Tyler Technologies Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 15 speakers on the call.

Operator

Hello, and welcome to today's Tyler Technologies Second Quarter 2023 Conference Call. Your host for today's call is Len Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. In order to address your questions and stay within the allotted time, please limit your question to 1 question per person.

Operator

As a reminder, this conference is being recorded today, July 27, 2023. I would like to turn the call over to Hala Elshirbini, Tyler's Senior Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Colby, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer and Brian Miller, our Chief Financial Officer. After I give the Safe Harbor statement, Lynn will have some additional comments on our quarter and then Brian will review the details of our results and provide an update to our annual guidance. Lynn, we'll end with some additional comments and then we'll take your questions. During this conference call, management may Make statements that provide information other than historical information and may include projections concerning the company's future results, Future prospects, revenues, expenses and profits.

Speaker 1

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 to differ materially from these projections. We would refer you to our Form 10 ks and other SEC filings for more information on those risks. Also in our earnings release, we have included non GAAP measures that we believe facilitate understanding of our results and 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 Financials tab schedules with supplemental information, including information about our quarterly bookings, Backlog and recurring revenues. On the Events and Presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks.

Speaker 1

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.

Speaker 2

Lynn? Thanks, Hala. Tyler delivered exceptionally strong second quarter results that exceeded expectations across our key performance measures. We also reached a new milestone for total quarterly revenues, surpassing the $500,000,000 mark for the first time. Our results reflect a high level of execution and collaborative one Tyler approach across our organization that is the foundation of our long term growth strategy.

Speaker 2

Total revenue growth was 7.6% with 10.4% organic growth. Recurring revenue comprised 82% of our quarterly revenues and grew organically almost 11%. It's gratifying to achieve double digit revenue growth even as the shift to SaaS and our new software contract mix continue to accelerate with SaaS deals comprising 82% of our Q2 new software contract value. Most importantly, SaaS revenues grew organically 20%, our 10th consecutive quarter of SaaS revenue growth of 20% or more. At the start of the year, we characterized 2023 as a pivotal year in our cloud transition, where the Significant decline in license revenue is replaced by valuable long term recurring SaaS revenue.

Speaker 2

Now halfway through the year, The accelerated pace of cloud adoption coupled with our heightened focus on our cloud optimization and migration efforts position us well to drive sustained long term growth an operating margin improvement. While operating margins this quarter declined from last year as expected due to our cloud transitions, Margins were better than planned because of operating efficiencies. We continue to deliver results that reflect our competitive strength And market leading position in the public sector. Key to our performance is our hyper focus on leveraging our largest asset, our unmatched installed client base To drive an increasing number of cross sell and up sell wins, prioritize migration of on premises clients to the cloud and capture higher transaction volumes through our unified payment solution. Overall, sales activity is high in what we see as a robust demand environment with leading indicators such as RFPs and demos generally at or above pre COVID highs.

Speaker 2

In addition to software solutions, our unified payment strategy and our digital solution division continue to prove their tremendous value to our growth algorithm. During the Q2, we signed 132 new payment deals, including a contract with Cook County, Illinois for traffic court payments. We also signed renewals of our state enterprise contracts in Wisconsin and Connecticut and extensions of our state enterprise agreements in West Virginia, Illinois, Idaho, New Jersey and Kentucky. Additionally, synergies from our disbursements Business through our acquisition of Rapid Financial Solutions and deals influenced by data and insights continue to materialize and provide compelling offerings in the state and federal markets. I'd like to highlight a few strategic second quarter deals that illustrate these successes.

Speaker 2

We've seen growing momentum in the public safety market with our best first half sales performance since we acquired New World in 2015. During the Q2, we signed contracts with 2 state police organizations for enterprise Automotive Solutions. These marquee license agreements include a cloud deployment for the Oregon State Police and an on premises deployment for the Missouri State Highway Patrol. Additionally, Harris County, Texas, the 3rd largest county in the United States selected Tyler's enforcement mobile solution for e citations and e crash applications. We want to cross sell opportunity with the Michigan Bureau of Elections, a digital solutions division client to replace an existing custom solution with Tyler's application platform, formerly IntelliTrack, with $1,700,000 of ARR.

