The paragraph introduces the Tyler Technologies Third Quarter 2024 Conference Call, hosted by Lynn Moore, the President and CEO of Tyler Technologies. Hala Elsherbini, the Senior Director of Investor Relations, welcomes attendees and introduces the participants, including Lynn Moore and Brian Miller, the Chief Financial Officer. The call will involve initial comments from Lynn on the quarterly performance, a detailed financial review by Brian, and updated annual guidance for 2024. It will conclude with a Q&A session. The conference call may include forward-looking statements concerning the company's future, subject to risks and uncertainties, and refers to the company's SEC filings for more information. Non-GAAP measures are included in the earnings release for better understanding and comparison with industry peers.

The company posted strong third-quarter results, driven by a shift towards SaaS and new software contracts, particularly in public safety, which boosted recurring and transaction revenues. SaaS revenues saw a 20.3% growth for the 15th consecutive quarter. The non-GAAP operating margin improved to 25.4% due to cloud efficiency and professional services margin improvements, and free cash flow hit a new high. Recurring revenues grew by 12.1%, making up 85% of total revenues. The company remains confident in meeting its 2025 and 2030 targets, as cloud operations initiatives yield early efficiencies, and the public sector market continues to be robust with a focus on cloud modernization.

The paragraph highlights the company's significant growth in SaaS contract value, totaling approximately $105.6 million, a 78% increase from the previous year. The growth is driven by a strong cloud-first strategy, leveraging their large installed base, and expanding into new markets, particularly in the public sector. The shift towards cloud solutions is evident, with 97% of new software contracts being SaaS in the third quarter, and 100% in the public safety sector, showing increased client adoption. Additionally, the company signed 108 contracts converting on-premises clients to cloud solutions, demonstrating the shift towards cloud adoption for both new and existing clients.

In the third quarter, the company saw a significant increase in contract value from flips and an average ARR growth of 37.2%. The Courts & Justice sector was particularly busy, highlighted by a $35 million contract with the Kentucky Court of Justice for the Enterprise Justice suite. This contract includes a 6-year term with initial ARR starting at $2.5 million and growing to $6.5 million, with $29 million in SaaS fees prepaid using ARPA funds. Kentucky became the company's 17th statewide courts client. Additionally, a 3-year $9.6 million SaaS contract was signed with Phoenix, Arizona Municipal Court, which positions the company as a preferred software provider for 170 courts in Arizona. Other significant deals included a $12 million 5-year contract with St. Petersburg, Florida, for various enterprise solutions.

The paragraph highlights the company's recent successes in securing SaaS contracts, emphasizing its growth through strategic cross-sell and upsell activities. Key wins include contracts with the Texas Office of Court Administration for a connected justice data solution, adding $1.5 million in ARR, and with the Illinois Department of Financial and Professional Regulation for a state regulatory application platform, totaling $9.2 million in contract value with potential future expansions. The company also focuses on modernizing enterprise solutions and expanding its payments business as part of its growth strategy.

In the third quarter, Tyler Technologies secured 268 new payment deals for an estimated $8.6 million in annual recurring revenue (ARR), including a significant enterprise payments contract with Riverside County in California. The company also extended its digital government and payment processing services in five states, winning competitive rebids in New Jersey and Indiana, and expanding services in Indiana to include resident identity proofing. Tyler's AI technology, including a chatbot solution, was introduced in Indiana. Financially, the quarter saw total revenues of $543.3 million, a 9.8% increase, with subscription revenue rising 17.6% and SaaS revenues up 20.3%. However, SaaS revenue growth can fluctuate due to various factors like the timing of new deals and renewals.

In the third quarter, the company experienced a 15.2% growth in transaction revenues to $180.5 million, largely due to increased transaction volumes and new SaaS arrangements. SaaS deals made up 97% of new software contract value, a rise from 80% the previous year, with 181 new SaaS arrangements added and 108 clients converted from on-premises to SaaS, amounting to a total contract value of $141 million. Average ARR for new SaaS contracts and conversions both saw significant increases. The company's total annualized recurring revenue was approximately $1.85 billion, with organic growth at 11.8%. Operating margins improved due to cloud efficiency and cost management, reaching 25.4%, while merchant fees impacted overall margins. Cash flows also hit new quarterly highs, with operations and free cash flow at $263.7 million and $252.9 million, respectively, up 55.5%.

The paragraph discusses the company's financial performance and outlook. In the quarter, cash flow was boosted by deferring $14 million in federal tax payments. The company has $600 million in convertible debt and $548 million in cash and investments, with a net leverage of 0.1 times its EBITDA. A new $700 million revolving credit facility was established, replacing the previous $500 million facility, to enhance liquidity and flexibility. The 2024 guidance projects total revenue between $2.125 billion and $2.145 billion, with expected organic growth and increased merchant fees. GAAP diluted EPS is estimated between $6.13 and $6.28, while non-GAAP diluted EPS is estimated between $9.47 and $9.62. The free cash flow margin is predicted to be between 21% and 23%, factoring in $54 million in additional cash taxes. The paragraph concludes by praising the company's teams for their high execution and collaboration in leveraging cloud infrastructure for innovation and client experience enhancement.

