in there and I ask because it seems like the pace of the innovation wave is moved so fast.
Speaker Change: Since you guys probably were even able to contemplate that so how do we think about those.
Brian Miller: So how do we think about both the top-line growth characteristics that could be associated there and any incremental potential margin degradation or headwinds or thoughts about that, and then I would put follow. Yeah, sure, Alex. Short answer is, yeah, when we gave our 2030 targets, we did not bake in efficiencies, internal efficiencies on any gross margin lines that were going to be driven by AI. Nor did we really bake in any sales that were really the result of either new products, products, newly developed products, or newly acquired products. To the extent AI was already in some of our products, we already had sort of some long-term sales roadmaps, so perhaps a little bit, but not in terms of additional R&D, additional M&A.
Speaker Change: Topline growth characteristics.
That could be associated there and any incremental potential margin debt.
Speaker Change: The degradation or headwinds or thoughts about that.
Following.
Speaker Change: Yes sure Alex.
Speaker Change: Short answer is yes, when we gave our 2030 targets we did not bake in.
Speaker Change: <unk> internal efficiencies on any gross margin lines that we're going to be driven by AI.
Speaker Change: Or did we really bake in any sales that were really.
The result of either new products products.
Speaker Change: Newly developed products, our newly acquired products to.
Speaker Change: To the extent AI was already in some of our products, we already had sort of some long term sales sales roadmaps, so, perhaps a little bit but not in terms of.
Additional R&D additional M&A.
Lynn Moore: And so that's the way I would think about it. I just remember that we're taking a very deliberative approach to AI, and while I say that, we're hearing more and more customers start to have things in their RFPs around AI, it's not a majority yet. And I think our clients will still be a little bit conservative, but when you start looking out five, seven years, those opportunities are there, and we're not going to wait five to seven years to then spin up initiatives; we will be doing those along the way. And to the extent there was some major R&D initiative, which I'm hypothetically, because that's not right now on our road map.
Speaker Change: M&A.
Speaker Change: And so that's the way I would think about it.
Speaker Change: Just remember that.
Speaker Change: We're taking a very deliberative approach to AI and.
Speaker Change: While I say that we're hearing more and more customers.
Speaker Change: Start to have things in their rfps around AI, it's not a majority yet and I think our clients will still be a little bit conservative.
Speaker Change: But when you start looking out five years seven years those opportunities are there and we're not going to wait five years to seven years to two then spin up initiatives.
Speaker Change: Will we will be doing those along the way and to the extent there was some major R&D initiative, which hypothetically hypothetically because that's not right now on our roadmap and an adjusted.
Brian Miller: And it adjusted an R&D expense line or something; we would obviously signal that and tell you that.
Speaker Change: On R&D expense line or something we would obviously signal that and tell you that but in terms of our long term targets.
Brian Miller: But in terms of our long-term targets, no significant AI benefits, either margin or revenue or base.
Speaker Change: No no significant AI benefits either margin or revenue were baked in.
Brian Miller: And to what extent, maybe this is just a clarification, to what extent are you hearing or seeing in sales cycles that those types of questions are actually facilitating or amplifying lips or converts, either the timeline around them or, you know, the momentum or enthusiasm. And then on three cash flow, Brian, again, I think the outperformance obviously both in the quarter and the guys with the player, very notable. You notice that one Kentucky pre-payment contract. How do we think about like the when, where and why those pre-payments happen, and more so, as we looked at 25 and beyond, is there any reason to assume that those would happen more frequently or less frequently.
Speaker Change: And to what extent.
Speaker Change: Maybe this is just a clarification to what extent are you hearing or seeing.
Speaker Change: In sales cycles that those types of questions are actually facilitating we're amplifying blips or converts either the timeline around them or.
Speaker Change: The momentum of our enthusiasm and then on free cash flow, Brian again, I think the outperformance obviously, both in the quarter and the guide for the full year very notable you noted that one.
Speaker Change: Bucky prepayment contract how do we think about like.
Speaker Change: Yes.
Speaker Change: When where and why those prepayments happened.
Speaker Change: More so as we looked at 25 and beyond is there any reason to assume that those would happen more frequently or less frequently and kind of changing the.
