Hello, and welcome to today's Tyler Technologies Third Quarter 2023 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. In order to address your questions and stay within the allotted time, please limit your questions to one question per person. As a reminder, this conference is being recorded today, November 2, 2023. I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director of Investor Relations. Please go ahead.

Thank you, Aaron, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. After I give the safe harbor statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and provide an update to our annual guidance. Lynn will end with some additional comments, and then we'll take questions. During this 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 those projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Also, in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We've also posted on the Investor Relations section of our website under the Financials tab schedules with supplemental information, including information about quarterly bookings, backlog and recurring revenues. Please note, there have been minor reclasses between historical SaaS and transaction-based revenues on the supplemental schedule as a result of the recent transition to our new financial systems. On the Events & Presentations tab, we have posted an earnings summary slide deck to supplement our prepared remarks. 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, Hala. Our third quarter earnings and cash flow surpassed expectations and reflect a continuation of execution at a high level on key operational initiatives. We achieved strong performance across several of our key metrics with double-digit recurring growth and free cash flow growth of more than 40%. Our recurring revenue mix rose to 83.4% of our total revenues with SaaS revenues up 26% organically. This was our 11th consecutive quarter of SaaS revenue growth of 20% or more and exceeded our near-term growth expectations of a 20% CAGR in SaaS revenues through 2025, as outlined during our June Investor Day. We also achieved solid growth in our transaction-based revenues, which were up 8.5%. While operating margins this quarter declined slightly from last year as expected due to our cloud transition, margins were ahead of plan as a result of our operating efficiencies and expense management, especially around cloud operations. It is encouraging to see margins hold essentially flat with last year even as we made considerable progress in our cloud optimization and cloud transition efforts, establishing a clear roadmap for operating margin improvement in 2024. The third quarter presented a very difficult comparison for our new software contract value and mix as last year's third quarter included two very large SaaS contracts that totaled $70 million in contract value. As we discuss regularly, the timing of large deals such as the two signed in last year's third quarter can cause significant lumpiness in our new software bookings. We're continuing to see a healthy public sector market environment and our new business pipeline is active. Leading indicators RFPs and sales demos remain strong with deals generally moving through the pipeline at a normal pace, which is often a 12- to 18-month procurement process. Overall, our competitive position and win rates are strong with growing momentum in cross-selling activities, a key value creation lever. Additionally, our transaction business continues to capture higher volumes as we gain traction with our unified payments solution. I'd like to highlight some of our significant third quarter wins, which included a number of cross-sell opportunities. We continue to build momentum with our public safety solutions. Key third quarter wins include the Naperville, Illinois Police Department for integrated public safety suite including CAD, records management, and e-citations. Naperville is the fourth largest city in Illinois, a state where we also have a strong presence with our Enterprise Justice solution. We're also pleased to see SaaS adoption growing and acceptance in the market with several cloud contracts signed during the quarter. We continue to gain traction with cross-sell wins under our digital solutions division, formerly NIC, and our state enterprise agreements. Under our state enterprise agreement in Utah, we won a cross-sell opportunity with the Utah Department of Corrections for our enterprise corrections electronic messaging solution. We also added deals for our application platform formerly Entellitrak, under our state enterprise agreements in Louisiana and Indiana. In the federal market, we secured a significant license win with the US National Guard Bureau for our turnkey suite of workforce case management applications. This is our largest workforce case management application within the Department of Defense and is another marquee win that spans 54 US states, territories, and the District of Columbia that will be hosted in our FedRAMP-certified private cloud. We signed a five-year multi-suite SaaS contract with Port Angeles, Washington, which includes our enterprise ERP, enterprise permitting, licensing, and cybersecurity solutions as well as payments. In the outdoor accretion space, we won a competitive deal for accretion dynamic solutions with the Minnesota State Parks. In our Payments business, we signed a one-year extension for enterprise payment processing under our state enterprise agreement in New Jersey. In Harris County, Texas, the third largest county in the nation, we added our digital jury solution, leveraging the disbursement capabilities that came to us through the Rapid Financial acquisition last year. Before I turn the call over to Brian, I want to highlight our recent acquisition activity. As I said at our Investor Day, M&A is part of our DNA. During the third quarter, we completed the acquisition of Computer Systems Innovations for approximately $36 million in cash. CSI brings AI-driven automation and enhanced document processing technology that can be leveraged across many of Tyler's vertical applications. It has primarily served the court technology space for many years, and we're excited about the opportunity to combine our expansive footprint with CSI's expertise in AI and machine learning applications to elevate several of our other solutions. Earlier this week, we completed two other tuck-in acquisitions. ARInspect is a leading provider of AI-powered machine learning and data-driven solutions for public sector field operations. ARInspect's advanced AI solution and expertise extends our applications platform with intelligent edge technology that can be leveraged across our state and federal verticals. ResourceX adds priority-based budgeting solutions to our entire ERP portfolio to address key challenges our clients face in their traditional budgeting process. The total purchase price for these two acquisitions was approximately $38 million in cash and stock. We're thrilled to welcome each of these companies and their team members to Tyler. Now I'd like Brian to provide more detail on the results for the quarter and our annual guidance for 2023.

