Tyler Technologies Inc

NYSE:TYL

Earnings Call Transcript 2021-Q4

[Operator]

Hello and welcome to today’s Tyler Technologies Fourth Quarter 2021 Conference Call. Your host for today’s call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. And as a reminder, this conference is being recorded today, February 17, 2022. I'd now like to turn the call over to Mr. Moore. Please go ahead.

[Lynn Moore, President and CEO]

Thank you, Gary, and welcome to our call. With me today is Brian Miller, our Chief Financial Officer. First, I’d like for Brian to give the Safe Harbor statement. Next, I’ll have some comments on our quarter and then Brian will review the details of our results. I’ll end with some additional comments on 2021 and our longer term outlook and then we’ll take questions. Brian?

[Brian Miller, CFO]

Thanks, Lynn. During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company’s future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. 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. Also, we're officially launching next week our new brand architecture, a broad company initiative that better organizes the name Tyler' Products and Solutions to represent the verticals and markets we serve. The new brand architecture uses functional descriptive product names and has eliminated all individual product logos. Tyler Solutions have been organized under five solution portfolios, public administration, health and human services, courts and public safety, schools and transformative technology. Throughout the call today, we'll refer to product and solution names using the new architecture. Lynn?

[Lynn Moore, President and CEO]

Thanks Brian. Our fourth quarter results were in line with our expectations and continue to the positive momentum from the first three quarters to provide a strong finish to 2021. We're pleased that revenue growth continue to rebound, even as we experience revenue headwinds from the accelerating shift of new business to our SaaS model. Total revenues grew 53% with solid organic growth increasing to 9.2%. NIC continued its strong performance in the fourth quarter as well with core revenue growth of 7.5% excluding COVID related revenues. As expected, COVID related revenues declined sequentially from the third quarter of 2021 and were slightly above our plan at $16.6 million as the Omicron variant increased demand for testing in December and revenues from our new initiative supporting rent relief programs in Virginia came online. Recurring revenues comprised over 80% of our quarterly revenues for the second consecutive quarter and were led by 144% growth in subscription revenues. Excluding NIC revenues, subscription revenue growth was robust at 28.1% again, reflecting our accelerating shift to the cloud. We have now achieved greater than 20% subscription revenue growth in 56 of the last 64 quarters. We continue to experience pressure on margins in Q4, as we have throughout the year as a result of several factors. Some low margin revenues such as billable travel that declined substantially in 2020 due to the pandemic began to return in 2021. In addition, some expenses that also declined in 2020 have also started to return including business travel, trade shows and employee health costs. Margins have also been impacted by the inclusion of NIC including their lower margin gross payments contracts and COVID initiative revenues. As a result, our non-GAAP operating margin declined 330 basis points to 23.6%. And while our accelerating move to the cloud continues to build long term value, the increase in the SaaS mix of new business also weighed on our fourth quarter margins as SaaS accounted for 77% of our new contract volume in the quarter versus 73% last year. We continue to be very pleased with NIC's performance in the market and with the growing pipeline of joint opportunities for Tyler and NIC. During the fourth quarter NIC was successful in competitive rebids for enterprise contracts in South Carolina and Indiana payments and with renewals or extensions of enterprise agreements in Mississippi, Arkansas, Colorado, Hawaii and Texas Payments. We believe that Tyler's acquisition of NIC was a positive factor in the extension of these client relationships in particular, the inclusion of our enterprise data platform powered by Socrata was a material differentiator in the successful competitive rebid for South Carolina. We had nine combined sell through wins in the quarter where Tyler products were sold through NIC state enterprise contracts, or with influence from NIC state teams. These wins contained a number of Tyler products and services, including our enterprise data platform powered by Socrata, case management development platform powered by IntelliTrack, VendEngine, and NIC payments and generated over $1 million in new ARR for Tyler. We also continue to experience increased cross-selling opportunities across Tyler's product suites, especially for our enterprise data platform and our two largest new SaaS deals in the fourth quarter were examples. The first deal was with the city of Lawrence, Kansas valued at approximately $4.3 million and the second was with the city of Hammond, Indiana valued at approximately $3.8 million. Both new contracts included our enterprise ERP powered by Munis, enterprise permitting and licensing powered by EnerGov and enterprise data platform powered by Socrata Solutions among others. In addition, we signed a new combination license and SaaS deal with the Colorado division of Real Estate valued at nearly $1 million for our case management and development platform and enterprise data platform solutions, as well as NIC's electronic payment solution. This is also a great example of not only our ability to add value by offering multiple Tyler solutions in a single deal, but also the ability to win follow-on deals with various agencies. As you recall, in Q2 of 2021, we signed a $9.3 million contract with the Colorado Department of Regulatory Agencies, Division of Professions and Occupations for similar products, which paved the way for this deal with the division of real estate. Other significant new SaaS operations signed this quarter each with a total contract value of greater than $2 million included the City of Camas, Washington for enterprise ERP and Enterprise Permitting and Licensing Solutions, Baton Rouge, Louisiana for Enterprise Justice and Supervision Solutions powered by Odyssey, the City of Taunton, Massachusetts for our enterprise ERP solution, Caldwell County, Texas for our Enterprise Justice and Jury Solutions and the City of Snoqualmie, Washington for our enterprise ERP solution. For our premise license contracts, notable new signings included the Lee County Clerk of the Courts and Comptroller in Florida valued at approximately $2.9 million and the City of Woodland, California valued at approximately $1.4 million for our enterprise ERP solution and the cities of Colorado Springs, Colorado and Salem, Oregon for our enterprise public safety solutions valued at approximately $2.4 million and $1.4 million respectively. Now I'd like for Brian to provide more detail on the results for the quarter and our guidance on 2022.

