Tyler Technologies Inc Q1 FY2024 Earnings Call

Hello, and welcome to Tyler Technologies' First Quarter 2024 Conference Call. Your host for today's call is Lynn Moore, President and Chief Executive Officer of Tyler Technologies. This conference is being recorded today, April 25, 2024.

Thank you, Christa, 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 update our annual guidance for 2024. Lynn will end with some additional comments, and then we'll take your questions. During this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future 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 have also posted on the Investor Relations section of our website under the Financials tab, schedules with supplemental information, including information about our quarterly recurring revenues and bookings. On the Events and Presentations tab, we 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 first-quarter results provided an exceptional start to the year, exceeding our expectations across key metrics, including revenues, earnings, operating margin, and cash flow. Recurring revenues grew almost 9% and comprised 84% of our total revenues. SaaS revenues grew 22%, marking our 13th consecutive quarter of SaaS revenue growth of 20% or more, and exceeding expectations of a 20% CAGR in SaaS revenues through 2025. In addition, transaction revenue surpassed our plan due to higher volumes and positive pricing trends. Our performance demonstrates the power of our business model against the backdrop of robust public sector demand supported by generally healthy budgets. Our key sales activity indicators remain elevated, and our pipeline reflects growing sales synergies as we execute our integrated go-to-market strategy. During our Investor Day last year, we announced our Tyler 2030 Vision, which aligns our strategic focus on four key growth drivers: leveraging our installed base, expanding into new markets, completing our cloud transition, and growing our payments business. Leveraging our unmatched installed base has been a cornerstone of our growth strategy, and we're pleased with the outstanding execution by our sales organization, driving impactful cross-sell and upsell activity that further deepens existing client relationships and expands our market reach with new client engagements. Notable cross-sell and upsell wins during the quarter included a records management and ERP contract, including payments with Ada County, Idaho, leveraging our state enterprise relationship. An on-premises contract for our full enterprise Public Safety suite with the City of Columbus, Georgia, added to its existing Tyler courts, corrections, ERP, tax, and permitting solutions. An enterprise ERP win with the Texas Legislative Council facilitated by our existing Digital Solutions division relationship in Texas, which avoided an RFP process to secure a new enterprise ERP client in a nontraditional market. A combined SaaS contract with the city of Juneau, Alaska, for enterprise assessment, tax, and enterprise permitting and licensing solutions. By prioritizing the cloud as one of our key growth drivers, we are unlocking new levels of innovation and responsiveness in making the cloud accessible for our clients, while providing enhanced security. Our new software SaaS mix continues to expand and comprised 93% of Q1 new software contract value. We're particularly encouraged to see a growing preference for cloud technology in the state and federal market with our application platform and an accelerated shift in Public Safety cloud demand with multiple client-driven SaaS selections. In fact, 75% of our first-quarter enterprise Public Safety deals were SaaS. Because the pace of the shift to SaaS in these markets this year is faster than we previously anticipated, we have lowered our expectations for license revenues for the year. And across Tyler, the volume of flips signed in the first quarter was in line with our expectations, with a 21.5% increase in average ARR. Key first-quarter new SaaS deals and flips included multiyear SaaS arrangements with the Hawaii Department of Natural Resources and land between the Lakes National Recreation area that build on our momentum in the outdoor recreation space. Competitive SaaS wins for Public Safety included a full enterprise Public Safety suite contract with Palm Beach, Florida, which was focused on a cloud-only strategy. We also won a sole-source enterprise Public Safety contract with the city of Evanston, Illinois, which expands our growing footprint in the Chicagoland area. An enterprise appraisal in tax for Fulton County, Georgia, which includes Atlanta. The contracts with ARR of more than $1 million was executed on an accelerated timeline with the go-live completed within one month. Two Public Safety SaaS flips with Beringham, Alabama, and Germantown, Tennessee, both of which were client-driven SaaS selections and accelerated go-lives. The Kansas judicial branch signed an enterprise justice appellate court SaaS flip as we continue to see a growing interest in moving to the cloud from our on-premises courts clients. Another key driver of our long-term growth is our transactions and payments business. As I mentioned earlier, better-than-expected transaction volumes contributed to first-quarter revenues that exceeded our expectations. In the first quarter, we signed 288 new payments deals across Tyler, representing approximately $9 million in projected ARR. In our state enterprise portal business, we signed a new three-year enterprise contract with the State of Mississippi, extending our existing 14-year relationship. Our enterprise agreement with the State of Idaho was also renewed for two years in a rebid through the NASPO Citizen Engagement agreement. We're also very pleased to see early traction and growing demand for the solutions we added to our portfolio through our 2023 acquisitions of CSI, ARInspect, and RexourceX, each of which brought us expanded AI capabilities. With CSI, we signed a contract with our existing course client in Dallas County, Texas, adding approximately $900,000 of ARR. We've seen demo activity double over pre-acquisition levels for our augmented field operation solution, formerly ARInspect, with first-quarter wins that included the city of Newark manhole inspections and an expansion contract with the New Jersey Department of Environmental Protection. For our priority-based budgeting solution powered by RexourceX, we signed contracts with Collier County, Florida, and Fort Worth, Texas that added almost $600,000 of ARR. Now I'd like Brian to provide more detail on the results for the quarter and our updated annual guidance for 2024.

