Tyler Technologies, Inc.

Hello and good morning, everyone, and welcome to today's Tyler Technologies first quarter 2022 conference call. Your host for today's call is Lynn Moore, President and CEO 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. As a reminder, today's conference is being recorded today, April 28, 2022, and I'd like to turn the conference call over to Mr. Moore. Sir, please go ahead.

Thank you, Jamie, and welcome to our call. With me today is Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give a safe harbor statement. Next, I'll have some comments on our quarter, and then Brian will review the details of our results. I'll end with some additional comments, and then we'll take questions. Brian?

Thanks, Lynn. During the course of 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 these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. 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?

Thanks, Brian. Our first quarter results surpassed our expectations and provided a very strong start to 2022. Total revenues grew approximately 55%, with robust organic growth of 12.8%. the highest in 20 quarters. NIC continued to perform well in the first quarter, with core revenue growth of 13%, excluding COVID-related revenues. NIC's growth was boosted by revenues under the new statewide payments contract in Florida, and in particular, by revenues associated with corporate filings with the Department of State that are concentrated in the first quarter. NIC's COVID-related revenues were in line with our expectations at $20.6 million. Recurring revenues comprise 79.5% of our quarterly revenues and were led by 140% growth in subscription revenues. On an organic basis, subscription revenues grew a robust 33.8%, reflecting both our accelerating shift to the cloud and growth in transaction-based revenues. We have now achieved greater than 20% subscription revenue growth in 57 of the last 65 quarters. We're particularly pleased with our strong revenue growth, even as we saw an acceleration of the shift in our new software contract mix from licenses to SaaS. In Q1, 80% of our new software contract value was SaaS, compared to 66% in Q1 last year. As we outlined on our last earnings call, while our move to the cloud builds long-term value, margins compressed in Q1 reflecting the new business mix shift, the inclusion of NIC, and in particular their COVID related revenues, as well as expenses related to the cloud transition. As a result, our non-GAAP operating margin declined 250 basis points year over year to 24.3%, but increased 70 basis points sequentially from Q4 of 2021. We continue to be very pleased with NIC's performance and with the growing pipeline of joint opportunities for Tyler and NIC. During the first quarter, NIC successfully extended our enterprise contract in Alabama, and in April, we extended our enterprise agreement with New Jersey. NIC also signed a new five-year SAS deal with the state of Mississippi to provide our NIC cannabis licensing platform, valued at approximately $4.3 million. We continue to experience success with sell-through deals of Tyler products through NIC's state relationships. In Q1, those deals included sales of our data and insights platform, to the state of Vermont, and our IntelliTRAC platform for Veterans Affairs in Alabama. We also signed agreements for NIC's payments platform with existing Tyler clients in Hillsborough County, Florida, Montgomery County, Maryland, and Glendale, California. Our largest new deal in the quarter was a SAS arrangement with the San Diego Association of Governments for our enterprise ERP powered by Munis solution, along with our data and insight solution valued at approximately $4.9 million. We also signed five notable SAS deals, each with a total contract value greater than $2 million, with Glynn County, Georgia, for our Enterprise Assessment and Tax, powered by IAS World Solution, the cities of Rialto, California, and Alamogordo, New Mexico, for our Enterprise ERP, powered by MUNIS, and Enterprise Permitting and Licensing, powered by Intergov. and the cities of Mansfield and Burleson in Texas for our enterprise ERP powered by MUNIS solution. Our largest license deal in Q1 was a $2.7 million agreement with the Utah Department of Public Safety, our first public safety deployment in the state of Utah. The deal includes enterprise law enforcement records, mobile, field mobile, enforcement mobile, and public safety analytics. We also signed four other notable license arrangements in the quarter, each with a total contract value greater than $1 million, with the St. John's County Property Appraiser in Florida for our Enterprise Assessment and Tax, powered by IAS World, the City of Elmhurst, Illinois for our Enterprise ERP, powered by Munis Solution, St. Mary's County Government in Maryland for our Enterprise Public Safety, powered by New World and Data and Insight Solutions, and the City of Virginia Beach, Virginia for our Enforcement Mobile powered by Braso solution. Now I'd like for Brian to provide more detail on the results for the quarter and our updated guidance for 2022. Thanks, Lynn.

