Tyler Technologies Inc Q3 FY2021 Earnings Call

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

Thank you, Jason, and welcome to our call. With me today is Brian Miller, our Chief Financial Officer. First, I’d like for Brian to give the Safe Harbor statement. Next, I’ll have some comments on our quarter and then Brian will review the details of our results. I’ll end with some additional comments and then we’ll take questions. 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. Our third quarter results were exceptionally strong, building on the momentum we established in the first half of the year. This was our first full quarter including NIC's results and it was our best quarter ever by most financial measures. We achieved new quarterly highs in revenues, non-GAAP EPS, free cash flow, adjusted EBITDA, bookings, and backlog. Total revenues grew 60.9%, with organic growth of 7.6%. As a result of the surge in the Delta variant, NIC's COVID-19 related revenues from TourHealth and Pandemic Unemployment initiatives were significantly above plan at $43.3 million. We had expected those revenues, which have relatively low margins, to wind down in the second half of the year. But we now expect they will continue into the first half of 2022. NIC's core revenues grew 5% in the quarter. Recurring revenues comprised over 80% of our quarterly revenues for the first time and were led by 183% growth in subscription revenues. Excluding NIC revenues, subscription revenue growth was robust at 23.9%, reflecting our accelerating shift to the cloud. We have now achieved greater than 20% subscription revenue growth in 55 quarters of the last 63 quarters. Software licenses and services revenues grew 13.9% or 2% excluding NIC. As expected, our margins compressed compared to last year's third quarter. Some expenses like tradeshows and employee health claims, as well as lower margin revenues like billable travel that declined in 2020 due to the COVID pandemic have begun to return this year. Margins were also impacted by the inclusion of NIC and particularly by the continuation of their lower margin COVID initiative revenues. As a result, our non-GAAP operating margin declined 330 basis points to 25.3%. Excluding NIC's COVID initiative revenues and related costs, our non-GAAP operating margin was 26.8%. Bookings reached a record high in the third quarter at approximately $601 million, more than double last year's third quarter. Excluding NIC, bookings grew 51.9%, with the biggest contributor being the $63 million renewal of our fixed fee e-filing arrangement with the State of Illinois. We’re very pleased to report early success this quarter with joint sales efforts between NIC and Tyler Solutions teams. We signed agreements with the Virginia Department of Housing and Community Development valued at approximately $24 million to provide a digital and call center solution for tenant, landlord, and third-party filing of Rent Relief Program claims. We will also provide Administrative Dashboards from our Socrata Data & Insight solutions, as well as payment processing capabilities. Our largest software deal the quarter also came from NIC with a $6.1 million SaaS contract with the West Virginia Division of Motor Vehicles for digital titling. This new digital vehicle titling and registration management system will go beyond modernization and revolutionize how the DMV manages vehicles and interacts with businesses and citizens. In addition to the streamlining of nearly every vehicle-related process in place today, many legacy paper processes will be fully replaced with secure digital solutions. The solution utilizes technology to govern and secure the vehicle ownership process, adding security, reducing fraud, and providing the flexibility that other state DMVs operations are lacking. The arrangement, which leverages our State Master Agreement, has an initial term of five years. In addition to the SaaS fees, the agreement will generate estimated transaction revenue of more than $3 million per year. I’d like to also highlight a few more significant deals signed this quarter. We signed Appraisal Services contracts with the Delaware counties of Newcastle and Kent. In addition, Newcastle County selected our iasWorld Appraisal Solution under a SaaS arrangement. The deals have a combined value of approximately $19 million. Coupled with the Appraisal Services contract signed last quarter with Sussex County, Tyler will now be performing a property reassessment for the entire state. Also, for our iasWorld Property Tax and Appraisal Solution, we signed SaaS arrangements with the Regional Municipality of Wood Buffalo in Alberta, Canada, valued at approximately $3.1 million, Franklin County, Ohio valued at approximately $3.5 million, and Summit County, Ohio, which also includes our Data & Insights Solution, valued at approximately $2.9 million. Other major SaaS deals included a $4.5 million contract with Arlington Heights, Illinois for our ERP Civic Services and Payment Solutions, and a $3.4 million contract with Bayer County, Texas for our Odyssey, SoftCode, and Supervision Justice Solutions. Our largest perpetual license contract of the quarter was a $5.4 million contract to provide our MicroPact Entellitrak Solution to manage COVID vaccination adaptations for the U.S. Department of Justice. We also signed a $2.5 million on-premises license contract with the Commonwealth of the Northern Mariana Islands for our Munis ERP and Enterprise Asset Management, ExecuTime, and Socrata Solutions. We also signed several significant contract renewals with existing clients, including extensions of NIC's State Enterprise Agreements with the States of Utah and Oklahoma, and a five-year renewal of our e-filing arrangement with the State of Illinois, which was expanded to include applications from our Socrata Data & Insights platform. On last quarter’s call, we reported that NIC had been selected as one of two vendors to provide the Internal Revenue Service with a Digital Payment Processing Solution that would allow taxpayers to securely pay their federal taxes, and that revenue under that contract was expected to begin in January of 2022. Following the award, three entities filed protests with the GAO. Prior to any ruling on the protest by the GAO, the IRS notified the GAO that it was canceling the two awards, including the award to NIC. While the IRS has not formally terminated NIC's contract, it has issued a stop work order under the contract. The IRS indicated that it will either amend the current solicitation, allowing all bidders to modify their previous submissions and then reevaluate the proposals, or terminate the existing solicitation and start the process over with a new procurement in the coming months. The IRS has not yet stated which of these options it will select and we have no information regarding the potential timing of either option. Given these recent developments, we do not expect to recognize any revenue under the IRS award in 2022. While the specific concerns raised in the protests have not been made public and are not known by Tyler, the decision to cancel the award to NIC was not related to NIC’s performance under the contract, its ability to successfully perform under the contract, or any allegations of misconduct or improper behavior by NIC. On the M&A front, we completed the acquisitions of VendEngine and Arx during the third quarter. VendEngine is one of the fastest growing technology companies in North America, operating in more than 230 counties and 32 states. Its leading cloud-based platform provides a comprehensive suite of applications focused on the corrections market, including deposit technologies for commissary, ordering and warehouse management, and various informational electronic communications, security, accounting, and financial trust management components. Arx is a cloud-based software platform that creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves. The acquisition of Arx allows Tyler to offer a full suite of Public Safety Solutions, including Arx Alert and Arx Community, designed to maximize efficiency and safety for law enforcement officers, while increasing transparency and trust building with communities. VendEngine and Arx have combined ARR of approximately $17.5 million and their additions further strengthen Tyler’s justice and Public Safety suites. Now, I’d like for Brian to provide more details on results of the quarter.

Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2021. In our earnings release, we’ve 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 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 $459.9 million, up 60.9%. Non-GAAP revenues were $460.6 million, up 61.1%. On an organic basis, GAAP and non-GAAP revenues grew 7.6% and 7.5%, respectively. Software license revenues rose 13.7%. Subscription revenues rose 183.3%. Excluding the contribution from NIC, subscription revenues were still very strong, growing 23.9%. We added 144 new subscription-based arrangements and converted 67 existing on-premises clients, representing approximately $84 million in total contract value. In Q3 of last year, we added 114 new subscription-based arrangements and had 46 on-premises conversions, representing approximately $56 million in total contract value. Subscription contract value comprised approximately 74% of total new software contract value signed this quarter, compared to 47% in Q3 of last year, reflecting our ongoing shift to a cloud-first approach to sales. The value-weighted average term of new SaaS contracts this quarter was 3.4 years, compared to 4.3 years last year. Transaction-based revenues, which include NIC portal, payment processing, and e-filing revenues and are included in subscriptions, were $171.2 million, up more than six-fold from last year. E-filing revenues reached a new high of $17.4 million, up 15%. Excluding NIC, Tyler’s transaction-based revenues grew 24.3%. For the third quarter, our annualized non-GAAP total recurring revenue or ARR was approximately $1.5 billion, up 79.2%. Non-GAAP ARR for SaaS software arrangements for Q3 was approximately $330 million, up to 24.7%. Transaction-based ARR was approximately $685 million, up 639% and non-GAAP maintenance ARR was flat at approximately $471 million. Our backlog at the end of the quarter was $1.77 billion, up 14.3%. Because the vast majority of NIC’s revenues are transaction-based, their backlog at quarter end was only $27 million. Excluding the addition of NIC, Tyler’s backlog grew 12.6%. As Lynn noted, our bookings in the quarter were very robust at $601 million, up 105.7% and includes the transaction-based revenues of NIC. On an organic basis, bookings were strong at approximately $444 million, up 51.9%, fueled by the renewal of the State of Illinois fixed fee e-filing arrangement of approximately $63 million and the addition of the two Delaware appraisal deals totaling $19 million. For the trailing 12 months, bookings were approximately $1.6 billion, up 31.3% and on an organic basis were approximately $1.4 billion, up 10.8%. Our software subscription bookings in the third quarter added $19 million in new annual recurring revenue. Cash from operations and free cash flow were both record highs for the third quarter at $205.4 million and $192.8 million, respectively. Our balance sheet remains very strong. During the quarter, we repaid the outstanding balance of $65 million on our revolver and paid down $57.5 million on our term loans for a total debt reduction of $122.5 million. We ended the quarter with total outstanding debt of $1.428 billion, in cash and investments of $348.4 million, and net leverage of approximately 2.3 times trailing pro forma EBITDA. We expect the net leverage to be approximately 2 times by year-end. We have raised our revenue and EPS guidance for the full year 2021 to reflect our strong year-to-date performance and our expectations for the fourth quarter. We expect 2021 total GAAP revenues will be between $1.577 billion and $1.597 billion and non-GAAP total revenues will be between $1.580 billion and $1.6 billion. We expect total revenues will include approximately $72 million of COVID-related revenues from NIC’s TourHealth and Pandemic Unemployment Services that are expected to wind down in the first half of 2022. We expect 2021 GAAP diluted EPS will be between $3.55 and $3.63, and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect 2021 non-GAAP diluted EPS will be between $6.94 and $7.02. Other details of our guidance are included in our earnings release. Now, I’d like to turn the call back over to Lynn.

