Tyler Technologies, Inc.

Hello and welcome to today's Tyler Technologies second quarter 2024 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 your allotted time, please limit your question to one question per person. You may get back into the queue for a follow-up. As a reminder, this conference is being recorded today, July 25th, 2024. I would like to turn the call over to Hala El-Shabini, Tyler's Senior Director, Investor Relations. Please go ahead.

Thank you, Matt, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer, and Brian Miller, our Chief Financial Officer. After I give the State Harbor Statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and update our annual guidance for 2024. Lynn will end with some additional comments, and then we'll take your questions. During this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these 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 recurring revenues and bookings. On the events and presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Len?

Thanks, Holla. We built on the momentum from our strong first quarter performance to again deliver exceptional second quarter results marked by consistently high execution and a continuation of solid operating and financial performance. Each of our key metrics across revenues, earnings, operating margin, and cash flow exceeded our expectations. These results are especially meaningful given the significant shift towards SAS in our new software contract mix, which pressured revenues and margins. Recurring revenues grew 8.4% and comprised 83% of our total revenues. SAS revenues grew 23.2%, our 14th consecutive quarter of SAS revenue growth of 20% or more, above our target of a 20% CAGR in SAS revenues through 2025. In addition, transaction revenues were ahead of plan, driven by higher transaction volumes, including an increase in e-filing volumes and expanded payment services. Since committing to our cloud first strategy in 2019, we've been intently focused on supporting our public sector's clients' digital transformation and guiding their migration to Tyler's next generation cloud applications. Last year, we reached an inflection point where valuable long-term recurring SAS revenues surpassed on-premises license and maintenance revenues. We're pleased to reach another milestone as we have now essentially completed the exit of our Dallas data center. This move is a significant achievement in our cloud migration roadmap as we continue to scale our deployments at AWS and drive more durable growth and margin benefits from our SaaS-based operating model. The public sector market remains healthy, characterized by high levels of RFP and sales demo activity. Our new business pipeline remains at elevated levels, reflecting the robust market environment, growing cross-sell opportunities, and continued strong execution by our sales organization. Our leading market position and competitive strengths, including our deep domain expertise, continue to differentiate us in the marketplace. These strengths underpin our long-term strategic focus on four key growth drivers, leveraging our unmatched installed base, expanding into new markets, completing our cloud transition, and growing our payments business. Our large client base represents one of our most significant assets, and we're pleased to see strong go-to-market execution with significant cross-sell and up-sell wins during the quarter, which included a joint effort with our justice group, leveraging our Digital Solutions Division's strong relationships in Florida for an agreement with the Florida Department of Corrections to manage all aspects of money transfer services for correctional facilities across the state. The contract brings together disbursement solutions from our rapid financial solutions acquisition, inmate trust and accounting and e-communications from the VendEngine acquisitions, and payments through our digital solutions division. A single-sourced enterprise supervision and enterprise public safety contract with Cherokee Nation Oklahoma, adding to its existing enterprise ERP solutions. The SAS agreement was a joint collaborative sales effort, resulting in a total Tyler client win. Additionally, we continue to innovate and elevate our clients' resident engagement experience. by empowering citizens with direct connections to government through Tyler's MyCivic platform. In Mississippi, we expanded citizen access to mental health resources with the Mississippi State Department of Health, leveraging our state enterprise agreement. We continue to advance our cloud transition and make substantial progress with our product version consolidation efforts, which will accelerate our continued migration of on-premises clients to the cloud. We're also pleased with the numerous second quarter SAS contract wins, which underscore the public sector market's recognition of cloud benefits, including enhanced security. One of the key themes that emerged during client interactions at our recent Connect 2024 user conference was a notable shift in client openness to embrace cloud technology and a growing expectation among on-premises clients that they will migrate to the cloud. This shift is especially apparent in the state and federal market with our application platform, and in the public safety market, where 90% of second quarter public safety contract value was SaaS compared to 13% a year ago. Primarily as a result of this accelerated shift in public safety cloud adoption, SaaS arrangements comprised 97% of our new software contract value in the second quarter. Additionally, we signed 111 flips of on-premises clients, including a number of larger clients, with the average ARR flips growing 21.8%. We also had a very successful go live in May with the SAS migration of the Idaho state court system. This is our first flip to the cloud of a statewide court system, and Idaho went live just four months after the project kicked off. This high profile migration has been watched closely by other statewide and large county courts, and its successful execution is certainly a positive reference point as we engage with other large core clients about moving to the cloud. Key second quarter new SaaS deals and flips included a competitive win with the city of Topeka, Kansas for multiple integrated solutions, including enterprise ERP, enterprise permanent licensing, enterprise asset management for nearly $700,000 in ARR. An ERP pro and payments contract with Richland County, Wisconsin funded via ARPA funds. that was executed on an accelerated 90-day sales cycle, leveraging our enhanced sales enablement and competitive intel teams. The Idaho State Police signed a SAS contract for our integrated enterprise public safety suite, including CAD, records management, and eCitations. This Tier 1 competitive win demonstrates our growing momentum with state public safety agencies. and represents the sixth state police agency to adopt our enterprise public safety solutions. The Oneida County New York Department of Emergency Services also chose our integrated public safety suite for a 64-agency, client-driven SAS deployment. Hunt County, Texas upgraded to enterprise public safety from our Public Safety Pro solution. And Spotsylvania County, Virginia signed a contract for our enforcement mobile solutions. joining eight of the 14 largest Virginia agencies using Tyler Public Safety applications. We signed an Enterprise Justice SAS Flip with Fulton County, Georgia, which includes Atlanta. The contract, with ARR of $1.9 million, follows Fulton County's Enterprise Appraisal and Tax SAS Flip signed in the first quarter, and includes integrated justice solutions such as prosecutor in jail, as well as additional client management services under our unified one-titler approach. We also signed an enterprise supervision expansion with the Arizona Supreme Court that builds on the success of adult probation to add juvenile probation for all 15 counties across the state. We leveraged the state relationship, which led to a five-year enterprise justice agreement with the Phoenix Municipal Court, representing an excess of 2.25 million in ARR. This strategic and highly competitive win includes five one-year extension options and paves the way for expansion and new court software opportunities in a large population state. Another theme coming out of Connect24 was pronounced interest in AI and our expanded AI capabilities that were added through our 2023 acquisitions. High interest is turning into multiple new deals and cross-sell wins for our application platform, leveraging our augmented field operation solutions, formerly AR Inspect, with four inspection SAS arrangements in the quarter across state environmental, health, and regulatory agencies. These included the California State Board of Pharmacy to configure and automate five regulatory inspection types, the Kentucky Department of Environmental Protection, the New York Department of Health, and the Arkansas Department of Labor and Licensing, which was a cross-sell win leveraging our Digital Solutions Division state enterprise relationship. Another key to our growth strategy is expanding our differentiated payments business, and similar to our first quarter results, higher transaction volumes contributed to better than expected transaction revenues. In the second quarter, we signed 195 new payments deals across Tyler Software clients, representing approximately $8 million in projected ARR. In our state enterprise portal business, we secured extensions for our digital government and payment processing services under four state enterprise contracts, including Hawaii, New Jersey, Kansas, and Kentucky, and also won a sole source award with the state of Rhode Island as no extensions remained under the previous contract. We also signed a two-year renewal with the state of Illinois for our outdoor and enterprise licensing solutions. Now I'd like Brian to provide more detail on the results for the quarter and our updated annual guidance for 2024. Thanks, Lynn.

