GTY Technology Holdings Inc.

Thank you. Good afternoon, everyone. I'm John Curran, GTY's CFO, and I'd like to welcome you to our second quarter 2021 earnings conference call. With me on today's call is TJ Parris, GTY's CEO. We will be presenting slides on today's call and encourage you to view the presentation found on our website at www.gtytechnology.com. Please note that our earnings release is also available on the GTY website and contains additional information about our financial results. Any forward-looking statements we made in the earnings release or any that we may make during this call are based upon information that we believe to be true as of today. Things often change, however, and actual results may differ materially from those projected or anticipated. Please refer to our cautionary statements in the earnings release under the heading forward-looking statements. You should also refer to our SEC filings, including our most recent Form 10-K and our subsequent SEC filings for a list of risk factors applicable to GTY, including risks associated with COVID-19. As you will hear in our comments, the pandemic is impacting our business today and for an undetermined time into the future. During the call, we may refer to non-GAAP financial measures if we believe they are useful to investors or if we believe it will help investors better understand our results or business trends. You can see a reconciliation of our non-GAAP financial measures to their nearest comparable GAAP financial measure in Exhibit 2 of the earnings release and in the appendix of this slide deck. With that, I'll turn the call over to TJ.

Thank you, John. Good afternoon, and thank you all for joining us. For those that are new to GTY, GTY provides cloud-based platforms that help government organizations transform the way they engage citizens and manage their operations. While a common perception is that government lags behind private sector, GTY was formed based on the founders' vision that governments were starting to accelerate their digital transformation. Even before the pandemic, Governments are moving away from heavy, monolithic, on-prem solutions to modern cloud SaaS applications. And this trend has gotten even stronger in the wake of the last year. State and local governments' modernization represents a massive opportunity for native cloud and SaaS-based platforms. Here's how we're going about it. We're providing our best of breed cloud technologies through five product suites that cover the front and back offices of state and local governments. Included in our primary target sectors are municipalities and counties, colleges and universities, K-12 school districts, public health care agencies, public utilities like water and power, transportation and transit, state governments and federal agencies. As of today, we have over 1,800 clients and over 370 employees across the business units, with both of these numbers increasing weekly as we start leaning into growth. To add some color to the size of our opportunity, in 2021, state and local government in the U.S. is expected to spend just under $120 billion in IT, and that's 7% higher than 2020, a healthy underlying growth rate. As our customers are starting to modernize their infrastructure, GTY is well positioned to capture the opportunity that the transition to the cloud represents. Let me unpack that a bit for you. Before I describe the product suites themselves, it's important to understand that GTY products have three broad characteristics that position us for success. First, they are cloud and largely SaaS. This means highly recurring revenue streams with remarkably low churn often multi-year contracts and strong gross margins and predictable cash flows. Second, each of our product suites were created specifically for government's unique requirements and are considered leaders in their respective functional areas. This leads to high win rates against older GovTech competitors, as well as against horizontal players Finally combined our product suites allow us to access a full spectrum of sizes and segments of our customers from 10,000 to 1 million and higher price points and across all eight sub-sectors from small municipalities, all the way up to large state governments and federal agencies. So let's meet the products and business units. First is Bondbuyer, a next generation sourcing and procurement platform. Second is Citibase, our payment platform that helps centralize the citizen interface of a government agency. that helps governments stay on top of one of their most important sources of funding. Fourth, Open Counter streamlines government permitting, which is one of the major touch points with citizens. And finally, rounding out our product suites are our budgeting platform companies, Quest and Sherpa, which we collectively call GTY Budget. Budgeting is a core and mission-critical financial activity of all levels of government. Combined, these product suites give GTY a strong starting position to capture