The conference call for Tyler Technologies' second quarter of 2024 is being hosted by Lynn Moore, the company's CEO. The call will include a question-and-answer session and will be recorded. Hala Elsherbini, Tyler's Senior Director of Investor Relations, will introduce Lynn and Brian Miller, the CFO, who will discuss the company's results and update their annual guidance. Management may make forward-looking statements during the call and refer listeners to their SEC filings for more information. The earnings release also includes non-GAAP measures and a reconciliation to GAAP measures.

The company has posted supplemental information on their website for investors, including schedules and earnings summary slides. The second quarter results exceeded expectations, with strong performance in key metrics such as revenues, earnings, and cash flow. The shift towards SaaS in new software contracts has affected revenues and margins, but recurring revenues and SaaS revenues continue to grow. The company has been focused on supporting clients' digital transformation and has completed the exit of their Dallas data center.

The company's move to AWS is a significant step in their cloud migration plan and will lead to growth and margin benefits. The public sector market is strong, and the company's leading position and strengths set them apart. They have a focus on four key growth drivers, including leveraging their large client base and expanding into new markets. The company has seen success in cross-selling and upselling to their existing clients, including a joint effort with their Justice Group and a contract with the Florida Department of Corrections. They have also secured a contract with Cherokee Nation, Oklahoma for their ERP solutions through a collaborative sales effort.

Tyler Technologies continues to improve their clients' experience by offering direct connections to government through their MyCivic platform. They have expanded access to mental health resources in Mississippi and are making progress with their cloud transition and product version consolidation efforts. The public sector market is increasingly recognizing the benefits of cloud technology, particularly in the state and federal market and public safety market. As a result, SaaS arrangements made up 97% of new software contract value in the second quarter. Tyler Technologies has also successfully migrated the Idaho State Court system to the cloud and this has been viewed positively by other large core clients considering a move to the cloud.

In the second quarter, Tyler Technologies had several successful SaaS deals and flips, including a $700,000 contract with the City of Topeka, Kansas for multiple integrated solutions. They also secured contracts with Richland County, Wisconsin, Idaho State Police, United County, New York Department of Emergency Services, Hunt County, Texas, Spotsylvania County, Virginia, Fulton County, Georgia, and the Arizona Supreme Court. These contracts represent a growing momentum with state public safety agencies and demonstrate the effectiveness of Tyler's enhanced sales enablement and competitive intel teams. Additionally, they leveraged their state relationship to secure a five-year enterprise justice agreement with the Phoenix Municipal Court.

The company has recently won a strategic and competitive contract that includes extension options and potential for expansion in a large state. There is also high interest in the company's AI capabilities, resulting in multiple new deals and cross-sell wins. The company's payments business is also growing, with higher transaction volumes and new deals signed. The company has also secured contract extensions and renewals with various state agencies. Total revenues for the quarter were $541 million, a 7.3% increase and organic growth of 6.5%.

In the second quarter, subscriptions revenue increased by 12.1%, with SaaS revenues growing by 23.2%. Transaction revenues also grew by 3.8%, exceeding expectations due to higher volumes from new and existing clients. The shift to a net model for payments under a state enterprise agreement continues to impact year-over-year growth comparisons, but this will no longer be a factor in the second half of the year. SaaS deals accounted for 97% of new software contract value, with 203 new SaaS arrangements and 111 on-premises conversions. This is an increase from the previous year's second quarter, which had 170 new SaaS arrangements and 94 on-premises conversions.

In the second quarter, the average annual recurring revenue (ARR) for Q2 flips increased by 21.8%, with larger clients such as Fulton and Clayton Counties, the cities of Tucson and Birmingham, and Columbus City schools transitioning to the cloud. Total bookings increased by 7.3% organically, and total annualized recurring revenue grew by 8.4%. The non-GAAP operating margin also improved by 150 basis points, reaching 24.5%, due to improved margins from cloud operations and effective expense management. Cash flow and free cash flow were above expectations, but were impacted by $29 million in incremental cash taxes. The company ended the quarter with $600 million in convertible debt and $262 million in cash and investments, with a net leverage of 0.65x trailing 12-month pro forma EBITDA.

The company has updated their annual guidance for 2024, expecting total revenues to be between $2.120 billion and $2.150 billion with organic growth of approximately 9%. They also expect an increase in merchant fees and GAAP diluted EPS, while non-GAAP diluted EPS is expected to be between $9.25 and $9.45. The company's cloud transition is generating expected benefits, leading to margin improvement and enhanced client experience. They launched a multiyear cloud strategy in 2019 and are now entering the next phase, seeing increasing opportunities to improve areas critical to client satisfaction.

Russell Gainford has been promoted to Chief Cloud Officer to lead Tyler's cloud-first strategy. He will oversee the development of cloud technology and operations, manage relationships with strategic partners and vendors, and design the organizational structure. Tyler's disciplined approach to capital allocation has allowed them to repay their debt and generate strong free cash flow, giving them flexibility for future investments. Tyler has been recognized by Times and Forbes and has welcomed two new board members with expertise in cloud software, SaaS transformations, AI, and payments.

The paragraph discusses the recent additions to Tyler's Board of Directors, including a finance and technology executive. The CEO thanks outgoing board members and expresses confidence in the company's future. The first question in the Q&A portion asks about higher CapEx and a decline in R&D, which the CEO explains are related to different types of R&D projects and their classification as either capital or expense.