Total revenues for the quarter were $541 million, up 7.3%, and organically grew 6.5%. Subscriptions revenue increased 12.1% and organically rose 11.8%. Within subscriptions, our SAS revenues grew 23.2% to $156 million and grew organically 22.5%. Keep in mind that there's often a lag from the signing of the new SAS slip or SAS deal or flip to the start of revenue recognition that can vary from one to several quarters. Because of this, as well as the timing of SAS renewals and related price increases, SAS revenue growth both year-over-year and sequentially may fluctuate from quarter to quarter. Transaction revenues grew 3.8% to $177.7 million. Transaction revenues exceeded our plan primarily due to higher transaction volumes from new and existing clients including recreational licenses such as hunting and fishing, which begin their peak season during Q2. In addition, e-filing revenues grew 11.2%. The year-over-year comparison for transaction revenues continues to be impacted by the change in mid-2023 from the gross model to the net model for payments under one of our state enterprise agreements. This will no longer be a factor in year-over-year growth comparisons in the second half of the year, and our expectation is for mid to high teens growth in transaction revenues in the second half of 2024. SAS deals comprised approximately 97% of our Q2 new software contract value, compared to 82% last year. During the quarter, we added 203 new SAS arrangements and converted 111 existing on-premises clients to SAS, with a total contract value of approximately $127 million. In Q2 of last year, we added 170 new SAS arrangements and had 94 on-premises conversions, with total contract value of approximately 93 million. More importantly, the average ARR associated with our Q2 flips increased 21.8% over last year, as larger clients such as Fulton and Clayton counties in metropolitan Atlanta, Georgia, the cities of Tucson, Arizona, and Birmingham, Alabama, and the Columbus, Ohio City schools flipped to the cloud. Including transaction revenues, expansions with existing clients, and professional services, total bookings increased 7.3% on an organic basis. Our total annualized recurring revenue was approximately $1.8 billion, up 8.4%, and organically grew 7.8%. In previous quarters, we discussed our expectation that 2023 would be the operating margin trough from our cloud transition. and that 2024 would mark a return to operating margin expansion. Our non-GAAP operating margin in the second quarter was 24.5%, up 150 basis points from last year. The margin expansion reflects improved margins from our cloud operations, along with effective operating expense management and improving professional services margins. As we discussed on previous calls, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins as they are passed through to clients and are included in both revenues and cost of revenues. We incurred merchant fees of approximately $45 million in Q2. Because of strong earnings and effective working capital management, both cash flows from operations and free cash flow were above expectations for the quarter at $64.3 million and $48.6 million, respectively. Cash flow in the quarter was impacted by approximately $29 million of incremental cash taxes due to Section 174. We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $262 million. Our net leverage at quarter end was approximately 0.65 times trailing 12-month pro forma EBITDA. Our updated 2024 annual guidance is as follows. We expect total revenues will be between 2.12 billion and 2.15 billion dollars. The midpoint of our guidance implies organic growth of approximately 9%. We expect that merchant fees will be up approximately 6% over last year, and that implied organic growth excluding merchant fees would be approximately 20 basis points higher. We expect GAAP diluted EPS will be between $5.76 and $5.96, and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $9.25 and $9.45. We expect our free cash flow margin will be between 18 and 20%, including an estimated impact of approximately $60 million of incremental cash taxes related to Section 174. Other details of our guidance are included in our earnings release and in the Q2 earnings deck posted on our website. And I'd like to turn the call back over to Lynn.

