Tyler Technologies, Inc. (NYSE:TYL) Q1 2024 Earnings Call Transcript

Tyler Technologies, Inc. (NYSE:TYL) Q1 2024 Earnings Call Transcript April 25, 2024

Tyler Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to today’s Tyler Technologies First Quarter 2024 Conference Call. Your host for today’s call is Lynn Moore, President and Chief Executive Officer of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded today, April 25, 2024. I would like to turn the call over to Hala Elsherbini, Tyler’s Senior Director of Investor Relations. Please go ahead.

Hala Elsherbini: Thank you, Krista, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. After I give the safe harbor statement, Lynn will have some initial comments on our quarter and then Brian will review the details of our results and update our annual guidance for 2024. Lynn will end with some additional comments, and then we’ll take your questions. During this conference call, management may make statements that provide information other than historical information and may include projections concerning the company’s future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projections.

We would refer you to our Form 10-K and other SEC filings for more information on those risks. Also, in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We have also posted on the Investor Relations section of our website under the Financials tab schedules with supplemental information, including information about our quarterly recurring revenues and bookings. On the Events and Presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.

Lynn?

Lynn Moore: Thanks, Hala. Our first quarter results provided an exceptional start to the year, exceeding our expectations across key metrics, including revenues, earnings, operating margin and cash flow. Recurring revenues grew almost 9% and comprised 84% of our total revenues. SaaS revenues grew 22%, our 13th consecutive quarter of SaaS revenue growth of 20% or more, exceeding expectations of a 20% CAGR in SaaS revenues through 2025. In addition, transaction revenue surpassed our plan with higher volumes and positive pricing trends. Our performance demonstrates the power of our business model against the backdrop of robust public sector demand, supported by generally healthy budgets. Our leading sales activity indicators remain elevated, and our pipeline reflects growing sales synergies as we execute our integrated go-to-market strategy.

During our Investor Day last year, we announced our Tyler 2030 Vision, which aligns our strategic focus on four key growth drivers: leveraging our installed base, expanding into new markets, completing our cloud transition and growing our payments business. Leveraging our unmatched installed base has been a cornerstone of our growth strategy, and we’re pleased with the outstanding execution by our sales organization, driving impactful cross-sell and upsell activity that further deepens existing client relationships and expands our market reach with new client engagements. Notable cross-sell and upsell wins during the quarter included a records management and ERP pro contract, including payments with Ada County, Idaho, leveraging our state enterprise relationship.

And on premises contract for our full enterprise public safety suite with the City of Columbus, Georgia, adding to its existing Tyler courts, corrections, ERP, tax and permitting solutions. An enterprise ERP win with the Texas Legislative Council facilitated by our existing digital solutions division relationship in Texas, which avoided an RFP process to secure a new enterprise ERP client in a nontraditional market. A combined SaaS contract with the City of Juneau, Alaska, for enterprise assessment and tax and enterprise permitting and licensing solutions. By prioritizing the cloud as one of our key growth drivers, we are unlocking new levels of innovation and responsiveness in making the cloud accessible for our clients, while providing enhanced security.

Our new software SaaS mix continue to expand and comprised 93% of Q1 new software contract value. We’re particularly encouraged to see a growing preference for cloud technology in the state and federal market with our application platform and an accelerated shift in public safety cloud demand with multiple client-driven SaaS selections. In fact, 75% of our first quarter enterprise public safety deals were SaaS. Because the pace of the shift to SaaS in these markets this year is faster than we previously anticipated, we have lowered our expectations for license revenues for the year. And across Tyler, the volume of flip signed in the first quarter was in line with our expectations, with a 21.5% increase in average ARR. Key first quarter new SaaS deals and flips included multiyear SaaS arrangements with the Hawaii Department of Natural Resources and land between the Lakes National Recreation area that build on our momentum in the outdoor recreation space.

