Tyler Technologies: SaaS revenues are growing

Tyler Technologies (BACK 8.31%)the leader of software solutions for the public sector, announced on October 23 good financial results for the third quarter of 2024.

Total revenues reached $543.3 million, up 9.8% year over year. The results reflected solid execution and successful maintenance of momentum. Notably, the company continued to lead in software-as-a-service (SaaS) adoption, growing its software-as-a-service (SaaS) revenue by an impressive 20.3% to $166.6 million. The quarter also saw record free cash flow of $252.9 million, boosted by a 48.6% increase in operating cash flow.

Faced with the costs of moving to the cloud and increased competition, Tyler Technologies has maintained its strategic focus and growth trajectory.

Source: SEC filings.

Business overview and key areas of focus

Tyler Technologies provides a comprehensive suite of integrated software solutions for the public sector, including public safety, justice, tax and education. It is distinguished by a comprehensive approach to the implementation of various functions of critical importance for government agencies. This integration ensures a streamlined operation of various government departments.

The company focuses on recurring revenue and customer retention. Because subscription-based services are the fastest-growing revenue category, Tyler boasts a low customer churn rate of 2%. Additionally, Tyler’s strategic shift to cloud-based solutions increases its competitive advantage by moving customers from on-premises to cloud models. Cooperation with platforms such as Amazon Web services (AWS) facilitate this transition by adapting to trends in government IT needs.

The most important financial and strategic information

Tyler Technologies achieved significant growth in key metrics during the third quarter. Recurring revenue, which includes subscription services, increased 12.1% to $462.8 million and represented 85.2% of total revenue. The subscription revenue segment recorded an increase of 17.6%. GAAP operating income increased 29.5% to $82.8 million, while non-GAAP operating income increased 12.4% to $137.8 million.

This period marked a new quarterly cash flow high, driven by an increase in operating cash flow of 48.6% to $263.7 million. Free cash flow reached $252.9 million, compared to $162.7 million in the same quarter last year. The strong cash flow reflects the company’s strong operational management and strategic focus on SaaS offerings. The Management Board emphasized the strong market activity of the public sector, as evidenced by increased contract volumes.

Reflecting its strategic priorities, Tyler reported that 97% of new software contract value was for SaaS solutions, up from 80% in the report a year ago. This proves the successful implementation of the product and market strategy. However, the company faces challenges related to transition costs associated with cloud offerings and competition from other providers with similar strategies.

No material one-off events materially impacted quarterly financial results, but R&D investments projected at $119 million to $122 million support future product innovation.

Prospects and key priorities

Looking ahead, Tyler Technologies forecasts 2024 revenues of $2.125 billion to $2.145 billion, with expected non-GAAP diluted earnings per share of $9.47 to $9.62. Management expects consistent free cash flow margins of 21% to 23%. The company remains committed to its cloud-first strategy by continuing to invest in cloud capabilities and strategic acquisitions.

Investors should keep an eye on ongoing developments in Tyler’s transition to SaaS for the potential impact on profitability. The Management Board emphasizes the strong market position of the public sector, strengthened by the implementation of a strategy adapted to the changing customer demand for digital administration solutions. As competition intensifies, Tyler’s ability to maintain innovation and strategic progress will be paramount to its continued success.