Tyler Technologies Inc (TYL) Q2 2021 Earnings Call Transcript

Hello, and welcome to Tyler Technologies' Second Quarter 2021 Conference Call. Your host today is Lynn Moore, President and CEO of Tyler Technologies. This conference is being recorded today, July 29, 2021. I would like to turn the call over to Mr. Moore. Please go ahead.

Thank you, Andrew, and welcome to our second quarter earnings 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 preliminary comments on our quarter results, and then Brian will review the details. I'll end with some additional comments, and then we'll take questions. Brian?

Thanks, Lynn. During the course of this conference 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 to differ materially from these projections. We would refer you to our Form 10-K 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?

Thanks, Brian. First, I want to provide you with an update on the NIC acquisition and our progress in the first three months post closing, and then we'll move on to a review of the quarter's results. As you know, we completed the acquisition of NIC during the second quarter on April 21st. With a purchase price of approximately $2.3 billion, this was by far our largest acquisition to date and our first acquisition of a public company. NIC is a leading provider of digital government solutions and payment processing that serves more than 7,100 federal, state and local government agencies across the nation. We believe that the combination of NIC and Tyler provides tremendous opportunities for incremental growth in both businesses. The combined company is the public sector market leader for payment solutions and we plan to use NIC's robust payment platform to expand our local government payments business. We also have an opportunity to leverage NIC's strong relationships and state enterprise contracts to deliver Tyler solutions at the state level, including our MicroPact and Entellitrak platform. We discussed our vision for those opportunities on our Investor Call in early June. I'm extremely pleased with the progress we've made toward these objectives in the three months that NIC has been a part of Tyler. Our teams have prioritized our opportunities and are very engaged, working well together in a regular cadence. Our pre-acquisition impressions regarding the high degree of compatibility between the cultures of the two organizations have thus far proven to be accurate and leaders in both organizations have commented on how natural the combination feels. Our payments teams are working together and have been very encouraged as we learn more about each company's strengths and how complementary they are. As we noted on our June call, the state of Florida is a great example of the kind of opportunities we're pursuing. NIC is in the process of implementing a statewide payment processing solution for the state government in Florida. And the contract allows for local governments in the state, more than 400 of which are Tyler clients, to piggyback on that contract and we are actively pursuing those opportunities. For the last two months, we've also been conducting weekly showcases to familiarize NIC state enterprise managers with Tyler's broad portfolio of solutions and to surface opportunities in their states. We have already developed a growing joint pipeline that is generating active engagements with prospects in NIC states. And finally, our teams are actively working together to jointly establish the data and analytics platform for Connected Communities, leveraging our respective strengths, including our Socrata Data & Insights platform and NIC's Gov2Go Citizen portal. Together, NIC and Tyler can now provide the most expansive set of capabilities for citizens to interact with government at all levels. Turning to the quarter. NIC, like Tyler, had a very strong second quarter as they continue to benefit from the recovery from the pandemic with a growing demand for citizens and businesses to interact digitally with government. NIC also recorded higher than expected revenues from its tour health and pandemic unemployment initiatives, although those lower-margin revenues are currently expected to taper off in the second half of the year. Although NIC's results are only included in Tyler's consolidated financials from the date of the acquisition on April 21, for the full quarter, NIC's core revenues, excluding revenues from Tour Health and Pandemic Unemployment Initiatives, grew 23.5%. We're also very pleased to report that in late June, NIC was selected as one of two vendors to provide the Internal Revenue Service with a digital