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spk09: Hello and welcome to today's Tyler Technologies third quarter 2023 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. In order to address your questions and stay within the allotted time, Please limit your question to one question per person. And again, we'll send reminders on how to ask a question at the conclusion. As a reminder also, this conference is being recorded today, November 2nd, 2023. I would like to turn the call over to Hala El-Sherbini, Tyler's Senior Director of Investor Relations. Please go ahead.
spk01: Thank you, Aaron. And welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer at 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 provide an update to our annual guidance. Lynn will end with some additional comments and then we'll take questions. During this 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 quarterly bookings, backlogs, and recurring revenues. Please note, there have been minor reclasses between historical SAS and transaction-based revenues on the supplemental schedule as a result of the recent transition to our new financial system. On the events and presentations tab, we have 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?
spk13: Thanks, Hala. Our third quarter earnings and cash flow surpassed expectations and reflect a continuation of execution at a high level on key operational initiatives. We achieved strong performance across several of our key metrics, with double-digit recurring revenue growth and free cash flow growth of more than 40%. Our recurring revenue mix rose to 83.4% of our total revenues, with SAS revenues up 26% organically. This was our 11th consecutive quarter of SaaS revenue growth of 20% or more and exceeded our near-term growth expectations of a 20% CAGR in SaaS revenues through 2025, as outlined during our June investor day. We also achieved solid growth in our transaction-based revenues, which were up 8.5%. While operating margins this quarter declined slightly from last year as expected due to our cloud transition, margins were ahead of plan as a result of our operating efficiencies and expense management, especially around cloud operations. It is encouraging to see margins hold essentially flat with last year, even as we make considerable progress in our cloud optimization and cloud transition efforts, establishing a clear roadmap for operating margin improvement in 2024. The third quarter presented a very difficult comparison for our new software contract value and mix. as last year's third quarter included two very large SAS contracts that totaled $70 million in contract value. As we discuss regularly, the timing of large deals such as the two signed in last year's third quarter can cause significant lumpiness in our new software bookings. We're continuing to see a healthy public sector market environment, and our new business pipeline is active. Leading indicators of RFPs and sales demos remain strong, with deals generally moving through the pipeline at a normal pace. which is often a 12 to 18-month procurement process. Overall, our competitive position and win rates are strong, with growing momentum in cross-selling activities, a key value creation lever. Additionally, our transaction business continues to capture higher volumes as we gain traction with our unified payment solution. I'd like to highlight some of our significant third quarter wins, which included a number of cross-sell opportunities. We continue to build momentum with our public safety solutions. Key third quarter wins include the Naperville, Illinois Police Department for integrated public safety suite, including CAD, records management, and e-citations. Naperville is the fourth largest city in Illinois, a state where we also have a strong presence with our enterprise justice solution. We're also pleased to see SAS adoption growing and acceptance in the public safety market with several cloud contracts signed during the quarter. We continue to gain traction with cross-sell wins under our Digital Solutions Division, formerly NIC, and their State Enterprise Agreements. Under our State Enterprise Agreement in Utah, we won a cross-sell opportunity with the Utah Department of Corrections for our Enterprise Corrections electronic messaging solution. We also added deals for our application platform, formerly IntelliTrack, under our State Enterprise Agreements in Louisiana and Indiana. In the federal market, we secured a significant license win with the U.S. National Guard Bureau for our turnkey suite of workforce case management applications. This is our largest workforce case management application within the Department of Defense and is another marquee win that spans 54 U.S. states, territories, and the District of Columbia that will be hosted in our FedRAMP certified private cloud. We signed a five-year multi-suite SAS contract with Port Angeles, Washington, which includes our enterprise ERP, enterprise permitting licensing, and cybersecurity solutions, as well as payments. In the outdoor recreation space, we won a competitive deal for our recreation dynamic solutions with the Minnesota State Parks. In our payments business, we signed a one-year extension for enterprise payment processing under our state enterprise agreement in New Jersey. And Harris County, Texas, the third largest county in the nation, added our digital jury payment solution, leveraging the disbursements capabilities that came to us through the rapid financial acquisition last year. Before I turn the call over to Brian, I want to highlight our recent acquisition activity. As I said at our investor day, M&A is part of our DNA, and during the third quarter, we completed the acquisition of Computer Systems Innovations for approximately $36 million in cash. CSI brings AI-driven automation and enhanced document processing technology that can be leveraged across many of Tyler's vertical applications. It has primarily served the court technology space for many years, and we're excited about the opportunity to combine our expansive footprint with CSI's expertise in AI and machine learning applications to elevate several of our other solutions. Earlier this week, we completed two other Tuckian acquisitions. AR Inspect is a leading provider of AI-powered machine learning and data-driven solutions for public sector field operations. ARinspect's advanced AI solution and expertise extends our applications platform with intelligent edge technology that can be leveraged across our state and federal verticals. Resource X adds priority-based budgeting solutions to our entire ERP portfolio to address key challenges our clients face in the traditional budgeting process. The total purchase price for these two acquisitions was approximately $38 million in cash and stock. We're thrilled to welcome each of these companies and their team members to Tyler. Now I'd like Brian to provide more detail on the results for the quarter and our annual guidance for 2023. Thanks, Lynn.
