Tyler Technologies Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ken Wong - Oppenheimer - Analyst : Great. Fantastic. Lots of momentum this quarter on the cloud side. I wanted to maybe dive into that 3x on the TCV of flips up to $36 million. Lynn or Brian, do you think this is a new run rate? Or is this just more of a one-off quarterly dynamic here?

Question: Matthew VanVliet - BTIG - Analyst : I'd be curious in terms of what you saw of sales linearity throughout the third quarter and maybe into October? And are you seeing at least lately any pressure of maybe decisions not being made until after the election? Or any impact there? But maybe just overall, what you're seeing in terms of demand linearity? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 2:00PM, TYL.N - Q3 2024 Tyler Technologies Inc Earnings Call

Question: Alexei Gogolev - JPMorgan - Analyst : Lynn, I had a question about the incremental competition during the quarter. Are you seeing more pressure from players like ServiceNow and intelligence and analytics in Workday and ERP? Or have those competitors subsided as demand in their core markets begins to recover?

Question: Alexei Gogolev - JPMorgan - Analyst : And Brian, a quick question on 2025 guidance that you've provided last year. Directionally, would you be able to suggest that you think you could see topline growth acceleration next year versus this year. And how are you thinking about free cash flow margin that you provided considering the net working capital improvements that you've just reported?

Question: Michael Turrin - Wells Fargo Securities - Analyst : Great. On the transaction business, ARR that are meaningful, we're used to seeing that may be down sequentially in 3Q, and it was up this year. I know you had a comment on a go live, but anything else you'd point us towards and drivers of the transaction revenue base? And is the seasonality there at all changing?

Question: Michael Turrin - Wells Fargo Securities - Analyst : That color is all super helpful. Just a small follow-on clarification, if I may, on the prior question. I think the primary question we're getting is just on the free cash flow performance. So Brian, just in summarizing some of what you said previously, it sounds like, is there anything you could do to help quantify anything that would fall into the more one-time basket. And it sounds like while you're not updating 2025 targets here, there's no REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 2:00PM, TYL.N - Q3 2024 Tyler Technologies Inc Earnings Call reason to expect margin to go down next year relative to what you're delivering. You're just kind of working through plans. Is that the right takeaway for us at this point?

Question: Terrell Tillman - Truist Securities - Analyst : It's great to hear the call out from my home state, Kentucky, multiple times. I have one question. It's a multiparter though. I think, Lynn, you've talked in your prepared remarks and it's in the press release around cross-selling success. What I'm curious is have you done things go-to-market kind of organized to kind of drive more of that pattern recognition? And what are some common plays you see for kind of the cross-selling? Like what product in particular seems to stand out? And then the second part of this question is the reality there's another milestone here for cross-selling success once you get these flips kind of stood up and so maybe we could see a step-up even in more cross-selling once they're kind of stable on new kind of cloud technology?

Question: Joshua Reilly - Needham & Company - Analyst : So after being at the IACP event here, one of the topics that came up was where customers are at in terms of version consolidation. Just wanted to get an update on some of the key product areas where we are at with that. I believe public safety is at around 30%, which might get a bit behind some of the other larger products? And how do you think about the benefit to margins over the next several quarters as you get more up-to-date there?

Question: Gabriela Borges - Goldman Sachs - Analyst : Lynn and Brian, I wanted to ask, given your experience in the space, we're clearly in a really healthy part of the budgeting cycle and the willingness to spend cycle across state and local governments. How should we be thinking about the sustainability of some of the healthy demand that you're REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 2:00PM, TYL.N - Q3 2024 Tyler Technologies Inc Earnings Call seeing. And maybe just level set us on the ARPA funds, how much of a benefit do you think that you're seeing today versus how much could you see in 2025 and 2026 as the funds that are committed to actually get spent?

