Tyler Technologies Inc Q3 FY2022 Earnings Call

Hello, and welcome to today's Tyler Technologies Third Quarter 2022 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 27th, 2022. I would like to turn the call over to Mr. Moore. Please go ahead.

Thank you, Cheryl, 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 highlighted by strong execution that drove solid organic revenue growth and higher earnings while also advancing our cloud-first strategy. Total revenues grew approximately 3% with organic growth, excluding COVID-related revenues of approximately 9%. Recurring revenues comprised 78.5% of our quarterly revenues. On an organic basis, excluding COVID-related revenues, subscription revenue grew 14.5%, reflecting both our accelerating shift to the cloud and growth in transaction-based revenues. We achieved solid revenue growth even as the shift in new software contract mix continued to accelerate to SaaS from licenses. In Q3, 91% of our new software contract value was SaaS compared to 74% in Q3 last year. Our largest new software contract for the quarter was with the US Department of State for our case management development platform, formerly known as entellitrak. This five-year SaaS arrangement is valued at over $54 million and includes over $5 million of ARR in the first year, ramping to over $8.5 million of ARR in the fifth year. However, due to certain contract terms, only approximately $8 million of the value of this contract is included in backlog and bookings for the third quarter. The second largest deal of the quarter was a five-year SaaS deal for our enterprise supervision solution with the Arizona Office of the Courts valued at over $15 million. This arrangement includes two five-year optional renewals and with add-on components has the potential to grow to more than $82 million over 15 years. We also signed a notable statewide SaaS deal for our enterprise supervision solution with the State of Oregon Judicial Department valued at approximately $3.5 million. These contracts are great examples of our ability to make a strategic tuck-in acquisition and grow the acquired products by leveraging our client base and sales channel. When we acquired CaseloadPRO, which is now our Enterprise Supervision Product four years ago, its annual revenues were approximately $2.7 million. This quarter alone, our new sales of Enterprise Supervision added almost $4 million of ARR. In other Tyler divisions, we signed five additional significant SaaS deals each for different product suites and each with a total contract value greater than $2 million. Those include Pierce County, Washington for our Enterprise Assessment and Tax solution, the City of Abilene, Texas, the Resin Unified School District in Wisconsin, and Alachua County, Florida for our Enterprise ERP solution, the Toronto Region Conservation Authority in Ontario for Enterprise Permitting and Licensing Solution. In addition, we signed 12 SaaS deals in the quarter with contract values between $1 million and $2 million each. We also signed three notable license deals in the quarter for Enterprise Public Safety, Enforcement Mobile and Data & Insight solutions. With Hidalgo County, Texas, which was funded by ARPA, the combined Regional Communications Authority in Colorado and the city of Melbourne, Florida. Also during the third quarter, we successfully renewed our NIC enterprise contract in Alabama and won a competitive rebid for our enterprise contract in Maine. Subsequent to the end of the quarter, in October, we renewed our NIC enterprise contract in Oklahoma, and our contract in Pennsylvania is expected to expire in the fourth quarter. We also converted our State of Iowa data and insights agreement from a third-party reseller to the NIC master contract. In addition, NIC signed a new four-year SaaS agreement for our medical cannabis regulation solution with the Arkansas Department of Health, Medical cannabis licensing with ARR of approximately $450,000. Before I turn the call over to Brian, I'd like to comment on the Rapid Financial Solutions acquisition we announced this morning. We're extremely excited to partner with the innovative team at Rapid, who will join our payments group. Rapid is a leader in the payment solutions market with 20 years' experience and expands our capabilities with best-in-class digital disbursements. We will now be able to offer our public sector clients a reliable, scalable, and secure platform for disbursing payments. Rapid has more than 1,500 customers concentrated in courts and correction facilities which includes managing disbursements for VendEngine, which we acquired in September of last year. Combined with our approximately 7,200 clients in the payment space, we believe this is a significant opportunity to leverage the full suite of market-leading payment solutions to make customer interactions stronger and more secure. Now, I'd like for Brian to provide more detail on the results of the quarter, and our annual guidance for 2022.

Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the third quarter ended September 30th, 2022. 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 have also posted on the Investor Relations section of our website under the Financials tab, schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues. Both GAAP and non-GAAP revenues for the quarter were $473.2 million, up 2.9% and 2.7%, respectively. Organic revenue growth, excluding COVID-related revenues, was strong at 9% on a GAAP basis and 8.8% on a non-GAAP basis. NIC's COVID-related revenues for the quarter were $11.7 million compared to $43.3 million in last year's third quarter. Revenue from the TourHealth initiative ended in the second quarter and the Virginia Rent Relief program has now officially ended with less than $2 million of remaining revenues anticipated in the fourth quarter. License revenue declined 10.6% as our new software contract mix has shifted to SaaS even more rapidly than planned at the beginning of the year. Professional services revenues rose 15.7% and 6.3% organically. We intend to continue to grow our implementation team during the fourth quarter to support delivery of our growing backlog and pipeline, but we'll likely continue to see some pressure on professional services revenue in the near term as those teams ramp up to become fully billable. Subscriptions revenue was just slightly above Q3 of last year due to the expected $37 million decline in COVID-related subscription revenue, but organically rose 14.5%. We added 153 new subscription-based arrangements and converted 70 existing on-premises clients, representing a total of approximately $149 million in contract value. In Q3 of last year, we added 144 new subscription-based arrangements and had 67 on-premises conversions, representing a total of approximately $84 million in contract value. Our software subscription bookings in the third quarter added $28.1 million in new ARR. Subscription contract value comprised a new high of approximately 91% of total new software contract value signed this quarter compared to 74% in Q3 of last year. The value weighted average term of new SaaS contracts this quarter was 3.8 years compared to 3.4 years last year. Transaction-based revenues, which include NIC portal, payment processing and e-filing revenues and are included in subscriptions, were $148.9 million, down 13% but excluding COVID-related revenue grew 11.1%. E-filing revenue reached a new high of $19.7 million, up 13.3%. Our non-GAAP ARR was approximately $1.49 billion, which was flat with last year, but up 11.2%, excluding COVID-related revenues. Non-GAAP ARR for SaaS software arrangements was $421.7 million, up 27.7%. Transaction-based ARR was $595.6 million, down 13%, but up 11.1%, excluding COVID-related revenues. Non-GAAP maintenance ARR was flat with Q3 last year at $469.4 million due to the continued migration of on-premises clients to the cloud. Our backlog at the end of the quarter was a new high of $1.88 billion, up 6.3%. Bookings in the quarter were approximately $499 million, down 17% on a difficult comparison to Q3 of last year for three main reasons. First, Q3 of last year included the State of Illinois fixed fee e-filing renewal of approximately $63 million. Second, COVID-related revenues and bookings were approximately $43 million in Q3 last year, versus $11 million in the current quarter. And finally, most of the Federal Department of State deals signed this quarter were not included in backlog or bookings. Normalizing for these items, bookings grew 7.7%. On an organic basis, bookings were approximately $364 million, down 17.9%, but grew 7.7% on a normalized basis. For the trailing 12 months, bookings were approximately $1.9 billion, up 18.1% and on an organic basis, were approximately $1.4 billion, up 2.1%. As a result of an increase in our estimated research tax credit, our annual GAAP and non-GAAP effective tax rates were positively affected. Our non-GAAP annual effective tax rate is now 22.5%, down from the 24% previously used and the non-GAAP effective tax rate for the third quarter was 19.6%, to adjust the year-to-date tax rate. This resulted in an $0.11 uplift to our third quarter non-GAAP EPS. For the full year, we expect this tax rate change to impact non-GAAP EPS by approximately $0.14. Cash flows from operations were $129.4 million, down 37% and free cash flow was $115.6 million, down 40%, mainly due to the timing of working capital items such as payroll accruals, remittance of portal fees, and taxes and we expect to see positive impacts of these timing items in the fourth quarter. We continue to strengthen our already solid balance sheet. During the quarter, we repaid $190 million of our term debt and since completing the NIC acquisition, we have paid down $665 million of term debt. We ended the quarter with total outstanding debt of $1.085 billion and cash and investments of $247.9 million. As a reminder, $600 million of our debt is in the form of convertible debt with a fixed interest rate of 0.25%. The remaining $485 million is in pre-payable term debt due in 2024 and 2026, with interest at floating rates based on LIBOR plus a margin of 125 or 150 basis points. So, our exposure to floating rates is limited. We also have an undrawn $500 million revolver. Our net leverage at quarter end was approximately 1.79 times trailing 12-month pro forma EBITDA. Looking forward, we have adjusted the upper end of our full year revenue guidance to reflect lower license revenue as a result of a higher SaaS mix as well as the timing of new license contracts in our Public Safety and Federal divisions along with ongoing pressures on professional services revenue. Adjusted for the change in our effective tax rate, the midpoint of our non-EPS guidance is unchanged. Our updated 2022 guidance is as follows; we expect both GAAP and non-GAAP total revenues will be between $1.837 billion and $1.857 billion. The midpoint of our guidance implies organic growth of approximately 8%. We expect total revenues will include approximately $49 million of COVID-related revenues from NIC's TourHealth and Pandemic Rent Relief services. Revenue from TourHealth ended in the second quarter, while revenue from the Rent Relief program is expected to end in the fourth quarter. We expect GAAP EPS will be between $3.89 and $4.05 and may vary significantly due to the impact of stock option activity on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $7.51 and $7.65. Interest expense is expected to be approximately $28 million, including approximately $7 million of non-cash amortization of debt discounts and issuance costs. For the full year, the net impact of the change in our tax rate, offset by increases in estimated interest expense, resulted in a $0.02 net reduction in non-GAAP EPS compared to our initial guidance. Other details of our guidance are included in our earnings release. Now, I'd like to turn the call back over to Lynn for his comments.

