The operator introduces the Tyler Technologies Fourth Quarter 2023 Conference Call and informs participants that the call will be recorded. Hala Elsherbini, Tyler's Senior Director of Investor Relations, introduces Lynn Moore, President and CEO, and Brian Miller, CFO. The speakers may make forward-looking statements, and non-GAAP measures will be used to facilitate understanding of the company's results. A reconciliation of GAAP to non-GAAP measures can be found in the earnings release.

In the second paragraph, the speaker discusses the additional information and materials available on the company's website, including schedules with supplemental information and an earnings summary slide deck. They also mention that all growth comparisons will be made with the corresponding period of the previous year. The speaker then hands over to Lynn Moore, who discusses the company's strong fourth quarter results, including growth in recurring revenues and SaaS revenue, and a new high in free cash flow. However, transaction-based revenues were impacted by seasonal trends and changes in a state enterprise agreement. The speaker also reminds listeners of the impact of pass-through merchant fees on revenue growth and margins in the company's payments business.

In some cases, clients pay merchant fees directly and revenues are recorded on a net basis. The company has made progress with its cloud transition, resulting in cost efficiencies and increased adoption of cloud services by both new and existing clients. The company also signed a strategic collaboration agreement with Amazon Web Services to streamline migrations to the cloud and support their goal of completing the transition by 2030. The public sector market remains strong, as seen by high levels of RFPs and sales demos.

Tyler's sales collaboration has led to a strong pipeline, with successful upsell, cross sell, and multi-suite deals. They have also seen success in their integrated payments team and unified payment strategy. In the fourth quarter, they secured a landmark contract with the California Department of Parks and Recreation, valued at $175 million, as well as contracts with Wyoming State Parks and the City of Miami. They have also expanded their digital solutions and signed two contracts under their state enterprise agreement in Mississippi, launching a mobile app to improve access to public and private services.

In the public safety market, the company had a successful fourth quarter with significant contract wins, including a mobile app for the Mississippi Department of Mental Health and several competitive wins against a key competitor. There was also an increase in SaaS adoption, with 46% of fourth quarter deals being for SaaS solutions. Existing on premises clients are also showing interest in moving to the cloud, with three signing contracts in the fourth quarter. The company also had notable public safety deals with various counties and states, as well as a court system in Idaho switching to their SaaS offering.

The company achieved significant success in the fourth quarter, including a major new SaaS deal with the state of North Carolina and operational milestones in Courts & Justice. They also secured a key SaaS win with the Virginia Department of Education and signed 172 new payments deals. The company also completed two acquisitions and saw early wins from their application platform. Total revenues for the quarter were $480.9 million, up 6.3%, with organic revenue growth of 6.1%. Subscription revenues increased 11.4% and organically rose 10.8%.

In Q4, the company saw strong growth in SaaS revenues, which aligns with their expected 20% CAGR through 2025. However, there may be fluctuations in SaaS revenue growth due to the lag between signing a deal and revenue recognition. Transaction revenues also saw growth, but at a lower rate, partially due to a change in revenue recognition for one state enterprise agreement. The company's transaction revenues are affected by seasonality, with Q2 being the highest volume quarter. SaaS deals made up a majority of new software contract value in Q4, and professional services revenue declined due to the absence of COVID-related revenues. Demand for the company's services in the public sector remains strong.

In the fourth quarter, the company saw significant growth in its SaaS arrangements, with 156 new additions and 92 conversions from on premises clients. The total contract value for these arrangements increased by 39% compared to the previous year. The company also saw steady growth in on premises conversions, with 338 flips in 2023 and a total contract value of $92 million. Total bookings increased by 21.2% on an organic basis, and the company's annualized recurring revenue grew by 7.9%. Despite pressure from its cloud transition, the company's non-GAAP operating margin increased by 70 basis points. Cash flow and free cash flow also reached new highs in the quarter.

In 2024, the company saw an incremental cash tax of $127 million and prioritized repaying term debt. They reduced their term debt by $90 million in Q4 and ended the year with $650 million in outstanding debt and $183 million in cash and investments. Their net leverage was 0.97 times EBITDA. The company expects total revenues to be between $2.095 billion and $2.135 billion with organic growth of 8%. They also expect a slight decrease in merchant fees. GAAP diluted EPS is expected to be between $5.17 and $5.37, while non-GAAP diluted EPS is expected to be between $8.90 and $9.10. The company expects a free cash flow margin of 17-19%, including the impact of incremental cash taxes. They are optimistic about the future and expect to see consistent operating margin expansion in 2024 as they implement their cloud optimization initiatives and exit their proprietary data centers.

Tyler Technologies is a leading provider of technology solutions for the public sector and has been recognized by Government Technology Magazine for their work in this field. They are focused on leveraging their competitive strengths and deep domain expertise to offer the most integrated offerings for the public sector. They are also confident in their ability to accelerate the pace of flips (converting clients to their cloud applications) while maintaining a mid single digit growth in sales and marketing expenses. This is due to the efforts of their inside sales organization and existing client relationship managers, as well as cross-selling and leveraging synergies across their sales organization.

Tyler Technologies has outlined its Tyler 2030 vision, which includes goals for flips and G&A initiatives in the next six to seven years. The company's hosting efficiencies are still improving, with continued optimization of products and version consolidation. The latest agreement with AWS, which runs through 2031, deepens their relationship and includes commitments from both parties around migrating clients, pricing, and innovation.

The speaker cannot provide specific details about the commitments and pricing concessions made by AWS, but he is very happy with their partnership and collaboration. They view each other as true partners, and their relationship has matured since they first signed the agreement. The speaker is excited to continue this journey with AWS for at least eight more years. The company has reached its 17-19% free cash flow target one year ahead of schedule, and it is likely that both free cash flow margin and EBIT margin will expand in the same range in the near term.