Question: Saket Kalia - Barclays - Analyst : Lynn, maybe for you, just to hit on a little bit of a different topic. Tyler's services has always been really important for your government customers. But it has been interesting to see that business over time grow just a little bit slower than the rest of the software business. So maybe the question is, could you maybe speak to how the services intensity in the business is changing as Tyler becomes more of a SaaS company, and maybe relatedly, Brian, for you, maybe touch on how that impacts margins over time. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 2:00PM, TYL.N - Q3 2024 Tyler Technologies Inc Earnings Call

Question: Charles Strauzer - CJS Securities - Analyst : Lynn and Brian, when you talk to clients who are somewhat hesitant to flip, what are some of the reasons why they're so cautious? And ultimately, how do you convince them otherwise?

Question: Robert Oliver - Baird - Analyst : Lynn, I just wanted to go back quickly to the question earlier regarding the ARPA funds. Given the fact that we have a deadline now to obligate these funds, I know you guys have been hesitant to draw a direct line between them and the actual deals. And you alluded to the Kentucky win, which is obviously exciting in courts and justice, but you noted that it was over a decade in the hopper. What, if anything, is your sales force doing now at state and local to be in front of your customers to talk about that commit process, how Tyler products could be useful? I know the vendor decision doesn't need to be made necessarily by the end of December. But I just -- I guess, another way of asking the previous question from Gabriela in terms of confidence that we might see more deals that could be supportive of that '25 and '26 progress, the deadline by which they need to spend it.

Question: Jonathan Ho - William Blair - Analyst : Can you give us a little bit of sense around the AI opportunity? I think you referenced one large deal and how your customers are maybe thinking about leveraging AI over time and what that means from an upsell perspective.

Question: Keith Housum - Northcoast Research - Analyst : In terms of like the acquisition front, you've got favorable debt terms, you're generating a good amount of cash. How are you guys thinking about acquisitions now? And then in terms of more specifically, is there specific end markets within your business that you're thinking that could benefit from acquisitions more than others? And perhaps what would they be?

Question: Mark Schappel - Loop Capital - Analyst : John, a question for you. Building on the earlier question on version consolidation which has been somewhat of a gating item to get customers to migrate to the cloud. Could you just discuss some of the carrots and sticks that you're using to encourage customers to move to the latest product release?

Question: Clarke Jeffries - Piper Sandler - Analyst : A question for Brian on the sort of the pace of the SaaS revenue I know you had quoted that the volatility of SaaS revenue, the timing of the go-lives from booked to a live system can be variable. But I just wanted to ask, we have two years now where the sequential growth in Q3 is the highest. I wanted to understand if that's purely circumstantial if there's any emerging seasonality to those go live. Any prerogative of these governments to get live on a Q3 or is that just really reflective of typically high Q4 bookings activity?

Question: Aleksandr Zukin - Wolfe Research - Analyst : Congrats on another solid quarter. I'll ask maybe a longer-term question. I think it's been alluded to a little bit. But again, as we think about AI, both [ agentic, copilot or system ] and you think about the customers that are starting to ask those questions. You think about the breadth of solutions that you're offering, both to your customers and across the portfolio of products. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 24, 2024 / 2:00PM, TYL.N - Q3 2024 Tyler Technologies Inc Earnings Call As we think about that monetization pathway, is that something we should think about maybe on top of the long-term guidance that you provided at the last Analyst Day through 2030, or is that embedded in there? I ask because it seems like the pace of the innovation wave has moved so fast since you guys fully were even able to contemplate that. So how do we think about those, the top line growth characteristics that could be associated there? And any incremental potential margin degradation or headwinds or thoughts about that? And then I have a quick follow-up.

Question: Aleksandr Zukin - Wolfe Research - Analyst : And to what extent, maybe this is just a clarification. To what extent are you hearing or seeing in sales cycles that those types of questions are actually facilitating or we're amplifying flips or converts either the timeline around them or the momentum or enthusiasm. And then on free cash flow, Brian, again, I think the outperformance obviously both in the quarter and the guide for the full year, very notable. You noted that one Kentucky prepayment contract. How do we think about like when, where and like why those prepayments happen. And more so, as we look to '25 and beyond, is there any reason to assume that those would happen more frequently or less frequently and kind of changing the complexion of the free cash flow margins.