Lynn, total revenues for the quarter were $512.4 million, up 8.6% and organically grew to 7.8%. Subscriptions revenue increased 11.7% and organically rose 11.4%. Within subscriptions, our SaaS revenues grew 22% to $148.8 million and grew organically 21.3%. Keep in mind that there's often a lag from the signing of a new SaaS deal or a flip to the start of revenue recognition that can vary from one to several quarters. Because of this, as well as the timing of SaaS renewals and related price increases, SaaS revenue growth, both year-over-year and sequentially, may fluctuate from quarter to quarter. Transaction revenues grew 3.7% to $164.5 million. While transaction revenues exceeded our plan, primarily due to higher transaction volumes from new and existing clients, including driver history records, the year-over-year comparison continues to be impacted by the change last year from the gross model to the net model for payments under one of our state enterprise agreements. SaaS deals comprised approximately 93% of our Q1 new software contract value compared to 87% last year. During the quarter, we added 200 new SaaS arrangements and converted 90 existing on-premises clients to SaaS with a total contract value of approximately $86 million. In Q1 of last year, we added 145 new SaaS arrangements and had 73 on-premises conversions with a total contract value of approximately $86 million. More importantly, the average ARR associated with our Q1 flips increased 21.5% over last year. Including transaction revenues, expansions with existing clients, and professional services, total bookings increased 15.7% on an organic basis. Our total annualized recurring revenue was approximately $1.72 billion, up 8.8% and organically grew 8.2%. In previous quarters, we discussed our expectation that 2023 would be the operating margin trough from our cloud transition and that 2024 would mark a return to operating margin expansion. Our non-GAAP operating margin in the first quarter was 23.8%, up 210 basis points from last year. The margin expansion reflects improved margins for our cloud operations along with effective operating expense management. As we discussed on previous calls, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins as they are passed through to clients and are included in both revenues and cost of revenues. We paid merchant fees of approximately $42 million in Q1. Both cash flows from operations and free cash flow were above expectations for the quarter at $71.8 million and $57.2 million, respectively, which allowed us to repay the remaining $50 million of term debt outstanding from the NIC acquisition earlier in the year than planned. We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $202 million. Our net leverage at quarter end was approximately 0.79x trailing 12-month pro forma EBITDA with our only remaining debt of $600 million convertible due in 2026. Our updated 2024 annual guidance is as follows. We expect total revenues will be between $2.110 billion and $2.140 billion. The midpoint of our guidance implies organic growth of approximately 8.5%. We now expect that merchant fees will be up slightly over last year and that implied organic growth, excluding merchant fees, would be approximately 50 basis points higher. We expect GAAP diluted EPS will be between $5.27 and $5.47 and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $9.10 and $9.30. We expect to see sequential growth in earnings throughout the year with both revenues and EPS slightly weighted towards the second half. We expect our free cash flow margin will be between 17% and 19%, including the estimated impact of approximately $58 million of incremental cash taxes related to Section 174. Other details of our guidance are included in our earnings release and in the Q1 earnings deck posted on our website. Now I'd like to turn the call back over to Lynn.