[Brian Miller, CFO]

Thanks Lynn yesterday. Tyler Technologies reported its results for the fourth quarter ended December 31, 2021. In our earnings release, we have included non-GAAP measures that we've belief 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 financial reports GAAP, schedules with supplemental information provided on this call, including information about quarterly bookings, backlog and recurring revenues. GAAP revenues for the quarter were $433.5 million up 53% with the inclusion of NIC and our other acquisitions. Non-GAAP revenues were $434.2 million up 53.2%. On an organic basis GAAP and non-GAAP revenues both grew 9.2%. Software licenses and services grew 21.1% or 4.6% excluding NIC. Subscription revenues rose 144.1%. Excluding the contribution from NIC, subscription revenues were still very strong growing 28.1%. We added 135 new subscription-based arrangements and converted 71 existing on-premises clients representing approximately $74 million in total contract value. In Q4 of last year, we added 118 new subscription based arrangements and 50 on-premises conversions representing approximately $73 million in total contract value. Our software subscription bookings in the fourth quarter added $14.8 million in new annual recurring revenue. Subscription contract value comprised approximately 77% of the total new software contract value signed this quarter compared to 73% in Q4 of last year, reflecting in our ongoing shift to a cloud first approach to sales and increasing client preferences for cloud based solutions. The valuated average term of new SaaS contracts this quarter was 3.9 years compared to 3.5 last year. Transaction based revenues, which include NIC portal, payment processing and e-filing revenues and are included in subscriptions were $137.1 million up almost fivefold from last year. E-filing revenues reached a new high of $17.6 million up 13.4%. Excluding NIC, Tyler's transaction-based revenues grew 14%. For the fourth quarter, our annualized non-GAAP total recurring revenue or ARR was approximately $1.4 billion up 63.7%. Non-GAAP ARR for SaaS software arrangements for Q4 was approximately $372 million up 34%. Transaction based ARR was approximately $548 million up 458% and non-GAAP maintenance ARR was down slightly at approximately $471 million due to the continued migration of on-premises clients to the cloud. Our backlog at the end of the quarter was $1.8 billion up 12.6%. Because the vast majority of NIC's revenues are transaction based, their backlog at quarter end was only $24 million. Excluding the addition of N I Tyler's backlog grew 11.1%. Our bookings in the quarter were robust at $464 million up 39.3%, including the transaction based revenues of NIC. On an organic basis, bookings were approximately $347 million up 4.2%. As a reminder, bookings in the fourth quarter of 2020 included a large contract for tax software and appraisal services valued at approximately only $18 million making for a tough bookings comparison. For the year, bookings were approximately $1.8 billion up 41.6% and on an organic basis, were approximately $1.4 billion up 11.7%. Our business continues to generate cash at a high level and for the fourth quarter, cash from operations grew almost 30% and free cash flow grew 13.7% to $95.1 million. Our balance sheet also remains very strong. During the quarter, we repaid $87.5 million for our term debt and since the NIC acquisition, we've repaid $395 million of debt. We ended the quarter with total outstanding debt of $1.34 billion and cash in investments of $407.8 million and net leverage of approximately 2.07 times, trailing 12 months, pro forma EBITDA. Turning to 2022, our focus continues to be on our strategic activities around our cloud transition on several fronts. Although this creates some short term pressure on revenue, growth and margins that Lynn will discuss in more detail, we believe the acceleration of this strategy is creating significant long term value for shareholders and clients. Our 2022 annual guidance reflects the impact of these strategic activities and is as follows. We expect both GAAP and non-GAAP total revenues will be between $1.83 billion and $1.87 billion. The midpoint of our guidance implies organic growth of approximately 9.5%. We expect total revenues will include approximately $36 million of COVID related revenues from NIC's tour health and pandemic rent relief services. The tour health revenues are expected to continue through the first half of 2022 while revenues from the rent relief program are expected to continue throughout the year. We expect GAAP diluted EPS will be be between $4.09 and $4.26, and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $7.41 and $7.58. To provide a little more color on our revenue guidance, we expect that our license revenues will decline in the mid-single digits in 2022, while subscription revenues will grow 25% to 30%. Excluding COVID related revenues, subscriptions are expected to grow in the mid to high thirties. Maintenance will be flat to down low single digits, software services, appraisal services and hardware and other revenues are each expected to grow in the low to mid-teens. Other details of our guidance are included in our earnings release. Now I'd like to turn the call back over to Lynn.