the opportunity ahead. With that context for the newcomers of GTY, let's turn to Q2. GTY reported another strong quarter, with Q2 exceeding expectations across all key operating metrics. The economic environment for our customers continues to improve despite challenges that persist from the new Delta variant of COVID-19. The core strength of our business unit is our ARR, which remained robust in the quarter. Our ARR growth rate of 24% in Q2 was slightly below both the prior quarter as well Turning to bookings, Q2 wasn't as strong as Q1 due to some large deals that were pulled forward into Q1 and a few other Q2 deals that pushed out into Q3. However, these push deals have already closed in Q3 and are a good leading indicator of how the back half of the year is shaping up. While recurring revenues as a percentage of total revenue can move around based on the timing of hardware installations and other services, they continue to grow at a faster rate than total revenue. For Q2, recurring revenues at 79% of total revenues are record high for us. We added 86 new clients with wins across all eight of our target sectors, as well as many customer expansions. Within our city-based business, we are working with New York City to expand in-person payments citywide, and at KC Water, we introduced new utility payment kiosks. Another new city-based customer is a prominent energy provider in Michigan who is improving their customers' payment processes with 43 new payment kiosks, which will be installed starting in Q3. Moreover, two prominent customers we announced in the fall of 2019, the City of Denver and the City of Austin, have been implemented and are now processing payments. Our cloud-based budgeting tools, Quesca and Sherpa, have been selected by a wide range of organizations, such as the City of as well as the state of North Dakota and the Central Ohio Transit Authority. Our grant management platform, eCivis, continues to move upmarket from small nonprofits to larger state and local governments. One recent example for eCivis is the Florida League of Cities. There are 410 incorporated cities throughout Florida, and we have signed up over 120 cities under the program, which includes all cities with access to our research. The new arrangement provides preferred pre-negotiated pricing to expand into all of our management products. Furthermore, key state agencies responsible for ARPA funding have been promoting the eCivis partnership and plan to roll out a program to execute those grants in the coming months. While still very early in the process, we are pleased with the high level of engagement. Additionally, our procurement platform, Bonfire, added a new approvals functionality that helps organizations track processes online. This feature, in addition to the rich feature set in the Bonfire platform, supports a work-from-home reality. Finally, we continue to invest in our leading cloud-based sector solution suites. In July, we announced general availability of our next major release of our flagship budgeting solution. Quesca Budget was developed to reduce friction and foster a more collaborative experience throughout the public sector budgeting process. and this new release includes major enhancements to our collaboration tools and overall user experience. Turning to our financial position, our P&L continues to strengthen, and in Q2, we saw strong year-over-year improvements in gross profit and operating loss. John will provide more details on the financials in a few minutes, but I feel good about our progress to date and how we're positioned for the future. Turning to our outlook. We believe there are several macro drivers that are providing tailwinds for our business. Our customers and prospects are becoming more comfortable with their budgets and their outlook. What's supporting this? First, the continued economic recovery as more Americans are vaccinated and the economy opens up. Second, budgets for 2021 and 2022 are less negatively impacted than initially feared. And finally, the American Rescue Plan Act of 2020 get more comfortable creating long-term investment planning, knowing additional funding will be there to support it. In response to positive market dynamics, increased sales productivity, and expanding pipeline of opportunities, we are investing in our sales and marketing capacity as well as our recruitment engine. The market for experienced salespeople is very competitive compared to prior years and requires an enhanced recruitment and retention strategy. we are already in the process of expanding our recruitment team to meet our goal of hiring at least 20 new sales and marketing staff in the second half of the year. While our attrition is in line with other technology companies, we are striving to be better and are using this time to highlight our unique employer brand. In conclusion, we are excited to have multiple tailwinds supporting our business and look forward to executing it on our growth initiatives. Thank you. Back to you, John.