Thanks, Brian. Our performance in the quarter demonstrates strong execution by team members across Tyler in key strategic areas, anchored to our Tyler 2030 Vision. We are starting to see the expected benefits of our cloud transition through progress with version consolidation, cloud optimization of products, cost efficiencies, and improved agility as we empower our clients who serve the public through Tyler's next-generation cloud applications. Our strong first-quarter results and positive outlook for the remainder of the year are reflected in our revised annual guidance. Even with lower expectations for license revenues because of the accelerated shift to SaaS with our Public Safety and application platform solutions, we've raised our revenue guidance while also increasing our earnings outlook. We recently published our 2023 corporate responsibility report, our fifth annual sustainability disclosure covering our environmental, social, and governance activities. Our sustainability initiatives in 2023 included investments in data management, validation, and processes to drive reporting efficiencies. We also undertook a double materiality assessment to understand key insights for multiple constituents on both financial materiality and impact materiality. We hope you take the time to review our report, which is available on our website. Finally, we're excited about Tyler Connect 2024, which will take place May 19 to 22 in Indianapolis. Nearly 5,000 Tyler clients and 900 Tyler team members will come together for training, collaboration, and networking, and we're looking forward to inspiring our clients with the latest innovations from Tyler. Now we'd like to open the line for Q&A.

And your first question comes from Rob Oliver from Baird.

Lynn, mine is for you. You mentioned in the outset of your prepared remarks, your growth focus areas, but you talked about the growing sales synergies and the integrated go-to-market strategy that you guys laid out in more detail last year. And I know this has been a big push of yours since you assumed the CEO role. Could you give us a little bit of color on what some of those growing sales synergies are? Where you're excited about the progress you've had so far? What some of the levers you're pulling are? And what are some areas you still need to improve on? I appreciate it.

Yes. Sure, Rob. It's a good question. Last year, we elevated a couple of people to oversee all of our public administration sales and all of our justice sales. They're working more closely together than ever before. We've done things around aligning some incentive compensation plans and changing the way people are compensated to make sure that, for example, in the old days, it was about whose P&L was this recognized by. We wanted to break down some of those barriers so that, really, when Tyler wins, everybody wins. And so we've been doing things like that. We're still in the process of some initiatives, and some of that's still a work-in-progress. I mean when I say that we started these initiatives, they're not finished, but these are things that are a work-in-progress. We're doing things around our PSD and DSD divisions, our application platform and formerly NIC; we see a lot of synergies there. So we're doing things right now to start to bring some of those divisions closer together in order to work more closely with sales and operating efficiencies. We believe the application platform is tailor-made for state government. There are a number of initiatives like that. There's a lot going on, and I think we're going to continue to see improvement as we look forward.

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

Lynn, the numbers are pretty straightforward. So maybe I'll ask just a little bit of a higher-level question. It sounds like the spending backdrop in state and local governments continues to sound healthy. But just to make sure the question is asked, can you talk about, Lynn, what you've seen historically from those customers in presidential election years? I mean I imagine that those two things aren't terribly related, but again, I just want to ask — I want to make sure that question is asked as we get deeper into election season.

Yes, I don't know that historically, there's been much of a correlation between our sales and presidential election years more than what may be going on in the broader macroeconomic environment. As you note, the budgets for our clients are healthy and strong. Our sales outlook for the year, we have some pretty aggressive sales plans, but our sales outlook for the year is looking on plan, and significant parts of our business may actually be ahead of plan. Maybe a little bit in the federal space. I don't know that I've got enough experience yet with our federal space as to what impact that may have. But in general, if you look at our traditional local and state space, I haven't seen a lot of change in my over 25 years.

Your next question comes from the line of Matt VanVliet from BTIG.

I said you continue to see a higher and higher mix of business going to set contracts, and I believe you're seeing an acceleration to a certain extent on the flips side. Are you perhaps holding back the case for, or I guess, impetus to try to push forward on more flips? Maybe encourage customers at a little bit more of an accelerated pace to move over and just try to get this done as quickly as possible? Or any changing in your thinking there of the motivation of customers?