payment processing solution, which will allow individual and business taxpayers to securely pay their federal taxes. The contract has an initial six-month term with four one-year renewal options and revenue under the contract is expected to begin in January of 2022. The actual revenue will be driven by the number of taxpayers who choose to pay online and who choose to use the NIC platform, and we expect to aggressively market our solution. We currently estimate annual gross revenue under the contract to be between $40 million and $60 million with annual net revenue of $5 million to $7 million after interchange and merchant fees. This contract significantly expands NIC's payment processing at the federal level and underscores the strength of NIC's platform and leadership in public sector payments. Moving on to our consolidated results. Our second quarter was very strong, reflecting the inclusion of the results of NIC from April 21 with both core Tyler and NIC operations exceeding expectations. Total revenues grew 49.1% driven by the inclusion of NIC, as well as the acceleration of Tyler's organic growth to 12.4%. Recurring revenues comprised 79% of our second quarter revenues and were led by 133% growth in subscription revenues with the inclusion of NIC. Excluding NIC revenues, subscription revenue growth was robust at 24%. Software licenses and services revenues also rebounded from the low point in last year's second quarter, growing 17% or 7.6%, excluding NIC. As expected, our margins were down compared to the second quarter last year as some costs and lower margin revenues, like billable travel, that declined in 2020 due to the COVID pandemic began to return. Margins were also impacted by the inclusion of NIC and particularly by the continuation of their lower-margin COVID-related revenues. As a result, our non-GAAP operating margin declined 100 basis points to 26.5%. Bookings in the second quarter grew 50% to approximately $464 million with the inclusion of NIC. Excluding NIC, bookings rose 17.5%. Our largest deal in the quarter was a combination license and SaaS arrangement with the Colorado Department of Regulatory Agencies valued at approximately $9.3 million for our Entellitrak, regulatory, Socrata Data & Insights, and SceneDoc Mobile Field Inspection Solutions, as well as NIC's electronic payment solution. All those solutions will be hosted in AWS. This deal is a great example of our ability to add value by offering multiple Tyler products, many of which came from recent acquisitions, into a single deal, enhancing the competitiveness of solutions like Entellitrak. We also signed a large public safety license contract with the Lake County Sheriff's office in Illinois for our CAD, RMS, Mobile Field Reporting, Brazos e-citation, Soft Code Process Service and Socrata Data & Insight solutions valued at approximately $4.1 million. In addition, we signed four other license deals across multiple product suites, each with contract values greater than $1 million. SaaS contracts represented 65% of our new contract software value in the second quarter. Our largest SaaS contract was a five-year deal with Dubuque, Iowa, for our Munis ERP and EnerGov Civic Services Solutions valued at approximately $4.6 million. We also signed SaaS contracts for our Munis ERP solution with Charles County, Maryland, valued at approximately $4 million; and DeSoto, Texas valued at approximately $3.5 million. We also signed a SaaS deal for our Tyler Supervision Solution with Riverside County, California, valued at approximately $3.3 million. This is the largest deal to date for our Supervision product, which came to Tyler through the acquisition of CaseloadPRO a little less than three years ago. In fact, the value of the single contract is greater than the total annual revenues of that business when we acquired it. In addition, we signed nine other SaaS arrangements during the quarter, each with a total contract value of greater than $1 million. In addition to the IRS payment processing contract, during the second quarter, NIC signed extensions of its state enterprise contracts for digital government and payment processing services with the states of Oregon and Idaho. NIC also signed a five-year SaaS agreement for its RXGov prescription drug monitoring program solution with the province of New Brunswick, Canada, marking the first international deployment for that solution. We're pleased to see the increased market activity and trends that reflect our markets are rebounding back toward pre-COVID levels. Now, I'd like for Brian to provide more detail on the results for the quarter.

Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the second quarter ended June 30, 2021. Note that the results of DataSpec and ReadySub, which were acquired on March 31st, are included in our consolidated results for the full quarter and the results of NIC are included in our results from the date of acquisition, April 21st. In our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results in 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. GAAP revenues for the quarter were $404.1 million, up 49.1%. Non-GAAP revenues were $405.4 million, up 49.4%. On an organic basis, GAAP and non-GAAP revenues grew 12.4% and 12.3%, respectively. Software license revenues rose 3.4%. Subscription revenues rose 133%. Excluding the contribution from NIC, subscription revenues were still very strong, growing 24%. We added 170 new subscription-based arrangements and converted 62 existing on-premises clients, representing approximately $73 million in total contract value. In Q2 of last year, we added 125 new subscription-based arrangements and had 42 on-premises conversions, representing approximately $39 million in total contract value. Subscription contract value comprised approximately 65% of total new software contract value signed this quarter, compared to 43% in Q2 of last year, as we continued our shift to a cloud-first approach to sales. The value weighted average term of new SaaS contracts this quarter was 4.1 years, compared to 3.7 last year. Transaction-based revenues, which include NIC portal revenues, payment processing and e-filing are included in subscriptions and are included in subscriptions, were $119.6 million, up 463%. That amount includes e-filing revenues of $16.3 million, up 14.5%. Excluding NIC, Tyler's transaction-based revenues grew 24.1%. For the second quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $1.3 billion, up 58.2%. Non-GAAP ARR for SaaS software arrangements for Q2 was approximately $325 million, up 25.9%. Transaction-based ARR was approximately $479 million, up 463% and non-GAAP maintenance ARR was approximately $478 million, up 2.4%. Our backlog at the end of the quarter was $1.63 billion, up 5.6%. Because the vast majority of NIC's revenues are transaction-based, their backlog at quarter end was only $21 million. As Lynn noted, our bookings in the quarter were very robust at $464 million, up 50.1% and includes the transaction-based revenues of NIC. On an organic basis, bookings were strong at approximately $364 million, up 17.5%. For the trailing 12 months, bookings were approximately $1.3 billion, up 9.6%. And on an organic basis, were approximately $1.2 billion, up 1.3%. Our software subscription bookings in the second quarter added $15 million in new annual recurring revenue. Cash from operations and free cash flow were both negative in the second quarter as Q2 included approximately $19 million of acquisition-related costs. In addition, cash from operations and free cash flow were negatively impacted by the timing of cash collections by NIC on behalf of government agencies prior to the close of the acquisition and remittances to the agency's post acquisition. This is purely a timing difference and will normalize in future quarters. Our balance sheet remains very strong. During the quarter, we paid down $185 million of the debt incurred under our revolver in connection with the acquisition. We ended the quarter with total outstanding debt of $1.565 billion and cash and investments of $380.9 million. Since the end of the quarter, we have repaid an additional $52 million on the revolver. And today, we have outstanding $1.513 billion of debt with a blended stated interest rate of 1.01%. We have raised our revenue and EPS guidance for the full year of 2021, which is as follows. We expect 2021 GAAP total revenues will be between $1.532 billion and $1.557 billion and non-GAAP total revenues will be between $1.535 billion and $1.560 billion. We expect total revenues will include approximately $32 million of COVID-related revenues from NIC's Tour Health and Pandemic Unemployment Services that are not expected to recur in future years. We expect 2021 GAAP diluted EPS will be between $3.68 and $3.81 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 $6.70 and $6.80. Interest expense for the year is expected to be approximately $23 million and includes approximately $11 million of amortization of debt discounts and issuance costs. For the year, pretax noncash share-based compensation expense is expected to be approximately $102 million. We expect R&D expense for the year will be between $94 million and $96 million. Fully diluted shares for the year are expected to be between 42 million and 42.5 million shares. GAAP earnings per share assumes an estimated annual effective tax rate of negative 2% after discrete tax items and includes approximately $46 million of estimated discrete tax benefits related to share-based compensation, which may vary significantly based on the timing and volume of stock option exercises. Our estimated non-GAAP annual effective tax rate for 2021 is 24%. We expect our total capital expenditures will be between $48 million and $50 million for the year, including approximately $10 million related to real estate and approximately $22 million of capitalized software development costs. Total depreciation and amortization is expected to be approximately $126 million, including approximately $89 million of amortization of acquired intangibles. Now, I'd like to turn the call back over to Lynn.