Yesterday, Tyler Technologies reported its results for the first quarter ended March 31st, 2022. In our earnings release, we've 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've also posted on the investor relations section of our website under the financial reports tab schedules with supplemental information provided on this call, including information about quarterly bookings, backlog, and recurring revenues. Both GAAP and non-GAAP revenues for the quarter were $456.1 million, up 54.7% with the inclusion of NIC and our other acquisitions from the last 12 months. Organic revenue growth was the highest since Q4 of 2016 at 12.8%. Software licenses and services grew 24.7% or 3.7% excluding NIC. Subscription revenues rose 139.5% with very strong organic growth of 33.8%. We added 149 new subscription-based arrangements and converted a new high of 88 existing on-premises clients, representing approximately $76 million in total contract value. In Q1 of last year, we added 84 new subscription-based arrangements and had 39 on-premises conversions, representing approximately $52 million in total contract value. Our software subscription bookings in the first quarter added $16.2 million in new ARR. Subscription contract value comprised approximately 80% of the total new software contract value signed this quarter compared to 66% in Q1 of last year, reflecting our ongoing shift to a cloud-first approach to sales and increasing client preferences for cloud-based solutions. The value-weighted average term of new SaaS contracts this quarter was 3.4 years compared to 4.0 years last year. Transaction-based revenues, which include NIC portal, payment processing, and e-filing revenues, and are included in subscriptions, were $150.9 million, up 461%. Excluding NIC, Tyler's transaction-based revenues grew 9.8%. E-filing revenues reached a new high of $18.2 million, up 16.9%. For the first quarter, our non-GAAP ARR was approximately $1.45 billion, up 63.6%. Non-GAAP ARR for SAS software arrangements was approximately $378.1 million, up 25.1%. Transaction-based ARR was approximately $603.7 million, up 461%. and non-gap maintenance ARR was down slightly at approximately $468.1 million due to the continued migration of on-premises clients to the cloud. Our backlog at the end of the quarter was $1.76 billion, up 13.8%. Because the vast majority of NIC's revenues are transaction-based, their backlog at quarter end was only $26.3 million. Excluding the addition of NIC, Tyler's backlog grew 12.1%. Bookings in the quarter were strong at approximately $419 million, up 70.1%, including the transaction-based revenues at NIC. On an organic basis, bookings were also quite robust at approximately $283 million, up 14.7%. For the trailing 12 months, bookings were approximately $1.9 billion, up 65%, and on an organic basis were approximately $1.4 billion, up 21.7%. If our weighted average contract term for new SAS contracts has been the same as last year, organic bookings growth would have been 17.1%. Cash from operations declined this quarter by 25.3% to $53.5 million, mainly due to changes in working capital related to higher payments of accrued incentive compensation and cash tax payments related to stock-based compensation. Free cash flow declined by 33.5 percent to $41 million due to the decrease in cash from operations and somewhat higher capital spending this quarter. Our balance sheet remains very strong. During the quarter, we repaid $20 million of our term debt, and since completing the NIC acquisition, we have paid down $415 million of term debt. We ended the quarter with total outstanding debt of $1.32 billion and cash and investments of $322.6 million and net leverage of approximately 2.1 times trailing 12-month pro forma EBITDA. As Len mentioned earlier, we're off to a great start in 2022, resulting in an improvement in our outlook for the full year. As a result, we have raised our 2022 annual revenue and earnings guidance as follows. We expect both GAAP and non-GAAP total revenues will be between $1.835 billion and $1.87 billion. The midpoint of our guidance implies organic revenue growth of approximately 9.5%. We expect total revenues will include approximately $40 million of COVID-related revenues from NIC's tour health and pandemic rent relief services. The tour health revenues are currently expected to continue through the second quarter of 2022 while revenues from the rent relief program are expected to continue through the third quarter. We expect GAAP diluted EPS will be between $3.92 and $4.08 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $7.48 and $7.64. Based on updated assumptions regarding additional interest rate hikes this year, We have increased our estimated interest expense for the year by $3.4 million to $23 million, with an impact on non-GAAP diluted EPS of approximately $0.06 a share. Other details of our guidance are included in our earnings release. Finally, before I turn the call back to Lynn, I'd like to announce that Hala El-Sherbini will be joining Tyler as Senior Director of Investor Relations, effective May 9th. Many of you have worked with Hala in the past, and we're very excited to have an IR professional with Holla's experience and knowledge of Tyler join our team. Lynn? Thanks, Brian.

I'm very pleased with our first quarter performance and our outlook for the full year. Activity in our public sector market continues to trend positively, and we are well positioned to take advantage of the continued strength in our market. We remain on track with our strategic initiatives, including our development projects to optimize our products for more efficient deployment in the cloud, and our cloud-first approach to sales, which we believe will create significant long-term value for clients and shareholders alike. Our balance sheet and cash flow remain very strong, and we continue to be opportunistic with regard to capital allocation. We're excited about the acquisition of USC Direct in February, which significantly expands our outdoor recreation portfolio, allowing us to offer an extensive, all-in-one outdoor recreation solution that will seamlessly integrate with our NIC payments platform. While we continue to evaluate strategic acquisition opportunities, we are heavily focused on the integration and execution around the acquisitions we've completed over the last two years, making the bar on new acquisitions at this time relatively high. Last Thursday marked the one-year anniversary of our landmark acquisition of NIC. As I reflect on the acquisition, and all that we have accomplished as a combined entity over the last 12 months, I can truly say that it has exceeded our expectations, which were already high. Our teams have come together as one unified organization, and our collective excitement about the opportunities that the combination unlocks has continued to grow. We've integrated our payments teams and have refined our strategy to pursue what we believe is a huge TAM in government payments. As we've discussed, We're winning new business with sell-throughs into our respective client bases, and this quarter, we doubled the number of sell-through opportunities in our pipeline. We look forward to continuing to report on our progress in the second year of our combination. The challenges of today's labor market continue to be an area of significant focus for us. While we added 195 new team members in the first quarter, we currently have a higher than normal number of open positions. Although our open positions have a short-term positive impact on margins, we have aggressive hiring plans for the balance of the year to support our growth. Finally, we're extremely excited to host clients live and in person at Connect, our annual user conference, which will take place in Indianapolis from May 15th through May 18th. With that, we'd like to open up the line for Q&A.