And you're kind of cutting out; I think I got most of your question, Matt. I'll start, and Brian, you can certainly jump in. In Public Safety, I think it's a couple of things. I think actually, if you step back and go to 2019, when we announced that we would go cloud-first from cloud-agnostic, some of the message was we were going to take our leadership position and start leading the market to where we thought it was going to go and needed to go. In Public Safety, as you know, historically, it's been a little bit slower. We've spent a couple of years. We have some new leadership in Public Safety. Our position in Public Safety is competitive. It's a competitive space, but we are in a very competitive environment. And really starting this year, more so in the third and fourth quarters of last year, we've taken the approach that we are going to start leading with SaaS. That has resonated. We talked about the Palm Beach, Florida contract, where they were only looking for a SaaS arrangement. Looking out this year, we're going to continue to push towards SaaS, while at the end of the day, it's still the customer's choice. There's a lot of selling messages around that. You look at our Public Safety; I think our plan for the year was to do about 50% on-prem licenses, give or take, which was up significantly from last year. What we're seeing right now is we reported 75% in Q1. As it relates to flips, there's a lot of selling messages generally around flips and where all our sales folks are armed with those. I think one thing that you're also starting to see, and we've talked about it before on earnings calls, is that the rise of cybersecurity and ransomware attacks is triggering clients to want to push to SaaS faster. The more they see this out in their community—which aren’t always publicized—I think that’s also starting to grease the wheels a little bit to make that decision to move to SaaS.

I guess the only thing I'd add to that is in terms of our ability to significantly increase the pace of flips beyond the sales efforts that Lynn talked about. We have talked about in the past the need for clients who aren't on the current version of our products generally to upgrade to that version either before or when they look to the cloud as we drive towards having one version of each product in the cloud. We’ve made a lot of progress with version consolidation and sunsetting old versions and moving clients along, but that continues to be a gating factor in the pace of flips. As we continue to make progress with that, it opens up more opportunities for clients being in a position to flip. But as we've talked about, especially as we move into the larger flips, they are complicated processes from a planning perspective. The timing leading up to the flip from when we start engaging with clients can sometimes be lengthy. So we're certainly pushing it as fast as possible. We've talked about a roadmap that varies by product, but converges on us being at 80% to 85% of our on-prem customer base having moved to the cloud by 2030, and all our business units have roadmaps that are aligned with that goal.

Your next question comes from the line of Ken Wong from Oppenheimer.

This one is for you, Lynn. When we look at the number of subscription contracts, it looks like it took a really big step up this quarter. I think you touched on some of the highlights. Just wondering if that's more of a lumpy, volatile, seasonal-type situation we're seeing there from the jump-up to 200? Or do you think that is perhaps a closer reflection of the run rate we can expect going forward?

It's probably a little bit of both. Obviously, with 200 new deals, they are going to vary in size and scope. But if you step back, generally, when I think about 200 new contracts a quarter, that plays out to over 800 a year. That's a lot of business we're doing, and that's a lot of business we're executing on. It’s great work by our sales teams and our ProServe teams to turn that into revenue. I think it's certainly higher than it was coming out of Q4 last year and most of last year. I think last year, we did about 750 new deals for the year. So we're on pace for a little better. Right now, markets are healthy; budgets are strong. Our sales outlook, all indicators are positive, and our sales outlook looks good for the year.

Your next question comes from the line of Alexei Gogolev of JPMorgan.

Considering the elevated level of demand that Lynn, you just referred to, has your win rate remained relatively consistent at around 50%? If it has, it feels like you should be taking more market share. Do you feel that you could show acceleration of organic revenue growth in the near term?

Yes. Thanks, Alexei. I'd say generally, our win rates across the board are consistent. When you say 50%, you've got to look by each major product. Certainly, some areas where our win rates are 80%, 85%, others that are in more competitive spaces, such as Public Safety and mid to higher ERP space may hover around there. Those really haven't changed. We still have some of the same lag factors that we talked about before between the time of getting a deal to contract to getting them up and running. But as we look out, our overall revenue growth has slowed over the last two years, and we expect that to pick back up, and we're starting to see some of that.

Your next question comes from the line of Joshua Reilly from Needham & Company.

