Tyler Technologies Inc

NYSE:TYL

Earnings Call Analysis

Robust Organic Growth Despite Cloud Transition

The company's total bookings grew organically by 10.3%, with total annualized recurring revenue reaching around $1.65 billion, marking an 11% increase. The non-GAAP operating margin dipped slightly by 10 basis points to 24.8% due to merchant fees influencing margins. However, operating cash flow and free cash flow remained strong at $177.5 million and $162.7 million, respectively. Without additional cash taxes, the year-to-date free cash flow would see a 41% boost. For 2023, the revenue is projected to be $1.942 to $1.962 billion, with an expected 7.5% organic growth. The guidance for non-GAAP EPS is set between $7.66 and $7.80.

Elevated Performance with Organic Bookings and Revenue Uplift

The company saw a healthy spike in its financial metrics with total bookings leaping by 10.3% on an organic basis. Total annualized recurring revenue attained a respectable $1.65 billion mark, marking an 11% overall increase and a 9.8% organic growth. These figures indicate the firm is on a growing trajectory, generating more recurring business and strengthening its financial foundation.

Operating Margins: Robust Yet Marginally Dented by Merchant Fees

The non-GAAP Operating Margin (OP margin) posted was 24.8%, only marginally down by 10 basis points from the same quarter in the previous year. However, an interesting revelation shows that, if merchant and interchange fees (to the tune of $36 million) were to be excluded, the operating margin would have seen an additional 190 basis points boost, suggesting that underlying business operations are more profitable than what surface-level metrics indicate. This elucidates the impact payment-related fees have on the company’s profitability.

Strong Cash Flows and Commitment to Debt Repayment

Cash flow performance stood out, with operations churning out $177.5 million and free cash flow hitting $162.7 million, a considerable part of which was due to an uptick in revenue collections. The free cash flow ascended by an impressive 41% compared to the previous year. This speaks volumes about the company's liquidity and financial health, also reflected by company actions to reduce their term debt by $135 million, thus concluding the quarter with a net leverage of about 1.24 times trailing 12-month pro forma EBITDA.

Forward-looking Guidance Signals Continued Growth

Looking forward, the company's leadership forecasts an encouraging financial trajectory, with expected revenues ranging between $1.942 billion and $1.962 billion, staking the year to an approximate 7.5% organic growth. Non-GAAP diluted earnings per share (EPS) figures are anticipated to lie between $7.66 and $7.80. This guidance provides a clear view of the expected progress and fortifies investor confidence in the company's growth story.

Ongoing Digital Transformation and Cloud Transition

The company is steadfast in delivering on its strategic objectives by scaling operations and enhancing efficiency—their transformation into a fundamentally cloud-centric enterprise, backed by the 'One Tyler' strategy, underscores this commitment. The narrative here is of a company that's not only keeping up but driving forward the digital transformation of its public sector clients.

Accelerated Adoption in Public Safety and Cloud Flips

Another narrative woven into the company's fabric this quarter is the increased rate of cloud transition, especially within their public safety domain. Historically slower to adopt, there has been noticeable momentum in the shift towards Software as a Service (SaaS) offerings, with expectations for this movement to hasten even further into 2024. This indicates that the firm is gaining grounds in areas that were once more resistant to change, a promising sign for its future SaaS strategies.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to today's Tyler Technologies Third Quarter 2023 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. [Operator Instructions] As a reminder, also, this conference is being recorded today, November 2, '23.

I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director of Investor Relations. Please go ahead.

[Hala Elsherbini, executive]

Thank you, Aaron, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. After I give the safe harbor statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and provide an update to our annual guidance. Lynn will end with some additional comments and then we'll take questions.

During this call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks.

Also, in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We've also posted on the Investor Relations section of our website under the Financials tab schedules with supplemental information, including information about quarterly bookings, backlog and recurring revenues. Please note, there have been minor reclasses between historical SaaS and transaction-based revenues on the supplemental schedule as a result of the recent transition to our new financial systems.

On the Events & Presentations tab, we have posted an earnings summary slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.

Lynn?