spk08: Total revenues for the quarter were $494.7 million, up 4.5%. Organic revenue growth, which also excludes COVID-related revenues, was 6.0%. Last year's third quarter included $11.7 million of revenues from COVID-related initiatives at our Digital Solutions Division, all of which ended in 2022. Subscriptions revenue increased 16.1% and organically rose 14.7%. Within subscriptions, our SAS revenues grew organically 26% to $138.5 million. It is important to note that as our new software contract mix continues to shift towards SAS, our growth rate may vary from quarter to quarter due to the lag in time from contract signing to the start of revenue recognition, though we remain on track with our near-term growth expectations of a 20% CAGR in SAS revenues through 2025. Transaction revenues grew 8.5% to $156.7 million, up 6% on an organic basis. License revenue declined 47.9% as our software business continues to shift to SaaS. SaaS deals comprised 80% of our Q3 new software contract value compared to 91% last year. As we noted earlier, last year's Q3 included two large SaaS deals totaling $70 million in contract value. Professional services revenue declined 14.9% primarily due to the absence of COVID-related revenues and was flat organically. We added 161 new SAS arrangements and converted 79 existing on-premises clients to SAS, with a total contract value of approximately $71 million. In Q3 of last year, we added 153 new SAS arrangements and had 70 on-premises conversions, with a total contract value of approximately $149 million. Overall, our pace of on-premises conversions to SAS continues at a steady pace, with 246 flips year to date. and we expect Q4 conversions will be 100 or more. More importantly, the total contract value associated with FLPS has increased year-to-date to $58 million. As we've discussed, conversions are a significant growth driver over the next several years as we accelerate the pace of FLPS. Including transaction revenues, expansions with existing clients, and professional services, total bookings increased 10.3% on an organic basis. Our total annualized recurring revenue was approximately $1.65 billion, up 11%, and organically grew 9.8%. Operating margins were better than expected despite pressure from our ongoing cloud transition. Our non-GAAP OP margin was 24.8%, down only 10 basis points from Q3 of last year. As we discussed in prior quarters, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins. In Q3, we paid merchant fees of approximately $36 million. If those fees were netted out of both revenues and cost of revenues, our consolidated non-GAAP operating margin for the quarter would have been approximately 190 basis points higher. Both cash flows from operations and free cash flow were robust this quarter at $177.5 million and $162.7 million, respectively. primarily driven by higher revenue collection. Cash flow in the quarter was impacted by approximately $22 million of incremental cash taxes due to Section 174. On a pro forma basis, excluding the incremental Section 174 cash taxes of $112 million, our year-to-date free cash flow would be approximately $300 million, up 41% over last year. we continued to prioritize repayment of our term debt as a use of our cash flow. And in Q3, we reduced our term debt by $135 million. We ended Q3 with total outstanding debt of $740 million and cash in investments of approximately $153 million. Our net leverage at quarter end was approximately 1.24 times trailing 12-month pro forma EBITDA. Our updated 2023 guidance is as follows. We expect total revenues will be between $1.942 billion and $1.962 billion. The midpoint of our guidance implies organic growth of approximately 7.5%. We expect GAAP diluted EPS will be between $3.82 and $3.96 and may vary significantly due to the impact of stock option activity on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $7.66 and $7.80. Interest expense is expected to be approximately $24 million, including approximately $5 million of non-cash amortization of debt discounts and issuance costs. Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website. In conjunction with our guidance for the full year, I'd like to remind you of the seasonality around our transaction revenues. While transaction revenues will grow year over year, as expected, they decline sequentially in Q3 and will decline sequentially again in Q4. Historically, transaction revenues are driven by two primary factors. State-determined deadlines, like corporate filings and hunting seasons, and the number of business days. Transaction revenues are typically at the highest in Q2, coinciding with peak outdoor seasons and tax deadlines. Transactions are at a seasonal low in the fourth quarter, with fewer business days and less activity around the holidays. As we noted previously, we are also seeing the revenue impact of mid-year contractual changes in one of our state enterprise agreements that includes a move from a gross to net model for payments. Now I'd like to turn the call back over to Len.