Thanks, Brian. Our exceptional performance in the first half of 2024 positions us well for a strong second half. We're pleased with our progress across all fronts as we remain on track with key initiatives around our four-prong growth strategy while demonstrating our competitive strength and model durability. Our cloud transition is beginning to generate the expected benefits of margin improvement and enhanced client experience. As you know, in 2019, we launched a multi-year cloud strategy to shift our solutions operations to a cloud first business model, leading our clients to a future in the cloud. As we enter the next phase of our cloud journey, and as more new and existing clients embrace our cloud strategy, we see increasing opportunities to prove areas critical to our clients that ultimately affect client satisfaction, including product release cycles, product consistency, performance reliability, and cost effectiveness. To effectively address these areas and lead this change, I'm pleased to share that Russell Gainford has been promoted to chief cloud officer effective immediately. Over the past three years, Russell has proven his ability to own the overall vision for Tyler's cloud first strategy. And in his new capacity, he will continue to drive our cloud initiatives across our organization. including developing our cloud technology and operation standards, controls, and business processes, overseeing our strategic business partner and vendor relationships, as well as architecting the organizational design and staffing plans in collaboration with operational leaders. Shifting to capital allocation, our disciplined approach bolsters our strong balance sheet as we've repaid our term debt during this period of higher interest rates. This, coupled with our ability to consistently generate strong free cash flow, provides tremendous flexibility to take advantage of opportunities to make investments that drive shareholder value, including product development, M&A, and potentially stock buybacks. And while the bar is currently high for acquisitions, we continue to evaluate strategic tuck-in acquisitions while building liquidity to be in a position to address our convertible debt maturity in March of 26. I'm also pleased to highlight that Tyler recently was recognized by two leading publications, as we were included on Time's list of America's Best Midsize Companies and Forbes' Best Employers for Women list. Before I close, I'd like to welcome our two new board members, Margo Carter and Andy Teed, who were elected at our May 9th annual meeting. Margo brings a wealth of experience in cloud software and SaaS transformations, AI, and payments. She currently serves as president of Living Mountain Capital, where she invests in and advises companies and private equity firms on digital transformation and innovative strategies. She has an extensive background in finance, M&A, and corporate governance and has served on several public company boards. Andy is a seasoned technology executive with significant public sector experience. He currently serves as the CEO of Eco Parking Technologies, an integrated lighting and parking guidance company. Prior to that, Andy spent nearly 20 years at Tyler in various senior leadership roles. His extensive public sector experience and familiarity with our products and clients, along with his knowledge of cloud technologies, make Andy a valuable addition to our board. I also want to thank our two outgoing board directors, Dusty Womble and Mary Landreau, for their years of service and contributions to Tyler's success. Finally, I'd like to express my appreciation to our entire Tyler team for their hard work and continued commitment to driving growth while leading our clients on their digital modernization journeys. Our leadership is aligned with a unified focus on cloud living, and I've never been more confident in our prospects and Tyler's future. Now we'd like to open the line for Q&A.

We will now begin the question and answer session. To enter a question into the question queue, please press star one on your touchtone phone. If you're using a speakerphone, please pick up your handset and then press the star key and the number one. To withdraw your request, press the star key, then the number two. As a reminder, please limit your questions to one question so we may stay within the allotted time. We will pause momentarily to assemble our roster.

The first question is from the line of Alexey Gogolev with JPMorgan.

Your line is now open.

Thank you. Hi, Len. Hi, Brian. Congratulations with great results. Brian, I was wondering the components of higher CapEx, what were they, if you could elaborate on that, and why are we seeing some decline in R&D? Does this have anything to do with your plans to reallocate certain R&D components? Remember you were saying you were planning to do that for COGS going into OPEX?