Ladies and gentlemen, at this time, we will begin the question and answer session. To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2 if you are using a speakerphone. We do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then 1 to join the question queue. Our first question today comes from Jonathan Ho from William Blair. Please go ahead with your question.

Hi, good morning, and congratulations on the strong quarter. I just wanted to maybe start out with your thoughts around just the win rates that you're seeing and potentially whether the investments that you've made over the past few years are now starting to have an impact as you start to look at the state of competition.

Yeah, sure, Jonathan, and I think that's right. You know, the markets right now are really strong. I'd say they're probably about as strong as I can remember. And our competitive position is really high, really across the board. You're right. You know, pre-COVID, we went through a significant period of elevated investments, and I think that's really paying off right now across all of our lines of business. Our win rates are strong. Our final rates are strong. It's really setting us up well for the next few years. And so I appreciate that comment.

Got it, got it. And then just as a follow-up, how should we think about sort of the pace of integration that we're seeing with AWS and maybe what customers, when you've had some discussions with them, what's that reception been like in terms of potentially shifting from Tyler hosted to AWS? Thank you.

Yeah, I think that's going real well, Jonathan. You know, AWS is going to be a great long-term partner for us. We're already starting to move customers into the AWS cloud. We're working on plans right now to exit the Tyler data centers over the next couple of years and move them into AWS. They're a great partner. You know, where we're going with our cloud initiative lines up well. Our cultures line up well, and our clients see that. Our clients see the benefits. They see the future roadmap that we've laid out, and our clients are excited about it.

And our next question comes from Pete Heckman from DA Davidson. Please go ahead with your question.

Good morning, everyone. Thanks for taking the question. Just two questions on the annual guidance. Your very strong organic subscription growth of the first quarter seems to argue that, at least the way I look at my model, I have something more in the mid to high teens embedded for organic growth and subscription revenue for the rest of the year. And I'm getting into the top end of your revenue guidance. Are there some other considerations we should think about why subscription revenue growth wouldn't continue to run at this elevated rate for the rest of the year?

Well, Pete, I think the biggest factor there, and we mentioned it in the remarks, is that there is some seasonality around some of the transaction-based revenues around payments. There's, I think, two things around that. One, as we pointed out, the Florida contract for statewide payments with NIC, which is a new contract, is ramping up. But there were some revenues in Q1 that are specific to Q1 around filings, revenues associated with corporate filings with the Department of State in Florida. And that added... I think roughly close to $6.5 million of revenue in subscriptions in Q1, and so actually accounted for a couple hundred basis points of overall growth in the quarter that really aren't expected to be there throughout the year. And then seasonally in Q4, some of the transaction-based revenues around the portals tend to be a little lighter as well. I think those are the biggest factors. But certainly we have an opportunity to continue to broaden our subscription revenues as we move through the year. But I'd keep those seasonality factors in mind.

Yeah, I think, Pete, I'd just add that the thing about the Secretary of State filings in Florida is it was a little bit somewhat unexpected as we entered the year. And I think it shows the potential of not just the Florida payment contract, and extending it beyond what I think probably NIC's original expectations were before they joined Tyler, but really the things that we can do across the country. And so while there's some seasonality to that, to me it's an exciting indicator of things that we can achieve down the road.

Great, great. And that helps. I admit the significance of that. And then just in terms of the expense ramp we talked about last quarter that's embedded in your annual guidance, you talked about maybe hiring running a bit behind schedule. But generally, would you say that the expense levels in the first quarter were at your expectations, a little bit below? I'm just trying to figure out if that contributed to the upside, at least from our forecast, to the earnings number in the quarter.

Yeah, I'd say as it relates to headcount, Pete, it is probably a little bit below, and that's been really the case for probably at least a year or so. And my sense is that's the case generally across all industries right now. There's certainly a lot of labor market challenges. It certainly helps with margins in the short term. We want to be a little more aggressive, and we are aggressive. Our HR department is working hard. But so that we can deliver on a lot of the sales, the good sales activity that we've had, you know, over the long run, being able to get these installations deployed, continuing to keep our customers happy is going to require getting some of those heads in.

Okay. Thanks. I'll get back to McHugh. And our next question comes from Josh Riley from Needham. Please go ahead with your question.

Hey guys, thanks for taking my questions. Congrats on the strong quarter here. How would you characterize the impact of the stimulus fund benefiting the 13% organic growth rate in the quarter? And how much of a tailwind can this be over the next couple of years? Is it closer to a one to two point benefit or could it be up to a five point benefit to sales?