So we’re hearing some of your venture-backed startup competitors in Public Safety, specifically in records management, are having challenges getting customers live. Are you using this as an opportunity to go back to these customers and highlight the Tyler value proposition? And more broadly, how often have you seen this across other product lines where some of the venture-backed start-ups are making promises about getting customers live on timelines that they are unable to execute?

Yes, Joshua, that's a good question. It's something we’ve seen over the 25-plus years I've been at Tyler. There's always periods where someone comes up, makes a splash, and they have a little spotlight on them. They certainly have a demo that looks good, but they wouldn’t have the depth of functionality and products that we've had because they haven't been in the space for as long as we have. They win some business, but that's only part of the battle. We've always said part of Tyler's secret sauce is not just winning the business but executing on it. It’s hard work. Take, for example, our municipal and schools division, which sells more on the low end of ERP and has some courts and other areas. They did 207 go-lives in one quarter. Obviously, those are small deals, but that’s a lot of business. From the outside, people generally look at Tyler's results and think this is an easy business to get into. What we found, not just with venture-backed companies but some private equity money, is they didn’t really understand the market, and it’s a lot more difficult than it may appear. It’s a testament to all our hardworking people at Tyler, our culture, and how we view our relationships with our clients. You’re only as successful as your last implementation, and all our clients talk. If you fail, everyone knows.

Your next question comes from Clarke Jeffries from Piper Sandler.

Brian, very encouraging to see operating margins up substantially, and operating income dollars up 19% year-over-year. You talked about improved cloud operations as a driver of that. Does that mean that some of the capacity in the private cloud is already being reduced? And you're taking up EPS today, but could you talk a little bit about the expectations for the full year and how operating margins pan out for the rest of the year?

Yes. It's not so much of the capacity. We do continue to move clients to AWS, and we are on track with our plans to evacuate our first data center midyear this year. But really, a lot of those costs don't go out until after that data center is closed. So that's not really the biggest factor. Some of the things driving the improved cloud efficiencies are the releases we've had over recent quarters of the cloud optimized versions of our product, which improves the efficiencies and lowers our hosting costs at AWS. The progress we've made with version consolidation, and we made significant progress last year and continue to have aggressive plans this year around sunsetting older versions of products and getting the benefits from both support costs and development costs associated with supporting multiple versions of products. The new AWS agreement that we talked about last quarter has provided us with increased efficiencies in our hosting costs, so all of those are continuing to play out. And then on the revenue side, the outperformance in terms of revenues, especially on the payment side, where we were able to cover fixed costs better with incremental revenues from things like driver history records actually above our plan that contributed there, along with effective expense management of OpEx.

Yes. Clarke, I'd add we are seeing efficiencies through the cloud, but there’s still some runway to go in the efficiencies we plan to achieve. Some other internal initiatives that we don’t talk much about, such as improving our gross margins on pro services, saw an uptick in Q1. That's a strategic focus we started last year. But it's also a function of a more stable labor market. Our turnover has returned to pre-COVID levels, so that helps with billable utilization. Other internal initiatives around things like rationalizing some internal IT costs and real estate costs are all starting to show results in addition to the cloud. I want to emphasize that the efficiencies we will capture from further version consolidation and optimization along with all the things we plan to do in the cloud are still opportunities for us.

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

Maybe on transaction revenue, the prepared materials mentioned a customer change from gross to net. Would be curious on the rationale there, whether that's something we could see other customers elect for? And Brian, maybe you can just walk through both the margin impacts for us to consider there as well as the increased growth guidance. Fast start came up a couple of times on the call, but if there's any supporting commentary on what's driving that, also helpful.

Sure. Last year, and we talked about this some, we had two clients last year, state enterprise clients that changed from the gross to the net model. Still, the vast majority of our payments business is on the gross model, and we expect that to continue. We don’t see large-scale changes ahead. It is a client decision. Most clients prefer the certainty and predictability that comes with a gross arrangement with us, where we're responsible for the merchant fees and interchange fees and bear the risk of fluctuations. These two clients, though, one changed at the beginning of the year, and the other impacted our comparisons from mid-year last year. They had roughly $4 million to $5 million in quarterly merchant fees associated with that account. This impacts our comparisons for the first half of the year, but it will no longer be a factor. As a result, our growth in transaction revenues is impacted, but it actually improves margins by moving to the gross model. For the first half of the year, we’ll see transaction fees growing in the low single digits. But in the second half, we expect low to mid-teens growth when that impact has lapped. I don’t see that as a real trend, but it’s a client decision, and different clients have different risk tolerances regarding paying those merchant and interchange fees directly.