Speaker 2

We also added our enterprise licensing platform and 1 outdoor solution under our state enterprise agreement in Illinois with $5,200,000 of ARR. 94 clients signed contracts to migrate on premises Tyler solutions to the cloud, including DeKalb County, Georgia for their Enterprise Justice solution Charleston, West Virginia for their enterprise ERP solution and the Wyoming State Control for their public safety solution. Now I'd like for Brian to provide more detail on the results for the quarter and our annual guidance for 2023.

Speaker 3

Thanks, Lynn. Total revenues for the quarter were $504,300,000 up 7.6%. Organic revenue growth, which also Flu's COVID related revenues in 2022 was 10.4%. Last year's Q2 included $15,200,000 of revenues From COVID related initiatives at our Digital Solutions division, formerly NIC, all of which ended in 2022. Subscriptions revenues increased 16.4% and organically rose 16%.

Speaker 3

Within subscriptions, our SaaS revenues grew 20% $131,500,000 and transaction revenues grew 13.7 percent to $166,300,000 On an organic basis, transaction revenues grew 12.8%. License revenue declined 34.8 As our new software contract mix continued to shift to SaaS at an accelerated pace with SaaS deals comprising 82% of our Q2 new software contract value compared to 74% last year. Professional services revenue declined We added 170 new SaaS arrangements and converted 94 existing on premises clients to SaaS, With a total contract value of approximately $93,000,000 In Q2 of last year, we added 167 new SaaS arrangements And had 96 on premises conversions with a total contract value of approximately $115,000,000 As a reminder, in last year's Q2, we signed a $20,000,000 SaaS contract for a digital motor vehicle titling solution in New Jersey. Our total annualized recurring revenue was approximately $1,660,000,000 up 11.2% Organically grew 11.6%. Operating margins in the quarter were once again pressured by the acceleration of the shift to the cloud in new business and the related decline in license revenues.

Speaker 3

We've also seen expenses associated with employee health benefits grow well above planned levels during the first half of the year And we remain cautious about future increases for the balance of the year and next year. As we've previously stated, we expect operating margins to trough in 2023 And the return to a trajectory of margin expansion in 2024. As we also discussed in prior quarters, merchant and interchange fees from our payments business Under the gross revenue model have a meaningful impact on our overall margins. In Q2, we paid merchant fees of approximately $44,000,000 If those fees were netted out of both revenues and cost of revenues, our consolidated non GAAP operating margin for the quarter Would have been approximately 220 basis points higher. Both cash flows from operations and free cash flow were negative this quarter at $19,200,000 negative $33,200,000 respectively, mainly due to incremental cash tax payments of approximately $90,000,000 Related to the current status of IRC Section 174 Capitalization Rules.

Speaker 3

On a pro form a basis, Excluding the Section 174 cash taxes, our year to date free cash flow would be approximately $120,000,000 up 19% over last year. We did not pay down term debt in Q2 due to the elevated cash tax payments, We expect to continue to prioritize debt payments as our cash flow accelerates in the second half of the year. We ended Q2 with total Our updated 2023 guidance is as follows. We expect total revenues will be between $1,940,000,000 $1,965,000,000 The midpoint of our guidance implies organic growth of approximately 8%. We expect GAAP diluted EPS will be between $3.87 $4.02 and may vary significantly due to the impact Stock option activity on the GAAP effective tax rate.

Speaker 3

We expect non GAAP diluted EPS will be between $7.60 7 point and $0.75 Interest expense is expected to be approximately $25,000,000 including approximately $5,000,000 of non cash amortization of debt discounts and issuance costs. Other details of our guidance are included in our earnings release and in the Q2 earnings deck In conjunction with our guidance for the full year, I'd like to remind you of the seasonality around our transaction revenues. While transaction revenues will grow year over year, we expect they will decline sequentially in Q3 and again in Q4. Historically, transaction revenues are driven by 2 primary factors: state determined deadlines like corporate filings and hunting seasons And the number of business days. Transaction revenues typically are at the highest in Q2, coinciding with peak outdoor seasons and tax deadlines.

