Q3 2024 Earnings Summary
- 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.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +10% | The increase from prior periods (e.g., $504.3M in Q2 2023 and $541M in Q2 2024) was driven by strong recurring revenue growth, especially in SaaS and transaction-based fees, along with continued expansion of the customer base. |
Enterprise Software | +10% | Growth came from new SaaS contracts and on-premises clients converting to subscription arrangements. This shift increased the segment’s recurring revenue and helped offset declines in traditional license revenues. |
SaaS Revenue | +20% | The ongoing transition to cloud-based solutions and consistent client conversions drove this double-digit increase (e.g., +20% year-over-year in prior quarters). Strong new-client signings and faster adoption of subscription models also contributed. |
Transaction-Based Fees | +15% | Higher online payment volumes, e-filing services, and recreational licensing transactions led to this rise. Seasonal factors (e.g., outdoor activity registrations) and new customers also boosted volumes compared to prior periods. |
Operating Income (EBIT) | +30% | Margin improvement stemmed from increased SaaS scale and cost controls, building on prior quarters’ focus on cloud optimization. Reduced operating expenses (e.g., data center exits) contributed to profitability gains. |
Net Income | +61% | A combination of revenue momentum, lower interest expense, and improved operating efficiency led to a more pronounced jump in net income compared to previous periods (e.g., Q2 2023 and Q2 2024). |
EPS (Diluted) | +60% | This spike reflects the net income growth and share repurchase impacts over the past year. Higher cloud margins and reduced costs pushed diluted EPS well above the prior-year level. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total Revenues | FY 2024 | $2.120B – $2.150B | $2.125B – $2.145B | no change |
Merchant Fees | FY 2024 | ~6% growth | ~7% growth | raised |
GAAP Diluted EPS | FY 2024 | $5.76 – $5.96 | $6.13 – $6.28 | raised |
Non-GAAP Diluted EPS | FY 2024 | $9.25 – $9.45 | $9.47 – $9.62 | raised |
Free Cash Flow Margin | FY 2024 | 18% – 20% | 21% – 23% | raised |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Total Revenues | Q3 2024 | $2.120 billion to $2.150 billion for FY 2024 (~9% organic growth) | $543.337 million(which is approximately a 9.8% year-over-year increase from $494.685 million) | Surpassed (Q3 yoy growth > 9%) |
GAAP Diluted EPS | Q3 2024 | $5.76 to $5.96 for FY 2024 | $1.74(Q3 2023 GAAP diluted EPS was $1.09, reflecting ~59.6% year-over-year growth) | On track (cannot fully conclude FY, but Q3 shows strong yoy growth) |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Cloud adoption and flips to SaaS | Q2 2024: 97% of new software contract value was SaaS, 111 flips. Q1 2024: 93% of new software contract value was SaaS, 90 flips. Q4 2023: SaaS revenue growth of 21.7%, flips reached 92. | Continued strong momentum: 97% of new software contract value was SaaS. Public safety hit 100% SaaS contract value, up from 28%. Signed 108 flips with total contract value more than triple last year; average ARR of flips rose 37.2%. | Consistent topic across all periods, with growing emphasis on flips and larger clients. |
No slowdown from macro factors or elections | Q2 2024: No mention of this. Q1 2024: Historically, no significant correlation with election cycles. Q4 2023: No real change in outlook due to macro factors. | No slowdowns observed. H. Moore noted no hesitations due to elections or macro factors, with most units meeting or exceeding sales plans. | Recurring topic; reaffirms stable demand despite elections or macro environment. |
Transaction revenues and payments business growth | Q2 2024: Transaction revenues +3.8% to $177.7M; shift from gross to net model impacted yoy comps. Q1 2024: +3.7% to $164.5M, with 288 new payment deals. Q4 2023: +3% to $145.1M; impacted by gross-to-net changes. | Transaction revenues grew 15.2% to $180.5M, aided by onboarding big contracts like California State Parks. Signed 268 new payment deals worth ~$8.6M in ARR. | Consistent growth topic; volume and new big wins continue to drive transaction revenue. |
Lumpy total contract value from flips | Q2 2024: Timing of deals can be lumpy; average ARR up ~20% yoy. Q1 2024: Variation due to mix and deal sizes. Q4 2023: Large flips like Idaho state courts caused TCV fluctuations. | Reiterated that flips can be “lumpy.” Q3 was strong but not necessarily a new run rate. | Consistent mention; guidance remains that quarter-to-quarter flip TCV can fluctuate. |
One-time prepayments impacting free cash flow | Q2 2024: No mention. Q1 2024: No mention. Q4 2023: No mention of specific prepayments. | Yes; Kentucky courts prepaid 6 years of SaaS (~$29M), creating a one-time cash flow bump. | New item this period; large prepayment spiked FCF. |
Client hesitancy to flip to the cloud | Q2 2024: Significant reduction in hesitancy, especially in public safety. Q1 2024: Version gating, complexity, and cybersecurity concerns shape client decisions. Q4 2023: Some flips triggered by ransomware incidents. | Still present; driven by control concerns and aging infrastructure, but customers are swayed by cybersecurity and peer influence. | Consistent topic; hesitancy is diminishing over time but still mentioned. |
Capitalized development costs and reduced R&D | Q2 2024: Shift toward increased capitalization lowered expensed R&D. Q1 2024: No mention. Q4 2023: Shift from capitalizing cloud projects to expensing. | No mention in Q3 2024. | No longer mentioned in Q3; previously cited around cost classification changes. |
Intense competition in the public safety sector | Q2 2024: Emphasized cloud advantage vs. smaller rivals; 90% of public safety deals were SaaS. Q1 2024: Acknowledged fierce market; SaaS is a differentiator. Q4 2023: Similar note, new smaller cloud-native players but facing challenges. | Neutral; no major changes, competition remains stable, win rates consistent. | Consistently addressed; remained competitive but stable. |
