Tyler Technologies' Second Quarter 2023 Conference Call is being hosted by Lynn Moore, President and CEO, and will include comments from Hala Elsherbini, Senior Director of Investor Relations, and Brian Miller, Chief Financial Officer. The call may include forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995, and non-GAAP measures are provided in the earnings release. Supplemental information, such as quarterly bookings, backlog, and recurring revenues, is available on the company's website.

Tyler Technologies delivered strong second quarter results, exceeding expectations across key performance measures, surpassing $500 million in total quarterly revenue for the first time, and achieving double-digit revenue growth. SaaS deals comprised 82% of new software contract value and SaaS revenues grew organically 20%, marking the tenth consecutive quarter of SaaS revenue growth of 20% or more. Operating margins declined from last year due to cloud transitions, but were better than planned due to operating efficiencies.

In the second quarter, Tyler Technologies saw high sales activity and signed 132 new payment deals, as well as contracts for enterprise CAD and mobility solutions with two state police organizations. Deals influenced by data and insights and those from the disbursements business through the acquisition of Rapid Financial Solutions also provided compelling offerings in the state and federal markets. Harris County, Texas selected Tyler's enforcement mobile solution for eCitations and eCrash applications.

In the second quarter of 2021, Tyler Technologies had total revenues of $504.3 million, a 7.6% increase from the previous year. Subscription revenues rose 16.4%, with SaaS revenues increasing 20% and transaction revenues increasing 13.7%. License revenue decreased 34.8% due to a shift to SaaS contracts. Professional services revenue decreased 7.7%, but rose 12.9% organically. Tyler Technologies added 170 new SaaS arrangements and converted 94 existing on-premises clients to SaaS, with a total contract value of approximately $93 million.

In the second quarter of last year, the company signed a $20 million SaaS contract and had an annualized recurring revenue of $1.66 billion. Operating margins were pressured by the shift to the cloud and higher employee health benefits. Merchant and interchange fees had a significant impact on margins, with $44 million in fees paid in the quarter. Cash flows from operations and free cash flow were negative due to increased cash taxes, but would have been $120 million up 19% if not for the taxes. The company did not pay down term debt in Q2, but expects to prioritize debt payments in the second half of the year.

Brian provided an update on the company's financial state, including total debt, cash and investments, and net leverage. He then provided an updated 2023 guidance, which includes total revenue between $1.94 billion and $1.965 billion, GAAP and non-GAAP diluted EPS, and interest expense. Lastly, he reminded the listeners of the seasonal nature of transaction revenues, which tend to be highest in Q2 due to peak outdoor seasons and tax deadlines, and lowest in Q4 due to fewer business days and holidays.

Tyler had two successful events in the quarter: Connect 2023, which was their most attended user conference to date, and their first stand-alone investor event in four years. At the investor event, they unveiled their Tyler 2030 vision and growth strategy, aiming for organic recurring revenue long-term CAGR of 10-12%, sustainable margin expansion, and expanded free cash flow of $1 billion. The ERP market is currently strong, with increased RFPs and demos. It is competitive, with Workday typically playing in larger deals.

Lynn Moore and Brian Miller discuss the difficulty of transitioning customers to the cloud, particularly in the public safety sector. They note that customers are often on older versions of the software, and that Tyler is going through multiple cloud transitions due to the different versions, technology, and endpoints of its core applications.

Brian Miller discussed the normal cadence of bookings for the quarter, which is generally spread throughout the quarter, and the decision to maintain the midpoint of the revenue guidance for the year. He noted that the market remains robust with a lot of activity and that the company had narrowed the range of its revenue guidance.

Lynn Moore and Brian Miller both expressed their enthusiasm for the payments segment of the company, which has exceeded internal plans. They attribute this success to the Rapid acquisition, which has allowed the company to make deals that it wouldn't have been able to make without it. Additionally, they note that there is a lag between signing a new payments deal and the revenue from it hitting the income statement, which can take a quarter or two.

In the second quarter of this year, the biggest deal was an $8.8 million total contract value in the Michigan Bureau of elections. There were 5 other deals worth more than $2 million and one large license deal, the Missouri Highway Control deal. This is a stark contrast to the second quarter of last year, which included a $20 million deal with New Jersey and a $13 million license deal with the tax system in Montreal. For the third quarter of this year, the largest license deal is a $2.5 million deal.

Lynn Moore reported that RFPs and demos are now at or above pre-COVID levels, which is attributed to the market as a whole. This activity is seen across all of Tyler's business units, and there may still be some residual effects from the pandemic. Terry Tillman asked for a look into 3Q, and Gabriela Borges followed up with a question about the quality of the RFPs and demos and how it might affect conversion rates.

Tyler Technologies is seeing improved efficiency in a number of areas, such as staffing levels, Digital Solutions reformer NIC business, and AWS operations. This is helping to increase subscription and maintenance gross margins, as well as SaaS business. Tyler Technologies expects that as SaaS revenues grow, margins should continue to expand due to improved efficiencies.

In Q3, Brian Miller reported that one customer switched from gross to net payments in the payments business, which had a revenue impact. Miller expects this growth to remain in the same range for the near future, and he expects the benefit from flips from on-prem customers to accelerate over the next few years.

Brian Miller states that the majority of their payment business is on the gross model, with only a few customers opting for the net model. He also states that the demand environment is stable or growing at or above pre-COVID highs. He then goes on to discuss the performance of their SaaS works, which is performing in line with expectations and is expected to continue to trend positively throughout the rest of the year and into 2024.

Brian Miller does not believe there is anything notable to call out in regards to customer behavior and the subscription mix as a percent of total contracts being consistent with what has been seen recently. He does note that the TCV and term metrics are down a bit, but attributes this to the timing of deals and what is in the pipeline.

Lynn Moore discussed how the company's business areas such as appraisal, tax, and courts & justice often have large, multi-year deals which can be cyclical in nature. This is why the company stopped talking about bookings numbers and started focusing on different metrics. Performance across the board has been solid and above plan in Q2. Moore also discussed how when customers consider moving from on-prem to cloud, it can be a cross-sell opportunity for the company as it gives them a chance to talk about other products that can hang off the product they are moving to the cloud.

Lynn Moore and Kirk Materne discuss the sales strategy that includes upsell opportunities for Tyler's data and insight solutions, payment solutions, and other compatible modules. They also discuss the customers' conservative approach to AI and how Tyler is looking at AI to improve internal and client efficiency.

Lynn Moore discusses the impact of the MOVEit data breach and the opportunities it has created to flip people into the cloud and to offer cybersecurity services. She also mentions that there has been some additional margin pressure due to higher employee claims than budgeted for health care costs.

Lynn Moore explains that the public safety segment is having its best first half of the year due to strong market activity, increased demos and proposals, and competitive positioning. They have also landed 3 large deals in the range of $1.8 million to $2 million, which is something they haven't done in a while.

Brian Miller and Lynn Moore discussed the investments they have made in their public safety product, and how the integration of their enforcement mobile product, data and analytics capabilities, and Courts & Justice platform have improved their competitive position in the market. They also discussed how the public safety market is slowly but surely beginning to embrace the move to the cloud. They concluded the call by thanking everyone for joining and inviting any further questions.

This summary was generated with AI and may contain some inaccuracies.