Speaker 3

Transactions are at a seasonal low in the 4th quarter with fewer business days and less activity around the holidays. In addition, starting in Q3, we'll see the revenue impact of contractual changes in one of our state enterprise agreements that includes a move From a gross to net model for payments. Now I'd like to turn the call back over to Lynn. Thanks, Brian. We finished a strong quarter And

Speaker 2

first half performance excelled across our business. The quarter was highlighted by 2 highly successful events, Connect 2023, which was our most attended user conference to date with nearly 6,000 attendees and our 1st standalone investor event in 4 years where we unveiled our Tyler 2,030 vision and key growth pillars driving our strategic direction toward organic recurring revenue long term CAGR of 10% to 12%, sustainable margin expansion with non GAAP operating margins of 30% or greater and expanded free cash flow of $1,000,000,000 and free cash flow margins in the high 20s. If you didn't attend our Investor Day in person or virtually, we invite you to watch the replay or access the presentations on our website. It's an exciting time in Tyler's next era of growth and we see a clear pathway to achieve our mid and long term goals. Guided by a well defined growth strategy and powerful financial algorithm to deliver sustained value creation and support our public sector clients' digitally empowered future.

Speaker 2

Now we'd like to open the line for Q and A.

Operator

We will now begin the question and answer As a reminder, please limit your question to one question, so we may stay within the allotted time. We will pause momentarily to assemble our roster. Your first question comes from the line of Pete Heckmann from D. A. Davidson.

Operator

Your line is open.

Speaker 4

Hey, good morning. Thanks for taking the question. Can you talk a little bit about The ERP business and whether you've seen any changing dynamics there competitively, I've always thought it was interesting that Yes. Some of the big horizontal ERP companies really just focused on the top tier. But are you seeing any instances of some players maybe like Workday coming down Into the mid tier where Tyler has historically been very strong.

Speaker 2

Yes, sure, Pete. I think to start the background, The ERP market is really strong right now. Market activity is good. RFPs are up, demos are up. I think we comment on that at the end of the Q1 earnings call.

Speaker 2

It is a very competitive market. We do see Workday More so at the top end as you mentioned, more so in larger deals and really it's we see them more in deals where Clients may be driven more from a HR point solution rather than a suite solution, and they compete very well there. We think over the long term that having a suite of products that's fully integrated is the best bet And we're competing well when we compete on that front.

Speaker 4

Okay. And then in terms Like some of the dynamics around in to out migrations, it seems like that's continuing apace. I guess, are there any pockets of either certain software products that will need to be upgraded Before they can be moved into the cloud or just certain areas where the customer base is maybe more reluctant, where you think they could be holdouts In terms of eventually moving to the cloud?

Speaker 2

Yes. No, that's right. That's one of the I think we talked a little bit about that At the Investor Conference, one of the, I guess, hurdles to getting people into the cloud and getting them Upgraded and migrated is, some of them are on older versions and that's something that we're consciously attacking across all our product lines, I'm trying to get to version collapse. Some divisions are a little more ahead than others. But I think it also sort of highlights what I've said a lot of times is Tyler is not really going through a single cloud transition.

Speaker 2

It's going through multiple cloud transitions because we have multiple core applications who are In different stages with different versions out there, different technology, different beginning points, different endpoints. And so it's kind of it's a lot of moving parts. But yes, that's certainly a key factor that plays across all of them and different products are in different points right now.

Speaker 3

And I'd just add to that that Public safety is probably the area that lags both in terms of adoption of new customers of the cloud and migration Of existing customers, but that is changing. We're seeing a continuous move towards a higher percentage of the new public safety deals Coming to us in the cloud. And this year we've had our first two flips of on prem public safety clients To the Cloud 1 in Q1 and then the Wyoming State Patrol this quarter.