Uncertainty regarding customer budgets | Q2 2024: Budgets steady, no negative changes. Q1 2024: Budgets strong, no election correlation. Q4 2023: No mention. | Generally healthy budgets, strong RFP/demo counts; H. Moore acknowledges unpredictability longer-term. | Recurring note of stable budgets offset by typical caution on future unpredictability. |
Raised full-year revenue guidance | Q2 2024: Provided $2.120B–$2.150B guidance, ~9% organic growth. Q1 2024: First time raising guidance in nearly a decade. Q4 2023: Provided initial 2024 guidance of $2.095B–$2.135B. | Yes; updated 2024 guidance to $2.125B–$2.145B, ~9% organic growth at midpoint. | Consistent upward revision; showing confidence in 2024 outlook. |
Improving operating margins tied to cloud | Q2 2024: 24.5% margin, cloud transition and data center exits driving improvement. Q1 2024: 23.8% margin, version consolidation and AWS optimization. Q4 2023: Operating leverage from AWS migrations. | Non-GAAP margin at 25.4%, reflecting cloud efficiencies and professional services gains. | Consistent expansion attributed to cloud progress and version consolidation. |
Accelerated growth in subscription contracts | Q2 2024: SaaS 97% of new software contract value, strong flips. Q1 2024: SaaS 93% of new software contract value. Q4 2023: SaaS revenue +21.7%, 156 new SaaS deals. | Subscription revenue +17.6%, SaaS +20.3%; 97% of new software contract value was SaaS. 108 flips contributed ARR growth. | Consistent high SaaS mix continues to rise quarter by quarter. |
Gross to net transaction revenue model changes | Q2 2024: Lapping mid-2023 gross-to-net shift reduced yoy transaction revenue comps. Q1 2024: Detailed changes for two state clients. Q4 2023: One state contract impacted Q4 by ~$9–$10M. | No mention in Q3 2024. | No longer mentioned this period; previously key factor for transaction revenues. |
Shift from license revenue to SaaS models | Q2 2024: Licenses <1% of total revenue. Q1 2024: Faster-than-expected SaaS adoption lowered license expectations. Q4 2023: Emphasis on SaaS growth; license revenues declining. | License revenue below plan due to more pronounced SaaS shift. | Consistent topic; license revenues continuing to drop. |
Challenges in realizing cloud transition benefits | Q2 2024: No direct challenges noted, primarily upbeat progress. Q1 2024: Mentioned version gating can slow flips. Q4 2023: Not explicitly stated, but recognized time lags for some benefits. | Not specifically mentioned; mostly positive about cloud efficiencies. | No direct mention this quarter; remains a minor undercurrent in earlier calls. |
Strong growth in public safety cloud adoption | Q2 2024: 90% of public safety contract value was SaaS. Q1 2024: 75% of enterprise public safety deals were SaaS. Q4 2023: 46%–50% shift, with new flips in public safety. | Yes; 100% of new public safety contract value in Q3 was SaaS, up from 28%. | Consistent and accelerating adoption trend in public safety. |
Confidence in achieving mid/long-term projections | Q2 2024: Confidence in Tyler 2030 amid SaaS flips momentum. Q1 2024: Raised guidance and emphasized alignment with 2030 Vision. Q4 2023: Expressed optimism despite merchant fee drag. | Yes; strong nine-month results and cloud ops gains bolster mid-term and 2030 goals. | Ongoing optimism about long-range targets. |
Significant operating leverage from cloud | Q2 2024: Cloud driving margin gains, 24.5% non-GAAP operating margin. Q1 2024: 23.8% non-GAAP margin due to AWS optimization. Q4 2023: Exiting data centers and version consolidation yield leverage. | Mentioned: Cloud efficiency initiatives and version consolidation expand margins. | Consistent margin improvement theme as cloud scales. |
Below-expectations revenue guidance for 2024 | Q2 2024: No mention of below-expectations. Q1 2024: No mention of below-expectations. Q4 2023: Guidance midpoint noted as slightly below Street estimates. | No mention of guidance being below expectations; new guidance stands at $2.125B–$2.145B. | No mention this quarter; previously called out in Q4 2023. |
Declining license revenues | Q2 2024: Licenses <1% of revenue. Q1 2024: Lowered license outlook due to accelerated SaaS. Q4 2023: Low single-digit growth but shrinking portion of the mix. | Yes; license revenues fell short of plan, overshadowed by SaaS. | Consistent theme of license decline as SaaS displaces on-prem. |
Upcoming $600 million convertible debt | Q2 2024: $600M outstanding, due March 2026. Q1 2024: Same figure, net leverage ~0.79x. Q4 2023: Plan to build cash to repay rather than refinance. | Referenced; due in ~16–17 months. Cash balance nearing coverage. | Consistent priority; planning to cover maturity with cash. |
Data center closings and AWS migrations | Q2 2024: Closure of Dallas data center to save CapEx; further AWS scaling. Q1 2024: Still on track to exit first data center by midyear. Q4 2023: Full exit from two data centers by 2025, deeper AWS collaboration. | No mention in Q3 2024 earnings call. | No mention this quarter; previously discussed cloud migrations and data center exits. |
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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. , -
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. -
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. , -
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. , -
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. -
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. , -
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. , -
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. -
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. -
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. ,