[Lynn Moore, President and CEO]

Thanks, Brian. I'm very pleased with our fourth quarter results, especially with regard to our sales and revenue performance. Activity in the public sector market continues to trend positively with indicators such as RFP and demo activity generally at or above pre-COVID levels. It's also gratifying that our NIC operations are executing at a high level, and that we're seeing early successes in achieving the go to market objectives we envisioned around the acquisition. For example, NIC was recently awarded an early three year extension to its Texas Payments contract at existing rates. Similar to the South Carolina rebid, the inclusion of Tyler's enterprise data platform and in particular payment insights with fraud detection and prevention proved to be a major factor in obtaining this early extension. We're very excited to expand NIC's portfolio of software solutions with the acquisition of USC Direct, which we completed last week. USC Direct has a market leading AWS cloud hosted outdoor reservation platform for the fast growing campground and outdoor recreation management market, which complements our existing strength in the hunting and fishing license market. This combination will allow us to create a very competitive all in one outdoor solution, addressing an estimated $2 million market while also expanding our payments opportunity. USC Direct is now a part of our NIC division, and we welcome their 60 team members to Tyler. Now I'd like to take a few minutes to discuss our accelerator move to the cloud, including the expected impact on our results in both the near term and the long term. As most of you know, we have operated in a hybrid model for many years, offering our core products in either an on-premises model with an upfront license and annual maintenance or a SaaS model with a software generally hosted in a Tyler data center and a multiyear subscription revenue stream. Since our first SaaS client Eau Claire [ph] Wisconsin chose Tyler in 2000. The mix of clients choosing our SaaS model grew slowly but steadily as we pursued a cloud agnostic approach to sales and let the market decide the pace at which it would move to the cloud. And as with many things in the public sector, our market has moved to the cloud more slowly than the private sector. In fact, it took until 2019 for the majority of our new business to come to us in the cloud a year in which we also recognize an all-time high $100.2 million in license revenues. 2019 was also the year in which we made the strategic decision to shift our future model from a cloud agnostic approach to a cloud first approach. In conjunction with that shift, we entered into a strategic collaboration agreement with Amazon web services and embarked on significant development efforts to optimize our key products, to be efficiently deployed in the cloud through AWS, with an ultimate goal of exiting our two proprietary data centers and eventually deploying all of our SaaS clients in the public cloud. Over the past two years, we've made substantial progress under our cloud first approach. I'm pleased to report that we remain on target with our product development initiatives with an expectation that all of our major products will be cloud efficient or cloud optimized by the end of 2023 or early 2024. In addition, almost every product we've added through acquisition in the last several years has been cloud native. We've begun deploying some new SaaS clients in AWS, as well as lifting and shifting a limited number of existing SaaS clients out of our data centers and into AWS. We've made changes to sales compensation to encourage cloud sales over licenses. In early 2021, we also created a new cloud strategy and operations team, which has responsibility for our overall cloud transformation strategy and operations, including things like defining best practices for cloud development, operations, and deployment to achieve the full value of our cloud initiative. And as we've embraced the cloud first approach, our market has also continued to embrace the cloud at an increasing rate. In 2021, 71% of our new soft contract value came to us in the cloud with that percentage reaching 77% in the fourth quarter and conversions of existing on-premises clients of the cloud have also reached new highs in each of the last three quarters. So clearly our shift to the cloud is in sync with the market as clients recognize the many benefits of cloud based solutions. This acceleration of our cloud transition is continuing as we move into 2022. Effective January 1, 2022, some of our major products, including enterprise ERP powered by Munis and enterprise permitting and licensing powered by EnerGov will almost exclusively be offered to new clients as cloud solutions. Other applications will follow. We expect that the percentage of new clients choosing the cloud model will continue to grow significantly in 2022, with the exception of public safety. With today, there has been more market reluctance to move systems to the cloud. The general impacts of a SaaS transition on a software company financial model are generally understood. From a revenue perspective, there's an initial headwind as licensed revenue that is generally recognized up front is replaced by a recurring subscription revenue stream. And unlike licenses, that recurring revenue stream is not recognized in full immediately. Rather revenue recognition typically begins when customers go live with particular models, which can take several quarters. However, because the annual recurring revenues from a subscription client are approximately 1.8 to two times the annual maintenance, the same client would generate in a license deal, the SaaS revenue stream is significantly higher over the life of a client. Some extent we have experienced this headwind for several years, but the impact is increasing as the shift accelerates. Over the next several years, as Brian mentioned, license and maintenance revenue will continue to decline while subscriptions will accelerate. For example, in 2019 maintenance revenues were 45% higher than subscriptions. In 2022, subscriptions will surpass maintenance revenues. From a margin perspective, there are multiple short-term headwinds as well. License revenues have very high margins with immediate impact and as they decline, margins are negatively impacted until the subscription revenue stream reaches the point where it offsets those lost licenses. In addition, we will experience some margin headwood from bubble costs around the transition from our internal data centers to the AWS hosting environment. We can currently host almost all of our more than 5400 SaaS clients in one of two main proprietary data centers. We have certain fixed costs associated with running those data centers, even as we transition the hosting of new and existing clients to AWS. Until we completely exit one and ultimately both of our data centers, we will incur some duplicative costs that put pressure on margins. Once we are in AWS with products that are architected to operate more efficiently in the public cloud, we will see an uplift in margins. With that backdrop, I'd like to turn to a closer look at our outlook for 2022 and beyond. Our revenue growth outlook is solid representing the continuing return to and growth over pre pandemic levels and our increasing competitive position. The midpoint of our guidance would represent approximately 16% total growth and 9.5% organic growth, even in light of the continued accelerated shift of new business to SaaS. We expect that approximately 80% of our new software contract mix in 2022 will be SaaS. From a margin perspective, the midpoint of our 2022 guidance implies non-GAAP operating margin contraction of approximately 160 basis points. That said, our implied 2022 non-GAAP operating margin is consistent with or even slightly higher than our 2021 Q4 operating margin as the major factors impacting margins began before this year. I'd like to break down a few of those factors. The first material category of margin pressures we consider to be part of our long term strategy of becoming a cloud first company, the impact of the year over year increase in our SaaS business mix, net of on-premises conversions, along with increasing bubble cost in 2022 will negatively impact operating profit by approximately $28 million to $30 million. The second significant category of factors causing margin pressure is made up of costs and low margin revenues that experience reductions during the pandemic, but have been slowly returning since the end of last year, in which we've discussed on prior calls. These include trade shows, sales related travel costs, and some billable travel. Importantly, some costs have not, and will not return to pre COVID levels. The third category of factors include some one time or non-discretionary costs. We like virtually every company are experiencing the effects of labor market disruptions and increased wage pressure and healthcare costs also continue to rise as a result of healthcare inflation combined with the catch up of expenses from healthcare that were deferred during the pandemic. We've posted on our website with a supplemental quarterly data, a summary of these margin challenges. The estimated total impact of all these items accounts for approximately 290 basis points of operating margin impact in our 2022 outlook. Looking beyond 2022, we expect that our margins will continue to be impacted by some of these factors, particularly declining license revenues and cloud transition bubble costs. We believe that operating margin pressures from the cloud transition will bottom out in 2023 and that beginning in 2024, we will start to see accelerating revenue growth and return to margin expansion. The timing of the cloud transition varies by products as some products are further along creating something of an ebb and flow in the short term headwinds and long term tailwinds. For example, for enterprise ERP our largest and most profitable product, revenue growth slowed to approximately 8.5% in 2021, and is expected to grow a approximately 8% in 2022 as the mix of new business significantly shifted to SaaS. For example, in 2019, the new business mix was 50%. Fourth quarter last year, it was over 90%. However, the early expectations are for that product's growth to accelerate around 11% in 2023, as it begins to reach the other side of this transition and experience the SaaS uplift. As we head into 2022, I am more excited than ever about Tyler's future. It's amazing to think that it took 19 years from the time we entered the government technology market in 1998 to surpass $800 million in revenues in 2017 and in 2022, we will have added the next billion dollars of revenues in just five years. In 2017, recurring revenues accounted for 63% of total revenues. In 2022, they will exceed 80% and approach $1.5 billion dollars creating long-term value. We're executing on our strategic long-term cloud transition and we have an incredible platform as the clear leader in the massive public sector market. We have reorganized and aligned our Tyler payments team with NIC's payment team to further capitalize on this opportunity. Our elevated pre-pandemic investments are paying off as our market environment is strong and our competitive position and win rates across our core applications remain extremely high. One of our biggest assets is our existing client base with over 37,000 installations across more than 12,000 locations, something that takes decades to establish, and we are poised to take advantage of cross-selling and payment opportunities to accelerate growth and expand margins as we complete our transition to the cloud. With that, we'd like to open the line for Q&A.