The demand for the company's services is strong, but the initial revenue guidance for 2024 is slightly lower than expected. The company expects to see a greater acceleration in 2025 in order to reach their target revenue of $2.35 billion by that year. The company is confident in their ability to meet this target.

Lynn Moore, a company executive, expresses confidence in the company's projected revenue growth for 2025 and 2030. The flat or declining merchant fees have impacted revenue growth, but overall, the company is seeing positive signs in the market, with new business deals and wins against competitors. The recent successful deal with Idaho Courts may also lead to more deals in the courts market as it serves as a reference for other potential clients.

The speaker discusses the impact of a recent state-wide deal in Idaho for the company's state court business. They believe that executing this deal successfully will have a ripple effect and positively impact the company's client base. The deal will take time to fully realize, with about 50% of the revenue uplift expected in 2024 and the full impact in 2025. The deal is similar to the successful go-live of the L.A. criminal courts and is expected to be completed by mid-year. The impact of payments from customers flipping from gross to net is also discussed.

The speaker explains that a state contract changed from gross to net, resulting in a $9-10 million impact in the second half of the year. This change will also affect the first half of the following year. The California Parks division deal is exclusively funded through transaction revenue and is the largest deal in Tyler's history. This validates the self-funding model and may lead to other states adopting a similar approach due to budgetary issues.

The self-funded project will have a negative impact on margins in 2024 but will see significant growth and margin expansion in 2025 and beyond. The transaction revenues are estimated and subject to variation and seasonality. The AWS extension still has room for leverage and the company is continuously optimizing their products.

The company believes there is still room for growth in their cloud operations. They mention a significant increase in revenues from an existing agreement with California and the inclusion of payment processing. When asked about the number of conversions, they state that there has been a consistent range in the past two years and they are not providing specific guidance for future conversions. They also mention the importance of getting customers on more modern versions and the significance of a recent deal with Idaho State Port.

Lynn Moore is discussing the impact of the flip contracts on the dollar value and the progress made in migrating clients to more modern versions of products. The company is ahead of pace in achieving its goal of only supporting two recent versions of each product. Rob Oliver asks about the progress and impact of the public safety business.

The speaker discusses the shift towards cloud deals in the public safety market and how Tyler Technologies is well positioned to take advantage of this trend. They mention that about 46% of Q4 deals were cloud deals and they anticipate this number to increase in the future. They also mention having new leadership in the public safety division who has experience with cloud transitions. The speaker is confident and optimistic about Tyler's position in the market.

The speaker reiterates the positive early results in public safety and cautions about future execution. The R&D expense is expected to have mid-teens year-over-year growth, mainly due to development around the cloud and a shift from capitalized to expensed projects. There are no abnormalities in the guidance, but the seasonality of the transaction business may impact quarterly results.

During a Q&A session, Charles Strauzer asks Lynn Moore about the impact of the spending bill on the sales cycle, specifically in the federal business. Moore responds that there have been no changes in the sales cycle and that Q1 is typically slower in that business. The next question comes from Jonathan Ho, who asks about operating leverage and the levers that can be pulled for additional leverage. Brian Miller explains that most of the leverage is coming from cloud operations, such as moving customers to AWS and consolidating versions of software. Moore adds that they are always looking for ways to become more efficient.

The company is actively working on internal initiatives to operate more efficiently. They plan to pay off their term debt in the spring and build cash reserves to pay off a $600 million convertible in two years. They will also continue to pursue strategic and accretive acquisitions. Contracts signed on a SaaS basis four to five years ago will start to come up for renewal, providing opportunities for cross-selling and upselling additional products or solutions.

The renewal cycle over the next few years will provide opportunities for cross-selling and upselling. The installed sales teams are reaching out to clients at different stages of their SaaS contract. Flips to the cloud also provide opportunities for upselling and cross-selling. Maintenance revenue is expected to decrease as more clients switch to the cloud, but the full impact of the flip will not be seen on the income statement until 2025.

The company expects to see a lift in revenue from flips, but the timing can vary due to internal client priorities and the complexity of the process. The number of flips is not a precise measure and can be affected by factors such as the length of discussions and planning with clients.

The company's recent quarterly results were generally in line with expectations, with some larger deals and better uplifts than anticipated. The company is on track with their long-term goal of migrating 75-85% of their customer base to the cloud by 2030, but the exact timing of these migrations is difficult to predict. There is currently legislation that could delay the company's R&D tax payments, but it is unclear when and how the company would receive the taxes they paid in 2023.

A question was asked about the backlog and the duration of it. The company stated that the backlog is generally stable and the average term for new SaaS deals is a little under four years. The company also mentioned that recent high-profile cybersecurity issues have led to an increase in clients switching to the cloud, which is seen as more stable and secure.

Lynn Moore provides an update on the company's progress towards their target of 75% cloud migration by 2030, stating that they are currently around 20% migrated. Each product has its own timeline for achieving this target, with some already further along than others. She also clarifies that the California contract will have a temporary drag on margins in 2024 due to front-loaded expenses for implementation, but overall the company is on track for margin expansion over multiple years.

The speaker discusses the expected growth of the company's revenue and positive operating profit in the next few years. They also mention that license revenues will continue to decline as a percentage of total revenue, and that the total contract value will vary depending on the length of the SaaS contract. They do not have a specific breakdown of the mix of license revenues year-by-year or quarter-by-quarter.

The paragraph introduces Lynn Moore, the President and CEO of Tyler Technologies, and thanks everyone for joining the call. Moore mentions that if there are any further questions, Brian Miller or herself can be contacted. The call is then concluded and participants are thanked for participating.

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