Competitive SaaS wins for public safety included a full enterprise public safety suite contract with Palm Beach, Florida, which was focused on a cloud-only strategy. We also won a sole-source enterprise public safety contract with the city of Evanston, Illinois, which expands our growing footprint in the Chicagoland area. An enterprise appraisal in tax for Fulton County, Georgia, which includes Atlanta. The contracts with ARR of more than $1 million was executed on accelerated timeline with a go-live completed within one month. Two public safety SaaS flips with Birmingham, Alabama and Germantown, Tennessee, both of which were client-driven SaaS selections and accelerated go-lives. The Kansas Judicial Branch signed an enterprise justice appellate court SaaS flip as we continue to see a growing interest in moving to the cloud from our on-premises courts clients.

Another key driver of our long-term growth is our transactions and payments business. As I mentioned earlier, better-than-expected transaction volumes contributed to first quarter revenues that exceeded our expectations. In the first quarter, we signed 288 new payments deals across Tyler, representing approximately $9 million in projected ARR. In our state enterprise portal business, we signed a new 3-year enterprise contract with the State of Mississippi, extending our existing 14-year relationship. Our enterprise agreement with the state of Idaho was also renewed for two years in a rebid through the NASPO Citizen Engagement Agreement. We’re also very pleased to see early traction and growing demand for the solutions we added to our portfolio through our 2023 acquisitions of CSI, AR Inspect and Resource X, each of which brought us expanded AI capabilities.

With CSI, we signed a contract with our existing course client in Dallas County, Texas, adding approximately $900,000 of ARR. We’ve seen demo activity double over pre-acquisition levels for our augmented field operation solution, formerly AR Inspect, with first quarter wins that included the city of Newark manhole inspections and an expansion contract with the New Jersey Department of Environmental Protection. For our priority-based budgeting solution powered by Resource X, we signed contracts with Collier County, Florida and Fort Worth, Texas that added almost $600,000 of ARR. Now I’d like Brian to provide more detail on the results for the quarter and our updated annual guidance for 2024.

Brian Miller: Lynn, total revenues for the quarter were $512.4 million, up 8.6% and organically grew 7.8%. Subscriptions revenue increased 11.7% and organically rose 11.4%. Within subscriptions, our SaaS revenues grew 22% to $148.8 million and grew organically 21.3%. Keep in mind that there’s often a lag from the signing of a new SaaS deal or a flip to the start of revenue recognition that can vary from one to several quarters. Because of this, as well as the timing of SaaS renewals and related price increases, SaaS revenue growth both year-over-year and sequentially may fluctuate from quarter-to-quarter. Transaction revenues grew 3.7% to $164.5 million. While transaction revenues exceeded our plan, primarily due to higher transaction volumes from new and existing clients, including driver history records, the year-over-year comparison continues to be impacted by the change last year from the gross model to the net model for payments under one of our state enterprise agreement.

SaaS deals comprised approximately 93% of our Q1 new software contract value compared to 87% last year. During the quarter, we added 200 new SaaS arrangements and converted 90 existing on-premises clients to SaaS with a total contract value of approximately $86 million. In Q1 of last year, we added 145 new SaaS arrangements and had 73 on-premises conversions with a total contract value of approximately $86 million. More importantly, the average ARR associated with our Q1 flips increased 21.5% over last year, including transaction revenues, expansions with existing clients and professional services, total bookings increased 15.7% on an organic basis. Our total annualized recurring revenue was approximately $1.72 billion, up 8.8% and organically grew 8.2%.

In previous quarters, we discussed our expectation that 2023 would be the operating margin trough from our cloud transition and that 2024 would mark a return to operating margin expansion. Our non-GAAP operating margin in the first quarter was 23.8%, up 210 basis points from last year. The margin expansion reflects improved margins for our cloud operations along with effective operating expense management. As we discussed on previous calls, merchant and interchange fees from our payments business under the gross revenue model, have a meaningful impact on our overall margins as they are passed through to clients and are included in both revenues and cost of revenues. We paid merchant fees of approximately $42 million in Q1. Both cash flows from operations and free cash flow were above expectations for the quarter at $71.8 million and $57.2 million, respectively, which allowed us to repay the remaining $50 million of term debt outstanding from the NIC acquisition earlier in the year than planned.