Speaker 4

Okay. That's good to hear. I appreciate it. I'll get back in the queue.

Operator

Your next question comes from the line of Matthew VanVleet from BTIG. Your line is open.

Speaker 5

Yes, good morning. Thanks for taking the question. I guess as we look at the strength of The SaaS business and especially on the SaaS bookings, I'm wondering if you could help us think through maybe the cadence of the bookings Throughout the quarter, were they a little bit more back end weighted, or anything from sort of a timing perspective? And then a second part there is, We seem to have seen some of the best organic growth in a number of quarters here. So business is performing well, but Maybe think about why you didn't maybe raise the midpoint of the revenue guidance for the year, just sort of what went into the process of Essentially maintaining the midpoint on the guidance there.

Speaker 5

Thanks.

Speaker 3

Yes. I'd say the cadence of bookings has been pretty normal. Our bookings typically are not terribly Back end loaded, they tend to be within a quarter, they tend to be generally spread throughout the quarter. We always have some push to get things in at the end of the quarter, but Probably different than some of the businesses, software businesses that are focused on the private sector. So I don't think there's anything Unusual this quarter.

Speaker 3

As we said, it continues to be a pretty robust market with a lot of activity. In terms of the revenue guidance, typically we're not making big changes in that Through the early part of the year, we did narrow the range. So more confident around where the bottom end and the top end are, but Our expectations really haven't changed. It's more around the timing. This quarter there were A few deals that happened, maybe a little earlier than we planned in the year, Our outlook for the full year really hasn't changed much other than to narrow.

Speaker 5

Okay, great. Thank you.

Operator

Your next question comes from the line of Terry Tillman from Truist Securities. Your line is open.

Speaker 6

Hi, good morning, Lynn, Brian and Hala. Thanks for taking my question and follow-up. So maybe Len first question for you is in terms of unified payments and you called out 132 payment deals. I'm just curious on that kind of revenue synergy side and now taking into account new use cases around disbursements. How does the back half look in terms of kind of building confidence in these revenue synergies?

Speaker 6

And can you keep building on top of like 132 payment deals as we move into 3Q And beyond just a little bit more around, could we see more goodness where you've seen so far?

Speaker 2

Yes, Terry, it's a good question. I think Payments is an area where it continues to even out beat our internal plan. And so my expectation is that's going to continue. It's something that we push with every deal. It's the more that we get involved, it's also involved in a lot of our inside sales, which also continues To outpace quarter after quarter, as it relates to Rapid, we're still pretty early, we're what 9 months, 8 months into the Rapid acquisition.

Speaker 2

We've got a lot of good traction. We've got a lot of deals that are in the works that are really pretty exciting deals that we wouldn't have without Rapid And they're going to add really some extra revenues down the road. So where we are with payments right now is I'm excited about where we are. I'm really excited about the Rapid deal. It's something that's being pushed throughout our entire sales channel and I would expect that to continue to grow.

Speaker 3

And I would point out that there is a lag typically from the time we sign a new payments deal To the time those revenues start hitting the income statement, it might be a quarter or 2, it might be longer. They often were replacing an incumbent payments provider and so there may be some time period for that change to take place or The payments are associated with the implementation of a new solution like the utility billing solution. And so those payments Start when that new system is implemented. So the fact that we're continuing to see a growing number of new deals signed Bodes well for future revenue growth in that area, but it isn't instant.

Speaker 6

Got it. Thanks for that as well, Brian. Guess maybe Brian just can follow-up question and then I'll get back in the queue is, it was good to call out that the lumpiness and large deal kind of So the $20,000,000 deal, if you back it out, I mean the software contract value was down a little bit year over year. It sounds like year to date there's been robust demand activity, but I'm just kind of curious, was there smaller large deals in the quarter and Compared to maybe last year's 2Q and then and is there anything we should call out into 3Q that you anniversary like a big deal like last year in 2Q? Thank you.