Thanks, Brian. I’m extremely pleased with our third quarter results, both from Tyler’s core operations and from NIC and its first full quarter as part of Tyler. When we spoke to investors in June, we discussed four priorities around the NIC acquisition for 2021. First, don’t mess up the business. Second, achieve our 2021 plans for both businesses. Third, retain NIC staff and establish the long-term leadership team. And fourth, identify and launch joint strategic initiatives and get our sales teams aligned. I’m happy to say we are executing on all of those objectives. Both businesses are executing at a high level and are exceeding our 2021 plans. The NIC team under the leadership of Elizabeth Proudfit is enthusiastic about the combination and the opportunities ahead with Tyler. And we’ve hit the ground running, with teams actively working on integration and go-to-market strategies. We’re showcasing Tyler products to NIC’s entire state general manager team and NIC’s general managers are providing detailed reviews of the NIC state enterprise contracts and relationships for Tyler’s team. We’ve also established a payments technology integration plan and are in the process of finalizing the joint Tyler/NIC payments organization. We’ve already had some early success and joint opportunities, such as our contract with the Colorado Department of Regulatory Agencies that includes NIC Payment Processing, Tyler’s Entellitrak Regulatory Solutions, and our Socrata Data & Insights platform, as well as the recent NIC contract with Virginia for a solution for the Rent Relief Program, which also includes Tyler’s Socrata applications. We have a current pipeline of more than 40 qualified sell-through opportunities with NIC’s state enterprise market across multiple Tyler solutions and have identified Tyler sales opportunities leveraging NIC state enterprise contracts to speed up the time from award to contract. We’re also beginning to build our combined payments pipeline, with early sales in Florida and Louisiana. We continue to see positive trends in public sector market activity. Indicators such as proposals, sales demonstrations, and pipelines are all up significantly from 2020 and are generally at or in some cases above pre-COVID levels. Our competitiveness remains strong as reflected by high win rates across our major applications. While not yet a significant factor, we’re starting to see purchasing activity that is identified as being funded through the federal stimulus under the CARES Act and the American Rescue Plan. We expect that the $350 billion of aid to state and local governments, and $167 billion of aid to 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 two to three years. A survey by the National Association of CIOs indicated that most state CIOs expect that remote work will continue and the need for digital services will increase. CIOs also said they plan to modernize legacy systems in the next two years, with human services and public welfare, labor and employment, and health services as priority areas. Tyler is well-positioned to help public sector leaders address those needs. We also remain on track with our R&D projects around our cloud initiative and with our progress toward hosting new SaaS implementations and on-premises conversions in AWS. Our cloud operation team is engaged in 2022 planning, with a focus on continued product optimization, data center migration, and operations maturity. Finally, I want to welcome the newest member of Tyler’s executive leadership team, Kevin Iwersen, who joined Tyler earlier this month as Chief Information Officer. Kevin is a seasoned IT leader with experience managing technology infrastructures for corporations, statewide judicial courts, statewide executive government agencies, and U.S. military organizations, most recently serving as CIO for the Idaho Judicial Branch. Kevin will work closely with our former CIO, Matt Bieri, until Matt’s retirement early next year. I’d also like to express our deep appreciation to Matt for his tremendous leadership of our IT and hosting organization over the last 11 years and wish him the best in his retirement. With that, we’d like to open up the line for Q&A.