Thanks, Lynn. Total revenues for the quarter were $494.7 million, up 4.5%. Organic revenue growth, which also excludes COVID-related revenues, was 6.0%. Last year's third quarter included $11.7 million of revenues from COVID-related initiatives at our Digital Solutions division, all of which ended in 2022. Subscriptions revenue increased 16.1% and organically rose 14.7%. Within subscriptions, our SaaS revenues grew organically 26% to $138.5 million. It is important to note that as our software contract mix continues to shift towards SaaS, our growth rate may vary from quarter to quarter due to the lag in time from contract signing to the start of revenue recognition, but we remain on track with our near-term growth expectations of a 20% CAGR in SaaS revenues through 2025. Transaction revenues grew 8.5% to $156.7 million, up 6% on an organic basis. License revenue declined 47.9% as our software business continues to shift to SaaS. SaaS deals comprised 80% of our Q3 new software contract value compared to 91% last year. As we noted earlier, last year's Q3 included two large SaaS deals totaling $70 million in contract value. Professional services revenue declined 14.9% primarily due to the absence of COVID-related revenues and was flat organically. We added 161 new SaaS arrangements and converted 79 existing on-premises clients to SaaS with a total contract value of approximately $71 million. In Q3 of last year, we added 153 new SaaS arrangements and had 70 on-premises conversions with a total contract value of approximately $149 million. Overall, our pace of on-premises conversions to SaaS continues at a steady pace with 246 conversions year to date, and we expect Q4 conversions will be 100 or more. More importantly, the total contract value associated with flips has increased year-to-date to $58 million. As we've discussed, conversions are a significant growth driver over the next several years as we accelerate the pace of flips. Including transaction revenues, expansions with existing clients and professional services, total bookings increased 10.3% on an organic basis. Our total annualized recurring revenue was approximately $1.65 billion, up 11% and organically grew 9.8%. Operating margins were better than expected despite pressure from our ongoing cloud transition. Our non-GAAP operating margin was 24.8%, down by 10 basis points from Q3 of last year. As we discussed in prior quarters, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins. In Q3, we paid merchant fees of approximately $36 million. If those fees were netted out of both revenues and cost of revenues, our consolidated non-GAAP operating margin for the quarter would have been approximately 190 basis points higher. Both cash flows from operations and free cash flow were robust this quarter at $177.5 million and $162.7 million, respectively, primarily driven by higher revenue collections. Cash flow in the quarter was impacted by approximately $22 million of incremental due to Section 174. On a pro forma basis, excluding the incremental Section 174 cash taxes of $112 million, our year-to-date free cash flow would be approximately $300 million, up 41% over last year. We continue to prioritize repayment of our term debt as a use of our cash flow. In Q3, we reduced our term debt by $135 million. We ended Q3 with total outstanding debt of $740 million and cash and investments of approximately $153 million. Our net leverage at quarter end was approximately 1.24 times trailing 12-month pro forma EBITDA. Our updated 2023 guidance is as follows: We expect total revenues will be between $1.942 billion and $1.962 billion. The midpoint of our guidance implies organic growth of approximately 7.5%. We expect GAAP diluted EPS will be between $3.82 and $3.96 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 $7.66 and $7.80. Interest expense is expected to be approximately $24 million, including approximately $5 million of non-cash amortization of debt discounts and issuance costs. Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website. In conjunction with our guidance for the full year, I'd like to remind you of the seasonality around our transaction revenues. While transaction revenues will grow year-over-year, as expected, they declined sequentially in Q3 and will decline sequentially again in Q4. Historically, transaction revenues are driven by two primary factors; state-determined deadlines like corporate filings and hunting seasons and the number of business days. Transaction revenues are typically at the highest in Q2, coinciding with peak outdoor seasons and tax deadlines. As we noted previously, we are also seeing the revenue impact of midyear contractual changes in one of our state enterprise agreements that include a move from a gross to net model for payments.