[Operator]

[Operator instructions] Our first question comes from Matt VanVliet with BTIG. Please go ahead.

[Matt VanVliet, BTIG]

Yeah, thanks for taking the question guys. Appreciate it. I guess, as you look at the commentary around the additional sales activity in RFPs, do you have a sense for how much the average budget is growing for the next 12 months or kind of on a go forward basis and how much of that can you attribute to the federal stimulus money finally sort of making its way into these budgets and people ready to allocate and spend those dollars?

[Lynn Moore, President and CEO]

Yeah, I don't have the percentage growth in government budgets at my fingertips, but the backdrop is strong. I would say that one of the -- obviously in public, in the local government, one of the biggest revenue streams is property taxes. Often that accounts for more than half of their budget and generally property values remain strong, real estate markets are strong, so there's not a lot of pressure there. So the overall environmental environment backdrop is strong and I would say that doesn't really include a lot of uplift from federal stimulus yet. We've seen, handful of deals this last quarter that were specifically identified as coming from or being funded with stimulus money. There's certainly some indirect funding that may not be used directly for a Tyler purchase that relieves pressures elsewhere in the budget and frees up funds for money they'd like to spend with Tyler. But in our view, the vast majority of the stimulus money has not yet been spent or even committed yet. With the Cares Act money they have until or the American Rescue plan money they've got until the end of 2024 to spend it and I think many governments are still in the very early stages of figuring out where they're going to spend that.

[Matt VanVliet, BTIG]

All right. And then Brian, when we look at the, the guidance, I guess how much impact to the top line are you seeing in terms of headwinds from just the elevated SaaS mix coming through? So if we were to assume sort of the same level of mix from '21 into '22, how much of a lift would we see on that revenue number and then kind of secondarily to that, on the margin side, what is the underlying assumption for the core Tyler legacy business in terms of margin expansion, excluding some of these transition costs?

[Lynn Moore, President and CEO]

Yeah. The combination of the bubble costs, which are the incremental SaaS costs and the shift in the new mix is a combination of about $28 million to $30 million of impact on the op line on the revenue line and op related to the mix shift it's probably in the low teens, $12 million to $15 million of revenue impact from the increasing shift towards more SaaS.

[Brian Miller, CFO]

Yeah. I'd say it's and that's a combination of two numbers because you've got the -- when you're just talking about new business activity, it's, more in the $17 million to $18 million hit on the short term. At the same time, we are doing flips which gets some immediate impact offsetting some maintenance loss. But if you're talking about just the new business revenue growth, it's more in the $17 million, $18 million. When you offset flips, it comes down a little bit lower but there's also a cost that's associated with flips. Typically when we do a flip, we provide some services that we don't bill and that also creates some short term pressure on the margins that will not be there in the future.