Brian Miller: And kind of changing the complexion of the three cash margin. Yeah, the pre-payment was really kind of a one off thing where, at least relative to that size of that, where, and that actually was to show up in the fourth quarter cash flow. But that was, again, our phones being used to pre-pay six years of sad payments. I don't think that would be the norm. The thing that's, I think, more consistent with impact on free cash flow is the characteristics around the transaction business that transaction revenues, whether they're payments or e-filing and those sorts of things.
Speaker Change: <unk> of the free cash flow margins.
Speaker Change: Yes, the free.
Prepayment it was really kind of a one off thing.
Where.
Speaker Change: At least relative to that size of that were and that actually will show up in the fourth quarter cash flow.
But that was again ARPA funds being used.
Speaker Change: Two.
Speaker Change: To prepay six years of SaaS payments I don't think that would be the norm the thing that I think.
Speaker Change: More consistent with with an impact on free cash flow was the characteristics around the transaction business that.
Speaker Change: Transaction revenues, whether their payments or E filing and those sorts of things.
Brian Miller: We generally get paid at the time of the transaction or very quickly after it. So we're not carrying large receivables there. So the cash flow characteristics around that transaction business are very attractive. And so, as it continues to grow, even as a, you know, tick higher than the rest of our business, that has a positive impact on cash flow. We've also had really effective management around our receivables, and it brought down our DSOs and continued to manage that. And that helps as well that those revenues are typically paid in advance annually in advance, as opposed to carrying long, longer, bigger receivables.
Speaker Change: We generally get paid at the time of the transaction are very quickly after it so we're not carrying large receivables there.
Speaker Change: So the cash flow characteristics around that transaction business are very attractive and so as it continues to grow.
Speaker Change: Even at a tick higher than.
Speaker Change: Then the rest of our business that has a positive impact on cash flow. We've also had really effective management around our receivables and that brought down our dsos and continue to manage that.
Speaker Change: SaaS helps as well then that those revenues are typically paid in advance.
Speaker Change: Annually in advance as opposed to.
Speaker Change: Carrying long.
Brian Miller: So really the transaction business is probably the biggest grower of improved margins in cash flow.
Speaker Change: Receivables, so really the transaction business is probably the biggest grower of.
Speaker Change: <unk> margins and cash flow.
Lynn Moore: Yeah, and the follow-up question on AI and sales. I mean, clients aren't looking for AI and for AI's sake, but when you look at our CSI acquisition, the document reduction solution, there's an ROI involved. There's an ROI for the clients. And that's a big sales point. They can do things with that system that used to take a lot of people to do, and they've removed that manual labor, that manual toil. And so, yeah, things like that are driving sales.
Speaker Change: And the follow up question on AI and sales I mean, it's.
Speaker Change: Clients arent looking for AIG for Ai's sake, but there are when you look at our our CSI acquisition. The document redaction solution. There is an ROI involved there is an ROI for the clients and Thats a big sales point. They can they can do things with that system.
Speaker Change: That used to take a lot of people to do and they've removed that manual labor that manual toil and so things like that are driving the sales.
Speaker Change: Yeah.
Unknown Attendee: Great. Thank you, guys.
Speaker Change #100: Great. Thank you guys.
Lynn Moore: And that concludes our question-and-answer session.
Speaker Change #101: And that concludes our question and answer session I will now turn the call back over to President and CEO Lynn Moore for closing remarks.
Lynn Moore: I will now turn the call back over to President and CEO Lynn Moore for closing remarks. All right. Thanks, Rob. And thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks, everybody.
Lynn Moore: Alright, Thanks, Rob and thanks, everybody for joining us today, if you have any further questions. Please feel free to contact Brian Miller or myself. Thanks, everybody have a great day.
Unknown Attendee: Have a great day.
Unknown Attendee: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change #102: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change #102: [music].
Speaker Change #102: Sure.
Speaker Change #102: Yes.
Speaker Change #102: Yes.
Speaker Change #102: Okay.
Speaker Change #102: Yeah.
Speaker Change #102: Okay.
[music].
Speaker Change #102: Yes.