Thanks, Brian. We're making solid progress every quarter to deliver our near and long-term objectives that we discussed in detail at our Investor Day earlier this year. Consistent with our track record, we continue to scale our enterprise while capturing more efficiencies as we transform into a largely pure cloud business, supported by a unified One Tyler strategy. Our strong year-to-date performance, underpinned by our powerful financial algorithm, strong balance sheet, and our unique ability to deliver mission-critical software solutions, enabling the public sector's ongoing digital transformation. We're also proud that 11 of our state partners won E-Republic Government Experience Awards. Our clients in Utah, Mississippi, Indiana, Arkansas, and Virginia swept the top 5 spots in the GovEx awards. Our momentum continues to build as we complete this pivotal year in our cloud transition. Our team is excited about the tremendous opportunity ahead of us, and we look forward to sharing our continued progress as we finish out 2023. Now we'd like to open the line for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question for today comes from the line of Matthew VanVliet with BTIG. Your line is live.

Yeah, good morning. Thanks for taking the question. I guess, when you look at the ongoing portfolio of customers that are looking to make cloud migrations and the overall flips there and then some of the net new business, I know you've highlighted public safety in the past as probably being a laggard longer term. But it seems like momentum of cloud deals there is starting to pick up. Do you anticipate that encouraging more of your existing customers to make those flips? How are those conversations going? And ultimately, how much upside do you feel like there's still left on the public safety side as you get more momentum in the cloud there?

That's a great question, Matt. Historically, public safety has been a bit slow to adopt new technologies, but we are starting to see that change. While I wouldn't say it's happening rapidly, there is noticeable momentum building. This is evident in the deals we are closing and the acceptance from our clients. We're seeing more movement on the RMS, or records management side, while mobility is already well established. On the CAD side, we have some progress. Recently, we completed a deal with Manassas, Virginia, where we transitioned them from an on-premises CAD RMS client to a SaaS solution. As the market grows more accepting, I believe momentum will continue to increase. Looking ahead to 2024, we are optimistic that the number of transitions and SaaS deals will rise at a faster rate, although it’s still not the majority of our business.

Thanks for your question. Our next question is from the line of Kirk Materne with Evercore ISI. Your line is live.

Yeah. Thanks very much. Congrats on the quarter, guys. Lynn, can you just give a little bit more color on what you're seeing sort of across some of the product categories in terms of SaaS bookings, meaning activity levels maybe on ERP versus Courts & Justice versus public safety? Just kind of a little bit more color on that might be helpful. Just trying to get a sense of where you're seeing momentum. And any color, I guess, on public safety into the fourth quarter too would also be helpful. Thanks.

Overall, across our entire portfolio, we are primarily focused on SaaS, except for public safety and perhaps our platform solutions. For the rest of our offerings, we are mostly prioritizing SaaS. Our budgets for SaaS are substantial, and our ERP segment is performing well, exceeding 90%. Courts & Justice is also performing strongly. The two areas that are progressing more slowly are public safety and platform solutions, which relate to our federal sector. However, the modernization efforts at the federal government are beginning to encourage a shift toward SaaS in those areas too. The majority of our business is experiencing strong demand and market receptiveness, and we are seeing positive momentum in those slower segments. Currently, licenses account for about 2% of our total revenues, mainly coming from the two divisions mentioned, though there are still some license transactions occurring in other parts of the business.

Thanks for your question. Our next question is from the line of Joshua Reilly with Needham. Your line is live.

Thank you for taking my question. Great job on the quarter. Our research shows that the MicroPact business had a strong pipeline leading into Q3, which aligns with the federal government’s fiscal year-end. Can you provide more details on how these deals were finalized and any insights on the cross-sell opportunities into the NIC state contracts related to the MicroPact business? Additionally, are there any more deals that could potentially fall into the fourth quarter? Thank you.