Yeah, Josh, it's a good question. It's hard sometimes to isolate. I think what I would say, I'd go back to my comment to Jonathan's question about the budgets overall. You know, from what I'm seeing right now, our clients' budgets are as healthy as they've ever been. You know, leading up 2018, 2019, the economy was really good. The budgets were really strong. There was anticipation of negative COVID impact that that prediction really didn't come through. And since then, as you mentioned, we've We've lumped on a lot of stimulus money. In addition to that, I think I mentioned on the last call perhaps, we all see what's going on out there in the real estate market and the boom that's going on there, which is driving appraisals and valuations up, which further then drives up assessments and property taxes, which is a big funder of a lot of our, particularly with our local government clients. We're seeing the impact. It's sometimes hard to track individual deals. But we're certainly seeing the impact in the fact that I think it's a very robust market right now.

Brian, you got something to add? I would add is that the stimulus money is available through the end of 2024 for them to make commitments around spending that. And so I'd say we're still, we believe a lot of governments certainly haven't fully spent their funds or are still in the process of determining where those will be spent. So we believe it's a you know, a potential tailwind through, you know, the next two or three years. But I'd say right now it's probably if there's an impact there, it's probably fairly modest. It's not five points of growth. But it's certainly part of that very active market we're seeing.

Got it. That's helpful. And then Just curious, on the U.S. eDirect acquisition, is there anything specific in terms of the functionality that you acquired there that's different than what you had internally for Parks and Recreation? Thanks, guys.

Yeah, sure. And I'd say the answer to that is yes, we're a really good complement. I mean, the outdoor market is something that we believe is a good growth opportunity. We believe that TAM is there. There's demand for this sort of all-in-one solution, and And really what NIC brought was really a first-in-class solution around hunting and fishing licenses. And USC Direct really was the leading outdoor reservation platform. So it sort of combines that into creating, as we said, sort of an all-in-one opportunity. We've seen the pipeline already just this year grow significantly in that space. And I think one of the things that we're excited about is not just combining the NIC technology with USC Direct, which is also, by the way, deployed in AWS, but our ability to go out and sell it. So it's a solution. You know, when you talk about outdoor reservations and stuff, it's not just going in the states, which will be through NIC sales channels, but we also have the ability to go sell it more locally through some of Tyler's sales channels.

And our next question comes from Terry Tillman from Truist Securities. Please go ahead with your question.

Yeah, thanks for taking my questions, and I echo the congrats on the first quarter results. Maybe a couple questions for me, and one of them is a follow-up to a prior question on the stimulus dollars. What about on the enterprise ERP business side? So those are longer sales cycle type deals, big transformation projects. I think maybe you mentioned San Diego, but how is that sales pipeline playing out in do you see like a quarter where if the pipeline is building, where you see a lot of conversions, or do you think that's going to be more smooth over the next couple of years, two or three years on the enterprise ERP side?

Yeah, I think generally speaking, what we're seeing on enterprise ERP is the market is, is, and the deals that we're signing each quarter really reflects sort of pre COVID levels. Um, so that's very encouraging. Um, we have identified a handful of deals that were, that are specific, uh, that can be tied specifically to the ARPA funding and things like that. But, again, sometimes it's hard to know specifically where a jurisdiction, how they allocate those funds. We don't normally sort of get that one-to-one rate. Our deal volume in enterprise ERP is good. We're really focusing on expanding payments through that customer base. As you mentioned, we're focusing on expanding our flips, which are continuing to increase at a faster rate quarter by quarter. You know, our installed client sales continue to be really strong there. So it's a very healthy business that's continuing to grow, and we're pretty pleased with the outlook.

Got it. Thanks for the answer on that. On the state of Utah, that was great to see that statewide public safety deal. And maybe easier said than done, but it seems like a great rinse and repeat opportunity across the broader NIC customer base with all these public safety solutions you have. Not trying to put you on the spot, but could we see more and more quickly with a repeat of what we saw with State of Utah on the public safety side? Thank you.

Well, I guess I'd step back and just say yes. We're excited about all of our cross-sell opportunities through the NIC base. The Utah deal was a great win for our public safety team, a very large contract. You know, I think it's early to say that yet, I mean, obviously part of our sales plans is to repeat these types of wins. That's part of our playbook. It may be long to say that those can happen relatively quickly. Sales cycles still sort of take a life of their own, but we're excited the way our teams are working together across all of our products and the potential with NIC.

Thank you.

Our next question comes from Matt Van Fleet from BTIG. Please go ahead with your question.

Yeah, thanks for taking the question, guys. Nice job on the quarter. Lynn, I wanted to follow up on something you mentioned at the end of your prepared remarks, and maybe it's a bit of a follow-up to Terry's last question there. But you mentioned that the pipeline for sell-through opportunities has doubled. I'm curious if you look at the assessment of kind of all of the NIC customer portfolio, you know, how far along are you in terms of kind of following up with those potential sell-through opportunities? As you've doubled that, you know, have you sort of gotten to all of those customers, or is there still more that could be added to the pipeline in the near term?

Yeah, I would say we're a year now into the NIC acquisition. Standing here a year later, I'm more than pleasantly surprised at how the teams are working and the number of opportunities that have already surfaced. Stepping back, looking at maybe a 20,000-foot level, we may still be in the first inning of this deal. We've got a long way to go. We're still learning about each other. We're still learning while we spent a lot of time last year educating both teams on products and sales channels and the ways to go about addressing the market. I think we're just barely scratching the surface of what we can achieve together.