Those two are related, but they're not related to any reclassification of R&D. They're just interrelated in terms of as we perform different R&D projects, Um, some of them fall in the category of requiring capitalization and others are expense and sometimes there's a. And this just reflects a little bit of a shift between those 2. so, um, more, um, of our, our development, um, costs are being expense, um, and less being. Um, I'm sorry more being capitalized and lesser being expense to R and D. So it's just a shift between capitalization and, um.

expense based on the the nature of the project understood thank you and then the second one about your aws contract renewal could you elaborate on the potential benefits to gross margin and whether you think there will be a one-off benefit or you expect to unlock more discounts as you progress through the contract

Yeah, Lexi, I think it's a couple of things. We did sign that long-term extension as we continue to commit more and more of our clients going into AWS and more and more spend each year. We do receive some additional discounts, so I would expect those to continue. I think the other side is really just some of the operational efficiencies that we're starting to see, the product optimization as we continue to optimize and move them into AWS. version consolidation, the things that we've talked about. So it's a number of factors, but I do expect, looking forward, that some of our gross margins would improve. I don't know that I would look, you know, I think as you look out over the next six, seven years, our Tyler 2030 vision, I would expect several of our gross margin lines to improve. I don't know that necessarily it's going to happen in the next 12 months, but we're making progress on all of those items.

Thank you, Lynn. Appreciate it.

Thank you for your question. Next question is from the line of Matt VanVleet with BTIG. Your line is now open.

Hey, good morning. Thanks for taking the question. You're continuing to have more success at the state level. I'm curious how much of that's being driven by the integration sort of more holistically on the sales team with the NIC team and sort of some of those hunting licenses versus the product maturation and the acceptance of cloud at that level. And as you look on a go-forward basis, how much of these deals are having sort of multi-product together to where the more, I guess, combined sales effort is paying off here?

Yeah, Matt, it's a good point. We are seeing more momentum, certainly more cross-sell momentum in that state space. Um, I think it's a, it's a testament to our DSD divisions, longstanding relationships, um, and really our, our enhanced focus on leveraging those these last couple of years, there's things that we've done. We've talked about in the last couple of earnings calls around compensation and sales commissions. Um, and also, um, you know, executive leadership compensations that sort of try to break down some of those barriers and, and enhance those cross sell opportunities. we are seeing more and more multi-product deals. I think I referenced a few in my notes earlier, and that, again, that's just, it's a testament to what I've been sort of calling for the last couple years this vision of one Tyler, operating more as a singular unified company, breaking down any sort of internal barriers that might have been just a slight hindrance in the past around cross-sells and up-sells, and I think we're starting to see that pay off as as relationships are continuing to forge and, and as they start to become more and more productive.

Great. Thank you.

Thank you for your question. Next question is from the line of Rob Oliver with Baird. Your line is now open. Great. Thank you. Good morning guys.

Lynn, my question is for you just, you know, pretty rapid and, um, Somewhat stunning, I guess I would say, having followed you guys a long time, increase in public safety's willingness, public safety customers' willingness to adopt the cloud. And you guys clearly are right there to address that opportunity. I was just wondering, you know, this is one of the areas within CoreTiler that has been historically the most competitive and I think somewhat of a modest concern for investors. I was hoping you could address the extent to which this cloud move is really underscoring competitive advantages for you guys, perhaps the relationship with AWS as you take a sector of your market that, you know, historically was somewhat more reticent to move to the cloud, how that is helping you. And then as you look at that public safety pipeline where you see, you know, sort of current Tyler customers and where that cross sell advantage might be. Thank you.

Yeah, you're right, Rob. Um, public safety has, it's actually been a little bit surprising their results this year. We, at the end of last year and really coming into this year, we had made the decision that we were going to really, you know, lead our clients to the cloud, sort of like the position we took across all of Tyler. And you're right, the momentum is there. Momentum's an interesting thing. And, you know, as you know, our clients talk. And so I think right now it is a competitive advantage for us. You know, we are able to offer All of our core public safety products in a SAS environment. That's not necessarily the case with all of our competitors. It's still a very competitive market. I like where we sit right now. I like some of our key wins are against some really key tier one competitors, some that I mentioned in my remarks earlier, like the Idaho State Police deal. So it's an interesting dynamic and one that I think is, you know, I talked earlier about momentum. It is building momentum and it's exciting to see. I think we're also starting to see the impact of, you know, some of the cybersecurity concerns, which are, you know, they're heightened across all of our clients, but we've seen a number of flips. I think we had six flips in a public safety in Q2. A couple of those were actually the result of some ransomware. And so being able to be nimble and stand up those clients very quickly perhaps not with full functionality, but get them up and running where they can do their job, has actually shown a lot of benefits in starting to give confidence to our clients and to their surrounding communities that the cloud is something that they should be looking at.

Great. I appreciate that. Thank you, Lynn.

Thank you for your question. Next question is from the line of Michael Turner with Wells Fargo. Your line is now open.