Thanks, Brian. We're encouraged by continued strength in the public sector markets as reflected in stable or increasing RFP and demo activity across our business units and a strong competitive position that continues to drive high win rates. Key characteristics of the public sector market is its relative stability across economic cycles, given the ongoing need to upgrade and replace aging mission-critical systems with next-generation applications. Our deep domain expertise, combined with the breadth of our product offerings, underscores our unique ability to deliver scalable and innovative digital solutions to meet these mission-critical needs. Our industry-leading competitive position remains high, in part due to our integrated solutions and our ability to expand existing client relationships as we leverage our installed base, the largest in the public sector market. Our cross-sell pipeline continues to grow, particularly as we begin to gain momentum with our NIC go-to-market strategy and leverage our strong sales organization and client relationships. Our pipeline of sell-through opportunities with NIC State Enterprise relationships expanded approximately 16% in the third quarter with emerging opportunities across multiple solutions with many influenced by our Enterprise Data and Insights offering. Additionally, we are seeing larger deal opportunities in the pipeline that require longer procurement cycles. Our cloud-first strategy is also tracking well as we continue to invest in optimizing products for more efficient cloud deployment, and as higher cloud adoption is reflected in the mix of our new business pipeline. Our expectation of the SaaS mix for new business for this year and 2023 has increased since the beginning of the year. We've talked about the impact of our accelerated move to the cloud on our margins in 2022 and the expectation that we will see further margin contraction in 2023 before rebounding in 2024. In addition to impacting margins, the accelerated pace and shift in new business mix towards SaaS puts pressure on revenue growth as we now expect 2022 license revenue to decline more than previously expected. We expect that trend to continue into 2023, and we are pleased that our early planning for next year indicates that SaaS adoption should increase even faster than previously expected, even in our Public Safety and Federal divisions. As a result, we expect to see license revenue decline even more than previously anticipated, with the license decline in the 40% range. Also, a reminder that with NIC's COVID-related initiatives now finished, $49 million of 2022 revenues, of which $11 million were in subscriptions and $38 million were in professional services, will not be present in 2023. Despite current macroeconomic uncertainty, we continue to execute against our long-term growth strategy, capitalizing on the durability of our recurring revenue model and solid financial position. We have a proven and successful track record of strategic and opportunistic acquisitions that support our growth priorities, expand our product portfolio, and extend our TAM. As we have commented in the past, we have the benefit of reliable cash flow, enabling us to aggressively manage our debt profile and impact from rising interest rates. We expect to continue to delever and use excess cash to reduce debt while still taking advantage of strategic acquisitions at reasonable valuations such as Rapid, which further enhances our ability to address the significant public sector payments TAM. Our business is resilient and while we are not immune to the effects of inflation, the long-term capital investment decisions we've made in strengthening our products and shifting to a cloud-first approach are foundational to driving sustainable growth and delivering stakeholder value. With that, we'd like to open the line for Q&A.