We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $202 million. Our net leverage at quarter end was approximately 0.79 times trailing 12-month pro forma EBITDA with our only remaining debt of $600 million convertible due in 2026. Our updated 2024 annual guidance is as follows. We expect total revenues will be between $2.110 billion and $2.140 billion. The midpoint of our guidance implies organic growth of approximately 8.5%. We now expect that merchant fees will be up slightly over last year and that implied organic growth, excluding merchant fees, would be approximately 50 basis points higher. We expect GAAP diluted EPS will be between $5.27 and $5.47 and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate.

We expect non-GAAP diluted EPS will be between $9.10 and $9.30. We expect to see sequential growth in earnings throughout the year with both revenues and EPS slightly weighted towards the second half. We expect our free cash flow margin will be between 17% and 19%, including the estimated impact of approximately $58 million of incremental cash taxes related to Section 174. Other details of our guidance are included in our earnings release and in the Q1 earnings deck posted on our website. Now, I’d like to turn the call back over to Lynn.

Lynn Moore: Thanks Brian. Our performance in the quarter demonstrates strong execution by team members across Tyler in key strategic areas, anchored to our Tyler 2030 Vision. We are starting to see the expected benefits of our cloud transition through progress with version consolidation, cloud optimization of products, cost efficiencies and improved agility as we empower our clients who serve the public through Tyler’s next-generation cloud applications. Our strong first quarter results and positive outlook for the remainder of the year are reflected in our revised annual guidance. Even with lower expectations for license revenues because of the accelerated shift to SaaS with our public safety and application platform solutions, we’ve raised our revenue guidance while also increasing our earnings outlook.

We recently published our 2023 corporate responsibility report, our fifth annual sustainability disclosure covering our environmental, social and governance activities. Our sustainability initiatives in 2023 included investments in data management, validation and processes to drive reporting efficiencies. We also undertook a double materiality assessment to understand key insights for multiple constituents on both financial materiality and impact materiality. We hope you take the time to review our report, which is available on our website. Finally, we’re excited about Tyler Connect 2024, which will take place May 19 to 22 in Indianapolis. Nearly 5,000 Tyler clients and 900 Tyler team members will come together for training, collaboration and networking, and we’re looking forward to inspiring our clients with the latest innovations from Tyler.

Now we’d like to open the line for Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from Rob Oliver from Baird. Please go ahead.

Rob Oliver: Great. Thanks very much for taking my question. Good morning. Lynn, mine is for you. You mentioned in the outset of your prepared remarks, kind of your growth focus areas, but you talked about the kind of growing sales synergies and the integrated go-to-market strategy that you guys laid out in more detail last year. And I know this has been a big push of your since you assumed the CEO role. Could you give us a little bit of color on kind of what if some of those growing sales synergies are? Where you’re excited about the progress you’ve had so far? What some of the levers you’re pulling are? And what are some areas you still need to improve on? I appreciate it.

Lynn Moore: Yes. Sure, Rob. It’s a good question. Last year, we elevated a couple of people to oversee all of our public admin sales, all of our justice sales. They’re working more closely together than ever before. We’ve done things around aligning some incentive comp plans and changing the way people are comped to make sure that, for example, it’s – in the old days, it’s well – whose P&L is this recognized by. And we wanted to break down some of those barriers so that really, when – it’s all about Tyler, when Tyler wins, everybody wins. And so we’ve been doing things like that. We’ve done some things, and we’re still in the process of – and some of that’s still work in progress. I mean when I say that we started these initiatives, they’re not by any means finished, but these are things that are work in progress.