spk13: Thanks, Brian. We're making solid progress every quarter to deliver our near and long-term objectives that we discussed in detail at our investor day earlier this year. Consistent with our track record, we continue to scale our enterprise while capturing more efficiencies as we transform into a largely pure cloud business, supported by a unified one-tyler strategy. Our strong year-to-date performance is underpinned by our powerful financial algorithm, strong balance sheet, and our unique ability to deliver mission-critical software solutions, enabling the public sector's ongoing digital transformation. We're also proud that 11 of our state partners won eRepublic Government Experience Awards. Our clients in Utah, Mississippi, Indiana, Arkansas, and Virginia swept the top five spots in the GovX Awards. Our momentum continues to build as we complete this pivotal year in our cloud transition. Our team is excited about the tremendous opportunity ahead of us, and we look forward to sharing our continued progress as we finish out 2023. Now we'd like to open the line for Q&A.
spk09: Thank you. We will now begin the question and answer session. To enter a question into the question queue, please press star 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset and then press the star key followed by the number 1. To withdraw your request, press the star key and then the number 1. As a reminder, please limit your question to one question per time so that we can stay within our allotted time today. We will pause momentarily to assemble our roster. Our first question for today comes from the line of Matthew Van Liet with BTIG. Your line is live.
spk12: Yeah, good morning. Thanks for taking the question. I guess when you look at the ongoing portfolio of customers that are looking to make cloud migrations and the overall flips there and then some of the net new business, I know you've highlighted public safety in the past as probably being a laggard longer term. But it seems like the momentum of cloud deals there is starting to pick up. Do you anticipate that encouraging more of your existing customers to make those flips? How are those conversations going? And ultimately, you know, how much upside do you feel like there's still left on the public safety side as you get more momentum in the cloud there? Thank you.
spk13: Yeah, Matt, that's a good question. And you're right. Historically, public safety has been a little bit slower to adopt. We're seeing that change gradually. I hesitate to say rapidly, but we are starting to see the momentum shift and the pendulum change a little bit. We're seeing it in the deals that we're doing. We're seeing it in the acceptance of our clients. I'd say more so still on the RMS, the record side. Mobility is already there, but you're seeing a little bit of on the CAD side. Just this past quarter, actually, we did a deal with Manassas, Virginia, where they were an on-prem CAD RMS client, and we flipped them over to SAS. I think just like the rest of the businesses that as the market continues to gain acceptance, the momentum will continue to grow and we're pretty optimistic as we look out into 2024 that the number of flips and the number of SaaS deals will continue to grow at a faster pace, albeit still not a majority of the business yet.
spk09: Great. Thank you. Thanks for your question. Our next question is from the line of Kirk Matern with Evercore ISI. Your line is live.
spk10: Yeah, thanks very much. Congrats on the quarter, guys. Lynn, can you just give a little bit more color on what you're seeing, you know, sort of across some of the product categories in terms of SaaS bookings, meaning, you know, activity levels, you know, maybe on ERP versus courts and justice versus public safety. Just kind of a little bit more color on that might be helpful, just trying to get a sense of where you're seeing you know, momentum and, you know, any color, I guess, on public safety into the fourth quarter too would also be helpful. Thanks.
spk13: Yeah, I think generally speaking across our entire portfolio, we're either, with the exception of public safety and probably our platform solutions, but all our other ones are, we're pretty much leading first with SAS. The deals are, you know, our budgets around SAS are high at ERP. I think we're north of 90%. um, courts and justice is, is high. Um, the two, the two market areas that are, that are a little bit slower still are public safety, um, platform solutions, which is our federal, which is our federal space. Um, but even there, um, you know, the modernization efforts that are going on at the federal government is really starting to shift that pendulum to SAS as well. So, you know, for the overwhelming majority of our business where, you know, the, the demand is there and the market receptiveness is there. And the momentum for those other two pieces are starting to go forward. When you look at our licenses, licenses now are about 2% of our total revenues. A lot of those license deals are coming out of those two other divisions, even as there still are some licenses, pockets of licenses around the rest of the business.