[H. Moore, executive]

Thanks, Hala. Our third quarter earnings and cash flow surpassed expectations and reflect a continuation of execution at a high level on key operational initiatives. We achieved strong performance across several of our key metrics with double-digit recurring growth and free cash flow growth of more than 40%.

Our recurring revenue mix rose to 83.4% of our total revenues with SaaS revenues up 26% organically. This was our 11th consecutive quarter of SaaS revenue growth of 20% or more and exceeded our near-term growth expectations of a 20% CAGR in SaaS revenues through 2025, as outlined during our June Investor Day. We also achieved solid growth in our transaction-based revenues, which were up 8.5%.

While operating margins this quarter declined slightly from last year as expected due to our cloud transition, margins were ahead of plan as a result of our operating efficiencies and expense management, especially around cloud operations. It is encouraging to see margins hold essentially flat with last year even as we made considerable progress in our cloud optimization and cloud transition efforts, establishing a clear road map for operating margin improvement in 2024.

The third quarter presented a very difficult comparison for our new software contract value and mix as last year's third quarter included 2 very large SaaS contracts that totaled $70 million in contract value. As we discuss regularly, the timing of large deals such as the 2 signed in last year's third quarter can cause significant lumpiness in our new software bookings.

We're continuing to see a healthy public sector market environment and our new business pipeline is active. Leading indicators RFPs and sales demos remain strong with deals generally moving through the pipeline at a normal pace, which is often a 12- to 18-month procurement process. Overall, our competitive position and win rates are strong with growing momentum in cross-selling activities, a key value creation lever. Additionally, our transaction business continues to capture higher volumes as we gain traction with our unified payments solution.

I'd like to highlight some of our significant third quarter wins, which included a number of cross-sell opportunities. We continue to build momentum with our public safety solutions. Key third quarter wins include the Naperville, Illinois Police Department for integrated public safety suite including CAD, records management and eCitations. Naperville is the fourth largest city in Illinois, a state where we also have a strong presence with our Enterprise Justice solution. We're also pleased to see SaaS adoption growing and acceptance in the public safety market with several cloud contracts signed during the quarter.

We continue to gain traction with cross-sell wins under our digital solutions division, formerly NIC, and our state enterprise agreements. Under our state enterprise agreement in Utah, we won a cross-sell opportunity with the Utah Department of Corrections for our enterprise corrections electronic messaging solution. We also added deals for our application platform formerly entellitrak, under our state enterprise agreements in Louisiana and Indiana.

In the federal market, we secured a significant license win with the U.S. National Guard Bureau for our turnkey suite of workforce case management applications. This is our largest workforce case management application within the Department of Defense and is another marquee win that spans 54 U.S. states, territories in the District of Columbia that will be hosted in our FedRAMP-certified private cloud.

We signed a 5-year multi-suite SaaS contract with Port Angeles, Washington, which includes our enterprise ERP, enterprise permitting licensing and cybersecurity solutions as well as payments. In the outdoor recreation space, we won a competitive deal for our recreation dynamic solutions with the Minnesota State Parks.

In our Payments business, we signed a 1-year extension for enterprise payment processing under our state enterprise agreement in New Jersey. And Harris County, Texas, the third largest county in the nation, added our digital jury solution, leveraging the disbursements capabilities that came to us through the Rapid Financial acquisition last year.

Before I turn the call over to Brian, I want to highlight our recent acquisition activity. As I said at our Investor Day, M&A is part of our DNA. And during the third quarter, we completed the acquisition of Computer Systems Innovations for approximately $36 million in cash. CSI brings AI-driven automation and enhanced document processing technology that can be leveraged across many of Tyler's vertical applications. It has primarily served the court technology space for many years, and we're excited about the opportunity to combine our expansive footprint with CSI's expertise in AI machine learning applications to elevate several of our other solutions.

Earlier this week, we completed 2 other tuck-in acquisitions. ARInspect is a leading provider of AI-powered machine learning and data-driven solutions for public sector field operations. ARInspect's advanced AI solution and expertise extends our applications platform with intelligent edge technology that can be leveraged across our state and federal verticals. ResourceX adds priority-based budgeting solutions to our entire ERP portfolio to address key challenges our clients face in their traditional budgeting process. The total purchase price for these 2 acquisitions was approximately $38 million in cash and stock. We're thrilled to welcome each of these companies and their team members to Tyler.

