Tyler Technologies, Inc. — 2024 Q1

Yes. Sure, Rob. It's a good question. Last year, we elevated a couple of people to oversee all of our public admin sales, all of our justice sales. They're working more closely together than ever before. We've done things around aligning some incentive comp plans and changing the way people are comped to make sure that, for example, it's -- in the old days, it's well -- whose P&L is this recognized by. And we wanted to break down some of those barriers so that really, when -- it's all about Tyler, when Tyler wins, everybody wins. And so we've been doing things like that. We've done some things, and we're still in the process of -- and some of that's still work-in-progress.

Yes, I don't know that historically, there's been much of a correlation between our sales and the presidential election year more so than what may be going on in the broader macroeconomic environment. As you note, the budgets for our clients are healthy and strong. Our sales outlook for the year, and we have some pretty aggressive sales plans, but our sales outlook for the year are looking on plan and significant parts of our business actually, may be ahead of plan. Maybe a little bit in the federal space. I don't know that I've got enough experience yet with our federal space as to what impact that may have. But it's normally more so around what's going on with the federal funding and budgets. But I think generally, in our -- if you look at our traditional local and state space, I haven't seen a lot of change in my 25 years plus.

And you're kind of cutting out, I think I got most of your question, Matt. I'll start. Brian, you can certainly jump in. At Public Safety, I think it's a couple of things. I think actually, as you step back and you go back to 2019, when we sort of announced that we were going to go cloud-first from cloud agnostic, some of the message was we were going -- at least internally was we were going to take our leadership position and start leading the market to where we thought it was going to go and needed to go. In Public Safety, as you know, historically, it's been a little bit slower. We've spent a couple of years. We've got some new leadership Public Safety. Our position in Public Safety is we're very competitive. It's a competitive space, but we're in a very competitive space and a place, excuse me.

I guess, the only thing I'd add to that is, in terms of our ability to significantly increase, the pace of flips beyond the sales efforts that Lynn talked about. We have talked about in the past the need for clients who aren't on the current version of our products generally to upgrade to that version either before or when they look to the cloud as we drive towards having one version of each product in the cloud. And we've made a lot of progress with version consolidation and sunsetting old versions and moving clients along, but that continues to be a gating factor in the pace of flips.

It's probably a little bit of both. I think one -- obviously, with 200 new deals are going to vary in size and scope. But if you step back generally, when I think about 200 new contracts a year -- a quarter, that plays out to over 800 a year. That's a lot of business we're doing, and that's a lot of business we're executing on. It's great work by our sales teams. It's great work by our ProServe teams to then turn that into revenue. But I think it's -- I don't know that that's the new -- it's certainly higher than it was coming out of Q4 last year and most of last year. I think last year, we did about 750 new deals, give or take for the year. So we're on pace a little better. But as I said, right now, markets are healthy, budgets are strong. Our sales outlook, all indicators are positive and our sales outlook looks good for the year.

Yes. Thanks, Alexei. I'd say, generally, our win rates across the board are consistent. And when you say 50%, that's -- you got to look by each sort of major products. So there's certainly some areas where our win rates are 80%, 85%, some that are more competitive spaces, we talk about Public Safety, we talk about sort of the mid- to higher ERP space where there's -- it's a lot more competitive market, and they may sort of be around there. So those really haven't changed. There's still -- we still have some of the same lag factors that we talked about before between time of getting a deal to contract to getting them up and running. But yes, I mean, we -- as we look out, we've -- our overall revenue growth sort of slowed over the last 2 years, and I think we've said we expect that to pick back up, and we're starting to see some of that.

Yes, Joshua, that's a good question. And it's something we've seen, I'd say, really, over the 25-plus years I've been at Tyler. There's always seems to be little periods where someone comes up, makes little splash, they have a little spotlight on them. They certainly have a demo that looks good. They wouldn't have the depth of functionality and products that we've had because they haven't been in the space for as long as we have, but they win some business, but that's only part of the battle. We've always said part of Tyler secrets sauce is not just winning the business, but executing on the business. And it's hard stuff. Take, for example, our municipal and schools division, which really sells more on the low end of ERP and has some courts and things like that.

