Tyler Technologies, Inc. (TYL) Earnings Call Transcript & Summary

Great. On the last call, on the Q4 call, you mentioned there really weren't any mega deals that were in it but rather a lot of these mid-range deals. Can you just talk about the pipeline, provide a little color around its composition today?

Sure. That's one area of our business that can be kind of lumpy, not so much from the revenue side but from the bookings side. We're -- as I said, we're very broad in terms of our product offerings and in terms of the size of governments that we serve and the size of deals that we do. And so in the court space for example, we -- in California, we serve the largest county. We're doing a $35 million implementation in Los Angeles County, which is the largest county in the country, of a civil court -- or a criminal court system for Los Angeles County as well as some other case types. And we also have the smallest county in California, Alpine County, which I think has about 1,500 people and 2 judges. So a SaaS product for Alpine County, big on-premises implementation for L.A. County. So these large deals are somewhat lumpy in terms of how they hit bookings. They're typically recognized over multiple years. So it's not as lumpy on revenues as it is on the bookings side, and so it creates some either tough or easy comps from quarter-to-quarter, depending on how those fall out. And we had 2 really large deals last year in Q2. That's going to make a really tough comp coming up in Q2. But we signed -- last year in Q2, we signed an $85 million deal, our largest SaaS deal ever, with the state of North Carolina for a court system and a $20 million deal in the same quarter in San Antonio, Texas for a court system. But in Q3 and Q4, we really didn't have any of those mega deals, kind of a deal of more than $10 million in contract value, but a lot of really solid midsized deals. So it was the most number of contracts we've ever signed in the quarter in Q4 and still really high bookings. We -- our bookings were up, I think, 33% year-over-year in Q4, but it wasn't done on the backs of very large deals. So more and more of our revenue -- we're about 2/3 recurring revenues, 67% from either maintenance or subscription. So that tends to make our revenue recognition much more consistent, but bookings can really jump around a lot.

Great. Any questions from the audience? Please.

So full disclosure, I'm Mark, I'm the analyst that covers Axon. So they talk a lot obviously about their efforts to driving from sort of the edge into geographic and in dispatch. So I'm wondering how credible it would be to make that competitive prejudice just from the standpoint of public safety.

Yes, the public safety business and the question is around, for the webcast, Axon, which is a public competitor of ours in the public safety space. Public safety is a really competitive market, maybe more so than some of the other segments of public sector we serve. We got into that space a little over 4 years ago through a large acquisition of a company called New World Systems, biggest acquisition in Tyler's history at the time. It was a company that was about 20% our size. And New World was really focused on the mid-market in the public sector market and public safety market. Public safety has really kind of, in the software side, 2 major segments. There's computer dispatch, which is the 911 side, and then there's the records management, so managing all the police, fire and ambulance records. Different competitors in that space have different strengths or different ways they come at it. So Axon -- and I'm not an expert on Axon -- but Axon has the TASER in the data side with the body cam and data that they have a strong presence in, and they're sort of moving into the software space. Motorola Solutions we compete with on a somewhat limited basis today, but as we move more up into the higher tiers of the public safety market, we expect to see them more often. And they obviously have the radios in the equipment side and then have moved more into software. With us, we really believe that our strength and our competitive advantage is the breadth of our product. So not only do we have the complete suite of public safety products -- and we've invested very heavily in our public safety offering since we acquired New World 4 years ago, and that investment was aimed at separating ourselves from the mid-market competition by adding features and functionality and also filling in the gaps that we needed to compete at the high end of the market. But we also have a very strong offering in the courts and justice space. Pretty -- a very clear leader in the case management space, which is sort of the hub of courts, so managing all the aspects of civil, criminal, family court cases. And we also have a strong jail system offering, a jury system, probation system, prosecutor, so we really have that whole suite of products. And all of the competitors -- or none of the competitors in public safety have courts and justice solutions, even though they're very closely related markets. So our strength, as we call it, from dispatch to disposition is that we have a set of solutions that are being integrated more and more tightly together to manage the whole process from a 911 call through dispatching of a first responder, through an incident report, an arrest, a jailing, a trial, all the way through probation. And so that can -- you can have that entire breadth of solutions from Tyler whereas, today, in a jurisdiction, that might be 7 different systems from 7 different vendors that may be integrated in one-off integrations or not integrated at all. And one of those solutions in the public safety side could be Axon. But we have this whole breadth of solutions, and we believe that being able to tie those products together and keep them tied together is really our strength. But public safety has a number of good competitors, and it's a market that is a very active market. It tends to be well funded. There's a little charge on your phone bill or your cell phone bill for 911, and there's a number of grants and various sources of funding for that space. So it's a good market for us. We like our competitive position a lot. I think the investments we've made have really started to pay off. We talked about on our fourth quarter call that our -- the volume of contract signings for us in public safety in the fourth quarter was double what it was last year's fourth quarter and signed the largest deal ever in public safety in the fourth quarter. We went live last year with our first Tier 1 customer in Orlando, Florida. So we're pleased with the progress we're making in public safety. But again, it is a competitive market.