Now I'd like Brian to provide more detail on the results for the quarter and our annual guidance for 2023.

[Brian Miller, executive]

Thanks, Lynn. Total revenues for the quarter were $494.7 million, up 4.5%. Organic revenue growth, which also excludes COVID-related revenues, was 6.0%. Last year's third quarter included $11.7 million of revenues from COVID-related initiatives at our digital solutions division, all of which ended in 2022.

Subscriptions revenue increased 16.1% and organically rose 14.7%. Within subscriptions, our SaaS revenues grew organically 26% to $138.5 million. It is important to note that as our software contract mix continues to shift towards SaaS, our growth rate may vary from quarter-to-quarter due to the lag in time from contract signing to the start of revenue recognition, but we remain on track with our near-term growth expectations of a 20% CAGR in SaaS revenues through 2025.

Transaction revenues grew 8.5% to $156.7 million, up 6% on an organic basis. License revenue declined 47.9% as our software business continues to shift to SaaS. SaaS deals comprised 80% of our Q3 new software contract value compared to 91% last year. As we noted earlier, last year's Q3 included 2 large SaaS deals totaling $70 million in contract value. Professional services revenue declined 14.9% primarily due to the absence of COVID-related revenues and was flat organically.

We added 161 new SaaS arrangements and converted 79 existing on-premises clients to SaaS with a total contract value of approximately $71 million. In Q3 of last year, we added 153 new SaaS arrangements and had 70 on-premises conversions with a total contract value of approximately $149 million. Overall, our pace of on-premises conversions to SaaS continues at a steady pace with 246 flips year-to-date, and we expect Q4 conversions will be 100 or more. More importantly, the total contract value associated with flips has increased year-to-date to $58 million. As we've discussed, conversions are a significant growth driver over the next several years as we accelerate the pace of flips.

Including transaction revenues, expansions with existing clients and professional services, total bookings increased 10.3% on an organic basis. Our total annualized recurring revenue was approximately $1.65 billion, up 11% and organically grew 9.8%. Operating margins were better than expected despite pressure from our ongoing cloud transition. Our non-GAAP OP margin was 24.8%, down only 10 basis points from Q3 of last year.

As we discussed in prior quarters, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins. In Q3, we paid merchant fees of approximately $36 million. If those fees were netted out of both revenues and cost of revenues, our consolidated non-GAAP operating margin for the quarter would have been approximately 190 basis points higher.

Both cash flows from operations and free cash flow were robust this quarter at $177.5 million and $162.7 million, respectively, primarily driven by higher revenue collections. Cash flow in the quarter was impacted by approximately $22 million of incremental cash taxes due to Section 174. On a pro forma basis, excluding the incremental Section 174 cash taxes of $112 million, our year-to-date free cash flow would be approximately $300 million, up 41% over last year.

We continue to prioritize repayment of our term debt as a use of our cash flow. And in Q3, we reduced our term debt by $135 million. We ended Q3 with total outstanding debt of $740 million and cash and investments of approximately $153 million. Our net leverage at quarter end was approximately 1.24x trailing 12-month pro forma EBITDA.

Our updated 2023 guidance is as follows. We expect total revenues will be between $1.942 billion and $1.962 billion. The midpoint of our guidance implies organic growth of approximately 7.5%. We expect GAAP diluted EPS will be between $3.82 and $3.96 and may vary significantly due to the impact of stock option activity on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $7.66 and $7.80. Interest expense is expected to be approximately $24 million, including approximately $5 million of noncash amortization of debt discounts and issuance costs.

Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website. In conjunction with our guidance for the full year, I'd like to remind you of the seasonality around our transaction revenues. While transaction revenues will grow year-over-year, as expected, they declined sequentially in Q3 and will decline sequentially again in Q4. Historically, transaction revenues are driven by 2 primary factors: state-determined deadlines like corporate filings in [ hunting ] seasons and the number of business days.