I'll start. I didn't quite catch all of that, Brian. So I'll let you take over. Our platform solutions typically perform best in Q3. They secured a strong deal with the National Guard Bureau. However, a significant license deal was postponed to 2024 due to uncertainties around federal government funding as Q3 ended, with some funds being redirected to what the federal government deems more mission-critical. The number of deals and the pipeline at the Federal level continues to expand, but there are still some large deals that can vary from quarter to quarter. Once the Q3 window closes, while there's still a good volume of deals in Q4, Q1, and Q2, the urgency tends to decrease as we approach late Q2 and into Q3.

Yes. And on the cross-sell, the opportunities with our application platform, the formerly called MicroPact Entellitrak product, remain one of the strongest opportunities and one of the areas where we're seeing the most activity in terms of leveraging the digital solutions state contracts to sell that into those states. And we had a couple of deals this quarter that we mentioned in the prepared remarks in different applications. I think in Louisiana and Indiana, where we've seen progress. We've seen a number of those deals since the acquisition of NIC, and that continues to be an opportunity that we're pursuing actively.

Yeah. I mean, the synergy between what we do at federal and the state market is really strong. As Brian mentioned, we're seeing more pipeline there. And really because when you think about the state government and what they're doing, a lot of what they're doing is case management. Our application platform really serves those modernization needs. It's less expensive, it's nimbler, it's built for government, and it's enhanced by our mobility, our D&I, and our payments. So we do see that synergy, and I think it's something that's going to become more of a focus for us as we look into 2024 and 2025.

Thank you for your question. Our next question is from the line of Rob Oliver with Baird.

Great. Hi, thanks. Good morning. In the prepared remarks, you called out the Naperville, Illinois win in public safety. It sounds like that was a cross-sell on Courts & Justice. So just curious if that's a path you guys are you called out because you're seeing success there? Obviously, the Tyler One vision, those being tied together would make a lot of sense. But is that a go-to-market play that you see driving increased wins for public safety in the future here? Thank you.

I believe it highlights our Connected Communities vision and the synergy we can create between our public safety and enterprise justice initiatives. Securing that win was significant, especially since it was a fiercely contested deal exceeding $1 million. Smaller deals, like the one we closed with the Ameriposta County Sheriff's Office in California this past quarter, also demonstrate our strategy. This deal utilized our enterprise justice contract to introduce Tyler corrections in that region. It was an essential win for us, particularly since we hadn't had recent success in California, and it showed the value of our relationship in the Courts & Justice sector. This opens up potential for expansion not only within that department but throughout California.

Thank you for your question. Our next question is from the line of Terry Tillman with Truist Securities. Your line is live.

Great. Good morning. This is Connor Passarella on for Terry. Appreciate you taking the question. Just curious about the payments business and how we should be thinking about organic growth going forward in that segment. And then also just on the payment disbursement use cases that have progressed since the acquisition of Rapid Financial last year. Thank you.

I’ll begin with the use cases. When we acquired Rapid, their main focus was in the court sector, which remains our primary emphasis at this time. We are currently early in our budgeting process for 2024, considering our investment options and various disbursement cases we want to fund. I won’t provide details on our R&D timeline or priorities just yet, as we are in the midst of that planning. We have previously mentioned the broad opportunities across Tyler's solutions regarding disbursements, which are significant. However, for now, our main focus continues to be in the courts area.

Yes. And on the expectations for growth rates around payments, at Investor Day, we broadly talked about an expectation of transaction revenues growing in the 10% to 13% range and expanding margins there over the next several years. As we've said, we're in the very early innings of executing on the cross-sell opportunity of driving payments more deeply into our local government customer base. We're still ramping that up, seeing good success in expanding those numbers of new deals each quarter. But generally, that 10% to 13% CAGR for transaction revenues is our expectation over the next few years.

Thank you for your question. Our next question is from the line of Alex Zukin with Wolfe Research. Your line is live.

Hey, everyone. I appreciate the opportunity to ask a question. I have a couple of quick ones. Bookings seem to have significantly increased this quarter compared to previous quarters. I would like to understand what contributed to that outperformance. Was it due to accomplishments achieved in the year or is there some additional momentum? Similarly, cash flow appears to have exceeded our estimates and consensus expectations significantly. Can you clarify if there were any one-time factors influencing this? How should we approach this for Q4? Lastly, Brian, could you provide insight into the specific factors affecting the cloud or SaaS statements this quarter? What were the main drivers, and how should we look at that moving forward?