Hey, great. Good morning. Thanks for taking the question. Looks like a strong Q2 for SaaS, fairly even split between new deals and conversions and the metrics. So I was just hoping you could maybe speak to the drivers there, how you'd expect that mix between new deals and conversions, likely trends, and if anything, seasonal in terms of Q2 and what we're looking at, we should be mindful of there. Thanks.

Yeah, I don't think there's anything particularly seasonal around the pace of those. Both the timing of new deals and especially the timing of flips can be a little bit lumpy. So we certainly expect the trend to continue to be over the mid and long term for the number of flips and the size of flips to continue to increase. That was one of the big factors this quarter was that the average ARR from flips this quarter was up almost 20%, and we highlighted some of those larger flips that are taking place. But I think in general, obviously, we're at a very high percentage of SAS at 97% in the new business. I think public safety still will have some license deals in the second half of the year, and so that may even fall back a little bit, but the trend that Lynn just described is certainly continuing of greater acceptance of SAS and public safety. So I think you'll continue to see the flips trend upward, although they may bounce around a little bit from quarter to quarter, and that the the vast majority of our new deals coming in in SAS will also continue.

Yeah, I think, Michael, too, I think when you look at the numbers and compare quarter over quarter from last year, we've talked about the public sector market and how budgets are healthy and sales pipeline is strong. I think you're seeing that. I think if you look at our total new software deals, it's up about 11% year over year. Our flips are actually up about 18%, and our new SaaS deals were up about 20%. Licenses, as Brian mentioned, are continuing to decline. I think licenses in Q2 were a little less than 1% of total revenues. And for the year, maybe a little less than 1.5% is what we're looking for the rest of the year. So you're seeing the results of a good, healthy market, and you're seeing the results of that market continuing to embrace SaaS in the cloud.

Thank you for your question. Next question is from the line of Charles Strausser with CJS Securities.

Hi, good morning. Just looking at guidance for the back half of the year, is there anything abnormal that we should think about when modeling the cadence of the back half? Just anything that kind of sticks out that we should build into our thinking here?

I don't think there's a whole lot. At a very high level, I think you'll continue to see revenue step up a bit from where they were in the second quarter, particularly around professional services. We'll continue to see it grow a bit. SAS will continue to see growth sequentially. I think the biggest growth in the second half will be as you'd expect. SAS revenues continue to step up quarter to quarter as more new customers come online and as we execute more flips and we get the impact of those revenues. The other revenue lines I think generally you'll see be fairly consistent with where they were in the second quarter across the third and fourth quarters. And, you know, dropping down to the bottom line, I think you'll see earnings generally in the same range that we see in the second quarter, in the third and fourth quarters. And cash flow, certainly the third quarter historically is by far our strongest cash flow quarter because of timing of maintenance collections, and that will be the case as well.

Thank you for your question. Next question is from the line of Alex Zukin with Wolf Research. You can leave that open.

Yeah. Hey, guys. Thanks for taking the question. I'm going to try to link a few threads and just throw something out there, which is it seems like the flips are happening faster. They're larger. You're promoting somebody to run cloud full-time immediately. And so I guess my question is, does it feel as though the value of that maintenance portfolio, the value of these flips, given even the attach rate and the expanded portfolio of other services that you're cross-selling and the transactional revenues, is it just growing? If you look at the value of that pipeline, is it a lot larger than maybe what you were previously anticipating? And how do you see that? How should we think about that playing out in the P&L over the course of the next, you know, year or two?

Yeah, Alex, I would say I think in the last, you know, several quarters, we're actually starting to see a little bit more uplift than what we had expected. But I think what it does is when you step back and you look at our long-term Tyler 2030 goals, I'd say what's been happening over the last several quarters now is it's really validating, you know, what we've set out to do and what we've said we're going to do. I would like to, you know, when you think about timing, you know, one of the things we've constantly said is that, you know, as we look out to 2030, it won't be linear. But again, each quarter where I start to see some of these, what I'm now calling momentums, makes me feel even more confident about, you know, what we're doing and what we've set out to do.

Thank you for your question. The next question is from the line of Sackett Calia with Barclays.

Okay, great. Hey guys, thanks for taking my question here and echo the nice result in the quarter. Brian, maybe my question is for you. I want to just talk about the payments business a little bit. I think you said, you know, mid to high teams growth, revenue growth in the second half, and you correct me there if I'm wrong. but is there a way that you think about kind of the payments business as sort of a, an equation right between, you know, kind of same store sales growth plus sort of share gains, or maybe set another way, you know, kind of a net revenue retention in that business plus new logo. How do you think about sort of that equation, even anecdotally as part of that kind of mid to high teens growth rate in the second half?