Transaction revenues are typically at the highest in Q2, coinciding with peak outdoor seasons and tax deadlines. Transactions are at a seasonal low in the fourth quarter with fewer business days and less activity around the holidays. As we noted previously, we are also seeing the revenue impact of a midyear contractual changes in one of our state enterprise agreements that includes a move from a gross to net model for payments.

Now I'd like to turn the call back over to Lynn.

[H. Moore, executive]

Thanks, Brian. We're making solid progress every quarter to deliver our near and long-term objectives that we discussed in detail at our Investor Day earlier this year. Consistent with our track record, we continue to scale our enterprise while capturing more efficiencies as we transform into a largely pure cloud business, supported by a unified One Tyler strategy.

Our strong year-to-date performance is underpinned by our powerful financial algorithm, strong balance sheet and our unique ability to deliver mission-critical software solutions, enabling the public sector's ongoing digital transformation. We're also proud that 11 of our state partners won e.Republic Government Experience Awards. Our clients in Utah, Mississippi, Indiana, Arkansas and Virginia swept the top 5 spots in the GovX Awards.

Our momentum continues to build as we complete this pivotal year in our cloud transition. Our team is excited about the tremendous opportunity ahead of us, and we look forward to sharing our continued progress as we finish out 2023.

Now we'd like to open the line for Q&A.

[Operator]

[Operator Instructions] Our first question for today comes from the line of Matthew VanVliet with BTIG.

[Matthew VanVliet, analyst]

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

[H. Moore, executive]

Yes, Matt, that's a good question. And you're right. Historically, public safety has been a little bit slower to adopt. We're seeing that change. I hesitate to say rapidly, but we are starting to see the momentums shift and the pendulum change a little bit. We're seeing it in the deals that we're doing. We're seeing it in the acceptance of our clients. I'd say more so still on the RMS, the record side.

Mobility is already there, but you're seeing a little bit of on the CAD side. Just this past quarter, actually, we did a deal with Manassas, Virginia, where they were on-camp -- on-prem CAD RMS client and we flipped them over to SaaS. So I think just like the rest of the businesses, that as the market continues to gain acceptance the momentum will continue to grow. And we're pretty optimistic as we look out into 2024 that the number of flips and the number of SaaS deals will continue to grow at a faster pace, albeit still not a majority of the business yet.

[Operator]

Our next question is from the line of Kirk Materne with Evercore ISI.

[S. Kirk Materne, analyst]

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

[H. Moore, executive]

Yes. I think, generally speaking, across our entire portfolio, we're either -- with the exception of public safety and probably our platform solutions, but all our other ones are -- we're pretty much leading first with SaaS. The deals are -- our budgets around SaaS are high. And ERP I think we're north of 90%. Courts & Justice is high. The 2 market areas that are a little bit slower still are public safety platform solutions, which is our federal space.

But even there, the modernization efforts that are going on at the federal government is really starting to shift that pendulum to SaaS as well. So for the overall majority of our business, we're -- the demand is there and the market receptiveness is there. And it's starting -- the momentum for those other 2 pieces are starting to go forward. When you look at our licenses, licenses now are about 2% of our total revenues. Most of that -- a lot of those license deals are coming out of those 2 other divisions even as there still are some licenses -- pockets of licenses around the rest of the business.

[Operator]

Our next question is from the line of Joshua Reilly with Needham.

[Joshua Reilly, analyst]

Nice job on the quarter here. Our checks indicated that the MicroPact business had a pretty strong pipeline coming into Q3 here, which makes sense with the fiscal year-end for the federal government. Can you just give some more color on how these deals closed and how -- anything to note on the cross-sell into the NIC state contracts that might be adjacent with the MicroPact business? And is there any more of these deals that potentially fell into the fourth quarter?

[H. Moore, executive]

Yes, I'll start. I didn't quite hear all that, Brian. So I'll let you jump in. But yes, so our platform solutions, Q3 is normally their strongest quarter. They had that really strong deal with the National Guard Bureau. There was a fairly significant license deal that slipped and probably got pushed to '24, and it was really around some uncertainty with the federal government funding as Q3 was coming to a close and sort of the move of some funds to what the Feds consider to be more mission-critical.