Our first question comes from Matt VanVliet from BTIG. Please go ahead.

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

Yeah. Sure. Matt, It’s a good question. It’s something that we’re starting to track a little bit more. I’d say, you’re seeing it really across a lot of our solutions. But I think we’ve seen a lot really on the enterprise side. We’re seeing a little bit in schools and we’ve seen some over on NIC. I think right now, if you look at Q3 and Q4, there are a few dozen deals out there that are certainly being spurred right now through some of that federal stimulus spending and I’d expect some of that to continue.

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

Yeah. So excluding NIC, the current guidance would have Tyler’s forecasts, I guess, the midpoint of our guidance would be around $1.224 billion revenues and that would be the midpoint around 9.5% growth for the full year and that would imply, again, at the midpoint of our guidance around 11% growth for the core Tyler operations in the fourth quarter. And NIC, as we had discussed, the COVID-related initiative revenues have continued beyond when we thought even at the end of last quarter, they would wind down. We had at the end of last quarter our guidance had about $17 million for the second half of the year and we did $43 million under those initiatives in Q3 and now expect the full year to be about $72 million, so about another $13 million or so in the fourth quarter and some of that then continuing on into next year. But NIC’s core growth excluding these core COVID initiatives was around 5% in the fourth quarter, I’m sorry, in the third quarter. And there’s some seasonality in their fourth quarter core operations, particularly around the holidays and some of the transaction volumes tend to fall in the fourth quarter. So their fourth quarter probably is what our guidance reflects that in the fourth quarter numbers.

Great. Thanks for all the color. I appreciate taking the question.

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

Hi, Lynn and Brian. Congrats on a really good quarter here. I guess I get several questions is, bookings were quite strong in the quarter especially excluding NIC. Lynn, if we dissect those a little bit, how much of the bookings in the quarter are maybe catch-up deals that were pushed from the earlier stages of the pandemic just into the current period or you’re kind of seeing more of a return to a normalized deal cadence here, which you’ve been enjoying for the last decade or so?

Yeah. I think it’s a combination of a couple things, Scott. We did have a couple of very large deals that we signed in the quarter, which obviously were absent in Q3. Q3 was difficult last year. But I think, as I mentioned in my comments, when you look at the market activity and what I’ve talked about over the last several quarters is, over the last 18 months or so the pandemic is sort of affected different parts of our business a little bit differently. Some were hit a little bit harder, and I think I’ve mentioned before that if you look at, for example, our mid-to-higher end financials or Munis product. That was an area that was hit a little bit harder and what you’re seeing there, for example, is you’re seeing awards and deals that are actually exceeding pre-COVID levels and I think that’s the example of what you just mentioned, which is, it’s really the example that both pent-up activity, as well as I think, sort of validate some of the investments and some of the strategy that we’ve been doing over the last couple of years.