We will now begin the question-and-answer session. Your first question is from Sami Badri of Credit Suisse. Please go ahead, your line is open.

Hi, thank you. I have a couple of questions. First, there was a mention of the ARPA project that was funded using federal funds. Could you provide an overview of the pipeline of potential projects and opportunities related to federal funding? My second question is about your comment regarding the significant allocation of federal funds to local governments, the federal government, and other branches. With the speed of these allocations starting to accelerate, do you think lead times and procurement cycles will remain the same or shorten? I was hoping you could explain what's happening with longer procurement cycles.

Yes, of course, Sami. I'll begin, and Brian can add in. First, regarding the ARPA deal, it was a great agreement for various reasons. As I mentioned earlier, this involved Hidalgo County, Texas, and consisted of a complete enterprise public safety suite including mobile enforcement and civil processes. The ARPA funds definitely played a role in finalizing and funding that deal. It's a $1.25 million license deal along with a $450,000 annual recurring revenue deal. Additionally, this deal was also influenced by our Tyler Alliance story, which helped in closing it. The strategic initiatives we've discussed continue to resonate with our clients. It's also worth noting that this deployment is via AWS Gov cloud, which is progressing steadily. We're beginning to see increased receptiveness in public safety towards moving into the SaaS model. To clarify, the deal was funded by ARPA. We keep track of ARPA funds, but pinpointing specific deals linked to these funds can be challenging, as they are often allocated for other uses which can then allow for pursuing additional deals. We frequently observe ARPA funds being used for singular purchases. For instance, we anticipate seeing some in school bus transportation deals where a large volume of hardware is purchased. Regarding the comment about longer procurement cycles, I want to make sure that isn’t misunderstood. In general, our cycles are consistent with what we've experienced in the past. The comment aimed to indicate that as we explore more cross-sell opportunities through NIC, some larger deals may take longer, but I wouldn’t describe the procurement cycles for the Tyler portfolio as lengthening. If we misspoke, I want to clarify that.

Thank you. Could you provide more insight into the procurement cycles, excluding NIC and large deals? Are you noticing an increase in the number of deals being signed due to federal funds, or has that not materialized as some may have anticipated in 2022?

Yeah. I don't think right now it's necessarily accelerating deals. We've talked before about our public sector clients. Their budgets are already healthy. The ARPA Funds are there. And as you know, some of them have limits on when those funds need to be spent. I don't think we're seeing that right now as a sense of urgency or emergency that they've got to flush all that through right now. And will that change over the next 12 months? It might, but we're not seeing that right now.

Your next question is from Pete Heckmann of D.A. Davidson. Please go ahead. Your line is open.

Good morning. Thank you for taking my question. Could you revisit the point you made at the end of your prepared remarks about the ongoing shift to software and the potential acceleration in the decline of software license fees? Could you repeat that comment? Specifically, what time frame are you considering? Is this related to next year, or is it a one-time occurrence? Do you anticipate that the remaining software revenue will decline more quickly than you initially expected?