The number of deals that we're doing and the pipeline of deals that we're doing at Federal continues to grow, but there still are some very large deals that sort of can swing quarter-to-quarter. A lot of times, once that sort of window passes in Q3, there's still a volume of deals that happen in Q4, Q1, Q2, but the sense of urgency is probably not quite the same as it is as you get into late Q2 and into Q3.

[Brian Miller, executive]

Yes. And on the cross-sell, the opportunities with our application platform, the formerly called MicroPact entellitrak product, remains one of the strongest opportunities and one of the areas where we're seeing the most activity in terms of leveraging the digital solutions state contracts to sell that into those states.

And we had a couple of deals this quarter that we mentioned in the prepared remarks in different kinds of applications, I think in Louisiana and Indiana, where we've seen progress. We've seen a number of those deals since the acquisition of NIC and that continues to be an opportunity that we're pursuing actively.

[H. Moore, executive]

Yes. I mean, the synergy between what we do at federal and at the state market is really strong. As Brian mentioned, we're seeing more pipeline there. And really because when you think about the state government and what they're doing, a lot of what they're doing is case management. And our application platform really sort of serves those modernization needs. It's less expensive, it's nimbler, it's built for government. It's enhanced by our mobility, our D&I, our payments. So we do see that synergy, and I think it's something that's going to become more of a focus for us as we look into '24 and '25.

[Operator]

Our next question is from the line of Rob Oliver with Baird.

[Robert Oliver, analyst]

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

[H. Moore, executive]

I do. I think we talked about it with our Connected Communities vision and sort of the leverage and power we can create between our public safety and our Enterprise Justice visions. It was a really good win. It was a good win because it was a very competitive deal. As you'd imagine, it was a license deal of over $1 million. So those are always going to be competitive. And I think part to your point as well, we actually did a smaller deal in California this past quarter.

That was with Mariposa County Sheriff's Office out in California, and that was really leveraging the Enterprise Justice contract to bring Tyler Corrections there. Important deal because we hadn't really had a win in California in a little bit of time and leveraging our relationship with -- on the Courts & Justice side and leveraging that contract was something that got us in the door, and I think an opportunity to expand not only in that department, but also in California.

[Operator]

Our next question is from the line of Terry Tillman with Truist Securities.

[Unknown Analyst]

This is [ Conor Basel ] on for Terry. Just curious on the payments business and how we should be thinking about organic growth going forward in that segment. And then also just on the payment disbursement use cases that have progressed since the acquisition of Rapid Financial last year.

[H. Moore, executive]

I'll start with the use cases. Right now, Rapid, when we bought them, they were primarily in the court space, and that's our primary focus right now. We're in the process. We're early in our 2024 budgeting, thinking about the investments and the various other disbursement cases that we want to put our money towards.

So I'm not going to give you our R&D time line right now or our priorities, but we're in the process of doing that. We -- as we've talked before, I think the opportunities across the Tyler solutions is pretty expansive on the disbursement side. We've talked before, I think, as big as on the acquiring side. But currently, right now, the focus is primarily still in the courts area.

[Brian Miller, executive]

Yes. And on the expectations for growth rates around payments, at Investor Day, we broadly talked about an expectation of transaction revenues growing in the 10% to 13% range and expanding margins there over the next several years.

As we've said, we're in the very early innings of executing on the cross-sell opportunity of driving payments more deeply into our local government customer base. And so we're still ramping that up, seeing good success in expanding those numbers of new deals each quarter. But generally, that 10% to 13% CAGR for transaction revenues is our expectation over the next few years.

[Operator]

Our next question is from the line of Alex Zukin with Wolf Research.

[Aleksandr Zukin, analyst]

I guess maybe just two quick ones for me. Bookings look like it took a step up this quarter after the last -- particularly over the last couple of quarters. So I wanted to just understand the outperformance there. Is that accomplished year or incremental momentum?

And then same question. Obviously, cash flow looked like it meaningfully outperformed, at least our estimates and I think consensus. So just an understanding of was there anything onetime there? And how should we think about it for Q4? And then just any color, Brian, on the specific elements around some of the cloud or [ statutory ] statement? This quarter, what drove that? And how should we think about that going forward?