Speaker 3

Yes. It was a tough comp from a bookings perspective. This year our biggest deal was an $8,800,000 total Contract value, the Michigan Bureau of Elections, and we hit on the SaaS side. And then we had, I guess, 5 other deals that were worth more than $2,000,000 and One large license deal, the Missouri Highway Patrol deal. Last year, we had the New Jersey deal, which was a $20,000,000 deal.

Speaker 3

So we don't have anything that approached That size deal this year. And we also had a $13,000,000 license deal with the tax system in Montreal. So there were just a number of large deals last year, this year was much more, I'd say, kind of normal. In Q3, I don't believe we have That's a meaningful sort of comp issue. I think our biggest license deal was $2,500,000 deal.

Speaker 3

And we did have on the SaaS side, we did have A very large deal with the State Department last year in Q3, which was a total contract value of north of $50,000,000 And we had A statewide supervision deal that was a $15,000,000 SaaS deal. So Those will make for a difficult comp on the staff side next quarter.

Speaker 2

Yes. I think what's interesting there, Terry, is while there were no huge mega deals this quarter, really across the board, all of our divisions Our outperforming plan and what they're seeing in their sales and in their pipeline and in their activity. Typically, there's always puts and takes, but really this is really just a strong quarter across the board, both from a revenue standpoint and an execution standpoint.

Speaker 3

We've talked for a long time about the lumpiness of those mega deals. They come along from time to time. We in some of these product areas where Like Courts and Justice and Tax, we're very well positioned to win those, but they're not here every quarter. So They do create some lumpiness whether it's SaaS or license bookings.

Speaker 6

Understood. Good luck in the 3Q. Thanks.

Operator

Your next question comes from the line of Gabriela Borges from Goldman Sachs. Your line is open.

Speaker 7

Hi, good morning. Thank you. I wanted to follow-up on the comment on RFPs and demos now being at or above pre COVID highs. Would love to get a little bit of color. How much of that is activity changing at the customer versus maybe Tyler specific initiatives?

Speaker 7

And is there any reason to think that the quality of these RFPs and demos could be better or worse? In other words, how do you think about conversion rates For some of this great top of funnel pipeline activity relative to history.

Speaker 2

Yes, Gabriel. I think it's just the RFPs and demos up, It's just a function of the market. And I think there's probably still been a little bit of hangover from COVID. But we're seeing it really across the board, Across all of our business units, as it relates to the quality of RFPs, I think there are certain business units where we're We're actually probably being even a little bit more selective, which I think is going to increase our win rates. I know we're doing that, for example, at Public Safety.

Speaker 2

But generally speaking, it's just a healthy market right now.

Speaker 3

I think it's a combination of both the strength of the market. I think the stimulus is a factor there, but not the major factor, but also the strength of Tyler's Broader presence, the ability for us to leverage our customer relationships And see more opportunities and see some of those opportunities sooner through the NIC state contracts And our ability, we talk about RFPs and demos, but a growing number of our deals take place without RFPs. So in sole source or deals that bypass that formal RFP process, so that's a positive for us as well.

Operator

Your next question comes from the line of Josh Riley from Needham. Your line is open.

Speaker 8

All right. Thanks for taking my question and nice job on the quarter here. Subscription and maintenance gross margin was higher in the quarter. Maybe you can give us some color on what drove that increase quarter over quarter and how is the cloud migration impacting gross margin near term here versus some of the operating expense line items? Thank you.

Speaker 3

Well, I think, we continue to see operating efficiencies, around Yes, a number of aspects of our business, but they're certainly impacting our recurring revenues and our SaaS business. We're continuing to be very efficient around managing Our staffing levels, we're seeing some of the efficiency gains, for example, around the Digital Solutions, a former NIC business that some changes that have been made there to operate more efficiently. So as we expect that as the SaaS revenues grow, margins should continue to expand. I think we're also seeing Improved efficiencies around our public cloud, the AWS operations and better per unit costs as we add more So even though we are seeing certainly pressure on margins because of the cloud transition, the things we've talked about, The bubble costs around until we exit our proprietary data centers, We are seeing efficiency gains around those operations as we continue to scale those.

