Tyler Technologies Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

There are 11 speakers on the call.

Operator

Hello, and welcome to today's Tyler Technologies Third Quarter 2021 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in listen only mode. Later, we will conduct a question and answer Session and instructions will follow at that time. And as a reminder, this conference is being recorded today, October 28, 2021.

Operator

Lynn Moore, please go ahead.

Speaker 1

Thank you, Jason, and welcome to our call. With me today is Brian Miller, our Chief Financial Officer. First, I'd like for Brian to give the Safe Harbor statement. Next, I'll have some comments on our quarter and then Brian will review the details of our results. I'll end with some additional comments and then we'll take questions.

Speaker 2

Brian? Thanks, Lynn. During the course of this 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

Speaker 1

We would refer you to

Speaker 2

our Form 10 ks and other SEC filings for more information on those risks. 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. Lynn?

Speaker 1

Thanks, Brian. Our Q3 results were exceptionally strong, building on the momentum we established in the first half of the year. This was our 1st full quarter, including NIC's results, and it was our best quarter ever by most financial measures. We achieved new quarterly highs in revenues, Non GAAP EPS, free cash flow, adjusted EBITDA, bookings and backlog. Total revenues grew 60.9 percent with organic growth of 7.6%.

Speaker 1

As a result of the surge in the Delta variant, NIC's COVID-nineteen related revenues from Tour Health and pandemic unemployment initiatives were significantly above plan at $43,300,000 We had expected those revenues, which have relatively low margins, to wind down in the second half of the year, but we now expect they will continue into the first half of twenty twenty two. NIC's core revenues grew 5% in the quarter. Recurring revenues comprised over 80% of our quarterly revenues for the first time And we're led by 183% growth in subscription revenues. Excluding NIC revenues, subscription revenue growth was robust at 23.9%, reflecting our accelerating shift to the cloud. We have now achieved greater than 20% subscription revenue growth In 55 of the last 63 quarters, software licenses and services revenues grew 13.9% Or 2% excluding NIC.

Speaker 1

As expected, our margins compressed compared to last year's Q3. Some expenses like trade shows and employee health claims as well as lower margin revenues like billable travel that declined in 2020 due to COVID pandemic Have begun to return this year. Margins were also impacted by the inclusion of NIC and particularly by the continuation of their lower margin COVID initiative revenues. As a result, our non GAAP operating margin declined 330 basis points to 25.3%. Excluding NIC's COVID initiative revenues and related costs, our non GAAP operating margin was 26.8%.

Speaker 1

Bookings reached a record high in the 3rd quarter at approximately $601,000,000 more than double last year's Q3. Excluding NIC, bookings grew 51.9 percent, with the biggest contributor being the $63,000,000 renewal of our fixed The e filing arrangement with the State of Illinois. We're very pleased to report early success this quarter with joint sales efforts between NIC and Tyler Solutions teams. We signed agreements with the Virginia Department of Housing and Community Development valued at approximately $24,000,000 To provide a digital and call center solution for tenant, landlord and third party filing of rent relief program claims. We'll also provide administrative dashboards from our Socrata data and insight solutions as well as payment processing capabilities.

Speaker 1

Our largest software deal in the quarter also came from NIC with $6,100,000 SaaS contract with the West Virginia Division of Motor Vehicles for digital titling. This new digital vehicle titling and registration management system will go beyond modernization and revolutionize how the DMV manages vehicles and Interacts with businesses and citizens. In addition to the streamlining of nearly every vehicle related process in place today, Many legacy paper processes will be fully replaced with secure digital solutions. The solution utilizes technology to govern And secure the vehicle ownership process, adding security, reducing fraud and providing the flexibility that other state DMVs Operations are lacking. The arrangement, which leverages our state master agreement, has an initial term of 5 years.

Speaker 1

In addition to the SaaS fees, the agreement will generate estimated transaction revenue of more than $3,000,000 per year. I'd like to also highlight a few more significant deals signed this quarter. We signed appraisal services contracts with the Delaware Counties of Newcastle and Kent. In addition, Newcastle County selected our IACE World Appraisal solution under a SaaS arrangement. The deals have a combined value of approximately $19,000,000 Coupled with the appraisal services contract signed last quarter with Sussex County, Tyler will now be performing a property reassessment for the entire state.

Speaker 1

Also for our IAS World Property Tax and Appraisal Solution, We signed SaaS arrangements with the regional municipality of Wood Buffalo in Alberta, Canada valued at approximately $3,100,000 Franklin County, Ohio, valued at approximately $3,500,000 and Summit County, Ohio, which also includes our data and insight solution, valued at approximately $2,900,000 Other major SaaS deals included a $4,500,000 contract with Arlington Heights, Illinois for our ERP Civic Services and Payment Solutions

Speaker 3

and a

Speaker 1

$3,400,000 contract with Bexar County, Texas for our ODiSI, SoftCode and Supervision Justice solutions. Our largest perpetual license contract for the quarter Was a $5,400,000 contract to provide our MicroPact and TeleTrax solution to manage COVID vaccination attestations for the U. S. Department of Justice. We also signed a $2,500,000 on premises license contract with the Commonwealth of the Northern Mariana Islands for our Munis ERP and Enterprise Asset Management, Executime and Socrata Solutions.