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

Just wanted to better understand the progress you're seeing in adding more transaction-based systems to your existing customers. Can you give us a sense of how penetrated you are in terms of those transaction systems, and whether you're on plan or on track in terms of adding more content to these existing contracts?

Yes, that's a good question. I don’t have those numbers offhand, but we can get back to you. Generally speaking, we’ve got a long runway left. We're still early in our transactions business. You can point to our presentation at Tyler 2030 for how we see transactions revenue to grow in the next five to six years.

Yes, we’re still in the very early stages of driving that cross-sell. We've done a lot of work with integrating the payments platform into our software products with significant payments capabilities, like utility billing and traffic court and licensing and permitting. As Lynn mentioned earlier, we're starting to see the impact of that with 288 new payments deals across Tyler's customer base. However, it's only a small fraction that we’ve penetrated to date in our software customer base, but it continues to build momentum, and we're really pleased with being on track with our plans for this year. But again, we're in the very early innings of that effort.

Yes, and I'd add, Jonathan, two years ago, we acquired Rapid Financial, which is in the disbursements world. We are only scratching the surface with that, so still a lot to do on both sides. If you look again at our 2030 presentation, I think we're kind of on track right now for that.

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

I want to unpack a comment you made earlier in terms of cybersecurity as a driver of public agencies moving to the cloud. Are we seeing concerns regarding ransomware and cybersecurity as perhaps a tailwind that you guys are dealing with now for public safety, but across the board? And are you seeing the life cycle of the systems you're replacing shrinking? So are we seeing an acceleration in the refresh cycle, albeit it might be small, but are we seeing some level of that you think?

I don’t know about that. I guess I would just say that—so my comment before on cybersecurity is we all know what’s out there. It’s a big event when it happens to a client. Generally, they view us and we view them as their trusted partner, and we’re usually there to help them. One thing they realize quickly is that getting them into the cloud will make them much more secure. To say that it’s driving flips, it is—it's not a huge tailwind, but it’s out there. It’s a fact of doing business in today’s world.

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

Brian, on the 21% growth in ARR and the flip, is that just largely pricing? Does that include cross-sell, upsell? Just trying to get a sense of whether that's apples-to-apples or if you’re seeing some of the sales synergies Lynn discussed earlier factoring into that growth as well.

Yes, I think the biggest factor is the larger average deal size. We’ve seen at least in the mix this quarter, but it won’t necessarily be consistent every quarter since that can be a bit lumpy. We saw more larger customers move; we highlighted one of them, Fulton County, Georgia, with their tax solution accounting for $1.3 million in ARR from that deal alone. We’re seeing more larger customers in the mix. Last quarter, we had our first court flip, and this quarter, we had the appellate court in Kansas flipping. So it's more around the average size of the clients, but there is also upsell in some of those as well.

Yes, and Kirk, I think there's also been instances where we may have won business a while ago. To secure that business, we had some contract concessions and fixed pricing for a period of time. The SaaS flip is an opportunity to revisit that.

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

And Brian, I want to reconcile some of the commentary you're making on the transaction business. You commented specifically around higher transaction volumes and better pricing. So maybe just help us understand if the volume is a function of the traction you're making in cross-sell and the run rate you talked about earlier? Or is there an underlying dynamic going on as well?

On the pricing side, we’ve talked about driving more business into the Tyler software customer base, enabling us to generally achieve premium pricing or better pricing than a commodities type payment arrangement where we provide additional value from things like automated reconciliations. So having the software or payments platform embedded within the software creates additional value for the customer, allowing us to get better pricing than payments-only type contracts. As we continue to add those, we're seeing improvements. We’ve seen some price increases in some of our revenue-sharing arrangements with third-party payment processors that have also benefited us. We saw, even though they’re down year-over-year, better-than-expected revenues from some of the other transaction volumes like driver history records, which tend to be a higher margin business as well. So it’s a combination of things driving that pricing.