Thank you, TJ. As TJ mentioned, Q2 was another strong quarter, highlighted by strong growth in recurring revenues and continued improvements in gross margins. For Q2, our GAAP revenue increased 28% to $14.3 million, compared with $11.2 million in Q2 of 2020. On a non-GAAP basis, revenue was $14.4 million for Q2 of 2021 compared with $11.3 million in Q2 of 2020, an increase of 28%. Reconciliation between our GAAP and non-GAAP results is included in Exhibit 2 of our press release and in the appendix of our slide deck. We'll provide a more detailed explanation of the change in revenue on a subsequent slide. Our second quarter 2021 GAAP gross profit was 9.1 million, or a 64% margin, compared with 6.8 million in Q2 of 2020, or a 61% margin. Our second quarter non-GAAP gross profit increased to 9.6 million, or a 66% margin, compared with 7 million, or a 62% margin, in Q2 of 2020. Continued growth in our recurring revenue is driving the improvements in our gross margins. Turning to our operating expenses, we saw a $200,000 or 2% increase in our operating expenses in Q2 of 21 compared with Q1 of 21. We saw about $150,000 of currency impact in the quarter. And if you recall, we had $240,000 of taxes related to RSU vesting in Q1 that didn't repeat in Q2. excluding the impact of currency and RSU taxes. We had about $300,000 of expense increases in the quarter related primarily to additional headcount and corporate costs. Our second quarter 2021 GAAP operating loss was 7.9 million compared with a loss of 8.1 million in Q1 of 2021 and a loss of 7.8 million in Q2 of 2020. Our second quarter non-GAAP operating loss decreased to $1.1 million compared with $1.5 million in Q1 of 2021, driven primarily by improvements in gross margins. Consistent with prior quarters, we wanted to provide a little more color on the change in non-GAAP revenues. As you can see in this chart, our recurring revenue grew by 11% on a quarter-over-quarter basis and grew by 33% on a year-over-year basis. Adjusting for seasonality in our payments business, our quarter-over-quarter recurring revenue grew by 9%. Services and other decreased by 4% on a quarter-over-quarter basis but increased 9% from an abnormally low services quarter in the year-ago period. 2020, service delivery was impacted by the early days of the pandemic and the transition to remote work by our customers. Our current services backlog remains strong, and we expect our services revenue to increase slightly in the second half of the year due to the delivery of large state deals for our budget and grants management business units. Our service revenue can vary from quarter to quarter due to the timing of large projects. and we continue and we expect professional services to decline as a percentage of revenue as our base of recurring revenue continues to grow. Other revenue includes sales of kiosks and software license sales that we also expect to decline as a percentage of revenue over time. Continue to expect recurring revenue to grow in the mid to high 20% range for the year. and expect our services and other revenue will grow by roughly low double digits compared with 2020. We will be delivering a large number of kiosks in the second half of the year, which will cause a temporary increase in our one-time revenue. Our current revenue growth should continue to be higher in percentage and dollar terms than service and other revenue as we continue to forecast growth in our base of subscription business. Taking a look at our balance sheet, there are three areas I would like to discuss. First is change in our receivables, which increased by $1.3 million this quarter, driven by higher renewal invoices. The second area is a decrease of $300,000 in accounts payable and approvals in the quarter, primarily due to invoice timing. The third area is deferred revenue, which increased $1.2 million, also due to renewal invoice timing. This increase represents the amount we have invoiced and excess of the amount of revenue we earned in the quarter. From a cash perspective, the start of the quarter was $17.9 million and ended with $15.4 million in cash. From an outflow perspective, our operating burn was roughly $700,000 this quarter, a $500,000 decrease from $1.2 million in Q1 of 2021. We also paid out $500,000 in interest in the quarter, and the change in working capital was an additional $1.2 million outflow. We completed the severance payments against our 2020 restructuring program last quarter, so that outflow is now behind us. As you may recall, during the second quarter of 2020, we received $3.1 million in loans as part of the Paycheck Protection Program. As announced at that time, those funds allowed us to limit our headcount reductions and retain more of our very talented workforce. We were pleased to report that we fulfilled the terms of the program and our loans were forgiven. Based on our reduced burn rates and our current forecasts, we believe we have sufficient cash to support our growth initiatives as well as our ongoing operations through 2022 and beyond. Turning to our outlook for the third quarter and full year 2021. The third quarter of 2021, we expect total revenue to be in the range of 15 million to 15.5 million, or approximately 20% year-over-year growth at the midpoint. For the full year 2021, we expect total revenue to be in the range of 59 million to 60.5 million, or approximately 22% year-over-year growth. ARR is expected to grow faster than our overall revenue growth as we continue to build our base of recurring business. As TJ mentioned, we're seeing some improvements in the market outlook, and we anticipate a modest level of increased investment in the coming quarters to support increasing demand. However, given the ramp time for any resources, we don't expect to see any material benefits to our top line in 2021. Given these investments, our operating expenses will be increasing as we move into the second half of the year to fund our 2022 growth initiatives. Obviously, this will affect our operating cash flow forecast for 2021, which we now expect to be negative in the $1 to $2 million range, depending on investment timing. With that, I'd like to turn things back to TJ.