Yeah, I think, and obviously the change from the, the, sort of low single-digit growth in the first half to the mid-to-high teens in the second half mostly revolves around the impact of us lapping the gross-to-net change from one of our state contracts mid-year last year. But if you break down that kind of high teens growth, I think generally sort of the, and it's a high level, but sort of the same store growth or the same customer growth is typically kind of high single digits, maybe approaching 10%, but kind of in that range is how we think about it. Some of that around our digital solutions division state contracts where they either have higher transaction volumes or we add additional services in a state that drive more revenues but with that same customer. And then the difference going up into the mid to high teens is sort of our new customer growth. And that's really reflecting the impact of driving the payments platform into our local government customer base and attaching it to both new and existing software customers. And we've talked about those being higher margin, higher premium pricing kinds of engagements. And those are the ones we're talking about, for example, this quarter that added $8 million of new ARR from new payments customers associated with our software customers. So that's kind of generally how we think about that split.

Yeah, and I think when we outlined, when we were looking out to Tyler 2030, we looked at transaction growth. It was really, we're projecting long-term CAGR of sort of low double-digit growth. One of the things we're also seeing, Saket, is we've gotten a lot better at onboarding our clients. We're getting a lot more efficiencies there, and so we're actually starting to get revenues recognized sooner. And then over time, to your point about sort of same-store sales, is trying to drive further and further adoption across that client base is a significant driver.

Thank you for your question. Next question is from the line of Terry Tillman with Truist. Your line is now open.

Yeah, good morning. Congratulations for me. Hi, Lynn, Brian, and Hala. I had one question. It might almost be two parts, so just bear with me. First, in terms of Idaho, congrats, Lynn, on the successful go-live. It sounded like four months. That's pretty strong. I'm curious, though, you said that's an important milestone. I know you have some really large on-prem or kind of private cloud customers in courts. but also, you know, maybe some that are more ready to move. How are you thinking about some of these other potential large court flip opportunities, whether they're actionable this year or into next year? And then, Brian, just the second part of this question is with CSI, Resource X, AR Inspect, I was intrigued last quarter because there were some big deals there. I think you said it was about a $4 million kind of quarterly run rate on those AI-based kind of solutions. Is that still hold or is it picking up from there? Thank you.

Yeah, good question, Terry, on the Idaho SAS flip. Our courts, there's only so many state court implementations out there. And so getting that first one out there on time, live, and referenceable was a pretty impressive feat by our people. And I'm going to make a little sidebar comment, because we've talked about it before over the years. But I think one of the things that's really impressive about our teams is all the work that we do behind the scenes. You know, we, we talk a lot about the numbers, but there's a lot of work that goes into getting these clients, uh, up and up and actionable, you know, whether it's a SAS flip or even just a new implementation and, and our teams just did an incredible job. As you know, this entire business is a reference business. And there were a lot of state courts, um, who had inquired, have been asking about the SAS flip, but they all were sort of keeping an eye on Idaho. So do I expect that to translate into other large statewide SAS flips or just other large court SAS flips? I do. I'm not going to say that they're going to start happening, you know, in the month of September, but I think as you look out over the coming quarters, you'll start to see that momentum grow and build in that market.

Yeah, with respect to the three acquisitions from last year that have strong AI capabilities, they continue to perform really well in terms of the new business market and they are continuing to grow. We highlighted last quarter a couple of large deals and I think we mentioned a few of those this time as well. I think we've been really pleased with the speed at which those have started to contribute and we're able to leverage cross-sells. Of course, that's part of the thesis behind all of those acquisitions that we can leverage our existing sales organizations and our existing customer base and new deal opportunities to sell more of those newly acquired products. And I think we've been really pleased with the speed at which we've been able to execute on those and particularly, you know, CSI adding that to some of our large quartz deals. Um, resource X, um, already had, uh, some large client, uh, um, engagements and, and we're continuing to see those come on board as well. And they are inspect, um, we called out several state deals there this quarter. So, uh, those are all performing really well and, and contributing nicely, um, kind of out of the box.

Yeah. There's a lot of buzz for these out in the marketplace, Terry. And, you know, as Brian said, it's, it's, it's, it's kind of twofold on the one hand. It's a great playbook that we've run for many years, a tuck-in acquisition that we can get in the hands of our sales teams and get out to our installed base, but also in areas like Resource X, for example. I mean, it's a differentiator for us in our new enterprise ERP sales. So it's both a competitive advantage in new sales, but also a huge opportunity to deploy through our installed base.

Thank you for your question. Next question is from the line of Josh Riley would need him in code. Your line isn't open.

Yeah, thanks for taking my question. Just on the Dallas data center closure, can you just remind us in the income statement where the expenses for that data center lie and what's the implication for our second half modeling with that shutting down and then just secondarily along the margin front? Can you just give us some color on what drove the margin improvement in services? Thank you.

