The operator welcomes participants to the Tyler Technologies Third Quarter 2023 Conference Call and introduces the host, Lynn Moore, President and CEO of Tyler Technologies. The call will include a question-and-answer session and will be recorded. Hala Elsherbini, Tyler's Senior Director of Investor Relations, will moderate the call. Lynn Moore and Brian Miller, Chief Financial Officer, will provide updates on the company's results and annual guidance. Management may make forward-looking statements and non-GAAP measures will be provided in the earnings release.

In addition to posting financial information on their website, the company has achieved strong performance in the third quarter with double-digit recurring growth and a rise in recurring revenue mix. They have also exceeded their growth expectations for SaaS revenues and achieved solid growth in transaction-based revenues. Operating margins declined slightly due to their cloud transition, but were ahead of plan thanks to operating efficiencies and expense management. The company is confident in their road map for operating margin improvement in 2024.

The third quarter presented challenges due to difficult comparisons with the previous year's large software contracts. However, the public sector market remains strong and the company's new business pipeline is active. Cross-selling activities and the unified payments solution are driving growth. Significant wins in the third quarter include cross-sell opportunities and SaaS adoption. The company also gained traction with its digital solutions and state enterprise agreements in Utah, Louisiana, and Indiana.

In the federal market, Tyler Technologies secured a significant license win with the US National Guard Bureau for their workforce case management applications. They also signed a five-year multi-suite SaaS contract with Port Angeles, Washington and won a competitive deal with the Minnesota State Parks for their accretion dynamic solutions. In their Payments business, they signed an extension with New Jersey and added their digital jury solution to Harris County, Texas. Tyler Technologies also completed the acquisition of Computer Systems Innovations for $36 million in cash and two other tuck-in acquisitions to enhance their AI and machine learning capabilities.

In the third quarter of 2023, Tyler Technologies acquired two companies, ARInspect and ResourceX, for a total of $38 million. These acquisitions will enhance Tyler's applications platform and provide solutions for budgeting challenges. The company's total revenue for the quarter was $494.7 million, with a 6% organic growth rate. SaaS revenues grew by 26% and accounted for 80% of new software contracts. Professional services revenue declined due to the absence of COVID-related revenues.

In the third quarter, the company added 161 new SaaS arrangements and converted 79 on-premises clients to SaaS, with a total contract value of $71 million. This is a decrease from the same period last year, where they added 153 new SaaS arrangements and converted 70 on-premises clients with a total contract value of $149 million. The company expects to convert 100 or more on-premises clients in the fourth quarter, which will contribute to the growth of their total contract value. Overall, the company saw a 10.3% increase in total bookings on an organic basis, with a total annualized recurring revenue of $1.65 billion, an 11% increase from last year. Despite pressure from their cloud transition, the company's operating margins were better than expected. Cash flows from operations and free cash flow were strong, but were impacted by approximately $22 million in incremental taxes. On a pro forma basis, the company's year-to-date free cash flow would be approximately $300 million, a 41% increase from last year.

The company continues to prioritize repayment of its term debt and has reduced it by $135 million in Q3. They ended the quarter with $740 million in outstanding debt and $153 million in cash and investments. Their net leverage at quarter end was 1.24 times EBITDA. The company has updated its 2023 guidance, expecting total revenues to be between $1.942 billion and $1.962 billion, with organic growth of 7.5%. They expect GAAP diluted EPS to be between $3.82 and $3.96, and non-GAAP diluted EPS to be between $7.66 and $7.80. Transaction revenues are expected to decline sequentially in Q4 due to seasonal factors and contractual changes in a state enterprise agreement.

Tyler Technologies is making strong progress in delivering their near and long-term objectives, with a focus on transforming into a pure cloud business. They have had a strong year-to-date performance and have won multiple Government Experience Awards. They are excited about the opportunities ahead and are looking forward to sharing their continued progress. The company is also seeing increasing momentum in cloud deals for public safety, which may encourage more existing customers to make the switch and provide additional upside for the company.

The speaker discusses the increasing adoption of SaaS in the public safety sector, with a recent deal in Virginia as an example. They also mention that SaaS adoption is growing across their entire product portfolio, with ERP and Courts & Justice leading the way with high budgets for SaaS. However, public safety and platform solutions are not yet seeing as much momentum in terms of SaaS adoption.

The two market areas that are still slower for the company are public safety platform solutions and federal space. However, the modernization efforts of the federal government are shifting towards SaaS, and the demand and market receptiveness for the majority of their business is strong. Licenses now make up 2% of total revenues, with most of those deals coming from the slower market areas. The MicroPact business had a strong pipeline coming into Q3, with a significant deal with the National Guard Bureau. There was a license deal that slipped to 2024 due to uncertainty with federal government funding.