[Lynn Moore, President and CEO]

So it's that impact of the mix shift is probably about a half point of margin for the year.

[Operator]

The next question is from Peter Heckmann with D.A. Davidson. Please go ahead.

[Peter Heckmann, D.A. Davidson]

Hey, good morning. Thanks for taking my question. Just a couple things, in the quarter were there any didn't sound like it, but were there any deals above $5 million in total contract value? And then in terms of, it's really encouraging to hear the cross sales so far, especially into the EGov base. I think you had done a little bit of qualification nine deals in the quarter, but is there any way to think about, quantifying the total value of bookings that Tyler may have added since the close of the EnerGov selling into current EnerGov customers?

[Lynn Moore, President and CEO]

I'll take the first part of that? No, there were not any deals this quarter that had a total contract value of more than $5 million. Our largest one was a little under $4.5 million. We had a lot of deals in the, the $1 million to $3 million range, but no, none of those mega deals this quarter and we did in the fourth quarter of last year as we pointed out.

[Brian Miller, CFO]

Yeah. I think I'd add, you talking about the cross selling, that's one of our largest opportunities in our core applications and every time we do acquisitions, it's real exciting to see the things that are going on within IC right now in our other divisions. One of the things that we didn't point out in our prepared comments was a very specific deal of the nine that we talked about. And this was a deal that NIC helped using their state enterprise contracts, state contacts with the State of Arkansas where we got a vend engine deal where vend engine is going to be handling all the online and phone bank deposits in the state-wide corrections contract. That's about $800,000 in ARR and what's I think what's particularly exciting for me is NIC is a company that we acquired in April and VendEngine is a company that we acquired in September and in the first quarter those two teams got together as part, we've talked in the past about some of the efforts we were doing around sales and education, and we're able to already get a deal of this size. I think it's an example of the tip iceberg of where we can go. Not only with NIC, but all the other acquisitions that we do for strategic purposes and again, it's pretty exciting.

[Peter Heckmann, D.A. Davidson]

Yeah. That's incredible and it sounds as if the more near term opportunity is selling Tyler Solutions into EGov base and that might be a little easier just based upon how their portal contracts are kind of like hunting licenses but, longer term, do you see some cross sells the other way, either payments or certain applications that that NIC has developed that you might be able to sell in municipalities?

[Lynn Moore, President and CEO]

Yeah, I think, that's fair. I also, going back to the NIC strategy, I remember a year and a half ago when I was talking with the business leaders about this deal, I said, show me why this deal is good for Tyler, but also show me why Tyler's good for NIC, and I just gave the example of the vintage in Arkansas deal, but I also gave examples in my prepared remarks about how D&I really was a significant contributor in getting South Carolina in a very competitive rebid against Deloitte and also an early extension of this Texas payments contracts. So that's an example where we provided value to NIC really out of the gate. I do think as we continue, you talk about payments yes, like you look at the State of Florida, we're going to help expand that payments revenue by having that hunting license and going through our local contact. We put our payments teams together and today I generally just consider it Tyler, it's one payments organization. I don't really distinguish between NIC and Tyler anymore, but certainly they were much more mature. They were the payments leader and, and I think we're helping there as well.

[Brian Miller, CFO]

And of the nine combined sell through deals this quarter, one of them was a payments deal with NIC payments with a Tyler local government client in Louisiana.

[Peter Heckmann, D.A. Davidson]

Okay, great. I appreciate it.

[Operator]

The next question is from Terry Tillman with Truist. Please go ahead, Terry. Your line is open on our end. Is it possibly muted on yours?

[UnidentifiedAnalyst]

Thank you very much. This is Joe [ph] on for Terry. Thanks for taking the question. Just acknowledging that bookings can be lumpy and trillion 12 month view helps smooth things out, but I'm just curious about the bookings in 4Q, how that played out versus your expectations?

[Lynn Moore, President and CEO]

I'd say generally pretty much in line with our X expectations. One of the things, we've talked about the recovery in the market that over the last year, we've consistently talked about activity, sort of leading indicators of activity in the market. The number of RFPs we're seeing, the number of sales demos we're doing, those things continuing to rebound and trend back towards and in many cases above pre COVID levels. But you have to keep in mind that our sales cycles are long and it's not uncommon that a deal from the time that process really gets started to the time we sign a contract can be a year, year and a half. So there's a lag between a lot of the time that activity starts to, to ramp up and the time it shows up in booking. So generally we're pretty pleased. There's always some deals that fly out of the quarter, but nothing really terribly unusual this quarter. And the progress in the booking is I think in line with our expectations given that activity we've seen over the last few quarters.

[UnidentifiedAnalyst]

Great. Thanks. And then if you could just comment on ERP demand through 2022 and how that looks going into '23. Thanks so much.

[Brian Miller, CFO]

Yeah, I think the ERP demand is like everything else and across the company. I talked earlier about, demos are, are at all time, high, RFPs are up. The number of deals that we're signing particularly at our enterprise platform is approaching really pre-pandemic levels. At the lower end at our, at our ERP pro, our win rates are at all-time highs. The growth is really is really good. It has been really for, it's been good for the last several quarters and really the last year and a half or two years. So I think the demand is still pretty robust out there.