Thanks, Brian. As you can see, our team of professionals, including our new team members at NIC, DataSpec and ReadySub, executed at a very high level in the second quarter, driving results that surpassed expectations. As I've said before, I'm extremely proud of how our team members have responded to the challenges in the last 1.5 years with incredible grit, grace and resilience. And we're proud that Tyler has recently been named a Best Place to Work by publications in Washington, D.C., Colorado and Mississippi, joining several other locations where Tyler has received similar awards. We've continued to invest in, and in some cases, accelerate all of our long-term strategic initiatives, in particular, our shift to a cloud-first approach with a focus on optimizing our products for the cloud and transitioning SaaS deployments from Tyler data centers to AWS. As a result, our competitive position has also continued to strengthen. We continue to see indications that our market is returning to normal, as many delayed procurement processes are moving forward and new processes are starting. RFPs and sales activities such as demos are trending toward, and in some cases, exceeding pre-COVID levels. While not a significant factor in Q2, we expect that the $350 billion of aid to state and local governments and $167 billion of aid for schools under the American Rescue Plan Act will 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. With that, we'd like to open the line for Q&A.

The first question comes from Peter Heckmann with D.A. Davidson.

Great to see a very strong quarter for both Tyler and EGOV right out of the box. Congratulations on the IRS win. Just curious, if I'm looking at it correctly, the annual guide, which you just gave in June, but it didn't go up as much as the relative beat in the quarter. There are some elements in the quarter that were maybe more onetime in nature or was it affected just by the timing of the close of NIC versus your original expectations? Or do you think that there's something that we should be thinking about for the back half in terms of margins?

Well, I’d say one of the factors certainly is that we've increased the expectation around the amount of revenues, certainly both in this quarter and continuing on into the third quarter around the COVID-related services that NIC is providing. Those have gone on a little bit longer. We expect they'd wrap up really in the second quarter, and those are continuing on into the second half of the year. So that's part of the factor around the second quarter outperforming on the revenue side, but not expecting to see that same bump in the second half of the year. Otherwise, we took up the guidance a bit. But typically, by the end of the second quarter, we're not looking to raise numbers quite a bit until we have better visibility around the second half.

Okay. And then just again, congrats on the IRS contract. That's a pretty good-sized deal, but do you believe it will be will you be recording it gross or net?

That's expected to be gross accounting. We're the merchant of record there, and we'll be responsible for the merchant and interchange fees. So it's a higher revenue number, but lower margin.

Lower margin. So on a gross basis, maybe margins come through at high single digits or so?

Yes. I mean if we're looking at we said sort of between $40 million and $60 million in revenues and the net revenue number kind of in the $5 million to $7 million range.

Yes, Pete, of their larger contracts, IRS and Texas are will be on a gross basis. Florida will be on a net basis when those revenues kick up starting late this year and really going into next year.

The next question comes from Matt VanVliet with BTIG.

Congrats on the quarter. Lynn, I guess, in part of your closing you mentioned that significant amount of stimulus funds sort of still available to local governments in particular. But curious in terms of what you're hearing. A lot of that recently reported as being unspent and people looking at what kind of time duration that might actually entail. Curious how much of that is sort of inspiring some of this uptick in RFPs and sales activity? And then conversely, has any of the delays in the proposed infrastructure bill put a little bit of a pause in some of these as those governments look to see kind of what else might be coming before they spend some of these funds now?

Yes, Matt. I saw a similar editorial yesterday regarding the unspent funds from the American Rescue Plan. I believe it has instilled confidence. We’ve discussed before how the impact of budgets has been less severe than in the past. Those funds are still available, and some have timing requirements for spending, which are still to be determined. We're noticing an increase in RFP releases and market activity, with certain aspects of our business returning to pre-COVID levels, while others are almost there. This uptick is partly due to the general sentiment and mood in the market. The American Rescue Plan contributes to that confidence. Additionally, most of our clients are now in a new budget year, and with expectations for increased funding, they are seeing that last year's budget impacts were not as severe. Some of that funding is starting to return. As we have discussed over the last year and a half, the demand for our services remains strong and is building up. So, at a high level, that's my perspective. Regarding the infrastructure bill delays, I don't think that will significantly affect our bids and RFPs in our daily operations.

