Tyler Technologies Inc Q2 FY2025 Earnings Call

Ladies and gentlemen, hello, and welcome to today's Tyler Technologies Second Quarter 2025 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. As a reminder, this conference is being recorded today, July 31, 2025. I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director of Investor Relations. Please go ahead.

Thank you, Abby, 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 an update on our annual guidance for 2025. Lynn will end with some additional comments, and then we'll take your 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 these 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, a schedule 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 second quarter results again exceeded expectations and reflect continued momentum with double-digit total revenue growth, strong profitability, and exceptional free cash flow. Our performance continues to be supported by stable market demand and strong execution as we advance our cloud-first strategy. SaaS revenues grew 21.5%, marking our 18th consecutive quarter of SaaS growth of 20% or more. Transaction-based revenue growth was especially robust and ahead of plan, up 21.3% as quarterly transaction revenue surpassed $200 million for the first time. Our non-GAAP operating margin expanded 200 basis points to 26.5%. In addition, free cash flow grew 80.9% to $88 million, significantly exceeding expectations. As we've discussed on prior calls, we operate in a market defined by inherently long sales cycles, particularly for larger deals, which can create quarterly variability, but ultimately support long-term growth. While we still are seeing some scattered delays or cancellations of procurement processes related to the macro environment and noise around federal funding, they are not material. Many of the sales processes that were delayed in Q1 were signed in Q2, and we saw a solid sequential improvement in SaaS bookings in Q2. We're seeing no fundamental change in public sector demand or purchasing behavior and our sales pipeline remains strong, supported by generally stable and healthy budgets with funding priorities increasingly aligned to technology investments that drive long-term efficiencies through digital modernization. In addition, client conversations at our recent Connect conference reinforced that the vast majority of Tyler clients do not expect federal funding, DOGE or other macro factors to impact their spend with Tyler. Our cloud-first strategy is the foundation of our success and is anchored by unifying principles that drive toward a single release stream to better scale, innovate and deliver improved time to value for our clients. By closely aligning our cloud strategy and client success efforts with our deliberate AI approach, we're unlocking the full potential of the cloud while creating deeper client connections through our unified experience that we believe will enhance cross-sell and upsell opportunities. Our team continues to execute at a high level against our strategic road map, reinforcing our leadership position in the public sector and advancing our four key growth pillars: completing our cloud transition, leveraging our large client base, growing our payments business, and expanding into new markets. I'd like to highlight a few second quarter wins that illustrate progress against our growth objectives with a broader list of key deals included in our quarterly earnings deck. Our largest SaaS deal in the quarter was an $11 million contract that expands our relationship with the Arizona Supreme Court for Enterprise Supervision solution. We signed a contract for a full Enterprise Justice on-premises to cloud migration with the Superior Court in Santa Clara County, California, the sixth most populous county in the state. This is our first California court flip and represents more than $1 million in SaaS ARR. It was another strong sales quarter in public safety, including a multi-jurisdictional, multiproduct competitive SaaS win with the West Suburban Consolidated Dispatch in the Chicago area. And a full public safety suite SaaS win in Anoka County, Minnesota, worth more than $1 million in ARR. The city of Dallas, Texas expanded its contract for our Priority Based Budgeting solution. The city desired an accelerated deployment to leverage our AI-powered application to identify and prioritize the highest value budget initiatives for the city and its constituents. The State of Alabama Department of Revenue selected our AI-driven Resident Assistant solution. This win builds on our Resident Assistant projects currently in deployment in four other states, including Hawaii, Indiana, Mississippi, and South Carolina. We see a strong pipeline behind these wins as we build upon these successes. We were recently recognized as a Leader and Visionary in the first-ever Gartner Magic Quadrant for Cloud-Based ERP for U.S. Local Government. We believe this represents a clear testament to the strength of our competitive position, innovation, and the differentiated value of our uniquely integrated suite of public sector solutions. Before I turn the call over to Brian, I'd like to highlight the acquisition of Emergency Networking earlier this week. Emergency Networking, a Tyler partner since 2023, is a leading provider of cloud-native software for fire departments and emergency medical services agencies, including fire records management and patient care reporting with advanced analytics. The addition of Emergency Networking solutions expands our TAM and adds an important piece of Tyler's public safety portfolio, solidifying our position as a market leader in compliant fire and EMS records management, including the National Emergency Response Information System, or NERIS. We believe Tyler now has the most comprehensive suite of solutions for public safety agencies, from law enforcement to first responders to EMS agencies. Now I'd like for Brian to provide more detail on the results for the quarter and our updated annual guidance for 2025.