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

Yeah. I’d say that’s accurate. We’re generally expecting the mix to continue to trend toward an increasing percentage of SaaS. Now, the fourth quarter, as you know, typically is a strong quarter for Public Safety, which still is primarily on-premises and so that tempers that a bit, but that also was the case last year. But, in general, we expect an ongoing continuation of the trends we’ve seen where a higher percentage of the mix is SaaS.

I think I’d add that the amount of SaaS has actually exceeded our expectations for the year. While we anticipated the market moving in this direction, the pandemic has certainly accelerated that. In the case of Munis, over 85% of our deals are now SaaS, and for our lower-end financials, it's more than 80%, compared to 50% last year. There is some headwind, but as the model continues to develop, I believe we will move past it.

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

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

Hey, everyone. This is Alex from Wolfe. I have a couple of questions. First, I wanted to ask about the maintenance revenue in the quarter, which seemed to be down a bit sequentially. Are you seeing any increase in conversion activity, and how should we anticipate that for Q4 and beyond?

I believe that’s correct. Each of the last few quarters has set new all-time highs for us regarding conversions. Looking back at the past four quarters, we’ve significantly outperformed the flips or conversions we experienced in the previous year. As new business transitions to more SaaS, we’re seeing greater interest from on-prem customers making the switch. While this does negatively impact maintenance, the revenue generated from subscriptions as they transition is about twice what maintenance revenue was. This contributes to the overall high growth in subscriptions. Additionally, the composition of new business over the last year is shifting toward more SaaS and fewer licenses, which also affects growth. Finally, we’re experiencing some attrition in our legacy product within the federal sector, as the federal government has required some states to transition off our product to a federal solution, impacting us as well. However, the ongoing conversions are the largest factor, and we expect this trend to continue, with a likely significant acceleration in these conversions over the next couple of years as we move those customers to AWS.

I think, Alex, to summarize, if you look out over the next couple of years, you’ll see that subscription revenue will continue to grow at an increasing pace. Conversely, licenses will contract proportionately, and maintenance will likely continue to flatten out, as Brian mentioned, due to annual increases being offset by flips, which have significantly increased year-over-year from last quarter.

Perfect. Regarding the NIC side, you mentioned the increasing synergy opportunities you're beginning to see in the base. When should we expect to see the 5% growth in the core NIC business that you talked about? How should we view that trend or acceleration, and do you believe it is sustainable from this level, excluding the one-time revenues from COVID? Additionally, do you think the COVID impact will end in the first half of next year, or are there any aspects that could be more durable, considering the variability of mandates?

I’ll begin with your last question. Personally, I’ve mentioned before that I would be glad if the COVID situation came to an end, which would indicate that it is becoming less relevant. We anticipate that our current revenues are mainly driven by three regions: primarily from South Carolina where the main testing is conducted, followed by Nevada, and also from the Virginia Unemployment Relief efforts. While this is somewhat speculative, we expect these areas of revenue to gradually decline. Notably, in South Carolina, our role will shift from contractor to subcontractor; thus, while revenues may continue to decrease, our profit margins in these areas are likely to improve. The COVID initiative highlights NIC's team's capacity for innovation, their flexibility, and the strong relationships with state contracts that enable quick responses and new solutions, which is very encouraging. Regarding your first question about future growth rates, the sales teams are quite enthusiastic during their meetings. As we progress, we look forward to marketing our diverse range of products via NIC’s sales channels and what we can offer to NIC in return. With Tyler Payments, we are already observing significant traction with our Socrata Data & Insights and Entellitrak platforms, as well as in Public Safety and Civic and Munis. These opportunities are being developed, and in the future, we may not always distinguish between NIC deals and Tyler products. Eventually, we may not separately track the revenue growth from NIC, but we believe that Tyler will experience overall revenue growth stemming from this acquisition, at a higher level than it could have achieved independently.