Yeah. Thanks, Pete. So I think what we're seeing is different divisions, different product suites have been moving at different paces to the cloud. Some of them we've talked before, like this year, our enterprise ERP solution is almost exclusively this year, and we budgeted this year to move to the cloud. Our lower end, or formerly our LGD, but our ERP Pro solution has continued to go at accelerated rates. What we're seeing is in areas, for example, like our enterprise, permitting and licensing solution, we budgeted this year that all new deals there would be 75% SaaS. And what we're seeing is they're 100% SaaS. We're starting to see it in our property and recording solutions, particularly our recording solution. We budgeted this year at 60% SaaS, it's 85% SaaS. What we're starting to see now also in the market and as we look into next year, is our two divisions, which have had really more dependency on licenses, particularly in the last couple of years, have obviously been public safety and Tyler Federal. Tyler Federal has been moving, I think, a little bit faster to SaaS. And we've talked before in the past about public safety's lag. But public safety, what we're seeing now and as we're looking into next year, we're looking at a lot higher subscription based arrangements probably more so than we anticipated earlier in the year. And so as we look into 2023, we're seeing the effects now, but as we preliminarily model, and again, this is not a 2023 call, but as we preliminarily look out to 2023, we see the licenses declining at a faster rate than we anticipated. And it's just a little bit shorter timeframe.

Okay. Given that you're not necessarily observing a slowdown in contracting activity, your subscription backlog should grow, and subscription revenue growth on an organic basis may remain in the mid to high-teens over several quarters. Does that sound correct?

I believe so. Our market activity is currently strong, and we aren't experiencing any economic impacts that may affect other industries. Our key indicators, including RFPs and demos, remain elevated and are either continuing to rise or are stable at those high levels. In the third quarter, we signed a record number of deals for our enterprise ERP and enterprise permitting and licensing solutions. The market activity is robust, our clients' budgets are healthy, and I think your observations are quite accurate.

Your next question is from Kirk Materne of Evercore ISI. Please go ahead, your line is open.

Thank you very much. Lynn, regarding the cross-sell pipeline and the deals with NIC that are starting to develop, are there any specific Tyler products that are integrating with NIC more effectively than others? For example, while ERP might not be particularly relevant for statewide deals, I assume it would be beneficial for Courts & Justice. Could you provide more details on which product categories are aligning well with NIC in certain state deals?

Yes, sure, Kirk. It's a good question. I think out of the gate, our data and insights, our analytics product has been something that has been extremely well received, and that's still got a lot of opportunities. We are seeing a lot of areas in courts and justice just cross-selling our payment solutions. Tyler Federal as well. And I think you'll see as time goes on, probably areas like our permitting and licensing products. But the top three or four right now are really our analytics, courts and justice, federal and payments.

Okay, that's helpful. And Brian, as we start, I know preliminarily looking forward to 2023, can you just remind us of some of the puts and takes from a margin perspective for you guys next year? I know there's a lot going on with the transition to AWS, but some of the COVID-revenues going away, which I assume is pretty high margin for you all. Can you just give us some puts and takes maybe where you're going to have some pressure on margin, but maybe some offsets to that?

Yes, I would say the main factor creating downward pressure on margins is the decline in licenses. As we discussed earlier, preliminary projections for next year's revenue indicate a potential decline in licenses by about 40%. Licenses, as you know, have very high margins. There is also a lag in the time it takes for subscription revenues from the same deals in subscription form to ramp up. Therefore, this will be the primary downside pressure. The revenue associated with COVID is generally diminishing. The early COVID-related revenues, particularly from Tour Health, had lower margins compared to our average, while the margins from the Virginia Rent Relief program aligned more closely with our overall margins. Thus, the impact from those revenues fading is expected to be slightly positive overall, but minimal. Regarding service revenues, we've mentioned they are under some pressure mainly due to our ongoing efforts to ramp up staffing. Typically, service revenues have low or no margins, so their temporary absence has a favorable impact. However, we anticipate rebuilding those in due course. Hence, while the overall impact may not be significant, there could be a slight positive effect from those revenues being somewhat lighter. That said, the decline in licenses due to the shift will be the most significant factor as we move forward next year.