[Operator]

The next question is from Charlie Strauzer with CJS Securities. Please go ahead.

[Charlie Strauzer, CJS Securities]

Hi. Good morning. Just two quick questions real quick on the AWS progress. Are you currently are you -- when you sign up a new SaaS customer, are you currently putting them on AWS? Are you still putting them on legacy systems and then migrating them over?

[Lynn Moore, President and CEO]

Yeah, that's sort of still depends a little bit by product. So new customers in our ERP side particularly in our civic and our powered by Munis, those new customers are going to be going in AWS, but you have to remember, we're still in the process of getting all of our core applications into a cloud efficient state. So, even the new customers that we sign that going to AWS, we're not going to be experiencing the higher margin that we will be, as soon as we get these products more efficient in the cloud.

[Charlie Strauzer, CJS Securities]

That makes sense and obviously we talked about some of the expenses and migration lasting it into next year. Do you think that's kind of first half of next year, full year, how should we think about the progression of that that decline of away from the,

[Brian Miller, CFO]

Oh, I'd say that it's pretty consistent throughout the year. We'd expect that impact to continue on through the year.

[Charlie Strauzer, CJS Securities]

Got it. And then just lastly, Brian, I apologize if you gave us that earlier, but in the guidance any guidance for cash flow?

[Brian Miller, CFO]

We do not guide the cash flow. We give a lot of in the press release. There's a lot of information around depreciation, amortization capitalization that can help you get to that number, but we don't specifically guide to cash flow.

[Operator]

The next question, if from Scott Berg with Needham & Company. Please go ahead.

[Scott Berg, Needham & Company]

Hi, everyone. Congrats on the good quarter and thanks for too my question. Lynn just to start off with a statement, you sound like you could be a CFO in your next life nice job with all those numbers there. Yeah, I guess I wanted to…

[Lynn Moore, President and CEO]

I'm known for my own spread sheets, Alex.

[Scott Berg, Needham & Company]

It's also impressive because I think your background as an attorney, if I remember correctly too, so double whammy there. That's fantastic. I guess wanted to start by tackling fiscal '22 margins from a slightly different angle. As we think about the fall off in NIC revenues this year, kind of the two part question, there is one, how much are NIC revenues pressuring margins this year versus the core kind of organic Tyler business, because you didn't lay that out in the slide necessarily on the website. And then secondly, as some of those COVID revenues fall off in the first half, given what those margins look like, should we get maybe a little bit of upward opportunity and margins, with a fall off of those revenues?

[Lynn Moore, President and CEO]

Yeah I'll start Scott. I think you'll see throughout the year our margin will increase some throughout the year and as we are losing some of those COVID revenues in some of the areas, I believe it's in South Carolina and Nevada our role in those COVID revenues has changed from a prime to a sub. So while those revenues drop off the margins actually get a little bit better. And so I think really at a high level NIC's contribution is somewhat consistent with Tyler's overall margin for next year.

[Scott Berg, Needham & Company]

Got it helpful. And then from a sorry, go ahead Brian.

[Brian Miller, CFO]

I was just going to say, yeah, the second half margins do step up from the first half as the NIC COVID revenues decline, but in general NIC's revenues or margins in 2022 are fairly close to in line with Tyler's.

[Scott Berg, Needham & Company]

Got it helpful. And then from a follow up question around the SaaS transition, you all seem significantly more confident in your ability to sell that obviously today, given what your recent successes are, but Brian, I remember talking historically over the last couple years is your largest of customers still had some hesitancy to adopt a subscription model for a variety of different reasons. I think in Lynn's remarks, your expectations around Munis virtually all of those deals to go subscription this year and of course Munis is one of those products you've also had an opportunity or growing opportunity at market. Should we see those large Munis deals also go subscription this year? Or is that something that might push into, maybe '23 or '24?

[Brian Miller, CFO]

I think we're seeing it across all tiers of the market. And that includes in the ERP space. I think last quarter 90% of Munis' deals were SaaS deals. So the upper end of the market is I think just as willing to go SaaS as the lower end and maybe in some cases more so, and we certainly had success across other products. For example, North Carolina a couple years ago in the odysey side on the courts was our biggest SaaS contract to date. And we've seen some large customers on the appraisal and tax side selecting SaaS. So I think it's across all tiers of the market.

[Lynn Moore, President and CEO]

Yeah, I think Scott, I'd add that, we've communicated to the Munis client base the direction and you're going to see more around this in, I think it's April when we have our Tyler user conference connect, you're going to see a significant, more focus on our shift to the cloud and the expectation really and the messaging is really, is that pretty much almost all new business up to that end will be going into the cloud. And as Brian mentioned, it was already over 90% in Q4 last year, which, if you go back three years ago, it had just gotten to 50-50. So it's been moving in that direction for some time.

[Operator]

The next question is from Alex Zukin with Wolfe Research. Please go ahead.

[Alex Zukin, Wolfe Research]

Hey guys. So just a couple for me, I guess, help us understand, because it does feel like again, you're at a high level, you're guiding to organic revenue growth acceleration next year, and you grew organic bookings 11.5% this year outside of the headwinds, obviously from the cloud transition stuff. Put that into context and just drive home maybe if you will, A, when was the last time you guided to accelerating growth and what are some of the sustainable, trends that you're seeing in the business that give you that confidence?