spk05: Thanks. I'll hop back in the queue.
spk09: Thanks for your question. Our next question is from the line of Joshua Riley with Needlehem. Your line is live.
spk02: Thanks for taking my question. Nice job on the quarter here. Our checks indicated that the micropack business had a pretty strong pipeline coming into Q3 here, which makes sense with the fiscal year end for the federal government. Can we just get some more color on how these deals closed and anything to note on the cross-sell into the NIC state contracts that might be adjacent with the micropack business? And is there any more of these deals that potentially fell into the fourth quarter? Thank you.
spk13: Yeah, I'll start. I didn't quite hear all that, Brian, so I'll let you jump in. But, yeah, so, you know, our platform solutions, Q3 is normally their strongest quarter. They had that really strong deal with the National Guard Bureau. There was a fairly significant license deal that slipped and probably got pushed to 24, and it was really around 4%. some uncertainty with the federal government funding as Q3 was coming to a close and sort of the move of some funds to what the feds consider to be more mission critical. The number of deals that we're doing and the pipeline of deals that we're doing at federal continues to grow, but there still are some very large deals that sort of can swing quarter to quarter. A lot of times once that sort of window passes, in Q3, there's still a volume of deals that happen in Q4, Q1, Q2, but the sense of urgency is probably not quite the same as it is as you get into late Q2 and into Q3.
spk08: And on the cross-sell, the opportunities with our application platform, the formerly called Micropact IntelliTrack product, remains one of the strongest opportunities and one of the areas where we're seeing the most activity. in terms of leveraging the digital solution state contracts to sell that into those states. And we had a couple of deals this quarter that we mentioned in the prepared remarks in different kinds of applications, I think in Louisiana and Indiana, where we've seen progress. We've seen a number of those deals since the acquisition of NIC, and that continues to be an opportunity that we're pursuing actively.
spk13: Yeah, I mean, the synergy between what we do at federal and at the state market is really strong. As Brian mentioned, we're seeing more pipeline there. And really, because when you think about the state government and what they're doing, a lot of what they're doing is case management. And our application platform really sort of serves those modernization needs. It's less expensive. It's nimbler. It's built for government. It's enhanced by our mobility, our DNI, our payments. So we do see that synergy, and I think it's something that's going to become more of a focus for us as we look into 24 and 25. Thanks, guys.
spk02: Nice job on the quarter.
spk09: Thank you for your question. Our next question is from the line of Rob Oliver with Baird.
spk16: Great. Hi. Thanks. Good morning. When in the prepared remarks, you called out the Naperville, Illinois win in public safety, and it sounds like that was a cross-sell on courts and justice. So just curious if that's a path you called out because you're seeing success there. Obviously, the Tyler One vision, those being tied together would make a lot of sense, but is that a go-to-market play that you see driving increased wins for public safety in in the future here? Thank you.
spk13: You know, I do. I think that, you know, we talk about it with our connected communities vision and sort of the leverage and power we can create between our public safety and our enterprise justice visions. Naperville was a really good win. It was a good win because it was a very competitive deal. As you'd imagine, it was a licensed deal of over a million dollars. So those are always going to be competitive. And You know, I think to part to your point as well, we actually did a smaller deal in California this past quarter. It was with the Mariposa County Sheriff's Office out in California. And that was really leveraging the enterprise justice contract to bring Tyler Corrections there. Important deal because we hadn't really had a win in California in a little bit of time and leveraging our relationship with on the courts and justice side. and leveraging that contract was something that got us in the door, and I think it's an opportunity to expand not only in that department, but also in California.
spk16: Great. Thanks for the call. I appreciate it.
spk09: Thank you for your question. Our next question is from the line of Terry Tillman with Truist Securities. Your line is live.
spk07: Great morning. This is Connor faster along for Terry. Appreciate you taking the question. Just curious on the payments business and how we should be thinking about organic growth going forward in that segment. And then also just on the payment disbursement use cases that have progressed since the acquisition of rapid financial last year. Thank you.