I'd also like to mention that we discussed this extensively back in February regarding the ongoing bubble costs as we transition with dual data centers and our move to AWS. This creates some pressure. However, looking at our projections for the next few years, which we have been developing for a while, this is all anticipated. We expected 2023 to be the year with the most margin pressure. The impact on revenue growth is slightly greater than we had initially expected at the start of the year, likely due to some divisions transitioning more quickly to subscriptions, as Brian noted earlier.

Your next question is from Michael Turrin of Wells Fargo Securities. Please, go ahead. Your line is open.

Thank you for taking my questions this morning. It's evident from your comments that the shift to subscription and SaaS is occurring faster than anticipated. The subscription TCV metric looks impressive. Could you elaborate a bit more on why this is happening now? Specifically, how much of this is due to fine-tuning your product offerings, your go-to-market strategy, versus increased customer interest and comfort with the cloud, which seems to be making these discussions easier?

Yes, I think it’s all of the above, Michael. We observed a changing landscape coming out of COVID, and fortunately, we had already made decisions internally before the pandemic. A lot of it relates to sales and how we're incentivizing our sales teams. We’ve made some announcements about our products, including various product lines starting this year that will offer cloud-only versions. So, it's about the market's receptiveness, improvements in our product offerings, and our internal strategies to drive subscription growth.

Yes, that line does tick down more so in the fourth quarter around seasonality of NIC transaction-based revenues. There's typically around the holidays as you move to the end of the year, there's just fewer transactions going through there. There also was year-over-year, a $37 million reduction in the COVID revenues that are included in those transaction-based revenues and has also ticked down from Q2. So there's an impact there. And of course, those are going away permanently. But yes, seasonality, a little bit in Q3, more so in Q4.

Yes, I believe that for NIC, state enterprise transactions are becoming an increasingly important source of revenue, and we aim to expand this area. While we saw an increase in Q3 compared to the previous year, there was a slight decline from Q2. As Brian pointed out, Q2 is typically their strongest quarter seasonally, leading to a decrease in Q3, and we anticipate a further decline in Q4, which is to be expected.

Your next question is from William McNemera of BTIG. Please go ahead. Your line is open.

Yes. Thanks. This is Matt VanVliet. I guess, first on the services capacity that you're seeing. You're talking about trying to catch up on hiring and having a little bit of a, I guess, a backlog of services to be deployed. So I guess two-part question. One, when do you expect to feel like you're sort of caught up there from both ramping the ones you've hired now and continuing to hire? And then second part, how much of that is limiting the subscription deployments and with that, the revenue recognition that might have missed or caused a little bit of a shortfall in the subscription growth versus what most of us were modeling?

Yes, there is some of that happening. As you pointed out, it's not that we're lacking services revenues or contracts being signed that lead to the start of subscription revenues, but there have been delays. In late Q2, we added significant staff and have continued hiring into Q3 and Q4. It appears that turnover, which has been high for us and many companies, is beginning to stabilize, which is a positive sign. However, we anticipate there will be a six-month delay from when we hire someone to when they are fully trained and billable. This will take several quarters to recover. In some subscription deals, this may delay our revenue recognition by about a quarter. On the other hand, our clients have also experienced high turnover, which can affect their readiness to begin projects. Some projects are being slightly delayed because clients need to hire additional staff before starting implementation. We are witnessing delays on both sides, and there is a lag in starting subscription deals in our backlog.

Okay. Helpful. And then looking at the state department deal that you announced, can you maybe just walk through some of the mechanics of why only a portion of that can be recognized in bookings and backlog, is it something you have to sort of earn your way into those other years on the contract, or how should we think about that going from $8 million to the $50-plus million that's in the headline number?