[Brian Miller, executive]

Yes. So a couple of things there. Cash flow, most of the outperformance was -- you see it in the working capital side and just really strong collections around our revenues driving good performance around our receivables. I think we're continuing to see the impact of more and more recurring revenues and the positive cash flow characteristics around that. Not really any onetime things there.

But I think that our expectation for the year has ratcheted up a little bit. I think right now, even after the impact of the Section 174 cash taxes, which the biggest impact was in the first half of the year, I think we said there's a $22 million impact on cash taxes this quarter, backed around the $15 million incremental taxes in Q4. But I think our expectation for the full year now is more in the $220 million to $240 million range for free cash flow, which is up from where we thought last quarter.

We did make some minor reclasses in the historical data, the split between -- in subscription, so all in the subscription category on the face of our income statement, but in the breakout of those, between transaction revenues and SaaS revenues. As we transition to a new financial system this quarter, we had better clarity on some of the mapping of the revenues, primarily from acquisitions since NIC and reclassified those somewhat between transactions and SaaS. So we've just sort of cleaned up some of those historical numbers. Don't expect any more changes going forward.

[Aleksandr Zukin, analyst]

Got it. And what about on the bookings side?

[Brian Miller, executive]

Yes. The booking side, we talked about this, it can be kind of lumpy. But generally, the -- really a reflection of kind of the combination of all the new SaaS business, the new increases in the transaction business, which kind of run through bookings at the same time as they run through revenues. And just the combination of all that led to a stronger quarter this quarter.

We didn't have any of the mega deals, but we did have a really solid flow of new SaaS deals, some -- a couple of not super large but meaningful license deals this quarter and then pretty good activity around the expansions with existing customers as well. So it's pretty broad-based, but again not driven by super large contracts, but nice growth across all of our revenue streams.

[Operator]

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

[Saket Kalia, analyst]

Brian, maybe for you. I'd love to dig into the restatements just one level deeper. So can you just walk through what some of the -- one of -- I guess, what some of the items were from the NIC business that are now SaaS versus transaction?

And maybe the follow-on is how would your SaaS revenue growth have looked I guess, excluding the restatement? I know that -- I think it's about 26% year-over-year growth this quarter. What would that have been under the old convention, which is what our model is kind of currently you are based on? Does that make sense?

[Brian Miller, executive]

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

[Saket Kalia, analyst]

Fair, the reclass. That's fair. That's a reclass not a restatement, Brian.

[Brian Miller, executive]

Some of those were -- when we originally acquired NIC and before we basically had almost all their revenues classified in our transaction category. And some of their revenues from a contract can have sort of a blend of some software revenues and transaction revenues around those. So they're providing some software services but getting paid with transaction fees.

And so sometimes there's some more even between that. Also, when we acquired the VendEngine acquisition, we initially made an additional judgment from their financials of how those revenues should be spread. And with a deeper understanding of those and as we start to map those to our new financial system. We just found that some of those were more appropriately classified a different way. So those are all relatively minor reclassifications as well. So I don't think there's a big change in the trends, but...

[Saket Kalia, analyst]

But maybe just to maybe understand that a little bit better because 26% growth is quite a bit higher than what we were seeing before. I mean, was that mix -- that the newly added SaaS revenue there, was that growing significantly faster than sort of what I'll call the old SaaS revenue that was in there? Because it is quite a bit higher than what it was before. So I just -- I wanted to make sure I just kind of flush that out.

[Brian Miller, executive]

No, no. There's not a significant change from that. That's not really accelerating it. The 26% growth is actually an acceleration this quarter. But again, we said that will maybe move around from quarter-to-quarter. But generally, we expect this around the 20% CAGR over the next couple of years in SaaS revenue. Some quarters, it may be higher. And as we talked about, some of that variability from quarter-to-quarter has to do with the lag from when we sign a new SaaS deal to when those revenues hit, which can be a quarter or 2 occasionally longer.

[Operator]

Our next question is from the line of Jonathan Ho with William Blair.