All right, very helpful. And then I guess maybe thinking about the stimulus and the ARPA funds from a little different angle, have you seen sales cycles shorten at all or do you feel like some deals have gotten pushed through maybe a little more quickly because there's more budget dollars available and would you allocate some of that rationale to having more of the stimulus funds out there or has there not been any kind of consistency across the time to contract?

Yeah, I would say that on one level it's You know, I've talked about the robust market. You know, I think my comment there would be some of it is still just release of pent-up demand during COVID. I do think we're seeing a little bit maybe quicker sales cycles in some of our inside sales, and that may be a little bit more directly tied to some ARPA funding. But we're also, you know, one thing I didn't mention earlier is one of the things that we're doing across Tyler is we're being pretty proactive about marketing the you know, the availability of the ARPA funds and how our clients can use them. We've done, you know, several webinars and podcasts and blogs and emails to sort of help stimulate that use and hopefully direct some of it to Tyler.

All right, wonderful. Thanks for taking the questions.

Our next question comes from Sakit Kalia from Barclays. Please go ahead with your question. Thank you.

Okay, great. Hey, guys, thanks for taking my questions. Appreciate you having me on the call. Maybe first for you, Brian, actually, just to maybe mix it up. You know, it felt like software and services bookings were maybe stronger than what we've seen historically. And SaaS was maybe a little bit more in line. And, again, that's from a bookings perspective. Part of that I think you called out is rightfully duration. But curious if you saw anything in mix or preference for on-prem versus SaaS. And how are you sort of thinking about that for the rest of the year?

Yeah, I think it was an interesting quarter from a new business perspective because even though – SAS as a percentage of the new deal volume increased pretty significantly over last year from 66% to 80%. And we also saw growth in license revenues and had several pretty decent sized, not super large, but several decent sized license deals, including the Utah public safety deal and some ERP deals. So we saw a little bit of both. On a broad basis, our expectation for the year is around 80 to the low 80s percentage of our new contract volume coming in in SAS. So we're generally online with that, but we would expect that we continue to see an ongoing shift towards that preference for new customers to come through the cloud. And as we talked about at year end, part of that reflects a change in our approach to sales and including a number of significant products that are now only available through the cloud that are no longer being offered in a license model in new proposals. So, yeah, we'd expect that trend to continue through the year.

Got it. Got it. Lynn, maybe that's a good segue for a question I have for you. You know, we've talked about some tools that were offered both on-prem and SaaS, but might phase out on-prem. This year, I think we've talked about maybe one or two of the ERP products as an example. Can you just recap that for us? And without preannouncing anything, of course, but are there other products where that might make sense to do as well in terms of leading with SaaS and maybe not even offering on-prem anymore? Does that make sense?

Yeah, no, I understand your question, and you're right. So, you know, coming into this year, and we announced – I think maybe in Q3 of last year, certainly on the Q4 call, our enterprise ERP powered by Munis Solutions are now really just being offered in a SAS model. I have made the comments that you should expect to see more of our core flagship products move in that direction, including probably one later this year and moving into next year. I'm a little hesitant to outline some of that right now because We haven't even notified all of our customers yet of our future strategy. Our clients generally know that we are going cloud first. That's not a surprise to anyone. But in terms of specific timelines, I'd rather sort of keep that messaging within us right now until we're ready to do that. But that's our strategic direction. It's not a surprise to anyone. We're making progress on our cloud initiatives, and we will reach the point generally across our portfolio, with perhaps the exception of parts of public safety, which will be market-driven. And as we talked before, they've been a little bit slower to move to the cloud.

Got it. That makes sense. Thanks, guys.

Thank you. Our next question comes from Michael Turin from Wells Fargo. Please go ahead with your question.

Hey, guys. This is David Unger filling in for Michael Turin. Thanks very much for taking the question. I just wanted to focus on free cash flow margin. Brian, I know you mentioned there were some things that happened this quarter. You mentioned cash taxes and working capital. But I just wanted to get a sense for, I mean, historically you do like 22% free cash flow margins over the past five years. So I just wanted to get an understanding of the seasonality of that and what, you know, how that will work itself out over the course of the year. Thank you.

Yeah, I generally expect that our free cash flow margins, there's a lot of puts and takes there. But generally, as we move through this year, probably in line with that historical number, very seasonal in terms of being weighted towards the third quarter. A lot of that has to do with the vast majority of our maintenance renewals, which are around $470 million a year of maintenance revenues. The vast majority of those renew as of July 1, and so we typically bill those in Q2 and collect them in Q3. So that drives really strong growth in our cash flow in Q3. And other than that, transaction revenues, we've talked about some seasonality around those being a little lighter in Q4, but As we continue to expand the subscription business, that tends to smooth out the cash flow. So Q3, Q1 is typically the lightest. Q3 is very much the strongest. But I think the margins you can expect to be fairly consistent.

Okay, thanks for that. And I know there were several questions asked about the fiscal stimulus, and this is – sorry for beating the dead horse on this, but I think it was maybe a couple quarters ago you mentioned – the couple dozen or so deals that are in the pipeline that are sourced from fiscal stimulus. Is that still roughly a similar type number? Just trying to get a sense of that. Thank you.