Yes. It's not so much of the capacity. We do continue to move clients to AWS, and we are on track with our plans to evacuate our first data center midyear of this year. But really, that -- a lot of those costs don't go out until after that data center is closed. So that's not really the biggest factor. Some of the things driving those improved cloud efficiencies are the releases we've had over recent quarters of the cloud optimized versions of our product, which improves the efficiencies and lowers our hosting costs at AWS. The progress we've made with version consolidation, and we made significant progress last year and continue to have aggressive plans this year about sunsetting older versions of products and getting the benefits from both support costs and development costs around the expenses associated with supporting multiple versions of multiple products.

Yes. Clarke, I'd add, we are seeing efficiencies through the cloud, but there's still a runway to go in the efficiencies that we're going to achieve. And there's some other internal initiatives, we don't talk a lot about, things like improving our gross margins on pro services. We've seen -- we saw an uptick of that in Q1. That's really a function of a few different things. It's more of -- it's a strategic focus that we started working on last year. But it's also a function of that we've had a more stable labor market. Our turnover has been much lower and sort of returned back to pre-COVID levels. And that really helps. It helps drive billable utilization. Other internal initiatives around things like rationalization of some internal IT costs and real estate costs. Things that we've been working on behind the scenes are all starting to show some results in addition to the cloud. But I want to emphasize that the efficiencies that we're going to see from further version consolidation and optimization and all the things that we're going to do in the cloud are still out there for us to go capture.

Sure. Yes, last year, and we talked about this some last year, we actually had 2 clients last year, state enterprise clients that had changes from the gross to the net model. And still, the vast majority of our payments business is on the gross model, and we expect that to continue to be the case. So we really don't see sort of large-scale changes like that ahead. It is a client decision. Most of our clients prefer the certainty and predictability they get from having a growth arrangement with us, where we're responsible for the merchant fees and interchange fees and bear the risk of the fluctuation of those. And -- so most of our clients prefer that.

Yes, that's a good question, Jonathan. I don't have those numbers just off here off the top of my head, we certainly can get back to you with those. I would say that generally speaking, we got a long runway left. We're still pretty early in our transactions business. You can point to our presentation at Tyler 2030 for how we saw transactions revenue to grow and the cash flow from that over the next 5 to 6 years.

Yes. We're still in the very early stages, very early innings of driving that cross-sell. We've done a lot of work with integrating the payments platform into our software products that have significant payments capabilities, things like utility billing and traffic court and licensing and permitting. And then as Lynn talked about earlier, the initiatives we've had to -- that in place more effective cross-selling sales motions. And we're starting to see the impact of that with, I think, we see 288 new payments deals across Tyler's customer base, but it's a very small fraction that we've penetrated so far of our software customer base with our payments platform, and that continues to build momentum, and we're really pleased with -- I'd say we're at least on track with our plans for this year. But again, in the very early innings of that.

Yes. And I'd add to that, Jonathan. I mean, last -- I guess, now 2 years ago, we acquired Rapid Financial, which is the disbursements world. We are -- we barely scratched the surface with that. So still a lot to do on both sides. I would say if you look -- again, point you to our 2030 presentation, I'd say we're kind of on track right now for that.

I don't know about that. I guess I would just say that -- so my comment before on cybersecurity is look, we all know what's out there. It's a big event when it happens to a client. Generally, they -- as I said, they view us and we view them as their trusted partner, and we're usually there to help them. And one of the things that they realize quickly is getting them into the cloud will make them much more secure. It's -- to say that there's driving flips, it is. It's not a huge tailwind, but it's out there. And it's not necessarily something that we're hoping for. But it's just a fact of life. It's a fact of doing business in today's world.