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

I’ll begin, but I don't have the numbers at hand. For 2022, we had an estimate for the revenues, which Brian will provide. There was some uncertainty regarding how quickly we could start operating and with payments beginning early in the year. I believe that real revenue growth would materialize later in the contract. We had significant revenue expectations. Honestly, I anticipate that this procurement will return sometime this year. We will bid on it again, and for the reasons we succeeded previously, I expect we will be very competitive moving forward. Brian, you have the details.

We discussed this last quarter when we received the award, which had multiple providers involved. The expected gross revenues were between $40 million and $60 million, with net revenues estimated at around $5 million to $6 million after accounting for interchange fees. Currently, we anticipate that there will be no revenues in 2022 as the IRS continues its procurement process, which will likely extend the tenure of existing vendors for another year. None of these revenues have started yet, so there won't be any reductions in our current base. At this point, it's evident that there won't be any impact in 2022, and we will monitor how quickly the new procurement unfolds.

Got it. Thank you, guys. Congrats.

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

Hi. Good morning. A quick question for you, I know you don’t like to give out formal 2022 guidance until the next call, but maybe some early thoughts on what you’re thinking about for next year?

You're correct, Charlie, we prefer not to jump ahead. Currently, we are deep into our planning for 2022. There are many variables and factors to consider, and we are still in the initial stages. I would say we are somewhat on track with our usual planning process. I expect to have more concrete information later this year. At this point, it's just too early to provide a forecast for 2022.

That’s fair. No problem. And then just looking at the labor side, a lot of companies having labor issues, trying to find new qualified people, I’m sure you’re not immune to that as well. Maybe you can talk a little bit about the labor side, any difficulties you have in there, the cause in wage inflation, et cetera? Thanks.

Yes, that’s a valid observation. We’re all aware of the developments happening across various industries. The labor market is currently changing, with staffing and wage pressures affecting many. Tyler is also experiencing these challenges. There is still some uncertainty regarding how permanent these changes will be versus how temporary they might be. We see individuals leaving their jobs for lifestyle adjustments, which we refer to as COVID-related exits. There is an increased competition for wages, and more individuals are now open to flexible work and remote positions, which is allowing us to tap into markets we might not have considered before. However, we're facing staffing levels that are slightly below our plans. Our HR team and recruiters are working diligently to address these issues, and it's a priority for us. We discuss this regularly at the executive level, and you are correct, Tyler is facing these challenges too.

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

We’re on track with our phased approach, which varies by jurisdiction due to different handling of the situation. Essentially, we aim to return to what we consider full in-office work at the start of the year. However, this won't be exactly the same as before COVID, as we will incorporate more flexibility moving forward, which reflects current market trends.

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

Great. Thank you, guys. Good morning. My question, first question is, Lynn, on Public Safety, just wanted to dive into that a little bit, it sounds like you guys are excited about Arx deal in terms of the full suite of products that it gives you guys for police. So I wanted to ask about that and whether we would expect that to be available in the bag of solutions for your Public Safety sales folks that are closing deals in the all-important Q4 here? And then just a broader question about what you guys are seeing and hearing from customers and Public Safety. I mean, it’s really been a secure type of a year where we went from defined and now it seems like more in fund environment? And just curious what that means for you guys relative to the pipeline and your confidence levels on public safety into Q4? And then I had a quick follow-up.

Thank you, Rob, for the question. We are quite enthusiastic about Arx despite it being a relatively small acquisition. Arx provides a database solution that offers valuable insights for police chiefs, command staff, and supervisors regarding the activities of law enforcement personnel. It assists with compliance matters and promotes officer wellness by identifying stress and mitigating risks. There has been considerable discussion surrounding public safety and law enforcement reform, and this solution fills a gap in our product offerings. Arx is located in Detroit, near our Public Safety office, and has been a partner in several deals. The demand for their solution has been increasing, which enhances our portfolio of Public Safety Solutions. We anticipate that we will market this acquisition through our Insight channels, making it a differentiator in new contracts. More public safety organizations are seeking these types of solutions, as you pointed out. Regarding funding for Public Safety, while different aspects of our business have been affected variably, Public Safety has remained relatively strong. The number of license deals we've secured this year has seen a year-over-year increase of over 35%. We have previously discussed our investments in this area, and we expect to see more deals exceeding $1 million in licenses than ever before. The funding and initiatives are present, and we are continuing to make significant investments and acquisitions to enhance our competitiveness, particularly in mobility. Overall, I remain very optimistic about our position in Public Safety and its future prospects.