Yeah, it's probably similar. But as Lynn said, it becomes harder and harder to identify deals that are specifically funded by stimulus. And there are certainly some of those. But in a lot of cases, the stimulus maybe used for something else, but frees up funds that are then used to move forward with something they're purchasing from us. So it's not exactly a science trying to pin down that number, but I'd say it's probably a fairly consistent number of deals that we're seeing, which is consistent with what we're saying, that we expect this not to be a you know, big flood of new business at one time, but to be somewhat of a tailwind over, you know, the next, call it three years.

Great. Thanks very much for the detail.

Thank you. And our next question comes from Charles Sauser from CJS Securities. Please go ahead with your question.

Hi, good morning. Brian, maybe you can help me with this. Looking at Q2, other than the continuation of the COVID revenue, what are the factors should we think about when we build out our model for Q2?

I don't think there's anything particularly unusual to think about in Q2. We would expect, I think, licenses to likely be at a fairly similar level to what we saw in Q1. Subscriptions should continue to grow. I think maintenance, as we've said in the past, for the year is likely to be flat to down low single digits, and I think we'll continue to see that trend. as we have more and more on-prem clients move to subscription. But I think those broad ranges of growth that we talked about on the year-end call are still generally true. When we talk about, you know, we don't give quarterly guidance, but when we talk about the full year, I think licenses will likely see a mid-single digit decline. Services are likely to be around a mid-teens kind of growth. Subscriptions expect to remain really solid growth in the 25 to 30 percent range for the year. Maintenance, as I said, flat to down low single digits. Appraisal is seeing a nice resurgence in activity after some slowdowns during COVID and Expect to see high teens growth there, and hardware is a much smaller piece of our business. But with Connect coming back in person this year, those revenues fall there. So expect to see kind of mid-30% growth on a relatively small base of revenues in hardware and other.

Yeah, and then I'd probably add to that, Charlie, I think we mentioned earlier, but, you know, the COVID, the tour health revenues out of NIC, our expectation is that those pretty much wind down in Q2. Okay.

Great. That's very helpful. Thank you for all that extra color there. And then just, you know, lastly, for me on the cash flow side, is debt paydown still kind of your top priority for use of cash?

I'm sorry? Oh, yeah. So, yeah, Charlie, I think right now our priority is to pay down the debt, particularly as interest rates have continued to increase. We already talked about, you know, readjusting our plan for the higher rates, and it costs an extra six cents. So, That's our priority. We're continuing to do everything else we've always done, which is be opportunistic, look at our internal R&D. We continue to look at acquisitions. With the softness in the market, we'll continue to evaluate repurchase opportunities versus paying down the debt. But I'd say right now that's our priority. Just as a reminder, as Brian mentioned, we've paid down $415 million of the debt and Of our outstanding debt, about 600 is sitting in a convertible, which right now is about 45%. And that's at a fixed rate, 25 basis points. That's not maturing until 26. I'd like to see us get some of that bank debt paid down. But, again, if opportunities present themselves, we'll probably move on those as well.

Great. Thank you very much.

Our next question comes from Kirk Matern from Evercore ISI. Please go ahead with your question.

Great. Thanks. Lynn, when you look at the sort of organic Tyler business and you think across, you know, ERP and Munis, courts and justice, public safety, my sense listening to you is that the pipeline is pretty balanced and you're seeing a nice sort of rebound or growth in all those areas. Are there any sort of points of strength versus, you know, maybe not as strong yet? I was just kind of curious how we should think about that, if there's any, you know, one product that kind of leads you out of a downturn or if they're all pretty balanced right now.

I'd say generally they're pretty balanced. You know, like I mentioned earlier, our enterprise ERP, our Powered by Muna solution, you know, that market is we're seeing the deal volume that's similar to pre-COVID. really at the lower end, we continue to see deal volume and growth higher than pre-COVID, which is great. And that's our ERP Pro, you know, our old ENCODE solution. You know, if you look at our appraisal and tax solutions, we started to see some increasing sales momentum late last year, and we're seeing that start to continue. You know, you look at courts and justice, we've made a number of acquisitions in the last couple of years, and we're pretty bullish on expanding those markets, whether it's our VendEngine, our Corrections, There's a lot of opportunity there. We're seeing that. We're also, you know, I think we sort of referenced it. Our e-filing is back to pre-pandemic levels, which is good to see. And, you know, public safety continues to do the things that we expected to do out of these investments. You know, they signed another large deal. Their competitive position is strong. You know, they've done a good job with their clients on some of these new products, getting them live, getting them settled, getting them referenceable. So, you know, across the board, it's pretty good across the board. Maybe it's a few places a little bit better than others, but generally speaking, I'd say it's pretty healthy.

That's helpful. And, Brian, you know, with around 80% of the sort of booked software in the quarter being more subscription-based, If it continues at this rate, does the overhang on margins in terms of the conversion essentially start to drop off a little bit? I'm just trying to get a sense on how much of sort of the overhang on margins, if we're looking ahead, is just on sort of the business model conversion versus more discrete items.

