Hello, and welcome to today's Tyler Technologies first quarter 2023 conference call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. In order to address your questions and stay within the allotted time, please limit your questions to one question per person. As a reminder, this conference is being recorded today, April 27, 2023. I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director of Investor Relations. Please go ahead. Thank you, Gavin. 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 your questions. During 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. 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 have 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. On the Events and Presentations tab, we 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? Thanks, Hala. We began 2023 by delivering strong first quarter results that met or exceeded our expectations for most key metrics. We continue to see broad-based demand across our product solutions, reflecting strength in the public sector market and our unique ability to support our public sector's clients' digital modernization needs. We're seeing a high level of request for proposal and demo activity across our software business, with particularly strong activity in the ERP space. Our mix of new software business also demonstrates how our market continues to embrace the move to the cloud. Total revenue growth was 3.5%, with 7.2% organic growth, which also excludes COVID-related revenues, and recurring revenues comprised nearly 84% of our quarterly revenues. We're pleased with our solid revenue growth, even as the shift to SaaS and our new software mix continue to accelerate, with SaaS deals comprising 87% of our Q1 new software contract value compared to 80% last year. Most importantly, SaaS revenues grew organically at 24.4%. Our sales activity this quarter reflected strong cross-selling success, including opportunities driven by leveraging state relationships at our Digital Solutions division, formerly NIC, and upsells with our Data and Insights solutions. In addition to our current quarter wins, our pipeline of cross-sell opportunities continues to grow. We also continued to execute our growth strategy around our payments business. During the first quarter, we signed more than 120 new payment deals, and we are especially pleased with the early traction that we are gaining with our acquisition of Rapid Financial Solutions and their robust payment issuing capabilities. I'd like to highlight a couple of first quarter deals that illustrate these successes. In Indiana, we expanded the relationship between Indiana's Family and Social Services Administration and our Digital Solutions division with a contract for Tyler's Disbursement-as-a-Service platform to improve the payment disbursement process for sending its existing Child Care and Development Fund payments to providers. The purpose of the CCDF federal program is to increase the availability, affordability, and quality of childcare. Leveraging the capabilities from the Rapid acquisition in combination with our existing state enterprise contract, we will streamline the entire disbursement process from portal setup, including registering users and collecting banking information from providers to virtual account payments across all payment types and channels. Through Rapid's robust platform, the solution will also provide reporting and reconciliation features to support complete oversight of the payment program. In addition, we signed two payments contracts to provide Rapid's disbursement solution for court funds, including Fort Bend County, Texas, a current user of Tyler's jury management solution, and Shelby County, Tennessee, a current Tyler Enterprise courts client. The quarter's largest SaaS deal, valued at approximately $18.5 million, was with the province of New Brunswick in Canada for our enterprise assessment solution. New Brunswick becomes the fourth Canadian province to implement our flagship property tax solution. Now I'd like for Brian to provide more detail on the results for the quarter and our annual guidance for 2023. Thanks, Lynn. Yesterday, Tyler Technologies reported its results for the first quarter ended March 31st, 2023. Total revenues for the quarter were $471.9 million, up 3.5%. Organic revenue growth, which also excludes COVID-related revenues, was 7.2%. Last year's first quarter included $20.6 million of revenues from COVID-related initiatives at our Digital Solutions division, formerly NIC, all of which ended in 2022. License revenue declined 39% as our new software contract mix continued to shift it to SaaS at an accelerated pace. Professional services revenue declined 13% due to completion of COVID initiatives, but rose 4.7% organically. Subscriptions revenue increased 14.3 and organically rose 16.4%. Within subscriptions, our SaaS revenues grew 24.4% to $126.6 million, and transaction revenues grew 7.1% to $153.9 million. On an organic basis, which also excludes COVID-related revenues, transaction revenues grew 13.1%. We added 145 new SaaS arrangements and converted 73 existing on-premises clients to SaaS with a total new software contract value of approximately $86 million. In Q1 of last year, we added 149 new SaaS arrangements and had 88 on-premises