spk13: I'll start with the use cases. You know, right now we're, you know, rapid when we bought them, they were, you know, primarily in the court space and that's, that's our primary focus right now. We're in the process. We're early in our 2024 budgeting, thinking about the investments and the various other disbursement cases that we want to put our money towards. So I'm not going to give you our R&D timeline right now or our priorities, but we're in the process of doing that. As we've talked before, I think the opportunities across the Tyler Solutions is pretty expansive on the disbursement side. We've talked before, I think as big as on the acquiring side. But currently, right now, the focus is primarily still in the courts area.
spk08: And on the expectations for growth rates around payments, at Investor Day, we broadly talked about an expectation of transaction revenues growing in the 10% to 13% range and expanding margins there over the next several years. As we've said, we're in the very early innings of executing on the cross-sell opportunity of driving payments more deeply into our local government customer base. And so we're still ramping that up, seeing good success in expanding those numbers of new deals each quarter. But generally that 10% to 13% CAGR for transaction revenues is our expectation over the next few years. Great.
spk07: Thank you.
spk09: Thank you for your question. Our next question is from the line of Alex Zukin with Wolf Research. Your line is live.
spk14: Hey, guys. Thanks for taking the question. I guess maybe just two quick ones for me. Bookings look like it took a step up this quarter, particularly over the last couple of quarters. So I wanted to just understand the outperformance there. Is that a comp issue or incremental momentum? And then same question, obviously cash flow looked like it meaningfully outperformed at least our estimates and I think consensus. So just an understanding of was there anything one time there and how should we think about it for Q4? And then just any color, Brian, on the specific elements around some of the cloud or SaaS restatement this quarter, you know, what drove that and how should we think about that going forward?
spk08: Yeah, so a couple things there. Cash flow, most of the outperformance was, you see it in the working capital side, and just really strong collections around our revenues driving good performance around our receivables. I think we're continuing to see the impact of more and more recurring revenues and the positive cash flow characteristics around that. Not really any one-time things there, but I think that our expectation for the year has ratcheted up a little bit. I think right now, even after the impact of the Section 174 cash taxes, which, you know, the biggest impact was in the first half of the year. I think we said there's a $22 million impact on cash taxes this quarter, expect around 15 million incremental taxes in Q4. But I think our expectation for the full year now is more in the, you know, $220 to $240 million range for free cash flow, which is up from where we thought last quarter. We did make some minor reclasses in the historical data, the split between in subscription, so all in the subscription category on the face of our income statement, but in the breakout of those between transaction revenues and SAS revenues. As we transition to new financial system this quarter, we had better clarity on some of the mapping of the revenues primarily from acquisitions since NIC and reclassified those somewhat between transactions and SAF. So, we've just sort of cleaned up some of those historical numbers. Don't expect any more changes going forward. And what about on the booking side? Yeah, the booking side, as we talked about, those can be kind of lumpy. But generally, you know, really a reflection of kind of a combination of all the new SaaS business, the new increases in the transaction business, which kind of run through booking at the same time as they run through revenues. And, you know, just a combination of all that led to a a stronger quarter this quarter. We didn't have any of the mega deals, but we did have a really solid flow of new SaaS deals, a couple of not super large but meaningful license deals this quarter, and then pretty good activity around the expansions with existing customers as well. So it's pretty broad-based. But again, not driven by super large contracts, but nice growth across all of our revenue streams.
spk09: Perfect. Thank you, guys. Thank you for your question. Our next question comes from the line of Sekit Kalia with Barclays. Your line is live.
spk04: Okay, great. Hey, Lynn. Hey, Brian. Thanks for taking my question here. Brian, maybe for you, I'd love to dig into the restatements just one level deeper. So can you just walk through what some of the items were from the NIC business that are now SaaS versus transaction? And maybe the follow-on is how would your SaaS revenue growth have looked, I guess, excluding the restatement? I know that I think it's about 26% year-over-year growth this quarter. What would that have been under the old convention, which is what our models kind of currently are based on? Does that make sense?
spk08: Yes. I don't have that number in front of me, and they're not restatements. In the financial statements, they were always all in subscription revenues. It's in the... Fair.
spk04: The reclass. That's fair. It's a reclass, not a restatement.