Thanks, Lynn. Total revenues for the quarter were $596.1 million, up 10.2%. Subscriptions revenue increased 21.4%. Within subscription, SaaS revenues grew 21.5% to $189.6 million. As we've discussed previously, there is 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 and SaaS bookings, both year-over-year and sequentially may fluctuate from quarter to quarter. Transaction revenues grew 21.3% to $215.5 million, driven by higher transaction volumes from both new and existing clients, increased adoption and deployment of new transaction-based services, and higher revenues from third-party payment processing partners. As a reminder, Q2 is typically our highest volume quarter for transaction revenues encompassing peak outdoor seasons along with tax filing deadlines. Professional services revenues declined 18.5% to $58.6 million due to both an intentional focus on deemphasizing low-margin services as well as the impact of reserves related to projects that were in the implementation phase with agencies in two states. Total bookings for Q2 were 28.8%, up sequentially from Q1 and up 5.1% year-over-year as some delayed Q1 decisions signed during Q2. SaaS bookings in total for Q2, including new SaaS deals, expansions, renewals, and flips were solid, up 47.7% sequentially from Q1 and up 8.2% year-over-year. During the quarter, we added 172 new SaaS arrangements and signed 118 SaaS flips of existing on-premises clients, with a total contract value of approximately $91 million, up 35.2% sequentially from Q1, but down 28.4% year-over-year against a difficult comparison, reflecting the lumpiness of large deals. Total ARR from new SaaS deals was approximately $15 million, which more than doubled sequentially from Q1 but was down 7% year-over-year. The average ARR from new SaaS contracts was approximately $87,000, up 65.1% sequentially from Q1 and up 9.8% over last year. The number of SaaS flips grew modestly over last year to 118. Total ARR from SaaS flips was approximately $13.3 million, up 10.9% sequentially from Q1 but down 9.2% year-over-year. Our total annualized recurring revenue was approximately $2.07 billion, up 15.2%. Our non-GAAP operating margin expanded to 26.5%, up 200 basis points from last year. The margin expansion reflects a positive shift in revenue mix towards higher-margin SaaS and transaction revenues, efficiency gains across our cloud operations and favorable operating expense trends, including leverage in sales and marketing and G&A expenses. 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 included in both revenues and costs of revenues. We incurred merchant fees of approximately $53 million in Q2 compared to $45 million last year. Cash flows from operations and free cash flow were robust at $98.3 million and $88 million, respectively, driven by higher margins and working capital improvements. The recent passage of the One Big Beautiful Bill Act provided a permanent repeal of Section 174, which required capitalization of R&D expenditures for tax purposes, along with favorable changes in the treatment of tax bonus depreciation. As a result, we currently expect that our cash tax payments in the second half of 2025 will be approximately $55 million lower than previously expected, adding approximately 200 basis points to our free cash flow margin for the year. Similarly, we expect that our cash tax payments in 2026 will be minimal. We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $895 million and net leverage of 0. In light of our strong second quarter results and our positive outlook for the balance of the year, we have revised our annual guidance for 2025 as follows. We expect total revenues will be between $2.33 billion and $2.36 billion. The midpoint of our guidance implies growth of approximately 10%. We expect GAAP diluted EPS will be between $7.40 and $7.70 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 $11.20 and $11.50. Our estimated non-GAAP tax rate for 2025 is expected to be 22.5%. We're currently evaluating potential impacts of the new tax bill on our tax rate going forward. We expect our free cash flow margin will be between 25% and 27%. We expect research and development expense will be in the range of $202 million to $205 million. Other details of our guidance are included in our earnings release and in the Q2 earnings deck posted on our website. I'd also like to add some additional color around our revenue guidance. Subscription revenues in total are expected to grow between 17% and 19%. Within subscription, SaaS revenue is expected to grow between 21% and 23%. Transaction revenues are expected to grow between 14% and 16%, with merchant fees up 7% to 9%. We now expect the majority of payment services under the Texas contract to continue through the end of 2025 or early 2026, with full year revenues of approximately $41 million. Maintenance revenue is expected to decline 4% to 6%. Professional services revenue is expected to decline 3% to 6%. License revenues are expected to decline 16% to 18%. Hardware and other revenue is expected to grow between 3% and 5%. Now I'd like to turn the call back over to Lynn.