Any other questions from the audience?

You mentioned earlier that you're very disciplined on valuation into M&A. Just curious if you can give a little more color on that on the valuation, on how you select what fits you or maybe even an example of something you decided not to and why.

Yes. So the question is about valuation on M&A. The metrics, it's not kind of hard and fast metrics anymore. It used to be EBITDA, and we would look to buy things at 6x to 7x EBITDA, and we traded at 13x EBITDA, and we look for good businesses that we could buy at reasonable valuations relative to ours. Now a lot of it's revenue-based, SaaS company revenue-based. The activity in the private equity space or private equity investors in our space that seem to be willing to pay much higher multiples and sometimes multiples beyond what we think are reasonable has been challenging. But yes, sometimes, we're looking at what it -- if it's a technology acquisition, what it would cost us to build that ourselves and how long. So it could be a company that doesn't really -- it's a breakeven company or even a company -- rarely do we buy something that's losing money but more around kind of what the cost of that technology is. We look at certainly what the synergies are, not just cost synergies but what -- how we can leverage our sales organization and our customer base. Now we don't like to pay a lot for what we're going to bring a business through our customer base, but that's certainly part of the calculation. But we thought the MicroPact company we bought last year, a well-established company, $80 million revenues, I think we paid 12 or 13x EBITDA. They actually had EBITDA. Socrata, the SaaS business, not profitable, but we paid 5x trailing revenues -- 5x forward, 6x trailing revenues kind of normal SaaS multiple for that. But -- so we pay a lot of attention to what kind of investments we'll need to make in the company after we acquire it because there typically is a period of investment, particularly integration to Tyler products, maybe accelerating initiatives they had underway. So we typically recognize that there's going to be a period of investment. And we've seen that impact on our margins over the last couple of years with the 8 acquisitions we've done in the last 2 years where we have accelerated investments in those. And collectively, they are -- have caused us to step back a little bit in what for us has been a really long-term trajectory of margin improvement, and some of that has been around the investments and acquisitions. So as we move forward with guidance for more like flat margins in 2020, some of that is due to those acquisitions and investments we've made over the last couple of years now starting to be more productive within Tyler.

Got it. Then if you could just touch on the cloud strategy as well as the AWS partnership.

Sure. Tyler, historically, I mean I guess we've described ourselves as kind of cloud neutral or cloud agnostic. Going back a long way, Tyler was primarily a license model on-premises deployment, perpetual license and a maintenance tail, the traditional software model. We began offering products in a subscription model, which for us is really a hosted model. So we have 2 data centers. So our subscription clients are almost all hosted, and most of those at our data centers. Our license customers are pretty much all on-premises. So it's kind of one or the other. We've been kind of agnostic in how we sell it. Kind of the sales rep gets paid the same commission regardless of which model the customer chooses. We really kind of let the market decide. And over the last few years, we've seen an acceleration in terms of the adoption of the subscription model. Not surprisingly, a lot of things get adopted in the public sector a lot slower than they do in the private sector, but there is an increasing move towards the cloud in the public sector. This last year, 2019, was the first year that more than 50% of our new contract value was in the subscription model. But because most of our products, our major products -- now things we bought in the last year or 2 or 3, things we've developed in recent years, are kind of cloud native, in some cases, cloud-only products. But our core products, they mostly were developed to be deployed on-premises. So it's a single-tenant architecture. And we don't really get all the benefits of a full cloud -- of hitting those products in the cloud. They're not as efficiently deployed in the cloud as they would be if they were architected differently. We have multiple versions of the software. We don't have everyone moving at the same time. So while our cloud customers are -- have -- we have better margins than on-prem, it's not as good as it could be. So we entered into a collaboration agreement with AWS in the fourth quarter, really shift -- sort of signals a shift to us kind of going from cloud neutral to cloud first. On the hosting side, we'll be moving -- hosting new customers at AWS rather than in our data centers. And over time, we'll move customers out of our data centers and kind of get out of the data center business. And then we're working also in conjunction with AWS to optimize our products for the cloud to make them more efficiently deployed. In some cases, that may mean rewriting portions of the products in different platforms. But in most cases, it's an evolution of the current architecture to be more efficiently deployed in the cloud, which will benefit us in -- by giving us higher margins, lower hosting costs. And as that takes place over, call it, the next 2 to 5 years, we would -- we'll increasingly become more active in terms of sort of pushing customers to the cloud rather than just kind of moving at the pace that they want to. And we do expect that the customer demand will be -- will continue to move towards a greater demand for the cloud.

Understood. Well, that actually takes us to the end of time. But thank you so much, Brian. This is great.

You bet. Thank you.

Appreciate it.