conversions with a total new software contract value of approximately $76 million. Our new SaaS bookings in the first quarter added $17.1 million in new ARR. Our total ARR was approximately 150... I'm sorry, $1.58 billion, up 9.1%, and organically grew 11.5%. Since Q4 of last year, SaaS revenues now exceed our maintenance revenues. Operating margins in the quarter were once again pressured by the acceleration of the shift to the cloud in the new business and the related decline in license revenues. As we've previously stated, we expect operating margin to trough in 2023 and to return to a trajectory of margin expansion in 2024. As we also discussed last quarter, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins. In Q1, we paid merchant fees of approximately $42 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 200 basis points higher. Cash flow was robust this quarter, with cash flow from operations of $74.7 million, up 39.5%, and free cash flow of $63.6 million, up 55.1%. As a reminder, cash flow for the balance of the year will be impacted by an estimated $131 million of cash tax payments resulting from the Section 174 tax changes, of which $73 million is related to 2022 taxes and $58 million is related to 2023 estimated taxes. We continued to strengthen our balance sheet as we repaid $120 million of floating rate term debt during the first quarter. We ended Q1 with total outstanding debt of $875 million and cash and investments of approximately $174.2 million. Our net leverage at quarter end was approximately 1.52x trailing 12 months pro forma EBITDA. Our revenue and Non-GAAP earnings guidance for the year are unchanged. Our 2023 guidance is as follows. We expect total revenues will be between $1.935 billion and $1.970 billion. The midpoint of our guidance implies organic growth of approximately 8%. We expect GAAP diluted EPS will be between $3.65 and $3.80 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 $7.50 and $7.65. Interest expense is expected to be approximately $26 million, including approximately $5 million of non-cash amortization of debt discounts and issuance costs. Other details of our guidance are included in our earnings release. I'd like to turn the call back over to Lynn. Thanks, Brian. Our first quarter results demonstrate the strong momentum we are building across our business. Our cloud transition initiatives are on track in this pivotal year as we make progress with our move from Tyler's data centers to AWS and manage through expected margin headwinds resulting from the accelerated pace of cloud adoption as well as cloud bubble costs. Our successes in the marketplace reflect our unparalleled competitive strength, synergistic cross-sell and upsell momentum and highly desirable cloud solutions, and position us well to execute on our long-term strategic growth roadmap. In the next few days, we'll release our fourth annual corporate responsibility report. We hope you'll take some time to review it and learn more about the progress we've made with our ESG efforts. To close, we're extremely excited to host clients in person at Connect, our annual user conference, which will take place in San Antonio from May 7th through May 10th. Registrations are at an all-time high, and this will be our largest Connect ever, with some 6,000 public sector clients attending. We also look forward to our upcoming Investor Day that will be held in person on June 15th in Frisco, Texas, along with a live webcast. We look forward to highlighting our differentiated value proposition and our mid to long-term strategic plan, growth drivers, and financial targets supporting our Tyler 2030 vision. More details will be communicated soon, and we hope you'll be able to join us in person or online. With that, we'd like to open the line for Q&A. We will now begin the question-and-answer session. To enter a question into the question queue, please press star one on your touch-tone phone. If you're using a speakerphone, please pick up your handset and then press the star key and then number one. To withdraw your request, press the star key and then the number one again. As a reminder, please limit your questions to one question so we may stay within the allotted time. We'll pause momentarily to assemble our roster. Your first question comes to line of Ryan Qiu from Credit Suisse Securities USA. Your line is open. Hi, this is Sami Badri on Ryan's line. Thank you for giving me a question. The first question I wanted to kick off with was just about operating margins. It looks like you guys did better than what Street and our models were forecasting. I kinda just wanted to understand, what's the mechanism kind of going into the model or into the business that's allowing you guys to execute a little bit better? Are you seeing better pricing, better cost control? Any other kind of details around the margin beat? The other question is, you know, I know that you guys have been messaging about operating margins troughing in 2023 before they expand in 2024. Is it possible that we have already seen your operating margins trough, and those are very well understood, and you're going to be building and expanding from this point forward, maybe from a 2Q base? Can you just give us color on margins, please? Sure. Around