Thanks, Brian. We closed the second quarter with strong performance and solid execution, positioning us well for the second half of the year. Our results reflect the competitive strength of our diversified business, delivering the broadest, most integrated portfolio of public sector solutions to lead our clients' digitally empowered future. In May, nearly 7,000 clients, sponsors and team members came together at Tyler Connect 2025 in San Antonio. At the conference, we previewed our AI strategic roadmap with resounding client interest and indications of elevated adoption readiness. Our AI strategy rooted in three core pillars, productivity, decision-making and service delivery, will include the introduction of new AI features for multiple products by year-end. We've also worked to standardize our monetization strategy, focusing on a value-based SaaS model that provides predictability that our clients' need. We also highlighted our increased focus on investments in improving the client experience, including presentations by our new Chief Client Officer, Andrew Kahl. You may have seen our Form 8-K filed last week, announcing John Marr's intention to end his service on Tyler's Board of Directors effective after the company's Annual Meeting of Shareholders in May of '26. John joined Tyler through the acquisition of Munis, ultimately rising to President and CEO of Tyler. He joined the Board of Directors in 2002 and has chaired the Board since 2017. John's impact on the company is immeasurable, and we look forward to celebrating him and his leadership next year. In the meantime, we extend both our profound thanks and our sincere congratulations to him. We're also grateful that he made this decision months before his actual Board service ends so that we have time to execute a thoughtful and responsible Board transition. To that end, Independent Directors of the Board discussed and unanimously agreed that their current intention is to nominate me as the company's next Board Chair. Independent Directors also unanimously agreed that they would continue to appoint a Lead Independent Director for as long as the Board Chair is not independent. On a personal level, I want to thank John for the remarkable ride we've had together since 1999. I'm deeply grateful for his leadership of the company and the Board, but also in my own career at Tyler. I remain fully committed to executing our mission, building momentum on the initiatives we have launched and delivering value to our shareholders, clients, and Tyler team members. It's been a privilege to do that with John, and I'm inspired as ever to continue writing more chapters in the incredible story that John helped write. Additionally, I'm pleased to announce the recent appointment of Ryan O'Connor as our Senior Vice President of Payment Strategy and Operations, a newly created executive role to support strategic objectives and further expand our payments market opportunities. Ryan brings more than 30 years of experience in the payments industry and a proven track record of driving innovation and operational excellence. He'll be responsible for Tyler's overall payment strategy, technology, third-party payments partnerships, and day-to-day payments operations. Ryan's strategic counsel will be key in this next phase of our growth as we realize the full potential of Tyler's payments business. Now we'd like to open the line for Q&A.

And our first question comes from Terry Tillman with Truist Securities.

First, I want to congratulate John and wish him all the best moving forward. Lynn, Brian, and Hala, I have a question focused on SaaS bookings. There was some mention in the prepared remarks about potential benefits transitioning from Q1 to Q2. Looking at the SaaS bookings of $148 million to $218 million, that's a significant increase sequentially and surpasses any bookings from last year, including quarters with large deals. Could you provide more insight into the bookings, considering that SaaS bookings encompass not only new deals but also extensions and renewals?

Yes, Terry. The real strength in the SaaS bookings this quarter, although the new deals, the new logo, new name deals did improve pretty significantly from Q1 sequentially, and that did include the impact of some of the deals that we talked about in Q1 that were delayed. But really, the strength there was around inside sales, which the expansions, additional sales to existing customers and renewals. It was a very strong renewal period. Some of that is just the timing of when some of the SaaS deals, especially multiyear deals, deals that we signed last year in a very strong bookings year, have renewed. And so that's really what drove most of that strength. But there's really four components there, as you mentioned, new names, additional sales to existing customers, renewals, and flips. And the latter three were all pretty strong this quarter.

And our next question comes from the line of Alexei Gogolev with JPMorgan.

Lynn, yesterday, we've heard Tenable call out improving federal spending environment. How have Tyler's sales cycle evolved since Q1? And what specific improvements are you observing in the pipeline as macro begins to improve?