I'd add, the American Rescue Plan, they've got until the end of 2024 to spend that. In fact, they just are getting the first half this year and the second half a year from now of those funds. So there's still a lot of allocations and determinations within these governments around how they're going to spend that money. So as we said in the prepared remarks, we really haven't seen much of an impact in terms of new deals and things that are of a significant size that are specifically tied to those funds. Most of the activity we're seeing today is more around the recovery of the or the resumption of some of those delayed processes and things that would have taken place in the last year otherwise.

All right. Very helpful. And then following up on a number of deals that you announced with, I guess, both legacy Tyler and NIC products. So congrats on that. But just curious in terms of sort of an update of where you're at in terms of the full integration of the sales teams, the go-to-market mechanism. Are you just starting to get to some of that, and we can see more of these deals coming through? Or do you think there's already been a lot of progress, and it's just more of getting through sales cycles from here forward?

Yes. So the integration is going well. We talked about it on our I think it was our June update call. We've got a lot of excitement. We have our priorities, though. We really want to make sure that we don’t do anything to mess up the business. We plan, retain their staff, identify these initiatives, get the sales teams aligned, and we're doing that. Obviously, Harry Herington, their founder, decided to retire. One of the key things that we first had to do was establish new leadership. We've done that. Elizabeth Proudfit is now leading that division. She's been with NIC for over 20 years and been responsible for selling most of their major state enterprise contracts, including Florida. As I mentioned in my comments, we've hit the ground running. Our Tyler teams are showcasing products really two to three a week with all of their state GMs. Our payments teams have gotten together and are working on Tyler technology integration plans, talking about how we can leverage NIC relationships. I guess I'd say all that stuff is active. It's going on. The excitement continues to be there. I'll echo my comments from back in June, balancing expectations. If you've been around a long time, these things take time. But the excitement is there. And we are seeing and identifying joint opportunities. It takes a while for those to come to fruition. But like I said, every time our teams meet, the excitement only continues to grow.

The next question comes from Scott Berg with Needham & Company.

Lynn and Brian, congrats on a good quarter. I guess two probably simple ones. The first question is on just general deal flow from the core Tyler side when you talked about how things seem to be normalizing more towards prepandemic levels, the volume of deal flow certainly speaks to that in the quarter. I guess my question there, is that more just pent-up demand that's flowing out? Or are you seeing a true normalization maybe of those sales cycles in the last quarter or two? And then my second question, Brian, is on your guidance for the year. The non ongoing revenues from the Tour Health and the Pandemic side from NIC was increased from $21 million to $32 million for the year. Did that mean the overall NIC contribution for the year went up that much? Or is it just maybe a shift in revenues within your expected contribution from that business?

Thanks, Scott. I'll start. And I'd say it's a little bit of both. Q2 last year was a slow year. And we talked about it in the last couple of earnings calls about how the impact was really felt a little bit differently across different parts of our business. But what we're starting to see now is that the number of RFPs are up significantly from Q2 a year ago, up over 50%. Trade shows are returning. Our unsigned selections, which we don't talk a lot about, those are up significantly. The number of new deals, as you pointed out, that we signed this quarter was, I think, up over 30% from a year ago. When you look at areas like where I talked about the last few quarters, where we saw a little bit more slowdown was more in our high-end financials, our Munis and our EnerGov solutions. We're certainly seeing the momentum growing there. I think Q4 was probably a low in those areas for RFPs and selections. And those are up significantly. Remember, those types of deals, they generally take about three quarters from RFP to close so there will continue to be a lag as we're seeing these RFPs come up, but that's continuing other places like our lower-end financials, our in code. I think RFPs now are actually back to 2019 levels. So it's there. It's a combination of pent-up demand, but also just the market returning.

And on the NIC COVID-related revenues, yes, that increase in our estimate of what those revenues will be for the year and the increase in what was actually recorded in the second quarter was added to NIC's revenue. So that's incremental to our estimates that we previously had for their full year revenues. Unfortunately, with some of the resurgence of COVID and the Delta variant, there's more of a need for testing for a longer period with some of our clients than we had previously expected. And some of those agreements have been extended beyond when we expected that they would roll off. We still expect that they will taper down in the third quarter and pretty minimal revenues from those in the fourth quarter.