the second part of the question, I don't think we've seen them trough yet. For the full year, we think the, the consolidated margin for the full year will be lower this year than it was last year. Our guidance implies that. I don't think Q2 will be the point where you'll see year-over-year margin improvement. I think by Q4, we'd expect that we would be seeing year-over-year margin improvement at that point. I don't think we've hit the trough yet. In terms of the overall margin, you know, we don't give quarterly guidance, so we didn't have a quarterly margin target out there. Our earnings and revenue guidance is basically unchanged from where we started the year. Our expectations at this point are generally consistent. The first quarter did have good performance, good growth around the subscription revenues as some of those revenues are coming online from deals we've signed in prior quarters. The pace at which those revenues hit can affect that somewhat. I think our subscription revenues were probably a bit above the where the Street was. Generally our expectation for the full year margins hasn't changed. Yeah. Sammy, I'd add this too. You know, we've talked a lot over the last couple years about the cloud transition and the impact on both revenue headwinds and margins. There's a lot more going on within Tyler, and I'd say right now there's a lot of intentionality going on at Tyler. It's a little bit more than just sort of sitting back and letting the cloud transition run through the financials. We've done a lot of internal analysis. We have a lot of internal initiatives going on, beyond just the cloud transition, deep look at different parts of our business, different things that we should be doing and can be doing. I really commend our executive team and really our entire staff, for the work that's going on right now. There's a lot of work going on at Tyler for sure. I could say that, you know, everybody's sort of aligned generally with what our long-term goals and our long-term vision is, and part of that is around margin expansion. There's just a lot of things going on, a lot of intentionality. There's some bigger pieces. There's smaller things that we're doing. I think there's just a lot of intentionality going on. This question comes to line of Kirk Materne from Evercore ISI. Your line is open. Yeah. Thanks very much. Lynn, given that you're going into Connect next week or in the next couple of weeks, can you just talk about what you're hoping, you know, clients to take away from that? And I was just kinda curious if you've seen more folks from, say, state governments, signing up to participate at the conference? Yeah, Kirk, that's a good question. We actually are hosting some special events around our state government clients, and we're gonna have a lot of our key state government stakeholders there. We're gonna have them introduced to a lot of our executive team, so there'll be sort of a side path going on with them. They'll also be part of, you know, the larger forum as well. You know, Connect's just a unique opportunity for us. You know, we've got so many clients. It's a chance for us to sit down and talk to them, talk about our vision, but also listen to them and listen to their needs, hear what their vision is. It's a chance for us to interact. It's a great opportunity for us to help our clients with more training, more information, talk about the new offerings that we have, things that can make their jobs better and more efficient. It's a big event. It takes a lot of work. Our marketing team and events team just does an amazing job. I If anybody hasn't been to it, I'd recommend people go. It's really done in a first-class manner. There's a lot of work that goes into it. It's not an inexpensive event, but it's something that's very worthwhile. I think not only does Tyler and the executive team get a lot out of it, I think our clients get a lot out of it. Your next question comes the line of Matthew VanVliet from BTIG. Your line is open. Yes. Good morning. Thanks for taking the question. I guess, Lynn, on the back of the last question there, you know, you referenced a number of potential pipeline opportunities around some of the state-level contracts. Curious if you could give us some sense of sort of the magnitude of how much you feel like is in sort of the near-term pipeline, you know, where you're actually discussing specific deal terms and things of that nature. Maybe just compared to sort of how much upsell, cross-sell has come through those contracts since the acquisition closed. You know, I guess maybe it boils down to sort of what inning or what% of those potential opportunities do you think you've realized so far? What's on sort of the near- term, and then what's maybe more long- term in terms of mix? Thanks. Yeah, sure, Matthew. I think we're to answer part of your question, I think we're still in the early innings. I'd say we're still in the early innings with everything we're doing with NIC. I probably talked a year ago about being in the first inning. We might be in the top of the second. The cross-sell opportunities continue to grow. We take a very deliberate approach around that. We've instituted this year. We've been doing these strategic account management meetings where we're getting