Speaker 1

We also signed several significant contract renewals with existing clients, including extensions of NIC's state enterprise agreements with the states of Utah and Oklahoma and a 5 year renewal of our e filing arrangement with the state of Illinois, which was expanded to include applications from our The Crota Data and Insights platform. On last quarter's call, we reported that NIC had been selected as one of 2 vendors to provide the internal revenue service with a digital payment processing solution that would allow taxpayers to securely pay their federal taxes and that revenue under that contract was expected to begin in January of 2022. Following the award, Three entities filed protests with the GAO. Prior to any ruling on the protest by the GAO, the IRS notified the GAO That it was canceling the 2 awards, including the award to NIC. While the IRS has not formally terminated NIC's contract, It has issued a stop work order under the contract.

Speaker 1

The IRS indicated that it will either amend the current solicitation, allowing all bidders to modify their previous submissions and then reevaluate the proposals or terminate the existing solicitation and start the process over with a new procurement in the coming months. The IRS has not yet stated which of these options it will select, We have no information regarding the potential timing of either option. Given these recent developments, We do not expect to recognize any revenue under the IRS award in 2022. While the specific concerns raised in the protests have not been made public and are not known by Tyler, the decision to cancel the award to NIC was not related to NIC's performance under the contract, Its ability to successfully perform under the contract or any allegations of misconduct or improper behavior by NIC. On the M and A front, we completed the acquisitions of VendEngine and Arx during the Q3.

Speaker 1

VendEngine is one of the fastest growing technology companies in North America, operating in more than 230 counties and 32 states. Its leading cloud based platform provides a comprehensive suite Of applications focused on the corrections market, including deposit technologies for commissary, ordering and warehouse management and various informational, electronic communications, security, accounting and financial trust management components. Arx is a cloud based software platform, which creates accessible technology to enable a modern day police force that is fully transparent, accountable and a trusted resource to the community it serves. The acquisition of Rx allows Tyler to offer a full suite of public safety solutions, including Rx Alert An Rx community, designed to maximize efficiency and safety for law enforcement officers, while increasing transparency and trust building with communities. Ventigence and Arx have combined ARR of approximately $17,500,000 and their additions further strengthen Tyler's Justice and Public Safety Suites.

Speaker 1

Now, I'd like for Brian to provide more details on the results of the quarter.

Speaker 2

Thanks, Lynn. Yesterday, Tyler Technologies Reported its results for the Q3 ended September 30, 2021. In our earnings release, we have included non GAAP measures that we believe facilitate understanding of our results Comparisons with peers in the software industry. A reconciliation of GAAP to non GAAP measures is provided in our earnings release. We've also posted on the Investor Relations section of our website under the Financial Reports tab schedules with supplemental information provided on this Call including information about quarterly bookings, backlog and recurring revenues.

Speaker 2

GAAP revenues for the quarter were $459,900,000 up 60.9%. Non GAAP revenues were $460,600,000 up 61.1%. On an organic basis, GAAP and non GAAP revenues grew 7.6% and 7.5% respectively. Software license revenues rose 13.7%. Subscription revenues rose 183.3%.

Speaker 2

Excluding the contribution from NIC, subscription revenues were still very strong, growing 23.9%. We added 144 new subscription based arrangements and converted 67 existing on premises clients, representing approximately $84,000,000 in total contract value. In Q3 of last year, we added 114 new subscription based arrangements And had 46 on premises conversions representing approximately $56,000,000 in total contract value. Subscription contract value comprised approximately 74% of total new software contract value signed this quarter, compared to 47% in Q3 of last year, reflecting our ongoing shift to a cloud first approach to sales. The value weighted average term of new SaaS contracts this quarter was 3.4 years compared to 4.3 years last year.

Speaker 2

Transaction based revenues, which include NIC portal, payment processing and e filing revenues and are included in subscriptions We are $171,200,000 up more than 6 fold from last year. E filing revenues reached a new high of 17 $14,000,000 up 15%. Excluding NIC, Tyler's transaction based revenues grew 24.3%. For the Q3, our annualized non GAAP total recurring revenue or ARR Was approximately $1,500,000,000 up 79.2%. Non GAAP ARR SaaS software arrangements for Q3 was approximately $330,000,000 up 24.7%.

Speaker 2

Transaction based ARR was approximately $685,000,000 up 639 percent And non GAAP maintenance ARR was flat at approximately $471,000,000 Our backlog at the end of the quarter was 1,770,000,000 Up 14.3 percent. Because the vast majority of NIC's revenues are transaction based, their backlog at quarter end was only $27,000,000 Excluding the addition of NIC, Tyler's backlog grew 12.6%. As Lynn noted, our bookings in the quarter were very robust at $601,000,000 up 105.7 percent and includes the transaction based revenues of NIC. On an organic basis, bookings were strong at approximately $444,000,000 up 51.9 percent Fueled by the renewal of the State of Illinois 6 CE filing arrangement of approximately $63,000,000 and the addition of the 2 Delaware appraisal deals Totaling $19,000,000 For the trailing 12 months, bookings were approximately $1,600,000,000 up 31.3 percent And on an organic basis, we are approximately $1,400,000,000 up 10.8%. Our software subscription bookings in the 3rd quarter added $19,000,000 in new annual recurring revenue.