spk08: Right. Some of those were when we originally acquired NIC, and before we... we basically had almost all their revenues classified in our transaction category. And some of their revenues from a contract can have sort of a blend of some software revenues and transaction revenues around those. So they're providing some software services, but getting paid with transaction fees. And so sometimes there's some blurring between that. Also when we acquired the VendEngine acquisition, We initially made an additional judgment from their financials of how those revenues should be spread, and with a deeper understanding of those, as we started to map those to our new financial system, we just found that some of those were more appropriately classified a different way. So those are all relatively minor reclassifications as well. So I don't think there's a big change in the trends. Got it.
spk04: But maybe just to maybe understand that a little bit better, because 26% growth is quite a bit higher than what we were seeing before. I mean, was that the newly added SAS revenue there, was that growing significantly faster than sort of what I'll call the old SAS revenue that was in there? Because it is quite a bit harder than what it was before. So I wanted to make sure I just kind of flushed that out.
spk08: No, there's not a significant change from that. That's not really accelerating it. The 26% growth is actually an acceleration this quarter. But again, we said that may move around from quarter to quarter, but generally we expect this around the 20% CAGR over the next couple of years in SAS revenues. Some quarters it may be higher. And as we talked about, some of that variability from quarter to quarter has to do with the lag from when we sign a new SAS deal to when those revenues hit, which can be a quarter to occasionally longer.
spk05: Got it. Very helpful. Thank you.
spk09: Thank you for your question. Our next question is from the line of Jonathan Ho with William Blair. Your line is live.
spk03: Hi, good morning and thank you for taking my question. Just wanted to better understand sort of the AI opportunity that you're seeing out there and sort of the rationale for making the acquisitions at this time. Just given state and local governments typically adopt technologies a little bit more slowly, How do you think about sort of driving these types of solutions? What does the opportunity look like? Just want to get the broader color. Thank you.
spk13: Yeah, sure, Jonathan. Obviously, it's a pretty rapidly evolving landscape. There's a lot that's in the news. Some of it may be a little more hype, but it's real. And, you know, we see AI benefits within Tyler. We're kind of looking at it two different ways. We're looking at it, sort of pointing it internally things that we're doing, how can we make ourselves more efficient by using AI? Because I think one of the biggest benefits around AI really is when you're talking about sort of high volume repetitive tasks, which there are pieces of our business that do that, whether it's some software coding, it may be some things around some support, things like that. The other side of it is, you know, how do we make our products more competitive and differentiate them more? What we've done internally is we've organized a working group that's been in place for several quarters looking at all the various opportunities. There's pockets of AI going on all around Tyler right now. We want to take a, not surprisingly, what we always do at Tyler, sort of a deliberate targeted approach. We're in the process of identifying what are the couple of key areas that we want to focus on in both of those scenarios, whether we're pointing it internally around creating more efficiencies or adding more competitors to our products. You know, the CSI acquisition is a great example of that. You know, they really started off as a sort of a document redaction sort of extraction leader. Recently, they've added some, you know, machine learning and robotic process automation. This is something that all of our core clients need, and some of our core clients we're already using. Tarrant County, which is here out in Fort Worth, They've utilized the CSI acquisition and what it's saved in their personnel costs. Their number is not mine. They're saying they've cut their labor costs by 50% by sort of automating some of these more repetitive things around documents, which, of course, there's a lot there. So even the CSI acquisition, we were just talking earlier about the rapid acquisition. Initially, it's in the court space. That's where we're pointing it. but we also see a lot of places to leverage it across other platforms and Tyler, whether it's things in our ERP space like invoice processing and things like that. So a lot of that, a lot of applicability, you're right. States and clients are, they're taking different approaches and we're going to take that deliberate approach with our clients.
spk09: Thank you for your question. Our next question is from the line of Clark Jeffries with Piper Sandler. Your line is live.
spk06: Hello. Thank you for taking the question. I apologize. I'm maybe going to beat a dead horse and ask a little bit more questions about the reclass. But specifically, you know, looking at SAS ARR, either pre-reclass or post-reclass, been in this mid-single-digit sequential growth paradigm. And what stood out was an acceleration to maybe a high single digit sequential growth in ARR. And so, Brian, I wanted to ask, you know, is this a reflection of maybe the good bookings you had last year and some of those deals finally reaching a timing where they would be going live in revenue terms? Or was there a change being made in the business, either on a capacity level or a new bookings level that we may not appreciate? contributed to an acceleration in ARR growth. Thank you.