Yeah, I think that kind of fits in with what we talked about at year end. as kind of what we expect to see with margins over the next couple of years. And we talked about the pressure on margins from not just the bubble costs associated with the cloud transition and moving from Tyler Data Centers to AWS, but the impact on margins and revenue from sort of the runoff of the licenses and those... as that business continues to shift towards a higher percentage coming in as SAS. And we said really by the end of both of those have impacts over the next couple of years, but we think that sort of that inflection point where licenses or the runoff of the remaining licenses or the shift of those into SAS model no longer has a negative impact on margins because we have built up that run rate of subscription revenues. And we really believe that 2023 is sort of the trough on margins and that after that, and part of that is the lessening of the impact of the mix shift. So what we're seeing this year is pretty much in line with how we looked at the the estimated mix going in, but we do expect that percentage at 80% to continue to grow. Okay.

That's great. Thanks, guys.

Our next question comes from Alex Zukin from Wolf Research. Please go ahead with your question.

Hey, guys. Thanks for taking the question. So I guess I want to drill into a figure that you give us in the supplemental disclosures, and that's calculated SAS net new ARR. I'm trying to square the commentary around the strength of the subscription business as a percentage or SAS contracts as a percentage of the total going up year over year. But then when I look at SAS net new ARR of 6 million, it's down pretty substantially year over year and sequentially. And I know that's a very volatile seasonal metric, but Just help us understand why that is. Also, if you think about, you know, the year in terms of the mix between new, you know, core Tyler business license versus SAS, how are we thinking about that? Meaning what type of net new ARR growth should we kind of think about this year versus the kind of license decline or is license going to be flat? I think that would be a good thing to just explore.

Yeah, there is some lumpiness in the growth in ARR around as there is with our license and our bookings. We do expect for the full year licenses to decline and to be down likely sort of in the mid-single digits. We expect subscription revenues to grow in the 25% to 30% range. And we would expect that new ARR would also grow in that 25% to 30% range.

Got it. Okay. And so I guess from a – is there anything that was just different seasonally from a deal construction standpoint this quarter versus maybe previous – last year's Q1 or anything to read into?

Not that I'm aware of. I think it's just a little bit of the lumpiness of the structure of the contracts, but not aware of anything that's particularly notable in terms of a difference from the prior year.

Got it. And then I guess, do you feel like, it sounds like you were a little surprised at the strength of the Do you feel like it's going to be the changes in the incentive structures or in the product that's going to drive that changing mix in the second half? Or I guess where could you be wrong with respect to that?

I'd say there that for the year, I think our licenses are sort of on track with our plan. They were a little higher in Q1. than our expectations. Some of that comes through our robust inside sales. Some of those tend to be, have tended to be more licensed than our expectation. Our new business generally is in line with our expectation. I think our licenses outlook for the year is in line, but it was higher in Q1, which obviously helped with our organic growth number.

Perfect. And just the last one on cash flow. I guess, Brian, if you think about it, as we progress through the year, given some of those mixed shift dynamics, what's the right way to think about the free cash flow progression through the year?

Yeah, I still think that, again, we still have a big base of maintenance that a lot of that cash flow comes in in Q3. So still expect that the progression will probably be similar to what we saw last year, that Q3 would be by far the peak of cash flow, but Q4 should be relatively strong as well. But I think we still sort of follow the historical seasonality of cash flow. Our CapEx should be fairly consistent across the year. And obviously, the recurring revenues with a much bigger base of transaction-based revenues help smooth out the seasonality around that piece of our revenues.

Perfect. Thanks again, guys.

Our next question comes from Keith Halsem from North Coast Research. Please go ahead with your question.

Good morning, guys. Hey, just following up on that last question, actually, I was going to ask the same thing, but more from the booking standpoint. You know, bookings in the quarter of $419 million were the lowest of the past four quarters. Is it just a matter of more timing in terms of either the pipelines healthy, but the deals haven't closed? Is it giving some of the optimism we're hearing here? Or is duration playing a part of it where that duration is attributing to, I guess, the lower bookings amount this quarter than it was in the past three quarters?

Yeah, durations is certainly a part of it. This quarter with the 3.4 years duration of our new subscription deals is much closer to what we're trying to drive to with sort of a standard of three years on most of our new subscription deals. So that certainly played a part in it. It's down from four years last year, and I think that also would be the lowest average duration we've seen over – call it the last year or so. So I think that's playing a part in it. Booking's growth on an organic basis was still pretty solid at north of, I think the number was 14%. So duration certainly would be one of the factors there. But we feel pretty good about bookings growth actually being, on an organic basis, being ahead of where revenue growth currently is.

Okay.

Appreciate that. In terms of the – One other thing, again, on maintenance, because those bookings come in when those renewals happen in Q2. Q2 typically is a stronger seasonal bookings quarter just because of where the maintenance falls, and Q1 is pretty light there, so – And it's the subscription bookings were, you know, certainly the strongest point of the bookings growth this quarter, which is what we'd like to see.

Okay. I appreciate that. In terms of the employees, I appreciate the commentary that there's some more hiring that needs to be done, but can you speak a little bit about, I guess, turnover and inflationary cost pressures? Obviously, it's been a very dynamic quarter in terms of inflationary pressures, but as the year is developing, is it worse than you expected in terms of what you guys are pulling up for new employees or just any commentary on that matter?