Speaker 2

Cash Operations and free cash flow were both record highs for the 3rd quarter at $205,400,000 $192,800,000 respectively. Our balance sheet remains very strong. During the quarter, we repaid the outstanding balance of $65,000,000 on our revolver And paid down $57,500,000 on our term loans for a total debt reduction of $122,500,000 We ended the quarter with total outstanding debt of $1,428,000,000 and cash and investments of $348,400,000 and net leverage of approximately 2.3 times trailing pro form a EBITDA. We expect the net leverage to be approximately 2 We have raised our revenue and EPS guidance for the full year 2021 to reflect our strong year to date performance And our expectations for the Q4. We expect 2021 total GAAP revenues will be between $1,577,000,000 And $1,597,000,000 and non GAAP total revenues will be between $1,580,000,000 And $1,600,000,000 We expect total revenues will include approximately $72,000,000 of COVID related revenues from NIC's Tour Health and pandemic unemployment services that are expected to wind down in the first half of twenty twenty two.

Speaker 2

We expect 2021 GAAP diluted EPS will be between $3.55 $3.63 And may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect 2021 non GAAP diluted EPS Will be between $6.94 $7.02 Other details of our guidance are included in our earnings release.

Speaker 4

Now I

Speaker 2

would like to turn the call back over to Lynn.

Speaker 1

Thanks, Brian. I am extremely pleased with our Q3 results, both from Tyler's core operations and from NIC in its 1st full quarter as part of Tyler. When we spoke to investors in June, We discussed four priorities around the NIC acquisition for 2021. 1st, don't mess up the business. 2nd, Achieve our 2021 plans for both businesses.

Speaker 1

3rd, retain NIC staff and establish the long term leadership team. And 4th, identify and launch joint strategic initiatives and get our sales teams aligned. I'm happy to say we are executing on all of those objectives. Both businesses are executing at a high level and are exceeding our 2021 plans. The NIC team, under the leadership of Elizabeth Proudfit, He's enthusiastic about the combination and the opportunities ahead with Tyler.

Speaker 1

And we've hit the ground running with teams actively working on integration and go to market strategies. We're showcasing Tyler products to NIC's entire State General Manager team. And NIC's General Managers are providing detailed reviews of the NIC Enterprise contracts and relationships for Tyler's team. We've also established a payments technology integration plan and And are in the process of finalizing the joint Tyler NIC Payments Organization. We've already had some early success in joint opportunities, Such as our contract with the Colorado Department of Regulatory Agencies that includes NIC Payment Processing, Tyler's IntelliTrac Regulatory Solutions and our Socrata data and insights platform, as well as the recent NIC contract with Virginia for a solution for the rent relief program, which also includes Tyler Socrata applications.

Speaker 1

We have a current pipeline of more than 40 qualified sell through opportunities with NIC's state enterprise market Across multiple Tyler solutions and have identified Tyler sales opportunities leveraging NIC State Enterprise contracts To speed up the time from award to contract, we are also beginning to build our combined payments pipeline with early sales in Florida and Louisiana. We continue to see positive trends in public sector market activity. Indicators such as proposals, Sales demonstrations and pipelines are all up significantly from 2020 and are generally at or in some cases above pre COVID levels. Our competitiveness remains strong as reflected by high win rates across our major applications. While not yet a significant factor, we are starting to see purchasing activity that is identified as being funded through the federal stimulus under the CARES Act And American Rescue Plan.

Speaker 1

We expect that the $350,000,000,000 of aid to state and local governments and $167,000,000,000 of aid to schools the American Rescue Plan Act, we'll provide a significant measure of relief to budget pressures faced by many of our clients and prospects And potentially provide a tailwind over the next 2 to 3 years. A survey by the National Association of CIOs Indicated that most state CIOs expect that remote work will continue and the need for digital services will increase. CIOs also said they plan to modernize legacy systems in the next 2 years, with human services and public welfare, Labor and Employment and Health Services noted as priorities. Tyler is well positioned to help public sector leaders address those needs. We also remain on track with our R and D projects around our cloud initiative and with our progress toward hosting new SaaS implementations and on premises conversions in AWS.

Speaker 1

Our cloud operation team is engaged in 2022 planning with a focus on continued product optimization, data center migration and operations maturity. Finally, I want to welcome the newest member of Tyler's executive leadership team, Kevin Iwersen, who joined Tyler earlier this month as Chief Information Officer. Kevin is a seasoned IT leader with experience managing technology infrastructures for corporations, Statewide Judicial Courts, Statewide Executive Government Agencies and U. S. Military Organizations, most recently serving as CIO for the Idaho Judicial Branch.

Speaker 1

Kevin will work closely with our former CIO, Matt Barry, until Matt's retirement early next year. I'd also like to express our deep appreciation to Matt for his tremendous leadership of our IT and hosting organization over the last 11 years and wish him the best in his retirement. With that, we'd like to open up the line for Q and A.

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you have further questions, you may reenter the question queue. Our first question comes from Matt VanVliet from BTIG. Please go ahead.

Speaker 3

Hey, good morning guys. Thanks for taking the question and nice job on the quarter. I guess pertaining to the commentary that was in both the press release and you've I talked about this morning in terms of some of the stimulus funding finally sort of making its way into the market. Wondering if you could give us Some additional color in terms of where you're seeing some of that coming through now, Where are some of the newer sales activities pertaining to jurisdictions that feel like they have more budget to Spend and maybe are looking at nice to have types of projects and anything additionally around types of Products that they're most interested in, in terms of using that funding? Thanks.

Speaker 1

Yes, sure, Matt. It's a good question. It's something that we're starting to track a little bit more. I'd say you're seeing it really across a lot of our solutions, but I think we've seen a lot really on the enterprise side. We're seeing a little bit in schools and we've seen some over on NIC.

Speaker 1

I think right now if you look at Q3 and Q4, There are a few dozen deals out there that are certainly being spurred right now through some of that federal stimulus spending and I'd expect some of that to continue.