[Lynn Moore, President and CEO]

Yeah, well, I think you're right. It's funny. I was, I talk sometimes in my personal life about the last couple years in COVID and sometimes I sort of call them as quote, the lost years and I try to -- I was trying to remember how things happened and I almost put everything in reference to, well, it was pre COVID or post COVID. But what I was thinking about this the other day, but at Tyler, these haven't been lost years. We've been working hard and we've been investing and we knew that this market was going to be rebounding. And we talked about it as COVID started about, we went back to the great recession and we had that great big boost out of coming outta the great recession. And we were anticipating this and we planned for it, we invested in it and at the same time made our investments into the cloud, and I think seeing the market return, yes, the stimulus money's out there. I think the local state and local government budgets are very robust. I think we're in our competitive position across all our products is an all-time high. We are at the point now where I'm starting to see the coming out of the other side of the SaaS transition. It's not happening tomorrow. It's not happening in the next couple of quarters, but my reference to what's going on at for example, up at Munis and we see the uplift that's coming from that. And so that's the stuff that gives me confidence. The acquisitions that we're doing, the cross selling that's going on, the interactions that's going on with our teams, one thing we've been focused on really a lot in the last few years is an idea that I call one Tyler and that's it's, it's not where our enterprise group and we're all together, and we're all pushing in the same direction and there's opportunities that we need to start tapping into more and more, and we're starting to see this in deals and we've done it very successfully for a long time. But as I say, our greatest assets are customer base. It doesn't take years to develop. It takes decades to develop and the opportunities we have there with our new products, as we move to SaaS, as we continue to do acquisitions things like vend engine USC direct, there's just -- there's so many opportunities out there and I just like where we sit right now, and as you can tell, I get a little excited. I think a year ago, I was talking about cautious optimism, and then I was talking about tempered excitement. And I think right now, I'm just flat out excited about the future. We're going to have a -- we're going to see some ripples for our financials over the next two years as the SaaS transition goes on, but we're making significant progress and we know where we're going to be on the other side.

[Alex Zukin, Wolfe Research]

That's super helpful. I guess let's talk about my next question's about those ripples. And I apologize, it'll be a little bit of a multi-part question, but I want, when you talked about subscription revenues, ex, the COVID points being over 30%, I want to ask, if we think about this SaaS transition, what's the durability of that 30% plus subscription revenue growth? And then on the margin side, I think you guys did a wonderful job laying out the costs -- the cost hit that you're taking this year and bridging the margins on a like for like basis without it. Is this the year that margins trough in the business and then next as you absorb those bubble costs, as you absorb the comeback COVID costs, and then in '23, you start to come, go back to seeing margin leverage, or is this transition going to, kind of peg margins at this level for a few years?

[Lynn Moore, President and CEO]

I'll start, I'll let Brian jump in. I think, margins will trough may be the right word or sort of balance out at this level through 2023. And I think you'll start to see the uplift coming out of there. On your question around subscriptions and the uplift of course, embedded in our subscription line is also transaction based revenues. Those, will grow not at the same rate as some of our subscriptions, which is just coming in with our SaaS contracts. We talked about on the call, we've grown in double digits 56 quarters out of 64 quarters. We've been consistently at 20% plus. And I think as we make the transition and start coming out on the other side, I think you'll start seeing that. We talked about a few milestones in my prepared comments. One of the things that's also exciting me when I look at our mix of recurring revenue versus where it was five years ago, and you talk about our growth, it took us from 1998 to 2019 to get to a billion dollars in total revenues. And in 2022, I think we're going to do right at about a billion dollars in subscriptions alone. That's part of the excitement that I see and I see that continuing to grow at a pretty healthy clip in the near future.

[Brian Miller, CFO]

And I would just point out that, that mid to high 30 subscription growth, it excludes the COVID related revenues, but it is not an organic number. So it also includes a full year of NIC. On organic basis, it would be more around the mid 20%, so 24%, 25% which is more consistent with I think what's sort of a sustainable in the near to midterm kind of growth in subscriptions.

[Alex Zukin, Wolfe Research]

Got it. That's super helpful. Thank you guys and congrats.

[Operator]

The next question is from Brent Bracelin with Piper Sandler. Please go ahead.

[Brent Bracelin, Piper Sandler]

Good morning and thank you for taking the question here. Obviously super encouraging to see government appetite to embrace cloud. I think the impact did you accelerate those transitions are very clear and well known and well understood. I wanted to double click into the cross opportunity around payments specifically around going into the existing installed base of Tyler software customers that potentially are using a different payment source and really convincing that base of customer to add on payments. Is the assertion point primarily upon a renewal. Is there a shorter sales cycle potentially to add on payments or and do you have a dedicated team now that is going in and trying to cross sell upsell existing Tyler software payments, little more color just around that opportunity. It seems like it's a very big opportunity encouraged by the nine deals. You talked about bundling those sound more like new deals. Love to get some color around being, trying to your success upselling the install base. Thanks.