Excellent. Congrats again.

The next question comes from Charlie Strauzer with CJS Securities.

Lynn, if you could kind of talk a little bit more about the pipeline and the length of the sales cycle, is that shrinking at all? And are you seeing a pickup at all in prospective clients from the rash of cyberattacks that have been in the news lately?

First, I’m not sure I heard everything clearly. The initial question concerned the pipeline. I believe that across all our major core applications, the pipeline is definitely improving. In certain areas of our business, it has returned to pre-COVID levels or even surpassed them. It is getting close in some areas. Currently, all the indicators we monitor, such as demonstrations and trade shows, are on the rise, with requests for proposals and deals occurring without formal proposals increasing significantly both sequentially and year-over-year. That's noteworthy. As for the second question, I didn’t quite catch it. Could you please repeat it?

Yes, just with the rash of cyber attacks in the news, have you seen any pickup in the inquiries from your clients about maybe moving to the cloud more rapidly than they may have thought before?

It's a good question. I think it's just all part of the overall equation. I think the increase that we've seen in our financial solutions, Munis and Encode, is notable. Our new deals in those areas are 85% to 90% SaaS, whereas a couple of years ago, that number was around 50%. I believe that's just a piece of the puzzle. I don't have any specific information regarding the cyber security concerns, but security is definitely a significant factor. However, I think that, along with COVID and the general direction the market has been moving over the last several years, all play a role.

This was a pretty good margin, the largest quarter we've ever had for flips or customers moving or existing customers moving from on-premises to the cloud as well. And that's one of the factors, I think. Not the sole factor, but a factor in that desire of customers to move to our cloud solution.

Interesting. Brian, could you provide more clarity on how we should view the progression over the next few quarters? It would help us better understand the situation.

Yes. The second half of the year will include growth since we only had a partial quarter of NIC. We expect both the third and fourth quarters to be above the second quarter level, but the third quarter will likely be our highest revenue quarter, with a slight decline from Q3 to Q4 as the COVID-related business diminishes. Therefore, Q3 is likely to have the highest revenues and EPS. This is somewhat unusual since our fourth quarter usually has the highest figures.

The next question comes from Rob Oliver with Baird.

Great. Lynn, I'll start with one for you. You've mentioned the $9 million win in Colorado, which included Entellitrak and NIC on AWS. That's a significant achievement. I'm curious if you could walk us through the details. Was that part of the Tyler contract in Origin, and was NIC included during the quarter? Please share some insights on the dynamics there, as it seems like a promising model for a meaningful subscription win early in the partnership between the two. I also have a follow-up question.

Yes, that's correct, Rob. This is a Tyler contract from the beginning, and it originated from our acquisition of MicroPact and our Tyler Federal business. MicroPact had connections with NIC even before our deal, so it wouldn't be surprising for them to have worked together on projects. Having them involved is, as you mentioned, a great addition. It also underscores the importance of our acquisition strategy over the years. This deal is our largest of the quarter, featuring our Entellitrak from MicroPact, along with Socrata, another recent acquisition, SceneDoc, and the NIC payments. It also includes our strategic alliance with AWS. This deal exemplifies our success this quarter and reaffirms our acquisition strategy, demonstrating how it strengthens our market position, even though it may take time to secure larger contracts that enhance our competitiveness against others.

Great. That's helpful. I have a follow-up. It's clear that payments is a primary focus for you in terms of integration. Lynn mentioned the opportunity in Florida, and with NIC having 28 master enterprise contracts, I'm interested in any early feedback or signs regarding how receptive they are to the products being offered. I also know those states are receiving some funding now, so any insights on that would be appreciated.