spk08: Yeah. Clark, I think it's more of the latter. So it's more of that timing. So good bookings, it could be as much as a year ago or longer where we sign new SAS deals, that some of those are now more fully reflected in the revenue run rate, as well as flips. So obviously the pace of FLPS has been accelerating over the last couple of years, continues to accelerate. But again, from the time, the numbers we announce each quarter, the contract signed for FLPS this quarter, so that revenue uplift shifting from maintenance to SAS is typically, you know, call it a 1.7x multiple. There's a lag from that. So the flips we signed last year or last quarter or the quarter before, some of those are now seeing the revenue uplift. So there's just sort of a lag from, which is different than some SAS companies that lag from the time a contract signed to the time that those revenues start to hit our income statement. I think that's more of that acceleration, and as we continue to increase the pace of flips and move more of the new business to SaaS, you'll continue to see that accelerate, although with a lag.
spk09: Thank you for your question. Our next question is from the line of Gabriella Borgs with Goldman Sachs. Your line is live.
spk00: Hi, this is Callie Valenti on for Gabriella. One from me would be, last quarter you made very specific comments on RFP and demo activity at or above pre-COVID highs. While it sounds like top of funnel remains strong, what are you seeing in the back half of this year compared to that dynamic that you were seeing in the first half and then Are there any idiosyncrasies of the government and market that are making you more or less bullish on RFP and demo activity next year? Thank you.
spk13: Thanks, Kelly. I would say it's been a strong year, and I would say we characterized that in the first half of the year as very strong, and I would say right now it's steady at that pace. Overall, the markets just seem healthy. The budgets are still strong, the activity is strong, and our win rates are good. I don't see any real meaningful change across our business lines from comments we've made in the first couple of quarters.
spk09: Thank you for your question. Once again, ladies and gentlemen, to ask a question, remember you need to hit star one on your touchtone phone. To withdraw your question, hit the pound key and then the number one. Our next question is from the line of David Unger with Wells Fargo. Your line is live.
spk17: Great, thank you. Hi, guys. So it's great to see the net leverage coming down to 1.25 times. Can you just remind us how you guys like to think about that leverage band and maybe some color around private market valuations? Thank you.
spk13: Yeah, thanks, David. Sure, as you know, we've been prioritizing debt pay down a lot at the same time while we're still looking at other deals. I'm excited. Once we dropped under 1.5 net leverage, our rate and our bank changed, and we were able to achieve that at the end of Q3, so that's encouraging. We've paid over about a billion dollars of debt down. Brian talked earlier about the impact of Section 174 taxes and the pro forma free cash flow. We'd actually be out of term debt or pretty close to out of term debt right now absent that, which is encouraging. As it relates to private market valuations there. I would say we're starting to see in the market and the deals and the things that we're hearing that expectations are finally starting to change. It's always been a little bit amazing to me that when you see things going on in the public markets and yet the private sector deals, people still think that the market should be where it was a couple of years ago. You know, we're still pretty disciplined in how we look at acquisitions. So, you know, in areas when private expectations still are too high, we'll simply pass on the deal. We're pretty excited to get these three deals done, one in Q3 and the ones that we announced earlier this week. These are good deals. These are good business deals, things that are going to help drive our growth, things that will leverage the growth drivers that we outlined in Tyler 2030, and they're going to be accretive to revenues and and margins over, you know, in pretty short order. So, you know, it's interesting, too. There's a lot of companies went private equity in the last few years, and I think we're going to start seeing a time when those are going to start spinning back out. And historically, I think they paid pretty high premiums. It's going to be interesting to see what happens in the markets. But our disciplined approach to how we do things isn't going to change.
spk08: And just to add to Lynn's comment about leverage and sort of our comfort level, we've never been highly leveraged and don't see a scenario where we really would be given the predictability and the strength of our cash flow, especially around our recurring revenues. When we did the NIC acquisition, we were, I think, around or maybe a little above three times leverage and certainly very comfortable there. Our lenders are very comfortable there. And as we said, we focused on deleveraging, especially as interest rates rose, and have done that very rapidly. But I think we have a lot of capacity as well, but within that sort of band up to the kind of three, three and a half times where we're very comfortable.
spk17: Appreciate a lot of people. Thank you, gentlemen.
spk09: Thank you for your question. Once again, ladies and gentlemen, if you do want to ask a question, it is star one on your touch tone phone. Our next question is from the line of Pete Heckman with DA Davidson. Your line is live.