Operator

Your next question comes from the line of Saket Kalia from Barclays. Your line is open.

Speaker 9

Okay, great. Hey, good morning, Len. Good morning, Brian. Thanks for taking my questions here. Brian, maybe just for you, Great to see the SaaS revenue here, I think, continue to grow 20% plus in the quarter.

Speaker 9

I know that that's the CAGR that we talked about at Analyst Day recently, I think out to 25. So maybe the Should we sort of think about this continuing pretty steady in this range in the medium term? Or should we think about just maybe a little bit of a different shape around SaaS revenue over the next couple of years. Just curious how you think about kind of this quarter's growth in the context of that long term target?

Speaker 2

Yes. I think

Speaker 3

in the Investor Day, I think we actually talked about kind of high teens CAGR over that Period, collectively from now through 2,030. So right now and for the next few years, we'll continue to see A bump to the growth from the flips from our on prem customers and over time, I mean that certainly will accelerate Over the next few years and then we'll wind down as we talked about the cadence that we expect to convert those customers over. So we are getting Higher benefit from those flips and we'll continue to see that. But I think ultimately, it moves more into The teens, but I'd expect to see this growth in this range for the near future.

Speaker 9

Got it, got it. And then if I could fit in a housekeeping question, really interesting point you made in your prepared remarks, Brian, just on having one customer switch from gross to net in the payments business here in Q3. Could you just maybe dig into how much of a revenue impact that is in Q3 that we should think about? And is this going to be more of a trend or do you think this is a little bit of a one off?

Speaker 3

Yes, I think we actually talked about that at our when we gave guidance for the full year. There is one state that's about a 10.5 that's changing mid year. So that impact will start to hit this year and we estimated that at around $10,500,000 in the second half of the year, probably a little more of that impact is in Q3. It happens really on a state or customer by customer basis. The vast majority of our business is on the gross model and we expect that Continue to be the case.

Speaker 3

Customers generally prefer the certainty and the predictability around having us Assume the responsibility for the merchant and interchange fees and have a set percentage that they're going to pay For their payments processing. There are some customers that are willing to accept that risk Around those merchant interchange fees and prefer the net model and sometimes there are changes there as we've seen this year really. I think we had 2 states That's been the case with this year. But again, generally, we would expect that the vast majority of our payments business would continue to be on the gross model.

Speaker 9

Got it. Thanks guys. Appreciate the time.

Operator

Your next question comes from the line of Alex Sukhan from Wolfe Research. Your line is open.

Speaker 10

Hey, this is Ethan Bark on trial of Sukhan. Thank you for taking the question. I have 2 parts here. Just Can you talk a little bit about the shape of the quarter, just comment a bit about kind of the demand environment coming in and out of the Analyst Day? And then just a question on the Saks flips.

Speaker 10

How did it perform just relative to your internal expectations as we look at about a year kind of versus the flips versus a year ago? And just how to think about Is that trending through the rest of this year and into 2024?

Speaker 3

Yes. The first is around the demand environment. Yes, the demand environment, as we said in the prepared remarks is Stable or growing generally at or above kind of our pre COVID highs. So very robust demand environment coming out of Investor Day and really very similar to what we've seen throughout this year And don't see signs of that changing right now. So stable at a high level.

Speaker 3

With respect to flips, I'd say generally we're performing a long The number of flips is very similar to last year, but the dollar value is higher. So we are seeing bigger customers flip. And I think that will continue to be the case, especially in the early days of Flip's most of the customers doing that. We're on Well, Len, today we're seeing more of the larger customers. We talked about a couple this quarter that were on the larger side, A large county in Georgia with a court system.

Speaker 3

As I said, we've seen our first couple of public safety customers slip. So I'd say generally those migrations are in line with our expectations for the year.

Operator

Your next question comes from the line of Michael Turrin from Wells Fargo Securities. Your line is open.

Speaker 11

Hey, great. Good morning. Thanks for taking the question. I wanted to go back to something that was asked earlier, but with a slightly different tilt. If we look at the subscription mix as a percent of total contracts, it's very consistent with what we've seen recently.

