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.