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    Tyler Technologies Inc (TYL)

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    Tyler Technologies, Inc. is a leading provider of integrated software and technology management solutions for the public sector, serving local, state, and federal government entities. The company offers a broad range of software solutions and services designed to support essential government functions, including public safety, justice, public health, taxation, budgeting, infrastructure, land use, utility and civic services, regulation, K-12 education, and social services . Tyler's business is organized into two main segments: Enterprise Software (ES) and Platform Technologies (PT) . The company generates revenue primarily from subscription-based services, including software as a service (SaaS) and transaction-based fees related to digital government services and online payment processing .

    1. Enterprise Software (ES) - Provides software systems for mission-critical "back-office" functions such as public administration, courts, public safety, education, and property recording solutions.
    2. Platform Technologies (PT) - Offers platform and transformative solutions, including digital solutions, payment processing, and streamlined data processing.
    Initial Price$502.79July 1, 2024
    Final Price$578.64October 1, 2024
    Price Change$75.85
    % Change+15.09%

    What went well

    • 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.

    What went wrong

    • 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.

    Q&A Summary

    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. ,

    Guidance Changes

    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% )
    NamePositionStart DateShort Bio
    H. Lynn Moore, Jr.President and Chief Executive OfficerJanuary 2017 (President), May 2018 (CEO)H. Lynn Moore, Jr. has been serving as the President of Tyler Technologies, Inc. since January 2017 and was named Chief Executive Officer in May 2018. He has been a director of the company since 2017 and is a member of the Executive Committee. Prior to his current roles, Mr. Moore served as Executive Vice President from February 2008 through December 2016, General Counsel from September 1998 through December 2016, and Secretary from October 2000 through December 2016. He also held the position of Vice President from October 2000 until February 2008. Before joining Tyler Technologies, Mr. Moore was associated with the law firm of Hughes & Luce, LLP in Dallas, Texas, from August 1992 to August 1998, where he represented numerous publicly held and privately owned entities in various corporate and securities, finance, litigation, and other matters .
    Brian K. MillerExecutive Vice President, Chief Financial Officer and TreasurerFebruary 2008Brian K. Miller has been with Tyler Technologies since 1997. He has served as the Executive Vice President, Chief Financial Officer, and Treasurer since February 2008. Prior to this role, he was the Senior Vice President, Chief Financial Officer, and Treasurer from May 2005 to February 2008. Before that, he held the position of Vice President, Finance and Treasurer from May 1999 through April 2005, and Vice President, Chief Accounting Officer, and Treasurer from December 1997 through April 1999. Before joining Tyler Technologies, Mr. Miller held various senior financial management positions at Metro Airlines, Inc. from June 1986 through December 1997 .
    Jeffrey D. PuckettChief Operating OfficerFebruary 2021Jeffrey D. Puckett has served as the Chief Operating Officer of Tyler Technologies, Inc. since February 2021. In his role, he oversees the company's cloud initiatives, corporate technology, IT, and information security teams. Prior to this, from 2019 until February 2021, he was the Chief Strategy Officer. Mr. Puckett has been with the company since 1992, having served in various roles, including President of the Courts & Justice division, and has over 30 years of direct industry experience .
    1. The Total Contract Value (TCV) of cloud flips tripled to $36 million this quarter; do you expect this level of growth in cloud flips to be sustainable, and how does this align with your projections for cloud adoption through 2030?
    2. You've indicated that competition in the market remains neutral, but can you provide more detail on how competitors like ServiceNow and Workday are impacting your business in key sub-verticals such as ERP and public safety?
    3. With some clients still hesitant to migrate to the cloud due to control concerns and aging infrastructure, what specific strategies are you implementing to address these hesitations and accelerate cloud adoption among your existing on-premise client base?
    4. Given that version consolidation is crucial for your cloud efficiency and margin improvement goals, particularly in products like Public Safety where consolidation may be lagging, what challenges are you facing in this process, and how might they affect your timeline for achieving targeted gross margin improvements?
    5. As the impact of ARPA funds on your deals has been somewhat mixed, how are you assessing the potential risks associated with the eventual depletion of these funds, and what measures are you taking to sustain your growth in the absence of such government funding?
    Program DetailsProgram 1
    Approval DateOctober 2002
    End Date/DurationNo expiration
    Total additional amount1.5 million shares (Feb 2019)
    Remaining authorization2.2 million shares (as of 2024-12-21)
    DetailsThe program is used to manage capital structure and return value to shareholders. Repurchases are influenced by market conditions and employee stock option exercises, funded by cash balances and credit facility.

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      • Total Revenues: $2.125 billion to $2.145 billion, with organic growth of approximately 9%.
      • Merchant Fees: Expected to increase by approximately 7% over last year.
      • GAAP Diluted EPS: $6.13 to $6.28.
      • Non-GAAP Diluted EPS: $9.47 to $9.62.
      • Free Cash Flow Margin: 21% to 23%, including an estimated impact of approximately $54 million of incremental cash taxes related to Section 174 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      • Total Revenues: $2.120 billion to $2.150 billion, with organic growth of approximately 9%.
      • Merchant Fees: Expected to increase by approximately 6% over the previous year.
      • GAAP Diluted EPS: $5.76 to $5.96.
      • Non-GAAP Diluted EPS: $9.25 to $9.45.
      • Free Cash Flow Margin: 18% to 20%, including an estimated impact of approximately $60 million of incremental cash taxes related to Section 174 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      • Total Revenues: $2.110 billion to $2.140 billion, with organic growth of approximately 8.5%.
      • Merchant Fees: Expected to be up slightly over last year.
      • GAAP Diluted EPS: $5.27 to $5.47.
      • Non-GAAP Diluted EPS: $9.10 to $9.30.
      • Free Cash Flow Margin: 17% to 19%, including an estimated impact of approximately $58 million of incremental cash taxes related to Section 174 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      • Total Revenues: $2.095 billion to $2.135 billion, with organic growth of approximately 8%.
      • Merchant Fees: Expected to be down slightly.
      • GAAP Diluted EPS: $5.17 to $5.37.
      • Non-GAAP Diluted EPS: $8.90 to $9.10.
      • Free Cash Flow Margin: 17% to 19%, including the impact of incremental cash taxes related to Section 174 of approximately $50 million .

    Competitors mentioned in the company's latest 10K filing.

    • Oracle Corporation
    • Infor
    • SAP AG
    • Workday, Inc.
    • CentralSquare Technologies
    • Thomson Reuters Corporation
    • Motorola Solutions, Inc.
    • Axon Enterprise, Inc.
    • Constellation Software, Inc.