Yeah, so there's a lot there, Keith, to talk about. Yep. Yes. We mentioned, I think, in our last earnings call that part of our OP pressure this year was the fact that we were generally increasing our budget for employee compensation a little higher than we had traditionally. The labor market challenges are out there. Our turnover is higher than historic, but from what we see and the studies that we look at, we still believe it's lower than most in the tech industry. But competition is tough out there right now. I sometimes look at it, however, in terms of, you know, when I think about external factors, be it inflation or recession concerns or the labor market is, you know, what are we doing within Tyler? How does it impact us versus our competitors? And, you know, people like to come to work here. We've got a good culture. I like to think that some of these things may disproportionately affect some of our maybe perhaps smaller competitors. as it relates to inflation and pricing. As you know, most of our agreements are annual agreements or multi-year agreements with the ability with escalators. We have the ability to adjust those, adjust pricing on our services that we send out there. So I think we're in a position where we can attack inflation, inflationary pressures, Our people are working hard to staff and hire. We've done a lot of business in the last year, and we need to go execute on some of it. And that's part of it is we need to get some people in here to go execute on some of these deals we've sold.

All right. Thank you.

Our next question comes from Brent Braslin from Piper Sandler. Please go ahead with your question.

Thank you. Good morning. Lynn, I wanted to double-click into the payment business, in particular, just revisiting the upside in the quarter from the Florida statewide contract. Pretty meaningful contribution that begs the question, how many other states are you active in discussions with, you know, replicating what you did in Florida, you know, today? And then could you maybe talk about the five-year opportunity that Do you think this is an opportunity where you could get a dozen states that potentially could look more like that Florida contract, or is it a bigger opportunity than that? Thanks.

Yeah, so, you know, with the Florida upside in the first quarter around the Secretary of State filings, we anticipated to have the Secretary of State filings. The manner in which the revenue model turned out to be a little bit different than we anticipated, and we were able to go with a convenience fee as opposed to a per click, per payment percentage. And that drove significantly higher dollars to us. My comments are really about the fact that the extension of what we can do with Tyler. We've talked about being able to go into local markets in Florida. Our ability because of our robust payment engine to be able to do things that certain other payment providers can't do that are focused on the government space. drives that as you look out towards, you know, other states and other localities. Look, payments is one of our big future growth drivers. It's something that all of our divisions are focusing on. And I think it's something that you're going to see drive growth over time. It's going to, like a lot of our long-term growth drivers, it will ramp up over time. And if you say, you know, where are we out five years from now? We think the market's pretty big. The TAM for payments is, I think, well north of $500 million. And, you know, we're positioned and are targeting to go get a vast majority of that.

Helpful color. And then, Brian, just as a follow-up on the maintenance side of the business, certainly encouraged to see the SaaS mix increasing, you know, sounding like 80% of new contract volumes are going to be SaaS-related. The flip side of that is maintenance. Maintenance, you know, I would expect at some point would decline at a steeper pace with that mixed shift, but it hasn't yet. I mean, it's still in a slow decline. What's the offset there? Is there annual price escalators that are helping insulate maintenance? You know, again, understand it's a slow decline here, but what's the offset that maybe we might see a steeper decline or not preventing a steeper decline in maintenance. Thanks.

Yeah, the offset really is the annual increases. I mean, most of our maintenance agreements, the vast majority of them are annual agreements, so renewable annually with pricing adjustments annually. And historically, I'd say across most of our customers, we're typically in the 4% to 5% annual increase on a pretty consistent basis over a number of years, and that hasn't changed. So, yeah, on the base, we typically get that at least low single-digit annual increase. We, as you know, have very, very low attrition in terms of customers leaving us, you know, in terms of dollars, probably around 1%. And then certainly as fewer new customers come to us in a licensed model with maintenance, that there's – smaller and smaller number of new ads, but we have that 20% of our new business that is coming in license does generate new maintenance. And then the bigger impact that is likely to accelerate over the coming years is the flips or the migrations of those on-premise customers that are currently paying us maintenance. moving into the cloud and shifting to subscription. So it's a change in what revenue line they come on. But those typically, in rough numbers, double what they're paying us over maintenance. So while we lose maintenance revenues, we gain close to 2x that on the subscription line.

Yeah, and I'd add there, Brent, that while we talk about our flips and our flips continue to increase quarter by quarter, I think our flips are year over year, maybe about 125%. Much like my comment on NIC, we're still in the very, very early innings on flips. That's a long road map and a long tailwind. As our products continue to get more cloud efficient, more cloud optimized, as we develop more systems to make that a little bit more of an efficient process, that's something that will be a tailwind for the next several years.

Great to hear. It looks like that cloud-first strategy is resonating out there, so sounds good. Thank you.

Thank you. And, ladies and gentlemen, with that, we'll be ending today's question-and-answer session. Mr. Moore, I'll turn the call back over to you for closing remarks.

Great. Thanks, everybody, for joining us today. If you have any further questions, please feel free to reach out to myself or Brian Miller. Have a great day.

Ladies and gentlemen, with that, we'll be concluding today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.