Speaker 3

Great. Thanks. And then following up, I guess, on the exact sort of contribution of what the NIC business It's looking like in the guidance for kind of the full year what the contribution looks like, understanding that some of that was one time. But Brian, if you could help us just kind of what the underlying core business is contributing there and kind of what the growth Continues to look like on a forward basis. Thanks.

Speaker 2

Yes. So excluding NIC, The current guidance would have Tyler's forecast. I guess the midpoint of our guidance would be around $1,224,000,000 of revenues And that would be the midpoint around 9.5% growth for the full year And that would imply again at the midpoint of our guidance around 11% growth for the core Tyler operations in the 4th quarter. In NIC, as we had discussed, the COVID Related initiative revenues have continued beyond when we thought even at the end of last quarter they would wind down. At The end of last quarter, our guidance had about $17,000,000 for the second half of the year and we did $43,000,000 under those initiatives In Q3 and I expect the full year to be about $72,000,000 so about another $13,000,000 or so in the 4th quarter And some of that then continuing on into next year.

Speaker 2

But NIC's core growth, excluding those COVID initiatives, was around 5% Around the holidays and some of the transaction volumes tend to fall in the 4th quarter. So Their Q4 probably is well, our guidance reflects that in the 4th quarter numbers.

Speaker 3

Great. Thanks for all the color. Appreciate taking the questions.

Operator

The next question comes from Scott Berg from Needham and Company. Please go ahead.

Speaker 5

Hi, Linn and Brian. Congrats on a really good quarter here. I guess I got several questions. Bookings were quite strong in the quarter, especially excluding NIC. Linn, if we dissect those a little bit, How much of the bookings in the quarter are maybe catch up deals that were pushed from the earlier stages of the pandemic just into the current period?

Speaker 5

Or are you Kind of seeing more of a return to a normalized deal cadence here, which you've been enjoying for the last decade or so.

Speaker 1

Yes. I think it's a combination of a couple of things, Scott. We did have a couple of very large deals that we signed in the quarter, which obviously were absent in Q3. Q3 was difficult last year. But I think as I mentioned in my comments, when you look at the market activity and what I've talked about over the last several quarters is, over the last 18 months or so, the pandemic has sort of affected different parts of our business a little bit differently.

Speaker 1

Some were hit a little bit harder. And I think I've mentioned before that if you look at, for example, our mid to higher end financials, our Munis product, that was an area that was hit a little bit harder. And what you're seeing there, for example, is You're seeing awards and deals that are actually exceeding pre COVID levels. And I think that's the example of what you just mentioned, which is it's It's really the example that both pent up activity, as well as I think sort of validate some of the investments and some of the strategy that we've been doing over the last couple of years.

Speaker 5

Excellent. Thanks. And then from a follow-up perspective, Brian, on the guidance for the year, if I back out the Added revenues expected from NIC, it looks like your core Tyler guidance is roughly flat for the year. How are you thinking about kind of deal mix around subscription versus license deals? Because the bookings were certainly strong, I guess I would have maybe expected a little bit more increase And kind of the core Tyler revenues, but that's probably related to maybe stronger subscription bookings mix than maybe what you're previously expecting?

Speaker 6

Yes. I'd say that's accurate. We are

Speaker 2

generally expecting the mix to continue to trend towards An increasing percentage of SaaS. Now the Q4, as you know, typically is a strong quarter for public safety, which Still is primarily on premises and so that tempers that a bit, but that also was the case last year. But in general, we expect an ongoing continuation of the trends we've seen where a higher percentage of the mix

Speaker 1

Yes, I think I'd add there Scott that it's the amount of SaaS has actually even exceeded our going into your expectations. And And while we expected the market to be moving this way, we talked before the pandemic has certainly accelerated that. And you look at areas, I'll mention Munis again, I mean we're north of 85 Our deals are SaaS now. You look at our lower end financials at ENCODE, north of 80%, where last year they were 50%. So There is some of that headwind.

Speaker 1

I think as the model continues to play out, we'll get on the other side of that.

Speaker 5

Excellent. Thanks for the color. Great quarter. Thanks.

Operator

The next question comes from Ethan Brook from Wolfe Research. Please go ahead.

Speaker 6

Hey, guys. I think this is it's Alex here from Wolfe. So a couple of questions from me. First, if we think about the I wanted to ask about the maintenance revenue in the quarter. The maintenance revenue was, I think, down a bit sequentially.

Speaker 6

Are you starting to see is that conversion Activity is starting to pick up a little bit and how should we think about it in Q4 and beyond Lynn?

Speaker 2

Yes. I think that's accurate. Each of the last couple of quarters have been new all time highs for us in terms of the number of conversions And certainly when you look back at the last four quarters, which all kind of filter into the maintenance growth, The last four quarters have well exceeded the flips or conversions that we saw in the prior year. And just as the new business is shifting towards more SaaS, there is an increasing interest in on prem customers Flipping. So that does have a negative effect on maintenance, but generally The revenues that are going into the subscription side as they flip is about 2x what the maintenance was.

Speaker 2

So that's a component On the other side of the high growth in subscriptions. And then you look at the mix of new business over the last As it continues to shift towards more SaaS and less license that has an effect on the growth as well. And then the last thing is some attrition around a legacy product At in the federal business, where the federal government has mandated some states to move off Our product and onto a federal provided product that's had a bit of an impact there as well. So, but the flip side, I'd say, are the biggest impact, those ongoing conversions and that will continue to be the case And at some point, over the next couple of years, there will likely be a significant acceleration in those as we have the ability to Accelerate that through moving those customers into AWS.