Yes. There are a few points to mention. The strong cash flow performance was mainly due to improvements in working capital and effective collections, which positively impacted our receivables. We're witnessing an increase in recurring revenues that contribute positively to cash flow. There aren't any significant one-time factors affecting this. However, our expectations for the year have slightly increased. After accounting for the Section 174 cash taxes, which had the largest effect in the first half of the year, we noted a $22 million impact on cash taxes this quarter, compared to around $15 million in incremental taxes in Q4. Currently, we estimate our full-year free cash flow to be between $220 million and $240 million, an increase from our previous estimate last quarter. We made some minor adjustments to the historical data concerning the split within subscriptions as we transitioned to a new financial system this quarter. This allowed us to clarify the revenue mapping, particularly from acquisitions, which resulted in the reclassification between transaction revenues and SaaS revenues. We've cleaned up some of the historical numbers, and we don't anticipate any further changes going forward.

Got it. And what about on the bookings side?

Yes, the bookings can be a bit inconsistent. However, they reflect the combination of our new SaaS business and the increases in transaction business, which impact both bookings and revenues simultaneously. This combination contributed to a stronger quarter. While we did not have any major deals, we saw solid new SaaS deals, along with a few smaller yet significant license deals this quarter, and good activity in expanding with existing customers. Overall, the growth was broad-based, though it wasn't driven by very large contracts, but rather showed nice growth across all our revenue streams.

Thank you for your question. Our next question comes from the line of Saket Kalia with Barclays. Your line is live.

Okay. Great. Hey, Lynn. Hey, Brian, thanks for taking my question here. Brian, maybe for you. I'd love to dig into the restatements just one level deeper. Can you walk through what some of the items from the NIC business are that are now classified as SaaS instead of transaction? And as a follow-up, how would your SaaS revenue growth have looked, excluding the restatement? I know it's about 26% year-over-year growth this quarter. What would that have been under the old convention, which is what our current model is based on? Does that make sense?

Yes. I don't have that number in front of me. They're not restatements. In the financial statements, they were always all in subscription revenues. It's in the...

That’s fair, it’s a reclass. That's fair. It's a reclass, not a restatement, Brian.

Some of those revenues were classified under transaction categories when we first acquired NIC, and nearly all their revenues were included there. Additionally, revenues from certain contracts can mix SaaS revenues with transaction revenues, as they provide some software services while receiving payments through transaction fees. This can lead to some overlap in classification. When we acquired VendEngine, we initially made decisions on how to distribute their revenues based on their financials. As we gained a better understanding, we began to align these with our new financial system and determined that some revenues were better classified differently. These are relatively minor reclassifications, so I don't anticipate a significant change in the overall trend.

But to understand it better, the 26% growth is significantly higher than what we observed previously. Was the new SaaS revenue growing much faster than the existing SaaS revenue? It certainly exceeds the previous figures, and I wanted to clarify that.

No, no. There's not a significant change from that. That's not really accelerating it. The 26% growth is actually an acceleration this quarter. But again, we said that will maybe move around from quarter to quarter. But generally, we expect this around the 20% CAGR over the next couple of years in SaaS revenue. Some quarters, it may be higher. And as we talked about, some of that variability from quarter to quarter has to do with the lag from when we sign a new SaaS deal to when those revenues hit, which can be a quarter or two, occasionally longer.

Got it. Very helpful. Thank you.

Thank you for your question. Our next question is from the line of Jonathan Ho with William Blair. Your line is live.

Hi, good morning, and thank you for taking my question. Just wanted to better understand sort of the AI opportunity that you're seeing out there and sort of the rationale for making the acquisitions at this time. Just given state and local governments typically adopt technologies a little bit more slowly, how do you think about sort of driving these types of solutions? What does the opportunity look like? Just want to get the broader color. Thank you.