I appreciate the insight, Lynn. I wanted to follow up on Matt’s question regarding the stimulus funds. You mentioned that you're beginning to see deals related to that funding and highlighted a strong pipeline influenced by federal stimulus. I'm curious about what feedback you're receiving from customers. You referenced a broad range of Tyler products. Can we assume that most of Tyler’s products are eligible for that funding? If not, you also suggested a potential long-term benefit. Should we view this in two ways: one, that federal stimulus dollars will positively flow to Tyler, and two, that improved budgets will lead to greater spending confidence? Is this a correct way to analyze the situation? Thank you.

To clarify my earlier comments, in Q3 and Q4, there are likely a few dozen deals that are being impacted. While I’m not saying they are fully funded, there may be partial funding involved. Your point about confidence is something I’ve mentioned before; I believe that having a strong foundation, along with the current market conditions, is beneficial for all these deals. We are observing federal stimulus in relation to these few dozen deals, which span various Tyler products. I wouldn’t necessarily highlight any particular one more than others, although there are some stimulus funds specifically allocated for schools. Overall, it’s a positive situation. Many of our clients and prospective clients are still figuring out how to access these funds and which ones are available. Our marketing and sales teams are working together to create materials to educate clients and guide them through the process. Generally speaking, it’s a supportive factor. While it’s difficult to quantify at this moment, I believe it contributes to the optimism we have at Tyler.

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

Yeah. I think they’re trying to route one or two school buses for our whole district. So I ask those guys to give you guys a call. So hopefully, you’ve got that from here in Connecticut. Thanks, guys. Appreciate it.

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

Yeah. Thanks very much and congrats on a good quarter. Lynn, I was wondering if you could talk or Brian if you could talk about just sort of the bookings level for NIC on an organic basis and I know obviously the core Tyler bookings were up a lot. But NIC’s growth of that 5% or is the book ahead of that rate right now. I realize there some rev rec things that make it a little tricky, but are you pleased with sort of the bookings trends in NIC right now?

Because they’re mostly transaction-based their bookings and revenue are pretty aligned, yes. They have some software business and I had a couple nice deals this quarter, we mentioned our biggest software dealer across Tyler came through NIC. But, generally, the vast majority of their revenues are coming through transactions, they are pretty much aligned. They’re pretty reliable. I guess that there is a little bit of seasonality. So we saw higher growth last quarter, a little bit lower growth this quarter. One of the areas that had been impacted in their business more by COVID is the driver history records, which is a significant part of their business and the growth there is a little slow right now. But expect those to rebound as things get back to normal, but offsetting that is that transaction volumes are generally up given the people are doing more business digitally with state governments. So, but generally, those bookings and revenues would be pretty similar.

Okay. That’s helpful. Thanks, Brian. And then, Lynn, as you look ahead 2022, you obviously have a much broader product portfolio at this point in time? What sort of your temperature on in terms of sort of focusing on what you have already harmonizing technology, go-to-market versus doing any other deals. I know you did a couple of smaller tuck-ins this quarter, but you have a huge product portfolio. I assume the focus is going to be on more just sort of again harmonizing the technology of what you have and go-to-market. Is that sort of the way we should be thinking about the strategy in the next year?

So I think you’re right, we do have a lot of initiatives going on. We do have a lot of with larger portfolio than we did even three, four, five years ago. We are focused on. We did just spend over $2 billion on NIC. We’re clearly focused on that. We’re also clearly focused on our cloud initiatives and things that we need to do to continue to optimize our products and do some things with our internal operations as we move there. I’ve talked before about how we approach M&A generally and we’ve done a little bit this year. And I think earlier when we’re talking about NIC, I said, we may go back to a couple of years ago, where we have a little bit of deliberate pause, we did a couple of other deals this year VendEngine, DataSpec. These were deals that were sort of in the works. I think though as we go into next year, we’re going to remain opportunistic. We’re going to continue to look at deals. I continue to look at deals today. I have been looking at deals over the last couple of months. Even though while we still have all this activity going on and when the right deal is out there. If it fits a need, whether it’s small, medium or large, we will definitely still in the position to execute on that and then I would expect that we would.