Speaker 11

If we look at The TCV and the term metrics, they're down a bit. And this is less a year on year comparison question. And more just Wondering if there's anything to call out in terms of customer behavior, whether it's rising rates or something that might be driving A slightly smaller initial deal size and then just thinking through if there are impacts that flow into the backlog or bookings numbers That we're looking at, just wanting to reconcile if there's anything to call out there, and just try to kind of Calibrate on maybe what to expect on those metrics for rest of the year? Thanks.

Speaker 3

Yes. I don't think there's anything Of note around that, the mix of what deals signed in any given quarter It can just vary a lot depending on the timing of when those things happen and What happens to be in the pipeline? So I don't think there's a trend to call out or anything, any macro condition that's affecting that. We continue to if we look at comparison to last year, I think some of those metrics are skewed a bit by those very large deals. But I don't think there's anything really notable to call out there and I'd expect that generally we expect to continue to see Deal sizes grow over time, but it's hard to predict exactly what will happen in Q3 or Q4, but I don't think there's anything fundamentally changing in the market around that.

Speaker 2

Yes. I think I would add there that Generally, there's a couple of areas in our business that sign larger deals. Appraisal and tax often has some very large deal, multi year deals. Our Courts and Justice, Enterprise Justice has some very large deals and the appraisal tax stuff can be a little cyclical. The large deals are They come and they go.

Speaker 2

We've talked about it for years. That's what makes that's one reason why we stopped talking about bookings numbers and started focusing on different metrics. I'd go back to my comment earlier today that really performance across the board has been really solid and actually above plan in Q2, which is Pretty exciting to see given as well as the our competitive position and sort of the demand nature that's out there right now.

Speaker 10

Appreciate the thoughts. Thank you.

Operator

Your next question comes from the line of Kirk Materne from Evercore ISI. Your line is open.

Speaker 12

Yes, thanks very much. Good morning, guys. Question on sort of flips. I was wondering, Lynn, if you could talk a little bit about when customers are considering moving from on prem to cloud, Is that a cross sell opportunity as well for you all, meaning when they're having that discussion, is that giving you all an opportunity to go in and talk about The sort of other products that might hang off the product they're moving to the cloud. I was just wondering if you have any thought process or there's anything you Share in terms of what percentage of flips come along with incremental revenue associated with it?

Speaker 2

Yes. No, that's a good point. You're right. That's a big part of our sales strategy. And I'd say we actually probably call that more an upsell opportunity.

Speaker 2

We talk about cross sells and upsells. It's an opportunity to add things like our data and insight solutions, our payment solutions, as well as just other Thanks. So and we talked earlier about how a lot of this requires the customers to upgrade to a newer version of the software, which also opens up doors for other modules and things that are more compatible.

Speaker 12

And you talk about just in terms of moving to the cloud, obviously, as people start talking more about generative AI and AI in general, take advantage of You sort of need to be in the cloud. Has that started to percolate at all as a topic of discussion for customers to move on over to the cloud? Or is it still just Super early days in the public sector.

Speaker 2

I think from a customer standpoint, the concept of AI is very early days. As you know, our customer base is Generally pretty conservative, pretty risk averse. And I think they probably are more on a wait and see approach. Now we at Tyler We're not just sitting around taking a wait and see approach. We are actively looking at AI.

Speaker 2

We formed our own AI task We're actively already using a little bit of AI. We're looking at things about how it can improve some of our internal efficiencies. We're looking at things and how we can improve our competitiveness as well as how it can improve our clients' efficiency. So we're looking at that right now, but I would say from a Tyler perspective, We're pretty early on and from a client's perspective, they're even earlier on.

Operator

Great. Thank you. Your next question comes from the line of Charles Strauzer from CJS Securities Inc. Your line is open.

Speaker 13

Hi. Good morning. Just a quick question. Just it seems like every month or so there's a high profile data breach, The latest one being the movement data breach that's been in the news impacting government clients and Private businesses, have you seen any impact on your business from that? And more importantly, are you seeing opportunities from that as well?