[Lynn Moore, President and CEO]

No, that's a good question, Brent. I think, you actually, you asked a number of questions in there. I'll try to get to the ones I recall, if I'd missed one, just come back to at me. The sales side will vary a little bit with payments and some of that will be dependent upon the customer and payments, there's a number of things that can impact that the current providers that our clients might be using is one. But you're right. It is one of our larger opportunities and payments while we've got some great new ground with NIC and for example, the Florida contract and going locally, it's one of the focuses and emphasis, for example, we talked, there's been a lot of questions about what's going on with Munis on this call. It's considered to be one of their primary key growth drivers in the next few years is payments. And there's a significant amount of dedicated resources that are focused on that. And going back into that installed channel. So you're exactly right there. What we bring with NIC in terms of payments and our now more complete solution I think is something that's pretty important. One thing that we had really built out was electronic bill presentment and payment, and that's a very, very big differentiator in the market. And it's something that NIC was not as strong at and obviously they were very strong with their payment engine and gateway stuff, things that we needed to build. I think we've talked before where we both brought strengths here. We've got the ability through our connections with our proprietary products, either you be in tax collections, and we've got those relationships and we can start going to drive those sales. And so, you're right. It's one of our larger strategic initiatives. It's getting a lot of attention and focus. I mentioned how we just recently reorganized the internally the payments organization bringing, 45 payment org resources within Tyler and getting them aligned with the NIC resources working on go to market strategies looking at the size of the market, and so it's something that we are, I can assure you we're actively pursuing.

[Brent Bracelin, Piper Sandler]

Great, super helpful color there. And just one follow up on, on the go to market for payments, is the intent that each major, it sounds like these now five solution categories would have their own dedicated payments team, or do you actually have an overlay payments sales team to go in and try to upsell cross sell?

[Lynn Moore, President and CEO]

Yeah, I think it's the latter right now. And there are certain parts of our business where payments will be a bigger focus. It obviously trickles through a lot of our different core applications. We'll be focusing on certain ones more out of the gate and as we continue to capitalize on that opportunity, we'll continue to expand.

[Brent Bracelin, Piper Sandler]

Got it. Very clear. Thank you.

[Operator]

The next question is from [indiscernible] with Evercore. Please go ahead.

[Unidentified Analyst]

Hey this is Aduvaid [ph] here asking a question on behalf of Kirk. Just two questions. First I know he's been a really big year from an R&A perspective but how are you thinking about the pace of M&A going forward, and then I know you talked a little bit about the transition to AWS, but could you touch a little bit about on the just the incremental costs associated with the transition?

[Lynn Moore, President and CEO]

Sure. I'll, start, M&A is part of our history. It's something we've done since 1998. I think we've done 50 acquisitions over the 23 plus years I've been here and it's something that we continually look at. We have done a, a fair number. We did five last year. We just closed another one. Excuse me, those take significant amount of internal resources. But I think as we look forward we're going to continue to look at opportunities and when we find something compelling and that's strategic, we're going to execute on it. I mentioned last year, obviously the NIC deal and I've made my comments where there were some other deals in the pipeline. USC directs a good example. This was something that was not in the pipeline last year. We talked about a little at higher bar. I think we probably had a little bit higher bar right now. But I'm also comfortable with where we sit with our balance sheet in our debt. We paid down $395 million last year. Our net leverage is right around two give or take a little bit. So in my view, we're in a position to execute on any strategic initiative and if it's a compelling M&A opportunity we're going to do it.

[Brian Miller, CFO]

And your question about the AWS transition costs, I guess what we refer to as the bubble costs or those incremental SaaS transition costs in 2022 will be in the $16 million to $18 million range. So, somewhere around 90 basis points of operating margin impact.

[Operator]

The next question is from Keith Housum with Northcoast Research. Please go ahead.

[Unidentified Analyst]

Hi, this is Trevor [ph] filling in for Keith. I had a quick question about NIC. So the core revenue growth for the quarter was a little bit less than we expected. Is driver history records being impacted the slowdown in new car sales?

[Brian Miller, CFO]

Yes, they are. That is the one of the bigger drivers of those revenue streams, which are a significant part of NIC's transaction revenues in many states. And one of the drivers of that is new car sales which trigger a insurance event. And so those have been affected in recent quarters by the slowness in new car sales as a result of supply chain issues.

[Unidentified Analyst]

Okay. And then a quick follow up sticking with NIC you kind of touched on this a little bit earlier, but could you share the biggest success story so far and the acquisition and maybe any revenue synergies that you've achieved?

[Lynn Moore, President and CEO]

Well, I think the biggest success story, well, I could probably talk for another hour. I think the biggest success story has been bringing in their team and seeing how their team aligns with our team and seeing our teams work together, executing on our out of the gate strategy in 2021, them continuing to deliver on their business while we also sat and outlined a number of strategic initiatives which are pretty wide and diverse across Tyler. We talked about it on this call, a couple of deals that were really joint deals that we're -- that may not have happened. Or certainly the timing of it may not have happened had we not been together the vend engine deal, great example the extension of Tyler -- of Texas payments by three years because of D&I, huge success story beating in a very, very competitive rebid in South Carolina, which is a $10 million ARR client and beating out them and using Tyler and the story of Tyler and D&I involved in that. Those are all success stories, and I almost get to the point it's you're almost asking me who's my favorite kid. There's a lot of them out there.

[Unidentified Analyst]

Okay, great. Thanks a lot. And congrats on the quarter.

[Operator]

At this time, there appear to be no more questions. Mr. Moore, I'll turn the call back over to you for closing remarks.

[Lynn Moore, President and CEO]

Thanks, Gary. And thanks everybody for joining us today. We hope you stay safe and healthy, and if you have any further questions, please feel free to contact Brian Miller or myself. Thanks everybody.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.