Yes, it’s really pretty simple. I mean there are effectively termination for convenience provisions in there that we certainly don't expect to be to come into play. But when contracts have those terms under the accounting rules, we can only recognize in backlog and bookings the first year revenues. We certainly expect that the full five years of the contract and potential extensions beyond that would be realized and that we'll get that full contract value, but those contract provisions limit us to what we can put in the backlog.

All right. Great. Thank you.

Your next question is from Joshua Reilly of Needham. Please go ahead. Your line is open.

Yes. Thanks for taking my questions. How much of the decline at the high end of the guidance for the year in revenue is due to customers and public safety increasingly choosing subscription versus license here in the short term because we know that Q4 is typically a seasonally strong quarter for public safety. And then how should we think about the implied impact to license versus services revenue here in Q4?

Hey Josh, let me start and then Brian will jump in. We're noticing increased interest in transitioning to subscription-based models in public safety. Many of the deals we've identified for Q4 are still license deals. Typically, Q4 is a strong quarter, and while we have numerous deals lined up, some of them may actually be pushed into next year. That seems to be the main point.

Yes, for around the timing of deals ...

Getting done.

Getting done and whether that falls in Q4 or Q1 versus the mix right now. As we look forward into next year, as Lynn commented earlier, we do believe that a higher percentage of the public safety deals will be subscription deals. But I don't think that's really the case as much in Q4 as it is looking into next year.

Your next question is from Keith Housum of Northcoast Research. Please go ahead. Your line is open.

Thanks. Appreciate it. Good morning. Just a follow-up on the Rapid Financial acquisition. Brian, I think you mentioned the margin profile was better. Can you elaborate, was that better than the acquiring side or better than Tyler's general operating margins?

It's better than the acquiring side. I was just talking about on a relative basis. The dispersing side or the issuing side has better overall margins than acquiring.

Thank you for the question, Alex. We're quite enthusiastic about this acquisition. As you know, we see payments as a crucial long-term growth driver. To provide some background, we have been involved in payments for some time, having acquired NIC, the leader in public sector payments. However, our expertise has primarily been in the acquiring side of payments. We planned to enhance our involvement in the issuing side, focusing on generating payouts, which we believe has a total addressable market similar in size to the acquiring side. The issuing side can be monetized through transaction load fees, interchange revenue, account fees, and Rapid already has a presence in courts and corrections on this side. Although we didn't initially have expertise in this area, we intended to develop it over time while concentrating on the acquiring side. In the near term, we've demonstrated our capability by partnering with VendEngine and we can expand our presence in courts and corrections due to our existing footprint. Looking at our Tyler portfolio and market position, we identify numerous opportunities in the Justice space, like juror payments, work release programs, unemployment benefits, unclaimed property, tax refunds, outdoor parks, and social services. We believe we can extend these offerings across our existing products. It’s important to note that acquisitions take time, but gaining this expertise allows us to complete the end-to-end payment cycle that we previously lacked. We are excited about this opportunity, knowing there is much work ahead of us, but this acquisition significantly enhances our capability in a way that others cannot match.

And the only thing I'd add there is on the issuing side versus the acquiring side of the processing side, the margins are better. So that's also a positive.

Your last question is from Joe Goodwin of JMP Securities. Please go ahead, your line is open.

Great. Thank you for taking my question. Is there any update on the NIC contract with the IRS that was those put on pause about a year ago?

Yes, we submitted our rebid and are expecting the IRS to make an award in the next month or so. We are confident about receiving that award, but there is no significant update that I am aware of. Brian?

No. The expected notification in the fourth quarter, but ..

Fortunately not happened yet.

And that would be for a start at the beginning of 2024. So that would be a full year ramp up and set up from the time the award takes place until the revenues would actually start.

There are no further questions at this time. I will now turn the call over to Lynn Moore for closing remarks.

Great. Thanks, Carol, and thanks, everybody, for joining us today. If you have any further questions, please feel free to reach out to myself or Brian Miller. Thanks, everybody. Have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.