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

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

Good morning, guys. And I’ll echo the quarter was great for you guys. Congratulations. Recall that the NIC business and just revisiting the prior question, it seems like the driver history record for NIC has not been up to par since really COVID began. Is there anything structurally that perhaps has changed at the driver history records perhaps might not go back to the previous growth trajectory they had?

I didn’t quite hear the question.

We’re not aware of any structural or fundamental changes in that regard. We anticipate that those will return to normal levels. There is no change in how insurance companies are receiving their information, and there hasn’t been a change in our pricing; at least, there hasn’t been any negative change. In fact, in some of our renewals, we have been able to secure increases in pricing. Therefore, I don’t believe there’s any fundamental change regarding the DHR side.

Got you. Okay. Appreciate it. The average length of your contracts this quarter was very good at 3.4 years. I recall previous conversations where the focus was on minimizing time spent on opportunities to increase prices upon contract renewals. Can you discuss the success you are experiencing with pricing changes as contracts are up for renewal?

I believe there hasn’t really been a change during COVID. We’ve generally maintained our maintenance agreements and targeted annual increases of about 4% to 5% on subscription renewals, which are usually in that same range. As you mentioned, by shortening the initial terms, we can recognize the benefits of those increases more quickly since revenues are evenly distributed over the duration of the agreement. We are generally favoring shorter terms and had success with that this quarter. However, on some of the larger contracts, like the one with the North Carolina courts, we have a 10-year agreement, which can vary a bit. Overall, we prefer shorter agreements, and our pricing has aligned with our historical aims.

Great. Thanks.

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

Hi. Good morning. Congrats on the strong results. I just wanted to maybe start out with some additional color on the VendEngine and Arx acquisitions that you guys recently made and just potentially understanding what the opportunity is to up-sell these types of opportunities there.

We are quite enthusiastic about the acquisition of VendEngine. It's a larger acquisition, and we're also excited about Arx. I mentioned Arx briefly, but regarding VendEngine, we see significant growth potential in the corrections market. We have been investing in our core corrections products for some time, and it's a crucial part of our Connected Communities Vision alongside our partnership with Tyler. The corrections sector represents a convergence of courts and public safety, and it's a major market where we previously lacked a leading product. Inmate services are becoming increasingly vital, with more RFP requirements emerging in this area. We have partnered with VendEngine on several projects and consider them leaders in this field. I anticipate revenue this year will reach around $20 million in annual recurring revenue, which has been growing at over 30% annually for the past few years. We see ample opportunity to market this to our existing clients, which will also enhance our ability to secure standalone corrections deals. Similarly, with Arx, I previously highlighted our focus on law enforcement reform, which was an area missing from our portfolio. We've collaborated with them before, like their product, and appreciate the cultural fit. We believe this acquisition will complement our offerings, and as I often say, our existing customer base is our greatest asset. With more solutions at our disposal, we can drive further growth through this base.

Got it. Regarding the multiproduct sales, can you provide some insight into how these additional products have boosted your deals? In the examples you mentioned, you highlighted several multiproduct opportunities. How should we view aspects like net expansion rates or the potential for cross-selling more to the existing customer base over time, as well as multiproduct sales for new clients? Thank you.

We're seeing a positive trend across all our solutions, especially with smaller core tuck-in deals that are being sold significantly across our product lines. For instance, in Public Safety, we've discussed closing deals related to our core systems and products like Socrata. Additionally, Data & Insight has emerged as a key differentiator across many of our offerings. Other products such as Mobility, Brazos, SoftCode, and Mobilized, which we acquired over the past few years, are also contributing to this momentum. On the enterprise side, solutions like ExecuTime for time and attendance management show our commitment. This strategy enhances our competitiveness by providing a broader range of solutions and a comprehensive suite that addresses client needs better than our competitors with less diverse offerings.

Great. Thank you.