I'll take the first part of it. Most of the costs for the data center are up in costs of subscriptions. So they're up in the gross margin line. There's also, I mean, there's depreciation, there's operating costs, and there's some personnel costs. The first data center that closed, the Dallas Data Center, is a COLO facility, so there's not a real estate impact there. So those costs will be part of our margin profile in the second half of the year, but also remind you that around the second data center, which we expect to close around the end of next year, The bubble costs or the duplicate costs of running that data center and incurring costs in AWS as we migrate customers out, those costs continue to increase until they go away because we continue to move more customers out of that data center as we progress towards its closure. So the impact of the closing the first data center is somewhat offset by the ongoing impact of the second data center. And then we'll get a bigger bump at the end of, after that data center closes in 25. So again, I think overall, I think operating margins are probably pretty consistent in the second half of the year with where they are here in Q2.

Yeah, I'd add to that, Josh. One of the things that's gratifying to me is You know, we outlined this vision of closing the data centers a couple of years ago, and we're basically hit it on track. And that takes a lot of work by a lot of people. And again, it continues to validate some of the things that we've outlined a couple of years ago as we started our cloud transformation. So that's gratifying to see. You know, the other obvious upside of getting out of the Dallas Data Center and eventually out of the Armit Data Center is all the future CapEx savings. You know, we would have We would have spent a lot of money over the next five, seven years adding to those capabilities had we not done that. Your question around pro services gross margins, it's a couple of things. I would say, one, it's been an enhanced focus, sort of a top-down focus from the management team over the last year plus. It's something that we're dissecting and continue to dissect and look at things around You know, really focusing on those gross margins, utilization, things like that. The other thing that's been driving it is we're starting to see a little more stability in our workforce, and we've been seeing that for several quarters. So turnover is a lot lower. And in the pro services area, you know, when you experience elevated turnover, which we did coming out of COVID, we did during sort of that period post-COVID when, you know, people were transferring out and going through the grass is always greener. It's tough because it takes a long time to get people trained up to speed and get to a point where they can be out in the field and be billable. I think it's part of what we're seeing overall in the labor market, but having that return of more stability and more consistent historical Tyler turnover levels is certainly helping, but it's also been an enhanced focus from the management team.

I think the ongoing move to the cloud helps us there as well because In a general sense, we're able to deploy software more efficiently in the cloud. And version consolidation helps us as well to some extent there on both services and support.

And to that point, Brian, I guess remote delivery of services is something we really started around COVID, and clients continue to have more and more acceptance of that delivery model.

Thank you for your question. Next question is from the line of Peter Heckman with DA Davidson.

Hey, good morning. Most of my questions have been answered. I just wanted to follow up on the NIC transaction and just see if you're seeing any changes in terms of those self-funded state level IT portal deals. If the states are looking for something different, something more, and then just curious about the look like a good renewal activity here uh in the first half but uh you know do you i guess what's your perception of of other states migrating to that self-funded portal model in the future or do you think it's it's more likely that you do something more on a on a agency by agency basis at the state level well it's a little bit of both um peter uh

You know, the state-funded model is what old NIC, now DSD, grew up with. And I think there's going to be continued demand for that type of model as budgets are constrained. We talked about it last quarter, the significant deal we signed last quarter, the quarter before, the California State Parks, which that deal could not have happened. It's the largest contract in Tyler's history, and that deal could not have happened absent the self-funded model. I do think we are also going to continue to see more and more agency by agency. That's part of our strategy, getting more products in on a targeted agency basis that's probably more aligned with the more historical Tyler model. We've done some things internally over the last couple of quarters really consummated in the last year. We've done an internal realignment between our platform solutions division and our digital solutions division. so that we can take advantage of both of those opportunities, align our sales teams, eliminate some overlap, but really start to drive both types of sales as we go forward.

Thank you for your question. Next question is from the line of Jonathan Hull with William Blair. Your line is now open.

Hi, good morning. Can you give us a little bit of additional color about your thoughts around cybersecurity and, you know, what this could potentially mean in terms of either upsell opportunities or accelerated transition to the cloud? I just want to get a sense for, you know, how much this is sort of impacting, you know, the industry as a whole. Thank you.

Yeah, Jonathan, I mean, it's a reality. You know, we always say it's even, you know, it's not a matter of if, it's when. and cyber security events has certainly impacted both our clients and others public sector agencies that aren't our clients. It is a natural opportunity to accelerate discussions around moving to the cloud and flipping the cloud. We've had a number of those. We don't necessarily... I talked about a couple of public safety that happened last quarter. I don't really like to highlight them too much, but it's a reality that's going on in the market. And one of the things that I think we're getting better at is as we're flipping clients to the cloud for whatever reason, but certainly as a result of cybersecurity, it is an opportunity to get them more modern and add some more products in the mix. So again, it's out there. We're all dealing with it. And our goal really is to be as responsive to our clients as possible. And we've gotten better. I've mentioned it at Public Safety. We've also gotten better about being able to stand up clients really quickly, maybe not with the full functionality that they might have had in an on-premise system out of the box, but enough to get them going, which also gives us an opportunity to sort of reevaluate all of their requirements and potentially upsell other items. And so, yeah, it's just out there.