Speaker 1

Yes, I think Alex too, I guess to summarize, if you look out over the next couple of years, You'll see that subscription revenue line continuing to grow at an increasing pace. Conversely, you'll see licenses contract Proportionately and maintenance will probably continue to flatten out as Brian mentioned as those annual increases started getting offset by flips which Our flips are up significantly year over year from last quarter.

Speaker 6

Perfect. And I guess Maybe on the NIC side, so as you talked a little bit about the Increasing synergy opportunities that you're starting to see in the base, when should we think about like when we think about That 5% growth for the core NSE business that you talked about, is that something like how should we think about that trending Or it is an acceleration that is going to be you guys think is sustainable from that level from here Ex the one time revenues from COVID. And then on the COVID impact, Is there any reason why we do think that they end in the first half of next year? Or are there any of those that actually have the potential to be more durable given the variability of mandates.

Speaker 1

Yes. I'll start with the last one.

Speaker 7

I guess

Speaker 1

I would say on a personal note, I think I've said before, I wouldn't be I'd be happy if it ended. That means that COVID is getting further in our rearview mirror. It's our expectation. The revenues right now are primarily out of 3 areas. It's out of the state of South Carolina, where they're The primary doing the primary testing also the State of Nevada and then we've mentioned the Virginia Unemployment release stuff.

Speaker 1

The expectation is, I mean, it is a little bit of a guess, but it's an educated guess and we're assuming that that will wind down. What's interesting about the South Carolina revenues is that we'll move from a contractor role to a subcontractor role. So while those revenues So continue and eventually taper off. I think our margins on those will increase. I think what's important about the COVID initiative though is it really shows The ability of NIC's team to innovate, it shows their agility and it also shows the relationships that they have With their state enterprise contracts that they could spin these things up quickly and create new solutions and I think that's what's exciting.

Speaker 1

When you talk about, I think your first question was about growth rates going forward. We're excited. I can't tell you how excited the sales teams are as they meet, they get together. I think as we move forward, we talk about selling All other different products through the NIC sales channels and conversely what we can bring to NIC. But you think about what Tyler Payments and we're already seeing a lot of our Socrata Data and Insights and IntelliTrac platform, Public Safety and Civic and Munis.

Speaker 1

All those deals are in the pipeline and I don't know that going forward we will always be able to sort of segregate, oh, these were NIC deals because these are Tyler products going through them. We probably at some point won't continue to isolate the NIC revenue growth, but what we see overall with Tyler is as part of this acquisition And part of the underlying rationale is that we believe it will help drive Tyler's overall revenue growth at a higher level than it would have on its own.

Speaker 6

That's super helpful, Lynn. And then the last question I wanted to ask about the IRS contract. Is there a way to dimensionalize at least what the expectation It may have been for that revenue stream in 2022 before the cancellation of the agreement and any thoughts For us, in terms of how we should think about modeling that for next year?

Speaker 1

I'll start, but

Speaker 4

I don't know if

Speaker 1

you have the number. But The revenues in 'twenty two the expected revenues in 2022, we have a number, Brian will get it, but little bit was uncertain because how fast we could get up and running and with the payments starting early in the year. The real revenue, I think expansion was going to happen in the later years of the contract. There were some significant revenues expected. And to be honest, it's my expectation that this procurement will come back out in the Sometime this year, we will bid it again and for the reasons we won the first time, we should be extremely competitive going forward.

Speaker 1

Brian, do you have the number

Speaker 4

we have?

Speaker 2

Yes. We talked about that last quarter when we had gotten the award and I believe that number was There are multiple providers and I believe the number was $40,000,000 to $60,000,000 in Gross revenues and something more I think in the $5,000,000 to $6,000,000 range on a net basis After all the interchange fees, but we currently expect that well, We are virtually certain that there won't be any revenues in 2022 that while the IRS works through this Procurement process that the existing vendors will be held in for another year. So, Those weren't in a none of those revenues have started already. So there was nothing in our current base that goes away. But It's pretty clear that won't be a 2022 impact at this point and we will see how Fast, the new procurement takes place.

Speaker 6

Got it. Thank you, guys. Congrats.

Operator

The next question comes from Charlie Strauzer from CJS Securities. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 8

Quick question for you. I know you don't like to give out formal 22 guidance until the next call, but maybe some early thoughts on So what you're thinking about for next year?

Speaker 1

Well, you're right, Charlie. We don't like to get out ahead of ourselves. Right now, We are well into our 2022 planning. There's a lot of variations, a lot of factors that go into that. We're still in the early stages.

Speaker 1

I'd say we're kind of on track with our normal planning process. I'd really expect to have better information later this year. I think it's just a little too early right now to

Speaker 8

And then just looking at the labor side, a lot of companies having labor issues I'm sure, Paul, you're not immune to that as well. Maybe talk a little bit about the labor side, Any difficulties you're having there that causing wage inflation, etcetera? Thanks.

Speaker 1

Yes, Charlie. I think That's a good point. It's we're all reading in the news what's going on across multiple industries. The labor market is certainly evolving right now. There's staffing pressures, there's wage pressures and I'd say Tyler hasn't been immune to that.

Speaker 1

I think there's still a little to figure out about How permanent this is versus how transitory it is. You're seeing people leaving careers for lifestyle changes. We call them sort of COVID casualties, you're seeing competition for wages and where people are now being more accepted to flexible work and work, Work from home that you're seeing people come in and go into markets that they may not have traditionally tried to hire people from And we're dealing with that as well. I think if you look across a lot of our business units, we're staffed a little bit under plan. Our HR team and our recruiters are doing a really good job responding to this, working really hard.