[Jonathan Ho, analyst]

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

[H. Moore, executive]

Yes, sure, Jonathan. Obviously, it's a pretty rapidly evolving landscape. There's a lot that's in the news, some of it may be a little more hype. But it's real. And we see AI benefits within Tyler, we're kind of looking at it in 2 different ways. We're looking at it sort of pointing it internally, things that we're doing, how can we make ourselves more efficient by using AI. Because I think one of the biggest benefits around AI really is when you're talking about sort of high-volume repetitive tasks, which there are pieces of our business that do that, whether it's some software coding, it may be some things around some support, things like that.

The other side of it is how do we make our products more competitive and differentiate them more? What we've done internally is we've organized a working group that's been in place for several quarters, looking at all the various opportunities. There's pockets of AI going on all around Tyler right now. We want to take -- not surprisingly, what we always do at Tyler is sort of a deliberate targeted approach. Sort of we're in the process of identifying what are the couple of key areas that we want to focus on in both of those scenarios, whether we're pointing it internally around creating more efficiencies or adding more competitiveness to our products.

The CSI acquisition is a great example of that. They really started off as a sort of a document redaction sort of extraction leader. Recently, they've added some machine learning and robotic process automation. This is something that all of our court clients need and some of our court clients were already using. Tarrant County, which is here out in Fort Worth, they've utilized the CSI acquisition. And what it saved in their personnel costs, this is their numbers not mine. they're saying they've cut their labor costs by 50% by sort of automating some of these more repetitive things around documents which, of course, there's a lot there.

So even the CSI acquisition -- we were just talking earlier the Rapid acquisition. Initially, it's in the court space, that's where we're pointing it. But we also see a lot of places and leverage it across other platforms in Tyler, whether it's things in our ERP space like invoice processing and things like that. So a lot of applicability. You're right, states and clients are -- they're taking different approaches, and we're going to take that deliberate approach with our clients.

[Operator]

Our next question is from the line of Clarke Jefferies with Piper Sandler.

[Clarke Jeffries, analyst]

I apologize, I'm maybe going to beat a dead horse and ask a little bit more questions about the reclass. But specifically, looking at SaaS ARR, either pre-reclass or post reclass, been in this mid-single-digit sequential growth paradigm. And what stood out was an acceleration of maybe a high single-digit sequential growth in ARR.

And so, Brian, I wanted to ask, is this a reflection of maybe the good bookings you had last year and some of those deals finally reaching the timing where they would be going live in revenue terms? Or was there a change being made in the business, either on a capacity level or a new bookings level that we may not appreciate that contributed to an acceleration in ARR growth?

[Brian Miller, executive]

Yes. Clark, I think it's more the latter. So it's more of that timing. So good bookings, it could be as much as a year ago or longer, that -- where we signed new SaaS deals that some of those are now more fully reflected in the revenue run rate as well as flips. So obviously, the pace of flips has been accelerating over the last couple of years, continues to accelerate. But again, from the time -- the numbers we announced each quarter, the contract signed for flips this quarter, so that revenue uplift shifting from maintenance to SaaS, typically, call it, a 1.7x multiple, there's a lag from that.

So the flips we signed last year or last quarter or the quarter before, some of those are now seeing the revenue uplift. So there's just sort of a lag from -- which is different than some SaaS companies, that lag from the time of contract signed to the time that those revenues start to hit our income statement. So I think that's more of that acceleration. And as we continue to increase the pace of flips and grow -- move more of the new business to SaaS, you'll continue to see that accelerate, although with a lag.

[Operator]

Our next question is from the line of Gabriela Borges with Goldman Sachs.

[Carolyn Valenti, analyst]

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

[H. Moore, executive]

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

[Operator]

[Operator Instructions] Our next question is from the line of David Unger with Wells Fargo.

[David Unger, analyst]

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

[H. Moore, executive]

Yes. Thanks, David. Sure. As you know, we've been prioritizing debt paydown a lot at the same time while we're still looking at other deals. I'm excited to -- once we dropped under 1.5x net leverage, our rate in our bank changed, and we were able to achieve that at the end of Q3. So that's encouraging. We've paid over about $1 billion of debt down. Brian talked earlier about the impact of Section 174 taxes and the pro forma free cash flow. We'd actually be out of term debt or pretty close to out of term debt right now, absent that, which is encouraging.