The company's number of deals and pipeline in the federal sector are growing, but large deals can still affect quarterly results. The cross-selling opportunities with their application platform, particularly in the state market, are strong. The recent acquisition of NIC has led to progress in deals in Louisiana and Indiana. The synergy between the federal and state markets is strong and will be a focus in the future. The company also mentioned a win in public safety in Naperville, Illinois.

The speaker is responding to a question about a recent win in the Courts & Justice market. They mention a cross-sell on the Tyler One vision and how it ties in with their Connected Communities vision. They also mention a smaller deal in California that leveraged their relationship with the Courts & Justice side. The speaker then moves on to discuss the payments business and how organic growth should be thought about going forward. They also mention the progress on payment disbursement use cases since the acquisition of Rapid Financial last year.

The company is currently focused on the court space and is in the process of budgeting for investments and disbursement cases. They are not disclosing their R&D timeline or priorities at this time. The expectation for growth rates around payments is 10-13% over the next few years. Bookings took a step up this quarter and cash flow outperformed expectations.

Brian Miller, the CFO of the company, discusses the strong cash flow performance in the fourth quarter and attributes it to the impact of recurring revenues and efficient collections. He also mentions a $22 million impact on cash taxes in the quarter, but expects the full year free cash flow to be between $220 million to $240 million. He clarifies that there were some minor reclassifications in the historical data for subscription revenues due to a transition to a new financial system, but does not expect any more changes. On the bookings side, he notes that it can be unpredictable.

The speaker discusses the company's strong quarter, attributing it to a combination of growth in SaaS and transaction businesses. They did not have any large contracts, but had a solid flow of new SaaS deals and some significant license deals. The growth was broad-based across all revenue streams. The speaker also clarifies that the changes in revenue classification were not restatements, but rather a reclassification from transaction to subscription revenues. The questioner asks for further details on the restatements and the potential impact on SaaS revenue growth.

The company's revenues from contracts can include a mix of SaaS and transaction revenues, leading to some reclassifications. The recent VendEngine acquisition also resulted in some changes to how revenues are classified. However, these changes do not significantly impact the overall trend of 26% growth, which is an acceleration from previous quarters. The company expects a 20% CAGR in SaaS revenue over the next few years, with some variability due to the lag between signing a deal and receiving revenue.

Tyler Technologies is interested in utilizing AI to improve efficiency and competitiveness in their products. They have formed a working group to identify key areas to focus on and have made acquisitions, such as CSI, to incorporate AI technology into their offerings. They see potential in both internal use for tasks and external use in their products.

Tyler Technologies' acquisition of CSI has helped cut labor costs for Tarrant County by 50%. The company plans to leverage the acquisition across other platforms, including ERP and invoice processing. The company has seen a high single-digit sequential growth in SaaS ARR, which is likely due to a change in business strategy rather than timing of bookings.

In the paragraph, the speaker discusses the strong bookings and revenue growth in the past year, particularly in the SaaS sector. They mention a lag in revenue recognition due to contracts signed for flips, but state that the pace of flips has been accelerating. They also mention that RFP and demo activity has remained strong throughout the year, with budgets remaining healthy.

The company's activity and win rates remain strong and there are no significant changes expected in their business lines. They have prioritized debt paydown and have seen a decrease in net leverage to 1.25 times EBITDA. Private market valuations are starting to change and the company remains disciplined in their approach to acquisitions. They are excited about recent deals and will continue to pass on deals with high expectations.

The speaker discusses good business deals that will drive growth and be beneficial to revenues and margins. They also mention a trend of private equity companies spinning back out and the potential impact of the market on this. They clarify that they have a disciplined approach and are not highly leveraged. They also mention the potential for the Federal Reserve to cut debit interchange and its potential impact on margins.

The speaker discusses their monitoring of market trends and potential impact of government actions on their long-term plans. They also provide an update on their plans to close two private data centers in 2024 and 2025. The speaker also mentions recent security breaches at companies like Clorox, GM, and Caesars.

The speaker, Lynn Moore, discusses the impact of cybersecurity on their business and clients. They have seen an increase in the need for clients to move to the cloud and modernize their systems due to the rise in cyber attacks. One client was prompted to switch to a SaaS model after experiencing a ransomware attack. The speaker believes that this reality helps with sales and understanding of the future direction with clients. On a follow-up question, Brian Miller mentions that the blended duration on SaaS bookings this quarter was not a significant factor.

The average term of new SaaS contracts this quarter was the same as last year at 3.8 years. The company generally aims for a three-year initial term, but some clients prefer a longer term. The blended term has been between 3.5% to 4% over the last few years. This quarter, however, the term was not a factor. The CEO thanked everyone for joining the call and invited further questions.

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