Yes, Alexei, that's a good question. If you take a step back and look at the broader economy, just three months ago, there was quite a bit of noise around various issues like DOGE and tariffs. However, things appear to be stabilizing overall. Recent reports suggest that inflation has decreased, and GDP was around 3% this past quarter, which reflects changes in imports and exports. In Q1, there were many pre-tariff imports. Wages are rising, and there's an expectation of rate cuts, indicating that some market uncertainty is starting to ease. We noticed some uncertainty transitioning from Q4 into Q1 regarding the overall environment. Nevertheless, the deals in our business still remain, and our pipeline is strong. Even with some delays in decision-making, we continue to deliver essential systems to our clients, whose demand remains steady. We're witnessing an increase in market activity; for instance, in our ERP sector, RFPs have risen by 25% since Q1. As I mentioned, the demand is persistent, and our pipeline is healthy. We anticipate an increase in decision-making as we progress through the year, returning to the levels we experienced in the past several years.

Our next question comes from the line of Ken Wong with Oppenheimer.

I realize that everyone's still digesting all the potential impacts of the One Big Beautiful Bill Act. Any thoughts on as more responsibility is pushed down to the state, specifically around things like Medicaid, they're already stretched thin. Any concerns this could potentially influence buying behavior in the near term?

Yes, Ken, we're not seeing that happen. When it comes to things being pushed down to the state level, what we observe are typical budgets. A recent report from NASB indicated that state budgets have remained relatively flat over the last few years, following a period of elevation. It's important to note that in our state business, less than 15% of our deals come from state-funded expenditures; most come from transaction-based funding. Therefore, that's a minor part of our business. Overall, we're not observing any significant changes as a result of the One Big Beautiful Bill Act.

And our next question comes from the line of Michael Turrin with Wells Fargo Securities.

Brian, I was hoping we could just go back to some of the free cash flow commentary and unpack it a bit more. I guess with Q2 specifically, I'm wondering if anything, in terms of transaction outperformance, it all impacts seasonality of free cash flow or anything we should be mindful of? And then the commentary on the bill impacts. Was that 200 basis points for the full year, just given the change in the second-half assumptions, anything additionally you can add just there and in terms of seasonality as we're updating our forecast and just trying to get a bit more calibration around some of the changes there is helpful.

The 200 basis points reflect the effect of $55 million in lower cash tax payments for the entire year, which influences the full year margin. Seasonally, the second quarter is typically the strongest for transaction revenues, and this quarter was notably better than expected, driven by increased volumes and the activation of new contracts signed in previous quarters. The third quarter remains our largest for free cash flow by a significant margin, and we anticipate this will continue, particularly since much of our maintenance renews in that quarter, and we cannot collect cash in the third quarter. The key change for our assumptions in the second half is related to the lower cash taxes, as we expect to avoid paying any significant federal cash taxes for almost the next one and a half years.

And our next question comes from the line of Mat VanVliet with Cantor.

I guess when you look at the pipeline for cloud flips, curious on how that was trending into your Connect user conference, how the conference helped support that? And then as you look towards the back half of the year, how should we think about the progress of cloud flips and the magnitude of the ARR flipped over?

Yes, Matt, I’ll begin, Brian. You might want to add some specifics. Generally, as each quarter passes and more clients successfully transition to the cloud, it generates increased momentum. I've mentioned around Tyler that momentum creates momentum, and we’re witnessing that. The SaaS transitions we completed in California serve as a solid example. I can't recall exactly when it happened, maybe one and a half to two years ago, when we executed our first statewide court transition in Idaho, and we noted that this reference would generate more momentum, which we are now seeing. Additionally, one factor driving the heightened interest in AI is the unique circumstances within the public sector, such as the changing workforce and workforce reductions, which will be further impacted as more employees retire. This creates challenges in hiring, especially in the public sector, and I believe this will continue to boost momentum in our cloud transition business.

This year, the flips are more concentrated in the second half. Our expectation regarding flips remains unchanged from the beginning of the year, with a projected growth of about 25% year-over-year. Our on-premises client base is primarily made up of large customers. So far, we have only transitioned one of our state court customers, and we recently completed our first county flip in California. The timing of larger flips significantly influences our ARR and tends to be unpredictable. We anticipate the peak of these flips, particularly among larger clients, to occur around 2027 or 2028. We are collaborating with customers across our on-premises base to establish timelines for their transitions, and for virtually all of them, it’s now a question of when they will flip, not if. However, we expect that peak to be a couple of years away.