The paragraph highlights the strength and recognition of the "One Tyler" team, emphasizing their commitment to excellence and sustainability, which earned them accolades from Newsweek as one of America's greenest companies and greatest workplaces for parents and families in 2024. It then transitions to a Q&A session where Ken Wong from Oppenheimer asks about the company's cloud momentum. Brian Miller responds, acknowledging a strong quarter with significant cloud transitions and indicating a trend of larger customers moving to the cloud more rapidly. He notes that while growth in cloud transitions is expected to continue, it may vary quarterly, and projects a bell curve trend in such transitions over the next few years.

In the paragraph, Lynn Moore and Brian Miller discuss the company's progress and plans for transitioning to the cloud, expecting 80-85% of their on-premises base to move to the cloud by 2030. They acknowledge that growth may be uneven but are confident in maintaining momentum. Matt VanVliet inquires about sales trends and election impacts, but Moore reports no slowdown or hesitation in demand due to the election, with most business units meeting or surpassing sales goals. Brian Miller notes no change in sales linearity. Alexei Gogolev asks about competition from companies like ServiceNow and Workday, although the question is not addressed in the excerpt.

Lynn Moore discusses the competitive landscape, noting it has remained generally neutral over the year with consistent competition levels. He mentions competition from companies like Workday and ServiceNow but sees them as different offerings. Win rates have been stable, matching past quarters and years. Alexei Gogolev then asks Brian Miller about 2025 guidance and potential growth acceleration. Brian states they are still in the planning stages for 2025 but are slightly ahead of their 2030 targets overall, particularly in cash flow, though progress is not expected to be strictly linear.

The paragraph discusses the performance of the transaction business, noting that annual recurring revenue (ARR) has increased, contrary to the usual trend of a sequential decline in the third quarter. There is no significant change in seasonality, but the business has benefited from several factors. These include revenues from new payment clients added over the past year, with a notable increase in the number of new payments customers. The company has also improved the speed of getting clients live and generating revenue. Specific contracts, like with California State Parks and Florida's SunPass, have contributed additional revenue, despite not being active for the full quarter.

The paragraph discusses the success of Tyler's business and execution, highlighting the effective onboarding processes that lead to quicker revenue recognition. A significant milestone mentioned is the successful, timely, and budget-compliant launch of a large contract with the California State, the largest in Tyler's history. The company's strong sales and implementation efforts have resulted in over 200 new deals and are seen as a model for expanding into other jurisdictions. The discussion finishes with a request for clarification on the topic of free cash flow performance, specifically regarding any elements considered one-time occurrences.

The paragraph features a discussion during a conference call about the company's financial targets and a specific contract in Kentucky. Brian Miller explains that although they are not updating their 2025 targets, margins are not expected to decrease next year. The company received a $29 million one-time advance payment from the Kentucky courts for a six-year SaaS contract, which impacts their fourth-quarter and full-year guidance. Terry Tillman from Truist asks about cross-selling strategies, seeking clarification on organizational methods for driving cross-selling and which products are most effective. Lynn Moore confirms that there is potential for increased cross-selling success after transitioning to new cloud technology.

The paragraph discusses how Tyler Technologies has focused on improving cross-selling and upselling strategies by restructuring compensation for their salespeople and divisions to promote collaboration. This approach has helped overcome internal barriers and enhance product bundling capabilities, enabling more integrated sales opportunities across different divisions. The company's integrated product offerings have sometimes led to sales in unexpected combinations, as illustrated by significant deals in Kenosha, Wisconsin, and St. Petersburg, Florida.

The paragraph discusses progress in Tyler's business, highlighting a $2 million ARR deal and successful internal initiatives. It mentions the importance of version consolidation in their cloud transition, noting variability in the pace for different flagship products. Public Safety is at 30% for version consolidation, but other areas like Courts & Justice and Enterprise ERP have advanced to fewer versions. The optimization of products for AWS contributes to margin outperformance and overall success.

The paragraph discusses the progress and benefits of consolidating software versions in a company’s cloud strategy, referred to as "cloud living," which involves moving clients to a single software version with shorter, less disruptive release cycles. This consolidation is expected to contribute to improved gross margins as part of the company’s 2030 goals. Following this, Gabriela Borges from Goldman Sachs asks about the sustainability of the strong demand from state and local governments and the impact of ARPA funds on the company. Lynn Moore responds, noting that budgets have been healthy for a couple of years but is unsure about future predictions given the uncertainty, such as upcoming elections.

The paragraph discusses the continued strength of leading sales indicators and mentions the role of ARPA funds in some deals. The speaker highlights that while ARPA funds have been involved in certain significant transactions like the Kentucky Enterprise Justice deal and the Arizona Supreme Court deal, these funds are not seen as a major driver of sales growth. The funds have often been used for one-time purchases rather than recurring expenses. While some projects involving ARPA funds may not have started yet despite being committed, the availability of these funds remains until the end of 2026. The Kentucky deal, although funded by ARPA, took 12 years to finalize.