No, that's a good point, Rob. And you're right. We talk a lot about payments, primarily because that was a big strategic initiative for Tyler before we even started talking with NIC. And what's interesting there is just how our as our teams get together, how complementary our products are and how the things that was on Tyler's development road map were things that really NIC had already not just done but perfected and things that Tyler had already had with their systems or things that NIC needed to do. But you're right, beyond payments, we talk about that a lot. But one of the things that makes us really excited is the ability to sell Tyler products through those state contracts and really leverage those NIC relationships. I mean, they've got very deep relationships at the highest levels of state government areas where really Tyler just didn't have access. And I'm talking about governors and senior decision makers. And you get in front of those people and we're able to get in front of those people and try to talk to them about what are you guys trying to get done, what policies are you pursuing, and whether it's economic development or HHS or prison reform or whatever it is, and we've got the solutions to do it. And that's really the crux of what we're doing with these weekly showcases with Tyler products. We have to educate all of these state the state GMs and the entire NIC executive team as to what our portfolio is really all about and how we can leverage that. And I don't want to minimize that because we talk a lot about payments, but that is something that we see as significant upside.

The next question comes from Jonathan Ho with William Blair & Company.

Congratulations on the strong quarter. I just wanted to maybe dig into some of the billable travel or some of the lower-margin revenue that returned this quarter. Is there a way for you to maybe quantify for us maybe how much has returned and maybe what you expect in terms of, I guess, the rest of the year in terms of how that will come back?

Yes. I don't have the number in front of me for billable travel. It's not significant. It's still well under what we typically did, which was about $5 million a quarter pre-COVID. It's probably on the order of 20% of that has come back. But it's come back a little sooner than we expected, just as we're starting to see employees coming back to the offices. Our customers are starting to want to see our salespeople and our implementation people in some instances back on site, and we still expect that we’ll continue in most cases to deliver the majority of our implementation services remotely.

Yes. And Jonathan, we're also doing things to try to incentivize more remote delivery of service as well in terms of pricing and things like that. And I think we're still trying to feel it out, as Brian said. The expectation is we will not go back to pre-COVID levels. There are parts of our business that really sort of still demand on-site, as Brian mentioned, public safety. But on the others, we're going to work with our clients and working in different ways to try to bring that down.

And then just in terms of trying to understand a little bit better the advantages of some of the statewide acquisition contracts that you've signed. Can you maybe help us understand how Tyler can leverage those contracts? And maybe what the advantages of having those contracts over a traditional RFP process? What can you do with those that you couldn't do before? And what does that sort of make easier in the contracting process?

You're referring to the NIC state contracts? Yes. There are a few key points. NIC has done an exceptional job over the years with these contracts. Although it may take a bit longer, they establish very open-ended contracts, which we often refer to as hunting licenses. This allows them to explore various opportunities across many different agencies, and sometimes even within local jurisdictions. It provides the chance to introduce products. More importantly, they have built strong relationships with various agencies and high-level executives at the state level, in areas where Tyler previously had no presence. Leveraging those relationships, together with Tyler's products and these open-ended contracts, creates unprecedented opportunities for Tyler. For instance, we are currently in discussions with a specific state regarding court solutions and are able to engage at exceptionally high levels, something Tyler has not had the ability to do in the past. Those connections stem from the state contracts. I've mentioned the renewals in Oregon and Idaho for NIC. It's significant to note that the Oregon contract is an extension of a 10-year relationship, while the Idaho contract is a 2-year extension of a 22-year relationship. These are profound relationships that NIC has cultivated. Securing these renewals is not to be taken lightly, and it requires continued delivery of value. On the flip side, as we leverage these relationships and introduce more products, it enhances the value of those contracts and further strengthens those relationships, ensuring their sustainability for the future.

The next question comes from Keith Housum with North Coast Research.

Just two questions for you. One on the IRS contract. I think I heard you say there's you're one of two vendors that have been picked. Can you perhaps provide more color? Are you guys splitting the revenue and the payment process here? Or is there an opportunity to perhaps expand that down the road?

Yes, you're correct. They selected two providers, but it's not a partnership. The choice will be made by the citizens or businesses deciding to pay. This situation is similar to our e-filing service, where multiple providers may offer services, although the backend is managed by Tyler. We will focus on marketing and providing the best service possible. Interestingly, before this contract, they had four vendors, none of whom were selected this time. There are now three vendors, with the other vendor and us being new selections by the IRS.