Your next question comes from the line of Mark Schappel from Loop Capital Markets.

John, I believe the remaining ARPA funds must be allocated by year-end. I was wondering if you could comment on the impact ARPA funds are having on your business today and whether you anticipate any demand falling off next year as these funds come to an end?

Yes. The ARPA funds generally have to be committed by the end of 2024 and spent by the end of 2026. At this point across our customers and prospects, I think the majority of those have been committed—probably an 80%, 85% or more that’s strong. They may have committed funds for new ERP systems, but they haven’t even issued an RFP yet. We've said we believe it is a factor in the strong market conditions we've talked about but not the biggest factor. We expect it to continue to be a tailwind through 2026 as those commitments turn into purchases and then revenue recognition for us. We don’t expect a big drop-off after that. Some funds are used for one-time purchases, but generally, when they buy from us, it creates a recurring revenue stream funded initially from ARPA and then remains ongoing as a subscription.

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

Most of my questions have been answered, but one question I still have is to maybe talk about traction with AI-powered acquisitions. I think it was called out in your slide deck. Just curious, these were probably small acquisitions, but what is the revenue size of these products? And sort of stack rank them in terms of how they compare to prior acquisitions and their potential?

Yes. Thanks, Terry. First of all, we're early with these acquisitions. They fit the mold of previous successful acquisitions, serving as product differentiators we can take into our installed base where we have a commanding position. Each of these three has different growth trajectories, which is one of our criteria—whether they can grow at a rate faster than Tyler's overall rate. All three have that potential. I would say the acquisition of CSI has a somewhat larger near-term market opportunity, while RexourceX will drive significant revenue on its own and also improve our ERP solutions' win rates.

Collectively, these three generated around $4 million in revenue for the quarter. So yes, small compared to Tyler's total, but a couple of those deals we highlighted were significantly sized with large customers. For example, the Dallas County CSI deal contributed almost $1 million in ARR. Adding single contracts that yield $1 million of ARR is off to a good start.

Your next question comes from the line of Alex Zukin from Wolfe Research.

So, correct me if I’m wrong, but this is, I think, the first time since almost 2014 that you’ve actually raised the top line guidance for the full year after Q1. Lynn, just talk about what’s giving you that confidence to do that. You guys don't usually do that. Is it improving demand from new arrangements and flips? Is it transaction revenue expectations? It might be all of the above. But what is driving that incremental confidence to do something you don’t usually do?

Yes, it’s a good point, Alex. I was also thinking about when the last time we did it—a decade was indeed a while back. We recently completed our management quarterly meetings, and we’re seeing lots of good visibility in the market. I would say it's improved. I talked earlier about not just the market demand but what we're observing in our sales outlook. A lot of things are lining up nicely, giving us the confidence to do this, as you point out, it’s not typical for us. While we don’t aim to be overly conservative, we prefer to describe plans realistically and then act on them. I truly believe that in the last couple of years, I’ve never been more excited about Tyler's future. Recently, I’d even sharpened that into saying that I’ve never been more confident in Tyler's future. A lot of things are coming together for us right now, and we have a management team aligned with a singular focus.

The revenue outperformance in Q1, notably not resulting from pull forward or timing issues as we've seen in previous quarters, especially around transaction-based revenue, has truly been additive to our overall expectations for the year. That contributed to us raising our outlook for the full year.

I usually never ask this follow-up question because we focus on margins and efficiency. But given this once-in-a-decade higher level of confidence, is there a world where you push the throttle on investments, organically and/or inorganically, as it appears the market is coming to you at a faster pace?

That's a good question, Alex. I think we will continue to take a disciplined approach regarding investments. We've got plans in place for margin and investment. I like our balance right now—our capital allocation, where we are today. I don’t think you’ll hear us say this isn’t 2017 or 2018, where we signal elevated investments. We have sufficient investments ongoing, and there are many initiatives in action focused on revenue growth and margin expansion.

This does conclude our question-and-answer session. I will now turn the call back over to Lynn Moore for closing remarks.

Thanks, Krista, and thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or me. Thanks again, and have a great day.

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