Yes. I think the biggest factor is larger average deal size. So we're seeing at least in the mix this quarter, and it won't necessarily be consistent every quarter because that can be kind of lumpy what that mix is. But we saw more bigger customers move we highlighted one of them, Fulton County, Georgia, with their tax solution. I think $1.3 million in ARR from that one. So seeing generally more larger customers in the mix. Last quarter, we had our first court flip. This quarter, we had the pellet court in Kansas flipping.

Yes. And Kirk, I think there's also been a few occasions where we may have won business a while ago. And to get that business, we had some contract concessions, maybe had some fixed pricing for a period of time. And the SaaS flip is an opportunity to sort of revisit that.

Yes. On the pricing side, specifically, we've talked about that as we continue to drive more business into the Tyler software customer base, we're able to generally achieve premium pricing or better pricing than a sort of a commodities type payment arrangement where we provide additional value from things like automated reconciliations. So having the software or the payments platform embedded with the software creates additional value for the customer and lets us get better pricing than some of the just payments-only type contracts.

Yes. The ARPU funds generally have to be committed by the end of 2024 and spent by the end of 2026. And so the commitments -- I mean, largely, I think, at this point across the universe of our customers and prospects, I think the majority of those have been committed probably a strong majority, I think, 80%, 85%, maybe more than that. But committed and sort of an internal commitment and doesn't necessarily mean that they've even started a buying process. So they may have committed funds for a new ERP system, but they haven't even issued the RFP yet.

Yes. Thanks, Terry. So I guess, first of all, like I said, we're early with these acquisitions. These acquisitions really fit the mold of acquisitions that we've done that have been very successful, which is a product differentiator that we can take into our installed base where we've got a really commanding position to leverage. I think each one of these 3 are -- have different growth trajectories, which is another one of our criteria is can this grow at a rate faster than Tyler's overall rate? And I think all 3 of these clearly ticked that box. I think the acquisition of CSI probably has a little bit bigger near-term market opportunity. The RexourceX will drive sufficient -- a lot of revenue in its own right, but it's also going to drive higher win rates for our ERP solutions, which is not necessarily as measurable.

And collectively, those 3 are around $4 million of revenues for the quarter. So yes, small compared to Tyler's total. But interestingly, a couple of those deals we called out were significantly sized deals with large customers. So the Dallas County CSI, almost $1 million of ARR from the CSI product. So you see how that -- relative to a business group that are collectively doing around $4 million a quarter in revenues, adding single contracts that add $1 million of ARR is off to a nice start.

Yes, it's a good point, Alex. And I was actually thinking to myself, when was the last time we'd ever done it, because I couldn't recall and you did my homework and told me it was 10 years ago. We just come off our management quarterly meetings. We've got really good visibility on what we see out there. And I would say it's improved. I talked earlier about not just the demand in the market, but what we're seeing for our sales outlook. We're just seeing a lot of things lining up in a way that gives us that confidence to do it, as you point out, I mean, it's not something we typically do. We were -- I wouldn't say we were conservative, but we like to not get ahead of our skis. And we'd like to tell you what we're going to do then we're going to go do it. And it's just -- it's a combination of a lot of factors.

And just generally, the revenue outperformance in Q1, obviously, it was not sort of pull forward or timing of things that we might have seen in the later quarter, especially around the transaction-based revenue, truly was additive to what we expected for the rest of the year. And so that drove us raising the outlook for the full year.

It's a good question, Alex. I think we -- I mean I don't know that we'll deviate from our historical practice of just taking a disciplined approach. We've got plans in place as it relates to margin and investment. I like our balance right now, I like our capital allocation where we sit right now. So I don't think you're going to hear us say this isn't 2017, 2018, where we're going to say, hey, this is now the time for elevated investment. We've got plenty of investments going on. And like I said, a lot of initiatives and both around revenue growth and margin expansion. So I don't think you'll hear that out of us over the next several quarters.

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