And our next question comes from the line of Saket Kalia with Barclays.

It's great to see some stabilization. Brian, I was pleased to see the SaaS bookings this quarter and the sequential growth. I noticed that you slightly narrowed the SaaS revenue growth guidance for the year. It's not a significant change, but could you discuss the factors you considered in making that adjustment? Also, could you remind us of what you shared about the long-term model for SaaS growth during Analyst Day? If I recall correctly, it was a two-stage model, and I'd like to hear more about what that indicates for SaaS growth.

Yes, of course. As we progress through the year and are now halfway through, we have greater clarity and can refine our projections. The main factors affecting SaaS growth this year are not primarily the current year bookings, as their impact on this year's revenues in the second half is minimal. The key is understanding the timing of when revenues from bookings made in the first half will start coming in, particularly regarding when revenue transitions from maintenance to SaaS. These factors have allowed us to narrow our projections a bit, but there are no major changes in our fundamentals. Regarding our long-term goals discussed during Investor Day, we aim for recurring revenues to grow between 10% and 12% annually, with SaaS growth in the high teens, around 20%, through 2025. We've been progressing faster than expected in that regard. As we move past the peak of the revenue transitions, growth will shift more towards the high teens overall, with low 20s growth during the peak, followed by a slowdown as we transition down from that peak.

And our next question comes from the line of Joshua Reilly with Needham.

As we enter the second half of the year here, how should we think about the pipeline for big deals? I know specifically, there's two states with RFPs for statewide court management contracts. Any update on how these are progressing and just the overall pipeline for big deals?

I believe our pipeline is strong. I have an idea of which dealers you are referring to. We consistently maintain a good pipeline in the court sector. Those larger deals in courts can be unpredictable. We anticipate some significant RFPs will be released in the upcoming quarters, and we plan to be very competitive for those opportunities. The timing for these is somewhat uncertain. However, even if RFPs were announced in the next quarter, it would still take time to navigate the process and finalize the agreements.

At a high level, the mix of large deals in our pipeline remains consistent with our long-term observations. However, as Lynn mentioned, it is challenging to predict the timing for larger deals until they are officially awarded. Even when there are announced timelines for procurements, they may not always be followed closely. Overall, the mix of large deals in our pipeline aligns with our historical norms.

And our next question comes from the line of Rob Oliver with Baird.

My question is on cross-sell. Brian, I think you mentioned from the SaaS revenue in the quarter, there was a good contribution from entices and cross-sell. So Lynn, my question for you is, and particularly coming out of Connect, you've done a lot to kind of change the culture internally at Tyler and to drive cross-sell. So two areas of focus. One, where are you seeing kind of the bulk of the cross-sell today? And I guess, within product sets. And then how are you seeing the evolution of kind of the One Tyler where you're creating a pipeline of ability to cross-sell, say, public safety into Munis and Odyssey into Munis and vice versa.

Yes, sure. I think that last point is pretty important. The One Tyler initiative, which really encompasses a lot of things and will become foundational for future cross-sell and upsell. And it's more than just things we're doing around our sales teams and how we're now quoting people. And even when we've talked recently about building out a state sales team, which is still in the early stages. But it extends into things like how we're approaching the cloud, how we're approaching cloud living, how we're approaching client experience, trying to give all of our clients a single unified experience, both from sales to support to implementation. That's what's going to continue to drive more and more cross-sell and upsell. We're seeing those opportunities really, I'd say, just kind of consistently across the board. I'd say we're still early in the process of capitalizing on the cross-sell, upsell opportunities. as we continue to build out that sort of One Tyler foundation that makes that, for lack of a better term, sort of helps grease the skids for those types of sales. So I continue to see that as one of our long-term growth drivers as we can continue to get more and more of our Tyler products into each of the clients' hands.

And our next question comes from the line of Jonathan Ho with William Blair.

Let me echo my congratulations as well. In terms of the transaction-based revenue, what maybe drove the strong performance this quarter? Can you just unpack that for us a little bit more? And what maybe causes us to drop back down to more normalized levels over the balance of the year?