Speaker 1

But it is something that's top of mind. It's something that we discuss at And you're right, Tyler has not been immune to it.

Speaker 8

And just picking up on that a little bit more when you look at your current employment base, Are you still asking people to kind of move back on-site into the offices this fall?

Speaker 1

Yes. So we're on track to sort of we've taken a phase based approach and we've taken a locally based approach As the each jurisdiction is a little bit different in the way they've handled it, and so essentially we're on track right now To sort of come back to what we would call full back in the office at the 1st of the year, what that means is Probably not exactly what it meant before COVID. There will be a little bit more flexibility. That's part of the market today. And so I'd expect some of that going forward.

Speaker 8

Great. Thank you very much.

Operator

The next question comes from Rob Oliver from Baird. Please go ahead.

Speaker 9

Great. Thank you, guys. Good morning. My question, First question is Lynn on public safety, just wanted to dive into that a little bit. It sounds like you guys are excited about the Arch deal in terms of The full suite of products that it gives you guys for police.

Speaker 9

So I wanted to ask about that and whether we would expect that to be available In the bag of solutions for your public safety sales folks that are closing deals in the all important Q4 here. And then just a broader question about what you guys are seeing and hearing from customers in public safety. I mean, it's really been a circuitous type of a year where We went from defund and now it seems like we're in fund environment and just curious what that means for you guys relative to the pipeline and your confidence level

Speaker 4

And then I had a quick follow-up. Yes.

Speaker 1

Thanks, Rob. That's a good question. Arc's is We are excited about Arc's. It was a relatively small acquisition. Arc's really, it's a database solution It really helps the Chief of Police, helps the command staff, helps supervisors, really have more insight into the activity of the law enforcement that are on the job, Helps with compliance issues, helps promote officer wellness by doing things like identifying stress, risk mitigation.

Speaker 1

And you're right, There has been sort of talk around the public safety area in a lot of different areas and a lot of focus lately and Has been on law enforcement reform and this was something that was missing in our product suite. Arcs is a company that's Based in Detroit, which is close to our Public Safety office in Troy. They had been a partner of Public Safety in a number of deals. This solution had been Saw that more and more and you're right, it really rounds out our portfolio of Public Safety Solutions. I'd expect it to be something like we do a lot of acquisitions that it's something we're going to sell in our inside channels and it's also going to become a differentiator in new deals.

Speaker 1

You're seeing more and more public safety entities looking for these types of solutions for the reasons you just talked about. When you talk about the funding for public safety, I mentioned earlier that different parts of our business were impacted differently. And public safety is Not suggesting it wasn't impacted, but it's still going pretty good. The number of license deals that it's got this year, Their expected licenses are up over 35% year over year. We've talked a lot before about the investments we've made there and the number of deals that will be $1,000,000 plus in license will be more than we've ever had before.

Speaker 1

I think the funding is there, The initiatives are there and we've been making a lot of investments and we've done some acquisitions around mobility and things like that, that make us even more competitive. So I'm pretty still I'm still very excited about where we stand with public safety and where the future is for that.

Speaker 9

Great. I appreciate that. That's great color. Thanks, Lynn. And then Just one follow-up.

Speaker 9

I know Matt asked that first question about the stimulus funds and you touched on that, but I just did want to follow-up Just briefly because you guys said in both the press release and in your comments here that you're starting to see some Deals that are specifically related to that funding and you mentioned I think the pipeline of I think it doesn't support by federal stim. Just curious what you're hearing from customers. You mentioned a pretty wide swath of Tyler products. And can we assume that the bulk of Tyler's products We qualify and are available under that. And then if not, I think you mentioned kind of potential tailwind over many years.

Speaker 9

So are there two ways to think about this? Is it one way to think about it? Yes, federal stimulus dollars are going to be flowing to Tyler, clear positive. Another would be that Budgets being shored up also creates opportunities for more confidence in spending. Or is that kind of the right way to think about a couple of different buckets?

Speaker 9

Appreciate it.

Speaker 1

Yes. I'd say and to clarify my comments earlier, if you look at the deals in Q3 and Q4, I'd say there's probably a few dozen deals where they're being impacted. I'm not suggesting that they're being fully funded, but they are Maybe partial funding or part of the equation. I think your comment is around confidence. It's something that I've touched on before.

Speaker 1

And I believe the confidence of having that blanket behind Along with generally what's been going on in the market, is helpful for all the deals. We are seeing Federal stimulus, when I talk about these few dozen deals, they are across different products of Tyler. I don't know that one would necessarily Lynn Moore. Moore:] Although there are some stimulus dollars that are specifically tied to schools. So I think generally it's a positive.

Speaker 1

It's something that still a lot of our clients and prospective clients are there's still a lot of them still trying to figure out how do we access them, Which dollars are actually there and it's something that our marketing team in conjunction with our sales teams are putting together materials To help educate our clients and help navigate them where we can. But yes, it's a tailwind. Generally speaking, it's hard to quantify at this point, but overall I think it's part of the reason for optimism we have at Tyler.

Speaker 2

And the American Rescue Plan, there is not much restrictions on what they can use it for. So I'd say generally almost anything Tyler Has in our portfolios would be available to be purchased or acquired through the ARP funds and they have until the end of 2024 to spend those funds and And the indications we have is that it's a very small percentage of those funds that have so far been spent or even allocated. There is still a lot of Work going on in governments around determining how they're going to spend those, but there's a lot of flexibility around what they can spend those on.