Speaker 2

Yes. I mean, it's an unfortunate reality of doing business, is the world of cybersecurity and breaches. And Our clients are not immune to it. I think there's been a fair number of those over the last couple of years. My guess is for the ones that are publicized, there's probably even more that are not.

Speaker 2

It does create opportunities for us. I think it creates opportunities to flip people into the cloud. It's creating opportunities around, for example, our cybersecurity offering. We didn't talk a lot about it last year. We had a client last year In Arizona that we had been trying to flip to the cloud for really for some time and they had a security breach and that was the decision point for them To pull the trigger and flip to the cloud.

Speaker 2

So, again, it's an unfortunate part of doing business, but I think that also creates opportunities For our clients to move into more secure environments.

Speaker 13

Great. Thank you.

Operator

Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.

Speaker 12

Hi, good morning. Just wanted to maybe understand some of sort of your comments around seeing some additional Margin pressure around employee increases, is this a change relative to your prior expectations? And can you maybe Walk through some of the dynamics or the details around that. Thank you.

Speaker 2

Yes, it's really it's not around Our labor costs generally or our headcount, it was really more around healthcare. We budget healthcare every year. We do the best we can. We model it based on last year's practices and we've just been experiencing a higher level of employee claims this year then to budget. Last year, I think our employee claims were a little bit below budget.

Speaker 2

This year, they're trending higher. And we're just trying to grapple with that as we go forward. It's something that we're probably modeling to continue throughout the rest of the year. But there's ebbs and flows as it relates to healthcare.

Speaker 3

Yes. Clearly there continues to be Higher inflation, I think, on the healthcare side even than in environment in general, utilization is up, Moore high claims experience. So we continue to monitor it. We believe we He has adjusted our expectations for the balance of the year in our guidance, But it is I would point out that it's several $1,000,000 of expense in the first half of the year above What our expectations were. And so I think that makes our the performance we've turned in for the first half of the year Even more positive, but and you see that Throughout our margins, but also especially in the SG and A side.

Operator

Your next question comes from the line of Keith Housum from Northcoast Research. Your line is open.

Speaker 14

Great guys. Good morning. Hey, Brian, question for you on your commentary regarding the Public Safety segment having the first, the best first half of the year. Is there something in the market that's helping to contribute to that or is this a market share gain, but how do you guys explain, I guess, your success you're having there?

Speaker 2

I'd say it's a couple of things Keith. Market activity is really strong in public safety. We're seeing Demos right now are on pace for their highest level in a year that we've seen in a long time. Proposals are up. Our competitive position is good.

Speaker 2

We've done some internal resets at Public Safety and really kind of excited about where we are. I mean, we landed 3 really large deals this quarter, sort of in the range of $1,800,000 to $2,000,000 range, which we haven't done in a while. So We're excited about what's going on at Public Safety. We're excited about where the market is and some of the things we've done internally to capture that market.

Speaker 3

Yes, the competitive position continues to improve. We've made investments in that product over the last several years. And I think the integration with some of the other acquisitions we've made, like our enforcement mobile product, Our data and analytics capabilities are very, very strong. And so all of those things that Create a very strong integrated public safety platform along with the integration to our Sports and Justice platform continue to improve our market position.

Speaker 2

Yes, our mobility platform, big differentiator. And I think what's also encouraging is that we talked about it, I think Brian mentioned in his remarks earlier is the fact that the public safety market Is really starting to slowly, I'll say slowly, but embrace movement to the cloud. It's been sort of moving at a snail's pace. I'm not suggesting It's going crazy, but we are seeing a lot more receptiveness, which was highlighted by some of the deals we talked about earlier.

Speaker 14

Great. Thank you.

Operator

We have no further questions at this time. I will now turn the call back over to Len Moore for any further remarks.

Speaker 2

Thanks, Colby, and thanks everybody for joining us today. If

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Earnings Conference Call
Tyler Technologies Q2 2023
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