There are several factors contributing to our growth in Tyler Payments revenues. We have been focusing on integrating payments with our new software sales as well as adding these services to our existing customer base. This strategy has been quite successful over the past year. We have also experienced growth in our revenue from third-party payment partnerships, which is encouraging. Additionally, we've established new payment relationships, particularly SaaS transactions where we earn revenue through transaction fees. For instance, the California Parks contract that started last August continues to contribute to our growth, along with our digital titling solutions in New Jersey. The Florida payments contract is also performing well since its launch with SunPass in July. Meanwhile, Texas, while phasing out, is still seeing increased transaction volumes. Overall, our success is driven by growing volumes, new customers, and effective cross-selling. However, some of our volumes can be seasonal. As we continue to engage our existing customer base, we will likely reach a point where opportunities become limited, but we still have time before we fully saturate this market.

I want to add that we are improving our onboarding process for our payment streams, and we are also working on initiatives to enhance adoption among our clients. This complements everything Brian discussed, along with those two additional factors.

And our next question comes from the line of Alex Zukin with Wolfe Research.

Echo the congrats. I guess maybe just two quick ones for me. First, around the kind of macro timing impacts, is there kind of maybe gauge the level of conservatism still embedded in the outlook for those events just given the kind of maybe lower macro impacts that we've seen thus far. That's just the first one. And then I have a quick follow-up.

Yes, as I mentioned before, there seems to be a lingering element in the broader economy that might be causing some uncertainty. However, this situation is temporary. The demand and our pipeline are still intact. Regarding our outlook for the rest of the year, even if more deals start coming in, I don't believe there is any significant conservatism in our approach for the remainder of 2025.

Got it. And then, Brian, regarding the increase in free cash flow, I noticed a 200 basis point addition from the bill, and you raised it by 100. What is the reason for that difference? Since this figure represents a half-year number, should we anticipate a 400 to 500 basis point impact for next year as we adjust our models, even though we are not providing guidance on that yet?

Yes. No, I wouldn't do that. I think that would probably be overly aggressive. I think the difference is really around just the impact of higher margins and higher earnings. So that's flowing through the cash, especially on the transaction side because the cash flow characteristics of the transaction revenues are really strong. We get the cash when the transaction takes place. So those are the biggest factors. The tax change and just the higher earnings and particularly transaction revenues. So I think your starting point is going to be probably somewhere around where we are this year. And then the impact of basically no federal cash taxes next year, which would have been probably in the $100 million range, but that impact on next year.

And our next question comes from the line of Charlie Strauzer with CJS Securities.

Just a personal thanks to John for the 23-plus years we've known each other and you, Brian, especially introducing us to the Tyler story at the very early days.

And our next question comes from the line of Gabriela Borges with Goldman Sachs.

I wanted to follow up on the prior commentary on the potential for flip to grow around 25% year-over-year. Give us a little bit of a sense of how that's progressing from here. I think in the past, you've talked about peak flips being in 2027, 2028. So do you think that 25% can accelerate? Or are we talking number of flips versus percentage growth rate, maybe just a little color on where we go from here on the flip.

Yes. The 25% refers to the number of flips, but the dollar value generated from those flips, along with the annual recurring revenue, is the main factor. It's somewhat challenging to forecast, but 2026 likely reflects another 25% increase from 2025, with further growth leading to a peak in 2027 and 2028. Therefore, we are likely anticipating about a 25% year-over-year increase in the next few years, alongside a consistent rise in both the quantity and average dollar value of these flips. There may be fluctuations from quarter to quarter, but we expect to maintain this growth trajectory until we reach the peak.

I got you. And so even if the number of percentage growth is steady to improving, the dollar value associated with that flips will be going up?

That's correct. We expect the dollar value to increase at a higher rate than the number of flips over the next couple of years, particularly with the larger court flips. The state-wide courts and large counties represent multimillion-dollar annual maintenance revenue streams, and we continue to see a fairly consistent 1.7x uplift from maintenance to SaaS.

And our next question comes from the line of Mark Schappel with Loop Capital Markets.

Nice job on the quarter. Lynn, I was wondering if you could just provide some additional details around Emergency Networking. The acquisition just announced, it looks like a nice little pickup, but maybe just some additional information such as maybe number of employees or customers, were they a regional player and where they profitable?