Speaker 9

Yes, I think they're trying to route 1 or 2 school buses for our whole district. So I asked those guys to give you guys a call. So hopefully you got that I hear from here in Connecticut. Thanks guys. Appreciate it.

Operator

The next question comes from Kirk Materne from Evercore ISI. Please go ahead.

Speaker 7

Yes. Thanks very much and congrats on a good quarter. Lynn, I was wondering if you could talk or Brian, if you could talk about just sort of the bookings level for NIC on an organic basis. I know, I know obviously the Cort Tyler bookings were up a lot, but NIC's growth is at 5%. Or is the book ahead of that rate right now?

Speaker 7

I realize there's some rev rec things that probably make that a little tricky, but are you pleased with sort of the bookings trends in NIC right now?

Speaker 2

Because they are mostly transaction based, their bookings and revenue

Speaker 9

are pretty

Speaker 2

aligned, yes. They have some software business and they had a couple nice deals this quarter. We mentioned our biggest software deal across Tyler Came through NIC, but generally, the vast majority of their revenues are coming to transactions and they are pretty much aligned. They are pretty reliable. Like I said, there's a little bit of seasonality.

Speaker 2

So we saw higher growth last quarter, a little bit lower growth this quarter. One of the areas that's been impacted in their business more by COVID is the Driver history records, which is a significant part of their business and the growth there is a little slow right now, but Expect those to rebound as things get back to normal, but offsetting that is that transaction volumes are generally up given that people Doing more business digitally with state governments. So, but generally, those The bookings and revenues would be pretty similar.

Speaker 7

Okay. That's helpful. Thanks, Brian. And then Lynn, as you look ahead to 'twenty two, You obviously have a much broader product portfolio at this point in time. What's sort of your temperature in terms of sort of On what you have already harmonizing technology go to market versus doing any other deals.

Speaker 7

I know you did a couple of smaller tuck ins this quarter, but You have a huge product portfolio. I assume the focus is going to be on more just sort of again harmonizing the technology of what you have and go to market. Is that sort of the way we

Speaker 1

So I think you're right, we do have a lot of initiatives going on. We do have a Larger portfolio than we did even 3, 4, 5 years ago. We are focused on we did just spend over $2,000,000,000 on NIC. We're clearly focused on that. We're also clearly focused on our cloud initiatives and things that we need to do to continue to optimize our products And do some things with our internal operations as we move there.

Speaker 1

I've talked before about how we approach M and A generally, and We've done a little bit this year. And I think earlier when we were talking about NIC, I said we may go back to a couple of years ago where we have a little bit of deliberate pause. We did A couple of other deals this year, Vend Engine, Data Spec, these were deals that were sort of in the works. I think though as we go into next year, We're going to remain opportunistic. We're going to continue to look at deals.

Speaker 1

I continue to look at deals today. I've been looking at deals over the last couple of months, even though while we All this activity going on and when the right deal is out there, if it fits a need, whether it's small, medium or large, We're definitely still in the position to execute on that and I'd expect that we would.

Speaker 7

Okay. That's helpful. All right. I'll leave it there. Thanks, guys.

Operator

The next question comes from Keith Housum from Northcoast Research. Please go ahead.

Speaker 1

Good morning, guys. And I'll let go. The quarter was great for you guys. Congratulations. Going back to the NIC business and just revisiting the prior question, it seems like the driver history record for NIC has not Been up to par since really COVID began.

Speaker 1

Is there anything structurally has perhaps changed that the driver history records perhaps might not grow back To the previous growth trajectory they had? I didn't quite hear the question.

Speaker 2

I don't we are not aware of anything structurally or fundamentally that's changed around that. We expect that those will rebound back to normal levels. Certainly, there's no change in the way insurance companies are getting their information, but And there hasn't been any change in our pricing, at least no negative change. And I know in some of our renewals, we've been able to get increases in pricing. So, I don't think there's any fundamental change around the DHR side.

Speaker 1

Got you. Okay, appreciate it. And then the well, thanks for your contracts, obviously, 3 point 4 years of average this quarter was very good. And if I remember back to previous conversations, the idea was either shorter the time spent and more opportunity you have To raise prices on the contract renewals, can you talk about the success you guys are having in terms of pricing changes as contracts are coming up for renewal?

Speaker 2

I think in the last there hasn't really been a change through COVID. We have been generally In maintenance agreements, we've targeted kind of in the 4% to 5% annual increases and on subscription renewals, Targets are generally in that same range. And as you said, shortening the initial terms, Because those revenues are straight lined over the term of the agreement, gives us the opportunity to realize the benefit of those increases sooner. And generally, we are leading with shorter terms and this quarter had success with that. Occasionally, particularly on some of the large contracts like I think back to the North Carolina Courts and Justice, we have a 10 year agreement.

Speaker 2

So that can bounce around a bit, but We do prefer to have shorter agreements and the pricing has been in line with what we have historically tried to achieve. Great, thanks.

Operator

The next question comes from Jonathan Ho from William Blair and Company. Please go ahead.

Speaker 10

Hi, good morning. Congrats on the strong results. I just wanted to maybe start out with some additional Color on the Vend Engine and Arx acquisitions that you've recently made and just potentially understanding what the opportunity is to upsell these types of opportunities there.