The paragraph discusses the impact of Tyler's transition to a SaaS company on its services business. While the services business has been growing slower than its software business, the company has seen improved services gross margins due to management focus and a stabilized labor market with less turnover. Internal initiatives have also driven improvements in professional services. Looking ahead, Tyler expects its services to remain relatively flat or even decrease slightly next year, attributed to efficiencies in client onboarding.

The paragraph discusses the company's strategy of reducing custom, one-off client applications to align with their "cloud living goals." This shift is expected to decline or flatten the revenue percentage from services, which historically have low or negative margins. By decreasing the mix of services and improving the margins on existing ones, the company aims to positively impact overall margins, contributing to their 2030 margin targets. During the Q&A, when asked about hesitant clients, it is explained that reluctance often stems from a desire for control, especially by those accustomed to managing their systems. However, factors like outdated technology and increased cyberattacks are making clients more open to adopting new systems.

The paragraph discusses how public implementations in various jurisdictions help reduce hesitancy as neighboring areas see successful outcomes. It then moves to a question from Rob Oliver about the impact of ARPA funds and how Tyler Technologies' sales force engages with state and local customers regarding these funds. Although there's no direct link between the funds and deals, the sales teams are equipped with information and materials to guide discussions about using Tyler products, even as they aim to meet future funding deadlines.

The speaker, likely a company official, discusses the impact of ARPA funds on Tyler's performance, indicating that while the funds have contributed to the broader environment, there isn't a direct correlation to improved performance. They highlight a specific deal in Kentucky as an example. They also address inquiries about AI opportunities, noting an increase in questions about AI in RFPs and indicating that the company is focusing on identifying areas to allocate AI resources, particularly for internal processes. They acknowledge a growing interest in AI but no significant strategy change from previous quarters.

The paragraph discusses a company's approach to acquisitions and the incorporation of AI in their solutions. They acquired CSI last year, which has AI successfully embedded in its offerings. AI tools from ARInspect are also mentioned, and there is a growing interest in AI among customers, though it is not yet a primary factor in deals. The dialogue shifts to acquisition strategy with Keith Housum from Northcoast Research asking about future acquisitions. Lynn Moore mentions that their priority has been debt reduction and they are being selective with acquisitions. As they approach the maturity of convertibles, they might consider more acquisitions moving into 2025 and 2026 but will maintain their valuation standards. They are assessing potential areas for significant return on investment through acquisitions but have no immediate plans.

The paragraph discusses the company's approach to encouraging customers to migrate to the latest product release, particularly in terms of version consolidation and cloud migration. John Marr explains that the strategies vary across different products and include minor financial incentives, exclusive availability of new features in cloud versions, and the eventual discontinuation of support for older versions. He highlights the challenges faced by clients with multiple products on different versions and the benefits of upgrading, such as improved compatibility and reduced support issues. The efforts involve a mix of sales tactics and internal initiatives, with each product being at a different stage in this process.

The paragraph discusses the process and impact of transitioning clients to newer software versions as part of multiple cloud transitions, with a focus on sunsetting older versions of enterprise solutions and ensuring clients have sufficient notice. Brian Miller explains that this has been implemented across various products, moving customers to current versions as support for older ones is discontinued. Clarke Jeffries inquires about patterns in SaaS revenue growth, specifically questioning potential seasonality in Q3, and Brian responds that any observed trends are likely circumstantial and tied to the timing of customer go-lives rather than a consistent seasonal pattern.

In this paragraph, Alex Zukin from Wolfe Research asks about how the company's AI advancements, both in terms of agentic, copilot, and system AI, are factored into its long-term growth and monetization strategies, specifically in relation to the 2030 targets shared at the last Analyst Day. Lynn Moore responds by explaining that the 2030 targets did not account for potential efficiencies or sales increases driven by AI, including AI-driven internal efficiencies, new or acquired products, or additional R&D and M&A related to AI. While some AI elements were included in existing product sales projections, the company is approaching AI developments deliberately. Additionally, Moore notes that although customer interest in AI is growing, it is not yet a majority concern, as clients remain somewhat conservative.

The paragraph discusses the company's strategic approach to future opportunities, particularly regarding AI benefits and R&D initiatives. It notes that although AI benefits have not been factored into long-term targets yet, initiatives will be developed over time. In terms of sales cycles, there's a focus on whether current questions are influencing their timing and enthusiasm. Regarding free cash flow, a notable one-time prepayment from Kentucky using ARPA funds is mentioned, impacting the fourth quarter cash flow. However, such prepayments are not expected to become regular. The paragraph then highlights that the company's transaction-based revenues, like payments and e-filing, are promptly collected, significantly influencing free cash flow by limiting large receivables.

The paragraph discusses the positive impact of a transaction business on cash flow and margins due to effective management of receivables and the nature of revenues being paid annually in advance. It highlights the role of AI in sales, specifically referencing an acquisition that offers a document redaction solution, which provides a significant return on investment for clients by reducing manual labor. The discussion concludes with a closing statement from President and CEO Lynn Moore, inviting further questions.

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