Great. Congratulations. Looking at the NIC growth, it was clearly a strong quarter for them. Was it more based on transactions, or are they finding success with the platforms they were developing before your acquisition, such as payments and recreational elections?

Yes. So I think they had, as you mentioned, a really great quarter. I think the revenue was up around 19%. And really, they really outperformed in a couple of areas. Their state enterprise transaction revenue, which includes payments and also their outdoor licensing, their recreation.gov as more and more people are getting outdoors, it's just it's up significantly over a year ago. Obviously, we also mentioned the COVID-related services continue to outperform even as we expect those to taper off. But yes, it's that state enterprise transaction revenue related payments, outdoor licensing and COVID.

The next question comes from Kirk Materne of Evercore ISI.

All right. Lynn, can you just give us an update on how it's going in terms of moving more of your products over to AWS at this point in time? When do you think you can have maybe a plurality of products running on AWS and some of the benefits to the business model from them? I'm just trying to get a sense on how far along we are on that front.

I'd say we're still in the early innings there. The expectation for me is, across our business lines, as we get into the second half of the year, we're going to start putting new clients there. We've still been over the last year, still been validating really sort of some of the costs. It's a project we call Lighthouse where we've got we're taking existing clients across all of our core apps and putting them in AWS, running them and verifying the costs and seeing obviously we're doing things already to make changes to our products to make them run more efficient in AWS, but this also helps provide a road map. And I think as you see going into next year, you're going to continue to see movement of new business into AWS because the goal is to eventually move out of two Tyler data centers to one. So we're going to need to start bringing that down. We'll start with new business and then we will probably start accelerating our we've already been accelerating our flips, but at some point, put together a more robust migration for existing. But I'd say overall, we're still in the early innings. And I think we'd probably be in a more better position to report on that kind of progress really starting next year.

That's great. And then, Brian, just to clarify, I understand that you don't want to discuss anything related to 2022 at this moment. But should we consider the COVID-related revenue from NIC for 2022 as negligible at this point? Is that the advice you would give us as we plan for next year? I know you prefer not to provide formal guidance, but it seems likely that this revenue will be quite insignificant next year.

Yes, that's our expectation now, that there won't be anything there next year.

And to be honest, Kirk, that's my hope because that means that COVID is going away.

All right. Congrats on the quarter.

And we have a follow-up from Matt VanVliet with BTIG.

Brian, just one quick follow-up. You mentioned the cash flow impact from some of the previously collected but then remitted funds for NIC post close. Could you just give us a sense for the magnitude there and how much it actually impacted cash flow in the quarter?

Yes, that was about $55 million, how much the reduction from the liability we had on the books for funds payable to clients, how much that went down from the time of acquisition to the end of the quarter. So pretty significant impact. That's just money that's passing through. So over the course of a longer period of time, that impact is zero. It comes in and goes out. But just the timing of it relative to what was on their balance sheet at the time of acquisition and paid shortly afterwards, ran through our cash flow statement to the tune of about $55 million.

Yes, the gross versus net payments primarily, which also impacts margins.

The next question comes from Joe Goodwin with JMP Securities.

Congrats on the quarter. Just a quick question on the master contracts. Great to see the renewals come through. But I guess now that NIC is combined with Tyler, does that motion of actually securing net new contracts or just new contracts with these states changed at all? Any commentary there would be great.

I don't believe there has been a significant change in that process. As I mentioned, I expect that NIC, which has done an excellent job of establishing these long-term relationships, will continue to provide value. I think that as Tyler works to enhance that value, it will facilitate future renewals.

At this time, there appear to be no more questions, Mr. Moore. So I'll turn the call back over to you for closing remarks.

Great. Thanks, Andrew, and thanks, everybody, for joining us today. We certainly hope you stay safe and healthy, and if you have any further questions or follow-up, please feel free to reach out to Brian Miller or myself. Thanks, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.