Yes, Jonathan, it's clear that the landscape is changing quickly. There's a lot being discussed in the news, some of which is more hype than substance, but the impact of AI is very real. At Tyler, we are exploring AI from two perspectives. First, we are assessing how we can enhance our internal efficiencies by utilizing AI, particularly for high-volume repetitive tasks that occur in parts of our business, such as software coding and support functions. Secondly, we are considering how we can make our products more competitive and distinctive. To facilitate this, we have established a working group that has been analyzing various opportunities for several quarters. There are many AI initiatives happening throughout Tyler. True to our usual method, we are taking a targeted approach to identify the key areas we want to focus on, whether for internal efficiency improvements or enhancing product competitiveness. The CSI acquisition exemplifies this strategy; they began as leaders in document redaction and extraction and have recently expanded to include machine learning and robotic process automation. This is essential for our core clients, some of whom, like Tarrant County in Fort Worth, have reported a 50% reduction in labor costs by automating repetitive document tasks. Additionally, we discussed the Rapid acquisition, which initially focuses on the court sector but has potential applications across other areas of Tyler, such as invoice processing within our ERP solutions. There is significant relevance here, and while states and clients may approach this differently, we will continue to take a deliberate approach tailored to our clients' needs.

Thank you for your question. Our next question is from the line of Clarke Jeffries with Piper Sandler. Your line is live.

Good morning. Thank you for taking the question. I apologize, I'm maybe going to beat a dead horse and ask a little bit more questions about the reclass. But specifically, looking at SaaS ARR either pre-reclass or post-reclass, been in this mid-single-digit sequential growth paradigm. And what stood out was an acceleration of maybe high single-digit sequential growth in ARR. And so, Brian, I wanted to ask, is this a reflection of maybe the good bookings you had last year and some of those deals finally reaching the timing where they would be going live in revenue terms? Or was there a change being made in the business, either on a capacity level or a new bookings level that we may not appreciate that contributed to an acceleration in ARR growth? Thank you.

Yes, Clarke, I believe it's primarily about timing. Good bookings may date back a year or more, where we secured new SaaS deals; many of these are now appearing more prominently in the revenue run rate as well as flips. The rate of flips has been increasing over the past couple of years and is still accelerating. However, there is a lag between the contract signing for flips and the revenue uplift that shifts from maintenance to SaaS. Typically, this is a 1.7x multiple. Therefore, the flips we executed last year, last quarter, or earlier quarters are now starting to generate revenue uplift. This lag is different from some SaaS companies, reflecting the delay from contract signing to when those revenues impact our income statement. I believe this acceleration will continue as we increase the pace of flips and transition more new business to SaaS, although there will still be a lag.

Thank you very much.

Thank you for your question. Our next question is from the line of Gabriela Borges with Goldman Sachs. Your line is live.

Hi. This is Kelly Valenti on for Gabriela. One for Mobi. Last quarter, you made very specific comments on RFP and demo activity at or above pre-COVID highs, while it sounds like top of funnel remains strong. What are you seeing in the back half of this year compared to that dynamic that you were seeing in the first half? And then are there any idiosyncrasies of the government end market making you more or less bullish on RFP and demo activity next year?

Yeah. Thanks, Kelly. I would say it's been a strong year. I would say we characterized that in the first half of the year as very strong. Right now, it's steady at that pace. Overall, the markets just seem healthy. The budgets are still strong. The activity is strong, and our win rates are good. So I don't see any real meaningful change across our business lines from comments we've made in the first couple of quarters.

Thank you for your question. Our next question is from the line of David Unger with Wells Fargo. Your line is live.

Great. Thank you guys. So it's great to see the net leverage coming down to 1.25 times EBITDA. Can you just remind us how you guys like to think about that leverage band and maybe some color around private market valuations? Thank you.

Thanks, David. We've been focusing heavily on reducing our debt while also exploring other opportunities. I'm pleased to share that after lowering our net leverage below 1.5, our banking rates improved, which we achieved by the end of Q3. We've successfully reduced our debt by over $1 billion. Brian mentioned earlier the effects of Section 174 taxes on our pro forma free cash flow, which suggests we would be nearing the end of our term debt if it weren't for those complications, which is promising. In terms of private market valuations, we're beginning to notice shifts in expectations. It's surprising how some in the private sector still hold on to the valuations from a couple of years ago, despite the changes in public markets. We're maintaining a disciplined approach to acquisitions; when private expectations are excessively high, we will avoid those deals. We're excited about closing three significant deals—one in Q3 and the others we announced this week. These deals will contribute positively to our growth and align with our strategy detailed in Tyler 2030, enhancing both revenue and margins in the near future. Additionally, many companies moved to private equity in recent years, and we may soon see a trend of them returning to the public markets. Historically, those companies were acquired at high premiums, so it will be interesting to see how that evolves. However, our disciplined approach will remain unchanged.

