Tyler Technologies(TYL) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total revenues for Q4 2022 were $452.2 million, an increase of 4.3% year-over-year, with organic growth of approximately 6% excluding COVID-related revenues [12][19] - Recurring revenues accounted for nearly 83% of quarterly revenues, with subscription revenues increasing by 11.9% and organic growth of 14.3% [5][14] - Non-GAAP annual recurring revenue (ARR) was approximately$ 1.50 billion, up 7.5%, while SaaS software ARR was $440.6 million, up 18.5% [15][19] - Operating margins were pressured due to the shift to cloud and increased R&D expenses, with an estimated impact of bubble costs on 2023 non-GAAP operating margin of approximately 130 basis points [15][25] Business Line Data and Key Metrics Changes - Subscription revenue growth was driven by a shift to SaaS, with 86% of new software contract value being SaaS compared to 77% in Q4 2021 [7][14] - The Digital Solutions division signed significant contracts, including a new contract with the Kansas Department of Revenue and several SaaS agreements with various states [8][9] - Professional services revenue rose 2.8%, with an organic growth of 8.5%, while licensed revenue declined over 60% due to the shift to SaaS [13][14] Market Data and Key Metrics Changes - The backlog at the end of Q4 2022 reached a new high of$ 1.89 billion, up 5.2% [15] - Bookings for the quarter were approximately $464 million, flat compared to the previous year, with organic bookings up 2% [16] - The company signed 571 new payments deals in 2022, contributing over$ 13 million in annual recurring revenue, with a significant portion sold to existing clients [10][19] Company Strategy and Development Direction - The company is focused on a cloud-first strategy, aiming to exit proprietary data centers by 2024 and 2025, with expectations of significant declines in licensed revenues replaced by recurring SaaS revenue [22][25] - Strategic acquisitions were made to enhance digital solutions and payments business, with three transactions completed in 2022 [24] - The company anticipates annual organic revenue growth in the 8% to 10% range over the next five to seven years, with consistent long-term margin expansion beginning in 2024 [27][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in long-term prospects, citing healthy budgets among clients and robust market conditions [37][64] - The company expects 2023 to be a margin trough year due to the transition to SaaS and associated costs, with a return to margin expansion anticipated in 2024 [25][36] - The impact of Section 174 tax changes is expected to significantly affect cash tax payments in 2023, potentially increasing cash taxes by around $100 million [21][61] Other Important Information - The company repaid$ 90 million of term debt in Q4 2022, with a total of $755 million paid down since the NIC acquisition [17] - The company received recognition for its environmental, social, and governance practices, being named to the Dow Jones Sustainability Index North America for the second consecutive year [30] Q&A Session Summary Question: Margin troughing in '23 and future expectations - Management indicated it is early to provide detailed projections for 2024 margins but expects an inflection point in 2023 as recurring revenues offset declines in licenses [31][32] Question: Impact of federal and state budgets on revenue - Management noted that client budgets are generally healthy, with access to federal funds contributing to a robust market environment [37][38] Question: Pace of conversions to SaaS - The company reported an increase in conversions, with 336 flips in 2022 compared to 239 in 2021, and expects this trend to continue [41] Question: Operating margin performance in Q4 - The decline in operating margins was attributed to a significant drop in licensed revenues and higher R&D expenses due to unexpected capitalization changes [42][43] Question: Subscription ARR growth expectations - Management expects subscription bookings and ARR to accelerate in 2023, driven by a strong pipeline and increased transaction activity [58] Question: Procurement cycles and market conditions - Current procurement cycles are normal, with no significant delays noted, and the market remains healthy with strong client budgets [64]