Speaker 1

Yes, sure, Jonathan. Vend Engine, We're pretty excited about that acquisition. It was a little bit larger. We're excited about both. I didn't mean to imply we weren't excited about ARCS.

Speaker 1

I think I Talked about ARCS a little bit. But for Vent Engine, corrections and the corrections market for us Well, something that we've really seen as a significant growth opportunity. We've been investing in some in our core corrections product for some time. It's a key part of our Tyler alliance, which is our Connected Communities vision. And it's really sort of the corrections area is sort of the crossover points between courts and public safety.

Speaker 1

And It's probably the largest market in just this white space that we didn't really have a leading product. And inmate services is becoming increasingly important to that opportunity. There's more and more requirements and RFPs around there. We've partnered with Vint Engine over the years in a number of deals and they're really just a leader there. I expect that the revenue this year will be somewhere in the $20,000,000 all ARR and it's been growing at 30 plus percent for the last few years.

Speaker 1

I do think we have an opportunity to sell that into our existing client base, but also it will help us lead with our corrections and standalone deals. So we're pretty excited about that deal. And similar with ARCS, I talked a little bit about before about the focus on law enforcement reform and that was a bit of a hole in our portfolio. Again, almost similar playbook. We had worked with them some, really liked them, really liked the product, good cultural fit.

Speaker 1

And we really think it will round out our portfolio. And as you mentioned, selling back into our base. I mean, our existing customer base, I say all the time, it's our greatest asset and the more solutions we have, the more that we can push through there and drive growth.

Speaker 10

Got it. And on that multi product sale point, can you maybe give us a sense of how to better understand how some of these incremental products I think in the examples that you cited, you did mention a number of multi product opportunities. What should we think about in terms of maybe net expansion rates or the ability to cross sell more into the base over time as well as multi product on new sales? Thank you.

Speaker 1

Yes. We're seeing it across all of our solutions. And we talk about some of these smaller quote tuck in deals. Those are deals that actually are really are being sold quite a bit now across our product lines. You look at public safety, for example, we've talked about deals where we sell either our core CAT or our core records, but it also includes things like Socrata and you You probably heard us mention data insights is becoming a differentiator for us across many product lines.

Speaker 1

But we also talk about mobility and Brazos and SoftCode and Mobilize. These are all products that were done through acquisitions in the last 3, 4, 5 years or so. You see it over the enterprise side, Things like Executime, Time and Attendance Management, we've seen it in the court space. And it is part of our overall strategy and It makes us that much more competitive as we have a wider range of solutions and sort of an enterprise suite as we compete against people who don't have such a diverse A set of solutions to fit the client needs.

Speaker 10

Great. Thank you.

Operator

The next question comes from Peter Heckmann from D. A. Davidson. Please go ahead.

Speaker 4

Hey, thanks for taking my call. I appreciate it. I'm trying to figure out on just appraisal. I know it's not a big part of the business, but it seems like there have been some notable wins there. Do we expect a real step function change in the size of that appraisal business or are other older contracts rolling off and so appraisal should Kind of continue to be a pretty consistent contributor.

Speaker 2

I'd say broadly, it's pretty consistent. We have deals these projects often are Multi year projects, sometimes 2 or 3 years, sometimes longer. Some of them are driven by Legislated cycles in certain states like Indiana and Ohio that have regular cycles, where we have what would be almost like recurring Appraisal projects. Others are more one off. These 3 counties in Delaware that comprise all of Delaware that we are getting ready to start It was a court ordered reappraisal.

Speaker 2

So sometimes the courts get involved when Well, it's determined that appraisals are out of date and maybe contributing to unfair distribution of taxes. So That's the case with these and we are pretty uniquely positioned to be able to We have a strong competitive position in those large deals, with those one off kinds of deals. They can be a little bit lumpy And but I'd say we are generally in a range. We are probably on a more active period right now, I am particularly coming out of COVID where some of these projects may have been delayed. But I wouldn't say it'd be a step function where there is a big step up.

Speaker 2

But we're doing really well in that business right now.

Speaker 4

Okay, that's fair. And then just thinking about the NIC business and you've been out Some renewals of state contracts that appear to be far ahead of their actual expiration date. And So as you go through and start talking to these states, are you trying to get them to renew early and opt up for additional years? And just as regards to that, certainly with the change in Texas and Deloitte kind of getting back into the market, How are you thinking about some of their more midsized state renewals here over the next 18 months? Do you expect any change in the competitive dynamics or Your base case that a renewal with the ability to upsell some additional Tyler applications.

Speaker 1

Yes. I think as I would say my outlook is pretty optimistic. I'll talk about it the Texas thing first. Our payments business or their NIC payments business in Texas He's one of our strong outperformers this quarter. When you talk about we mentioned Utah and we mentioned Oklahoma, these were early renewals.

Speaker 1

And part of that actually, the reason for the early renewal was some of the excitement that's been generated through NIC with the customer About what the combined entity of Tyler NIC can bring, we've talked about our Connected Communities vision, we've talked about the different products and offerings that we can bring. And I think both of these states were areas where they're seeing that future and they wanted to go ahead and jump in early, which gives me optimism for what I think we'll see Going forward in the market.

Speaker 4

Okay. That's good to hear. That's all I have for now. Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Lynn Moore for any closing remarks.

Speaker 1

Great. Thanks, Jason, and thanks everybody for joining us today. We hope you stay safe and healthy. And if you have any further questions, please feel free to contact Brian Miller or myself. Have a good day everybody.

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Earnings Conference Call
Tyler Technologies Q3 2021
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