Just to add to Lynn's comment about leverage and our comfort level, we've never been highly leveraged and don't see a scenario where we really would be given the predictability and the strength of our cash flow, especially around our recurring revenues. When we did the NIC acquisition, we were, I think, around or maybe above 3x leverage and certainly very comfortable there. Our lenders are very comfortable there. And as we said, we're focused on deleveraging, especially as interest rates rose and have done that very rapidly. But I think we have a lot of capacity as well. But within that band up to the kind of 3, 3.5 times, where we're very comfortable.

Thank you for your question. Our next question is from the line of Pete Heckmann with D.A. Davidson. Your line is live.

Thank you. Good morning. Just wanted to see if you had any preliminary thoughts on the potential for the Federal Reserve to cut debit interchange and whether based on the convenience fee model that NIC had, whether a lower interchange might be a benefit to margins?

I don't have any preliminary thoughts on it. We monitor market developments closely, especially as we consider our long-term plans. I'm not in a position to speculate on actions from anyone in Washington, including the Fed. So at this moment, I don’t have any significant comments on that.

Okay. And then just a housekeeping item, Brian. Were there any single deals above, let's say, $10 million in total contract value in the quarter?

I don't think we had any contracts over $10 million in value. Our largest SaaS deal was about $5.5 million, which was the Minnesota Parks deal. Our largest license deal was below $5 million in total contract value, although it has numerous options that could raise that amount significantly. However, the recorded amount was under $5 million. So, there were no particularly large deals this quarter, but we did see a good volume of solid midsized deals.

Thank you for your call and your question. Our next question is from the line of Alexei Gogolev with JPMorgan. Your line is live.

This is Helen Smith on for Alexei Gogolev from JPMorgan. Thank you for taking my question. So my first question revolves around your private data centers. At your Investor Day, you talked at length that one data center will be closed in 2024 and the other in 2025. Do you have any updates on that front?

Yeah, I'd say right now we're on track for what we outlined. We expect our Dallas Center to shut down sort of middle of 2024. And yes, we're still on track for evacuating the other one by the end of 2025.

Great. Thank you so much. My second question revolves around security. There have been some pretty high-level security breaches recently out like Clorox and GM, Caesars. I was wondering if this has changed the way that you're working with your customers or if your customers have brought forward any sort of concerns.

Security remains a significant concern, especially in our industry and for our clients. Recent developments in cybersecurity have underscored the importance for clients to transition from traditional on-premise setups to cloud solutions and embrace modernization and digitization efforts. This shift has been notable. For instance, I mentioned previously that we had a client in Arizona who had been considering a move to SaaS for an extended period. Following a ransomware attack, they swiftly decided to move to the cloud, which became a crucial factor in their decision-making. This reality is something we must all contend with, and our clients are particularly aware of it as many public sector clients are prime targets. I believe this situation can positively influence our sales and foster a deeper understanding of the future direction we should take alongside our clients.

Thank you for your question. Our next question is from the line of Saket Kalia with Barclays. Your line is live.

Okay. Great. Hey, guys. Thanks for taking the follow-up question here. Brian, one follow-up question for you, if I may. Can we just talk a little bit about the blended duration on SaaS bookings this quarter a little bit, putting aside the reclass? I think if we look at SaaS bookings ARR, that expectedly faced the tough comp that we were talking about earlier. So that was down year-over-year pretty decently. But SaaS TCV was actually pretty decent in terms of total bookings. I just wondered if duration was anything to consider there and how you thought about that?

Not really. Actually, the average term of our new SaaS contracts this quarter was exactly the same as the third quarter of last year at 3.8 years. We've said we generally tried to bring that down over recent years and generally lead with a three-year initial term. We certainly have some clients who want a longer term. And so that blended term or that average duration has generally been in that kind of 3.5% to 4% over the last couple of years. But this quarter, yes, that wasn't a factor at all.

Got it. Very helpful. Thanks.

Thank you for your question. Ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn it back over to Lynn Moore, President and CEO, for closing comments.

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

Thank you. Ladies and gentlemen, that does conclude today's Tyler Technologies Third Quarter 2023 Conference Call. Have a great rest of your day.