The company has seen success at the state level, and it is driven by a combination of factors, including the integration of the sales team with NIC and the maturation of products and acceptance of cloud technology.

The speaker, Lynn Moore, discusses the recent increase in cross-selling and multiproduct deals in Tyler's DSD division. She attributes this success to the company's efforts to break down internal barriers and operate as a unified company. The next question from an analyst addresses the rapid adoption of cloud technology in public safety and the competition in this area for Tyler.

Lynn Moore, the CEO of Tyler Technologies, discusses the company's move to the cloud and its impact on the public safety sector. She notes that the decision to lead clients to the cloud has been successful and has given the company a competitive advantage. They are now able to offer all of their core public safety products in a SaaS environment, which is not the case for all of their competitors. Moore also mentions that they have had several key wins against Tier 1 competitors, such as the Idaho State police deal. She believes that the momentum is building and they are starting to see the impact of cybersecurity concerns, with several clients switching to Tyler's products due to ransomware threats.

The company has been able to quickly set up clients on the cloud, even if not fully functional, which has increased confidence in the cloud. The next question is about the strong Q2 for SaaS, with an even split between new deals and conversions. The company expects this trend to continue and mentions that flips may be a little lumpy, but the majority of new deals will still be in SaaS.

The speaker discusses the company's strong performance in the public sector market, with total new software deals up 11% year-over-year and SaaS deals up 20%. They also mention a decline in licenses, which account for less than 1% of total revenues. The speaker attributes this success to a healthy market and the increasing embrace of SaaS and cloud technology. When asked about guidance for the rest of the year, the speaker notes that revenues will continue to grow, particularly in professional services and SaaS, and earnings will likely remain consistent with the second quarter.

In the third quarter, the company expects strong cash flow due to timing of maintenance collections. The value of the maintenance portfolio and flips is growing larger than expected, and the company's long-term goals are being validated. The company's momentum is building and the CEO feels confident about their plans. A question was posed to the CFO about the results.

The speaker discusses the payments business and its expected revenue growth in the second half. They break down the growth into two parts: same-store growth and new customer growth. Same-store growth is around 10%, while new customer growth is driving the mid- to high teens growth rate. The company is focusing on expanding the payments platform into its existing software customer base, which has resulted in $8 million of new ARR this quarter.

The company is projecting low double-digit growth in transactions by 2030, and they have become more efficient at onboarding clients, resulting in earlier revenue recognition. They are also focused on driving adoption among their client base. One question from an analyst is about the recent successful go-live in Idaho and the potential for more large court flip opportunities. The CEO also mentions the success of their AI-based solutions, with a $4 million quarterly run rate.

The speaker praises the hard work of their team in successfully implementing SaaS flips and other new implementations for clients. They also mention that the company's strong AI capabilities have led to successful cross-selling opportunities and contributed to growth in the market. The speaker expects this momentum to continue in the coming quarters.

The speaker, Lynn Moore, discusses the positive impact of a recent acquisition and its potential for both new sales and existing customers. The next speaker, Brian Miller, addresses a question about the closure of a data center and its impact on expenses and margins. He explains that the majority of costs for the data center are in the gross margin line and that the closure will have an impact on the second half of the year. He also mentions ongoing costs related to the closure of a second data center, which will continue until it is fully closed.

In this paragraph, the speaker discusses the company's operating margins and future plans for data centers. They mention that operating margins will likely remain consistent in the second half of the year and that they are on track to close data centers as planned. This will result in future cost savings. The speaker also mentions the company's focus on improving gross margins in their pro services area, which has been driven by lower turnover rates and more stable workforce.

The stability and consistency of historical Tyler turnover levels, along with the management team's enhanced focus, have contributed to the company's success. The move to the cloud and version consolidation have also helped with efficiency. The use of remote delivery of services during COVID has been well-received by clients. The NIC transaction has not affected the demand for self-funded state-level IT portal deals, but there is also an increase in agency-by-agency deals.

The speaker discusses the impact of cybersecurity events on the industry and the potential for upsell opportunities and accelerated cloud transitions. They mention a recent realignment within the company to better address these opportunities. The speaker also notes that cybersecurity incidents have occurred for both their clients and other public sector agencies, and that these incidents can serve as a catalyst for moving clients to the cloud and adding more products. The company's goal is to be responsive to their clients and they have improved in this area.

The speaker discusses how their company has improved in being able to quickly set up clients with cloud-based systems for public safety, which allows for potential upselling. This has also given them a competitive advantage against smaller players in the market. The shift towards a cloud strategy has been successful and well-executed.

The speaker discusses the changing dynamics in the market and how the company has been able to capitalize on it and lead it. They also mention that most of their clients have healthy budgets and their win rates are good. They have noticed strong indicators across all their product lines and are not seeing any negative changes in public sector budgets.

The speaker discusses the strong demand for digital modernization in government and how it is driven by the need to do more with limited resources. They also mention the progress made in version consolidation efforts as part of their cloud transformation, which includes selecting AWS, optimizing products, and exiting data centers. Version consolidation is important for getting clients up-to-date on modern versions and laying the foundation for transitioning to the cloud.

The speaker discusses the progress of the company, stating that they do not measure progress quarter-by-quarter, but rather by the achievement of goals. An example of this is the high number of clients now using a single version of their enterprise ERP division, compared to a few years ago when there were multiple versions. This progress is seen across all divisions and operating units. The operator then thanks the participants and the call is concluded.

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