As it relates to private market valuations there, I would say there's -- we're starting to see in the market and the deals and the things that we're hearing that expectations are finally starting to change. It's always been a little bit amazing to me that when you see things going on in the public markets and yet the private sector deals or people still think that the market should be where it was a couple of years ago. We're still pretty disciplined in how we look at acquisitions. So in areas when private expectations still are too high, we'll simply pass on the deal.

We're pretty excited to get these 3 deals done, 1 in Q3 and the ones that we announced earlier this week. These are good deals. These are good business deals, things that are going to help drive our growth, things that will leverage the growth drivers that we outlined in Tyler 2030. And they're going to be accretive to revenues and margins over -- in pretty short order. So it's interesting, too, there's a lot of companies went private equity in the last few years. And I think we're going to start seeing a time when those are going to start spinning back out. And historically, I think they paid pretty high premiums. It's going to be interesting to see what happens in the markets, but our disciplined approach to how we do things isn't going to change.

[Brian Miller, executive]

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

[Operator]

[Operator Instructions] Our next question is from the line of Pete Heckmann with D.A. Davidson.

[Peter Heckmann, analyst]

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

[H. Moore, executive]

I think the short answer is no, I don't have any preliminary thoughts on it. Obviously, we watch all these types of things that are going on in the markets, particularly as we think about our long-term plans and views. I'm certainly not in a position to think one way or the other of where -- what anybody in Washington is going to do let alone the Fed. But -- so I'd say right now, I don't have any real comment on that.

[Peter Heckmann, analyst]

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

[Brian Miller, executive]

I don't think we had anything above $10 million in contract value. Our biggest SaaS deal was around $5.5 million in contract value. That was the Minnesota Parks deal. And our biggest license deal was under $5 million total contract value, though it has a lot of options that could drive that significantly higher. But the booked amount was less than $5 million. So no, no -- nothing in that really large size this quarter. A lot of good midsized volume of kind of bread-and-butter deals.

[Operator]

Our next question is from the line of Alexei Gogolev with JPMorgan.

[Eleanor Smith, analyst]

This is Ella Smith on for Alexei Gogolev from JPMorgan. So my first question revolves around your private data centers. At your Investor Day, you talked at length that one data center will be closed in '24 and the other in '25. Do you have any updates on that front?

[H. Moore, executive]

Yes, I'd say right now we're on track for what we outlined. We expect our Dallas Center to shut down sort of middle of '24. And yes, we're still on track for evacuating the other one by the end of '25.

[Eleanor Smith, analyst]

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

[H. Moore, executive]

Well, yes, I mean, security is always an issue and particularly in our business and our clients. I think the thing about what's been going on with cybersecurity is it really highlights the need for our clients to move away from their traditional on-prem type environments, move to the cloud, move to the modernization and digitization efforts. And I think it contributes to that. We've seen clients where -- I talked about it, I think, a couple of quarters ago, we had a client that we were trying to move to a SaaS flip for -- out in Arizona for quite a long time. And unfortunately, they had a ransomware attack, and it was surely after that we were able to flip them to the cloud. It was a triggering point for their decision. So it's a reality that we all have to live with, and our clients are acutely aware of it because a lot of the public sector clients are targets. But I do think it does help with the sales and understanding about where we need to go in the future together with our clients.

[Operator]

Our next question is from the line of Saket Kalia with Barclays.

[Saket Kalia, analyst]

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

[Brian Miller, executive]

Not really. Actually, the average term of our new SaaS contracts this quarter was exactly the same as third quarter of last year at 3.8 years. We've said we generally tried to bring that down over recent years and generally lead with a 3-year initial term. We certainly have some clients who want a longer term. And so that blended term or that average duration has generally been in that kind of 3.5 to 4 over the last couple of years. But this quarter, yes, that wasn't a factor at all. So...

[Operator]

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

[H. Moore, executive]

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

[Operator]

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