spk15: Hey, good morning. Thank you. Good morning. Just wanted to see if you had any preliminary thoughts on the potential for the Federal Reserve to cut debit interchange and whether based on kind of the convenience fee model that NIC had, whether a lower interchange might be a benefit to margins.
spk13: I think the short answer is no, I don't have any preliminary thoughts on it. Obviously, we watch all these types of things that are going on in the markets, particularly as we think about our long-term plans and views. I'm certainly not in a position to think one way or the other of what anybody in Washington is going to do, let alone the Fed. So I'd say right now I don't have any real comment on that. Okay.
spk15: And then just a housekeeping item, Brian, were there any single deals above, let's say, $10 million in TCV in the quarter?
spk08: I don't think we had anything above $10 million in contract value. Our biggest SAF deal was around $5.5 million in contract value. It was the Minnesota Parks deal. Our biggest license deal was under $5 million total contract value, although it has a lot of options that could drive that significantly higher. But the booked amount was less than $5 million. So no, nothing in that really large size this quarter. A lot of good mid-sized volume of kind of bread and butter deals.
spk15: Yeah, yeah, just a lot of singles and doubles. Okay, I appreciate it. Thank you.
spk09: Thank you for your call and your question. Our next question is from the line of Alexei Gogoliev with J.P. Morgan. Your line is live.
spk11: Hi, this is Ella Smith. I'm for Alexei Gogoliev from J.P. Morgan. Thank you for taking my question. So my first question revolves around your private data centers. At your investor day, you talked at length that one data center will be closed in 24 and the other in 25. Do you have any updates on that front?
spk13: Yeah, I'd say right now we're on track for what we outlined. We expect our Dallas center to shut down sort of middle of 24, and yeah, we're still on track for evacuating the other one by the end of 25.
spk11: Great. Thank you so much. And my second question revolves around security. There have been some pretty high-level security breaches recently at like Clorox, MGM, Caesars. I was wondering if this has changed the way that you're working with your customers or if your customers have brought forward any sorts of concerns.
spk13: Well, yes. I mean, security is always an issue, particularly in our business and our clients. I think the thing about what's been going on with cybersecurity is It really highlights the need for our clients to move away from their traditional on-prem type environments, move to the cloud, move to the modernization and digitization efforts. And I think it contributes to that. We've seen clients where, I talked about it I think a couple of quarters ago, we had a client that we were trying to move to a SAS flip out in Arizona for quite a long time. And unfortunately, they had a ransomware attack. And it wasn't shortly after that that we were able to flip them to the cloud. It was a triggering point for their decision. So it's a reality that we all have to live with, and our clients are acutely aware of it because a lot of public sector clients are targets. But I do think it does help with the sales and understanding about where we need to go in the future together with our clients.
spk11: Great. Thank you so much.
spk09: Thank you for your question. Our next question is from the line of Saket Kalia with Barclays. Your line is live.
spk04: Okay, great. Hey, guys. Thanks for taking the follow-up question here. Brian, one follow-up question for you, if I may. Can we just talk a little bit about the blended duration on SaaS bookings this quarter a little bit, putting aside the reclass? I think if we look at SaaS bookings ARR, You know, that expectantly faced, right, the tough comp that we were talking about earlier, right? So that was down year over year pretty decently. But SAS TCV was actually pretty decent in terms of total bookings. I just wondered if duration was anything to consider there and how you thought about that.
spk08: Not really. Actually, the average term of our new SAS contracts this quarter was exactly the same as third quarter of last year, 3.8 years. We've said we generally have tried to bring that down over recent years and generally lead with a three-year initial term. We certainly have some clients who want a longer term. And so that blended term or that average duration has generally been in that kind of three and a half to four over the last couple of years. But this quarter, yeah, that wasn't the factor at all.
spk05: Got it. Very helpful. Thanks.
spk09: Thank you for your follow-up. Ladies and gentlemen, that does conclude our question and answer session. I would like to turn it back over to Len Moore, President and CEO, for closing comments.
spk13: Thanks, Aaron, and thanks, everybody, for joining us today. If you have any further questions, please feel free to reach out to Brian Miller or myself. Have a great day.
spk09: Thank you, ladies and gentlemen. That does conclude today's Tyler Technologies third quarter 2023 conference call. Have a great rest of your day.
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