Thank you for your question. Next question is from the line of Kirk. My turn with every core. Yeah, thanks guys.

Congrats on the quarter. Lynn, I was wondering on the public safety side when customers are now flipping in a bigger way towards cloud, how does that change the competitive environment for you? Meaning I'd imagine there are a lot of smaller competitors that don't necessarily either have the scale on the cloud side or potentially are as advanced as you all. Is that leading to better, I guess, win rates in that particular segment of your business as well?

Yeah, I think, Kirk, it's certainly a competitive differentiator right now. And I think we've seen this historically across different business lines. There's always times when, you know, competitors sort of make a move and then we make a move. I'd say right now I like where we sit with public safety. You know, we have the most comprehensive offering. We have the most comprehensive offering that can be deployed in the cloud. Um, you know, there are some smaller players who, um, you know, certainly have some cloud native offerings, but may not have the depth of functionality and may not really be good candidates for some of these, these larger deals, um, and, and whether or not their, their ability to execute it on it. What's, what's been impressive, I think over the last 18 months or so, 12, 12, 18 months at public safety is, is the execution on this strategy. Um, it's a shift in mindset for our, for that sales team. It's a shift in mindset, uh, for all the operational teams and, and messaging that out to the market. It's, it's resonating. Um, and it's something that's exciting to see. I remember a couple of years ago talking about how, boy, it could be several years, you know, maybe five, six years before we were even at 50%, uh, SAS levels at public safety. And, and it just shows you that the changing dynamics in the market and And fortunately, we've been in a position through some of the work we've done over the years to not only capitalize on it, but also help lead it.

Thank you for your question. Next question is from the line of Gabriella Borges with Goldman Sachs. Your line is now open.

Hi, this is Callie Valenti on for Gabriella. I think you're taking my question and congrats on the quarter as well. Given that a lot of your customers are now kind of on a new fiscal year, can you share some early observations on what customer budgets are looking like this year relative to last year? And then how much of this stronger demand that you're seeing is tied to these healthy budgets versus kind of just, you know, demand for clouds and some other factors you talked about?

Yeah. I don't know that, yeah, we, for a lot of our clients are on June 30th fiscal year. But I don't know that we necessarily have significant insight in those budgets. They're pretty steady, they're pretty healthy. Most of our sales procurement cycles are multiple years long, or certainly long, not all multiple years, but they tend to be lengthy. I think, I'm sorry, I lost my train of thought there. So yeah, I think the budgets are healthy right now, and I think our win rates are good. One of the things that we have noticed this year is I think probably a leading indicator is when you look across our product lines, all of the indicators are still strong. And really, most of our divisions, almost all of our products are either at or above sort of what their sales projection was for the year in terms of being mid-year. So that's a good tailwind as we look out over the next several quarters. And right now, we're not seeing any certain, certainly no negative changes in sales. in the public sector budgets.

And I think the other side of that strong demand is this increasing desire for digital modernization. And it's really how governments increasingly do, you know, address doing more with less resources. So to the extent that they have really struggling with understaffing. A lot of workers left the public sector space during COVID, and in general, government has not rebuilt its workforce. So they're trying to perform these essential services with staffing constraints and really turning to technology as how they do that. So I think it's a little bit even more than just the traditional replacing a 20-year-old system that's at end of life and is dying. but being more strategic about it and saying, okay, new technology will help me do the things I have to do with either the budget or the personnel constraints that I'm forced to deal with.

Thank you for your question. Next question is from the line of Mark Chappelle with Loop Capital Markets. Your line is now open.

Hi. Thank you for taking my question. Nice job on the quarter. John, question for you in your prepared remarks. You noted continued progress you're making around your product version consolidation efforts. Just wondering if you could elaborate on the progress you made during the quarter on that front and also what we can expect maybe in coming quarters here.

Yeah, sure, Mark. You know, obviously, version consolidation has been a big part of what I've been calling sort of phase one of our cloud transformation. Phase one is selecting AWS, it's a product optimization, it's version consolidation, it's the flips, it's exiting the data centers. Version consolidation is critical for a lot of reasons. One is we need to get down to a single product. We need to get down to a cloud release. We need to get our clients up to date on the modern versions. Otherwise, they're not really going to be flipping the cloud. That's part of the foundation for that. Um, you know, we don't really go, you know, I don't know that you see necessarily quarter by quarter progress, but you see goals that are being hit and attained. Um, anecdotally, for example, in our enterprise ERP division, which is, uh, formerly our munis product, um, we now have about 95% of our clients down on, on a single version. Whereas a couple of years ago, um, there was several versions with, you know, maybe hundreds, hundreds of clients on different types of versions. So that's significant progress that's been made. and it's a focus across all of our divisions and all of our operating units, and they're making similar progress.

Thank you for your question. There are no additional questions waiting at this time, so I'll pass the call back to Len Moore for any closing remarks.

Thanks, Matt, and thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks, everybody. Have a great day.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.