Tyler Technologies Inc (TYL)

• Strong Cross-Selling Success Leading to Larger Deals and ARR Growth: Tyler Technologies has made internal changes to incentivize cross-selling, resulting in significant integrated deals like a $1.6 million ARR contract with Kenosha, Wisconsin, and almost $2 million ARR with St. Petersburg, Florida. This strategy is contributing to ARR growth. -
• Transactions Business Exceeding Expectations with New Clients and Faster Onboarding: The transactions business saw revenues up sequentially due to over 200 new payments customers added in the quarter and faster onboarding processes. Significant go-lives like the California State Parks contract adding about $3 million revenue demonstrate strong execution. -
• Strong Growth in Cloud Flips Indicating Successful Cloud Transition: The total contract value from cloud flips more than tripled compared to last year, with TCV of flips up to $36 million. Average ARR of flips rose 37.2%, reflecting continued momentum in moving clients to the cloud. -

• Tyler Technologies' Public Safety division is lagging in version consolidation, with only 30% completion, potentially delaying margin improvements in that segment. -
• The company is taking a deliberate approach to AI, without significant AI benefits included in its long-term targets, which may place it behind competitors rapidly adopting AI technologies. -
• Revenue from client migrations ("flips") to cloud is lumpy, and recent strong quarterly results may not be indicative of future performance, leading to potential fluctuations in revenue growth. -

1. 2025 Guidance and Cash Flow
   Q: Will top-line growth accelerate in 2025? How are you thinking about free cash flow margin?
   A: Management is not ready to provide guidance for 2025 yet but mentioned they are ahead of their 2025 targets on the path to 2030. They expect 2025 cash flow to be at least consistent with this year, noting they are well ahead on cash flow and above their 2025 target already. Some one-time effects this year, like the $29 million prepayment from the Kentucky courts contract, are not typical. - , -

2. Free Cash Flow and One-Time Items
   Q: Can you quantify one-time items affecting free cash flow? Should we expect margins to stay at least at this year's level next year?
   A: The $29 million prepayment from the Kentucky courts contract is a significant one-time item affecting cash flow, but such prepayments are not typical. Management expects margins to remain at least at current levels next year, as they are ahead of their initial plans. -

3. Version Consolidation and Margin Benefits
   Q: What's the status of version consolidation, and how will it benefit margins?
   A: Version consolidation is progressing well, with flagship products like Enterprise Justice and ERP now down to 1 or 2 versions from 5–7 versions previously. This reduces the resources needed for maintenance and support, contributing to margin outperformance this year. They expect continued improvement in gross margins as part of their Tyler 2030 goals. - , -

4. Transaction Business Growth
   Q: What are the drivers behind transaction revenue growth, and is seasonality changing?
   A: Despite typical seasonality, transaction revenue grew due to new payments clients, faster onboarding, and significant deals like the California State Parks contract adding about $3 million and the Florida SunPass adding a couple of million dollars. Seasonality hasn't changed; growth is driven by new business and increased adoption. - , -

5. Services Business Impact on Margins
   Q: How is the shift to SaaS affecting services, and what is the impact on margins?
   A: Services revenue is expected to remain flat or decrease due to efficiencies in client onboarding and moving away from large custom implementations. As services are lower margin, less services in the revenue mix, combined with improved services margins, will positively impact overall margins, contributing towards their 2030 margin targets. -

6. Demand Sustainability and ARPA Funds
   Q: How sustainable is current demand, and how much benefit is coming from ARPA funds?
   A: Budgets remain strong, with leading indicators like RFP counts and demos consistent. ARPA funds have been helpful in certain deals but are not a major driver of sales growth. The impact of ARPA funds may continue up to 2026, but they don't attribute significant growth directly to it. - , -

7. AI Opportunities and Long-Term Guidance
   Q: Is AI included in long-term guidance, and how are customers thinking about leveraging AI?
   A: The 2030 targets did not include significant AI-driven efficiencies or sales. While customer interest in AI is growing, it's not yet a major driver in deals. They are taking a deliberative approach to AI, with applications like the CSI acquisition's document redaction solution providing ROI to clients. - , -

8. Competitive Landscape
   Q: Are you seeing more competition from ServiceNow and Workday?
   A: The competitive landscape has been neutral, with no significant increase in competition. They see some competition from horizontal players like Workday in ERP and ServiceNow in certain areas, but overall win rates are consistent with past periods. -

9. Cross-Selling Success
   Q: What are you doing to drive cross-selling, and will it increase after flips?
   A: Internal initiatives like changes to compensation to promote a One Tyler approach have enhanced cross-selling. Flips offer opportunities for upselling. Products like Courts & Justice with Public Safety and integrated deals in Kenosha, Wisconsin and St. Petersburg, Florida illustrate cross-selling success. -

10. Client Hesitation to Flip
    Q: Why are clients hesitant to flip to the cloud, and how do you convince them?
    A: Clients may hesitate due to a desire for control, especially those used to managing their own systems. Factors like aging infrastructure and increased cyber attacks are driving demand for flips. Seeing neighboring jurisdictions successfully move to the cloud reduces hesitancy, and Tyler's strong execution helps convince clients. - , -

Annual guidance for FY 2024:

• Total Revenues: $2.125 billion to $2.145 billion - (no change from $2.120 billion to $2.150 billion - )
• Merchant Fees: 7% - (raised from 6% - )
• GAAP Diluted EPS: $6.13 to $6.28 - (raised from $5.76 to $5.96 - )
• Non-GAAP Diluted EPS: $9.47 to $9.62 - (raised from $9.25 to $9.45 - )
• Free Cash Flow Margin: 21% to 23% - (raised from 18% to 20% - )