Thank you, Mark, for your question. The main focus of our solution lies in fire records and patient care reporting for EMS. Fire records have always been part of our public safety suite, but we haven't significantly invested in it as we've concentrated more on our CAD and police records. The new partner has a cloud-native, multi-tenant offering, and we've been collaborating with them for about two years to address this gap. This has been an internal trial process to evaluate their product, understand their culture, and determine the product's potential for growth in the market, which it has demonstrated. New compliance standards have emerged in this sector, and it has experienced notable consolidation recently. It's compliant with NERIS, the National Emergency Response Information System, and most agencies currently use NFIRS, which they must transition from by early 2026. Their solution meets these compliance requirements, and shortly before or after our letter of intent, they secured a statewide deal in Pennsylvania that has generated significant interest. We believe we have one of the top solutions available and are enthusiastic about it. Although it's a smaller firm with several million in revenues, close to breaking even, we are confident that we can leverage this acquisition similarly to our previous tuck-in acquisitions. It enhances our portfolio, increases our competitiveness, and given the urgency surrounding regulatory compliance changes and our recent market successes, we are very excited about this opportunity.

I'll add on the impact from Emergency Networking, although it's relatively immaterial is included in our guidance for the year.

And our next question comes from the line of Trevor Walsh with Citizens.

Lynn, I appreciate all the color around kind of DOGE maybe taking a bit of a back seat or at least the noise around that diminishing and that kind of being a good, I guess, confirmation of stronger budgets at the state level. But have you seen anything, I guess, within the confines of your federal business? I know it's small, but just has that pressure released there? Maybe just in that broader question, just give us an update on kind of where the opportunities might lie as you go more towards that part of the customer base.

Yes, Trevor. And you're right. Our federal business is a pretty small piece of our business, less than 5%. What we're seeing right now is that projects haven't been taken away. As you know, Q3 is the biggest quarter for that. So it's still a little TBD. But I think, generally speaking, I don't see a material change in our outlook. There will be pockets in federal. But as we mentioned in our opening remarks, while there has been some scattered stuff across our diversified portfolio, we don't view any of it as material.

And our next question comes from the line of Kirk Materne with Evercore ISI.

This is Bill on for Kirk. How should we think about trailing 12-month bookings numbers? Is it still a bit too lumpy? Should we look at it more over a trailing two-year basis?

The variations in the numbers suggest that it would be beneficial to consider a longer time frame for a clearer trend. As we have mentioned previously, last year was exceptional for SaaS bookings, featuring several major deals, especially in the third and fourth quarters. This creates challenging comparisons due to the strong performance during that period, which was heavily influenced by timing. Notably, we had significant SaaS contracts in places like Arizona and Maine, each worth between $15 million and $20 million. Therefore, examining a slightly extended historical period may provide a more reliable trend, minimizing some of the fluctuations. We are pleased with our current pipeline, and the expectation for bookings in the second half of the year looks promising, although it will face tough comparisons to last year's final two quarters. Please keep this in mind.

And our next question comes from the line of Keith Housum with Northcoast Research.

Question for you on bookings. As I look at the bookings here, obviously, it's not quite what you guys are growing in terms of revenue. But in terms of your revenue, what do you guys recognize as perhaps not recorded in your bookings? Is there a gap there in terms of payments or whatever might you see in revenue but not in bookings?

Payments are not reflected in bookings immediately. They appear in bookings only when the revenue is recognized. If we sign a new payments or transaction-based deal, it won't impact the current quarter's bookings. Even though the revenue from these deals is predictable, it relies on transactions, so it doesn't count towards bookings. We are regularly securing deals where we deliver software paid for through transaction revenues, which won't appear in the bookings figure but will contribute to revenue growth. This creates a hybrid model for us that gives a competitive edge by allowing us to deliver software while being compensated through a transaction model, particularly at the state level. However, this approach can lead to bookings being understated, especially concerning software.

Yes, Keith, a good example is that our ERP suite signed a deal in Florida this past quarter, I think with the city of Apopka. That deal was around $370,000 in annual recurring revenue for SaaS, but we expect $330,000 in transactions per year. So it's approximately $700,000 a year in recurring revenue. However, most of those transactions will not be reflected in the bookings.

Just another example, we signed a deal with the State of Oklahoma for our Cashiering product. There is a small SaaS fee associated with it in $140-some thousand dollars a year. But with transaction revenues associated with it, it's $1 million of ARR. But all that showed up in the bookings was $144,000. So that's why we have sort of deemphasized backlog in bookings in favor of total ARR.

And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the call back over to Mr. Lynn Moore for closing remarks.

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

And this concludes today's call, and we thank you for your participation. You may now disconnect.