We’re doing things around our PSD and DSD divisions, our application platform and formerly NIC, we see a lot of synergies there. So, we’re doing things right now to start to bring some of those divisions closer together so that they can work more closely with sales and operating efficiencies. We believe the application platform is tailor-made for state government. And so just a number of initiatives like that. It’s – there’s a lot going on. And I think we’re going to continue to see improvement as we look out forward.

Rob Oliver: Great. Okay. Thanks for that. I’ll hop back in the queue and stick to one. Appreciate it.

Operator: Your next question comes from the line of Saket Kalia from Barclays. Please go ahead.

Saket Kalia: Okay. Great. Hi Lynn, hi Brian, thanks for taking my question here. Lynn, the numbers are pretty straightforward. So maybe I’ll ask just a little bit of a higher level question. It sounds like just the spending backdrop in state and local governments continues to sound healthy. But just to make sure the question is asked, can you talk about, Lynn, what you’ve seen historically from those customers in presidential election years? I mean I imagine that those two things aren’t terribly related. But again, I just want to ask – I want to make sure that question is asked as we kind of get deeper into election season.

Lynn Moore: Yes, I don’t know that historically, there’s been much of a correlation between our sales and the presidential election year more so than what may be going on in the broader macroeconomic environment. As you note, the budgets for our clients are healthy and strong. Our sales outlook for the year, and we have some pretty aggressive sales plans, but our sales outlook for the year are looking on plan and significant parts of our business actually maybe ahead of plan. Maybe a little bit in the Federal space. I don’t know that I’ve got enough experience yet with our federal space as to what impact that may have. But it’s normally more so around what’s going on with the federal funding and budgets. But I think generally, in our – if you look at our traditional local and state space, I haven’t seen a lot of change in my 25 years plus.

Saket Kalia: Very helpful. Thanks.

Operator: Your next question comes from the line of Matt VanVliet from BTIG. Please go ahead.

Matt VanVliet: Yes, good morning. Thanks for taking my question. I said you continue to see a higher and higher mix of business going to set contracts and I believe even see an acceleration to a certain extent on the flip side. It seems like areas like public safety are maybe holding you back more, but that doesn’t seem to be the case. Is there any, I guess impetus to try to push forward on more flips, maybe encouraged customers at a little bit more of an accelerated pace to move over and just try to get this done with sort of as quickly as possible? Or any changing in your thinking there of the motivation of customers?

Lynn Moore: And you kind of cut it out, I think I got most of your question, Matt, I’ll start. Brian, you can certainly jump in. At Public Safety, I think it’s a couple of things. I think actually, as you step back and you go back to 2019, when we sort of announced that we were going to go cloud first from cloud agnostic, some of the message was we were going – at least internally was, we were going to take our leadership position and start leading the market to where we thought it was going to go and needed to go. And Public Safety, as you know, historically, it’s been a little bit slower. We’ve spent a couple of years. We’ve got some new leadership Public Safety. Our position in public safety is we’re very competitive. It’s a competitive space, but we’re in a very competitive space and a place, excuse me.

And really starting this year and started more so third quarter, fourth quarter last year, we’ve taken the approach that we are going to start leading with SaaS with Public Safety. And so that’s resonating. We talked about the Palm Beach, Florida contract. That was a deal where they were only looking for a SaaS arrangement. As we look out this year, we’re going to continue to do things to push things quicker to SaaS. At the end of the day, it’s still the customer’s choice. There’s a lot of selling things around that. You look at our Public Safety, I think – our plan for the year was to do about 50% on-prem licenses, give or take, which was up significantly from last year. And what we’re seeing right now, I think we reported 75% in Q1. As it relates to flips, there’s a lot of selling messages generally around flips and where all our sales folks are armed with those.

I think one thing that you’re also starting to see, and we’ve talked about it before on earnings calls is the continued rise of cybersecurity and ransomware attacks are also sort of triggering clients to want to push to SaaS faster. And the more that they see that out in their community, which aren’t always publicized, I think that’s also sort of starting to grease the wheels a little bit to make that decision to move to SaaS.