the Tyler salespeople together with state GMs and really sort of we're doing what we call sort of the state of the state baseline, where we're sort of taking a deep dive and look into what are the objectives in that particular state, what are the relationships that NIC or Digital Solutions divisions brings, what's the Tyler product footprint, what's the terms of the contract vehicle, how can we easily get products into those clients' hands. When we talk about what those near-term opportunities are, we do qualify them. I mean, we have a number of opportunities that we think are more longer term, but what we call more qualified leads. We're up around sort of in the 175-180 range right now. All different types of plays that we're looking at there. You know, probably somewhere around $50 million in ARR is what we consider more qualified pipe. Qualified pipe to me is not something that's gonna close in the next month or two, but it's something that I think has got a pretty viable horizon on it. Your next question comes the line of Joshua Reilly of Needham & Company. Your line is open. Yeah, thanks for taking my question. You mentioned the strong ERP results in the quarter and the pipeline for the rest of the year. Can you just speak to what's driving that pipeline and the visibility that you have in ERP deals for the rest of 2023? Thank you. I think what I would say there, Joshua, is that what we're seeing in terms of the sales indicators, the RFP volume, the number of demos that we're doing is really at almost all-time highs. That's not gonna turn into business for several quarters, but it's very encouraging to see. I don't really can't really put my finger on what's driving that right now other than the fact that demand remains high and our clients' budgets remain solid. Next question comes to line of Terry Tillman of Truist Securities. Your line is open. Yeah. Good morning, Lynn, Brian, and Hala. Thanks for taking my question, or question with a slight follow-up. I guess on the conversions, what I'd be curious, Lynn, has anything evolved or changed in terms of as you're doing these flips or conversions, the propensity to, you know, maybe do multi-suite then and/or just think much more strategic and broader with the broader product footprint that you've evolved? The second part of this is just with Rapid Financial Solutions. It sounds like it's really interesting in terms of kind of one plus one is 3. Anything on the quantifying the size of that business now? Thank you. Sure. I think, you know, we certainly use the flips and conversions as an opportunity to upsell. That is part of our strategic direction. you know, we're still going at a pretty healthy pace. I think, when we get to Investor Day in June, we'll probably hear a little more guidance on, you know, the pace of our conversions and where we think we'll be over the next, you know, four, five, six, all the way up to Tyler 2030. Yeah, you're exactly right. It's an opportunity for us to once again reach out and upsell other products around and then help incentivize flips too. As it relates to Rapid, you know, this is a transaction that we're pretty excited about. You know, it's a capability that we didn't have in-house. It's not a capability that NIC didn't have in-house, the whole bringing in the whole issuing side of disbursements. The fact that, you know, we've closed that deal, what, at the end of November. We've owned this company for just a little over about five months now, not quite five months. Already the synergies in working with the Digital Solutions team, formerly NIC, these deals that we've already got signed, I think this early is something a little unusual for us with acquisitions. It normally takes a little bit of time. You know, there's a lot of roadmap going, looking out on the disbursement side of payments. As you know, their primary focus right now sort of in the justice space, but there's applicability across all of our product lines. That, again, is gonna take, you know, years to develop, but it's pretty exciting, the early momentum we've seen. Yeah. We don't disclose the revenues for Rapid separately, but when we acquired them, they were in the kind of $14 million-$15 million annual revenue range. Your next question comes from the line of Chucky Esoliji from Wolfe Research. Your line is open. Hey guys, this is Alex. I guess maybe just another quick question on the demand environment. It does seem, Lynn, that You're seeing literally every company, you know, kind of talk about the strength of state and local. Is there? You know, obviously the budgets have been on a relative basis better than other sectors, but is there anything unique or special going on? And kind of if you look at your own pace of new SaaS bookings, has that changed at all? Like, is the environment better on a relative basis than where you thought it was gonna be? Is it as good as you thought it was gonna be? I would love to get color there. Then just one for Brian around, you know, appreciate the commentary on operating margin trends through the year. Is there anything you can help us with on free cash flow? Specifically, I think, you know, the 130, how that propagates those cash tax payments through the year and as you're looking at cash conversion on an annual basis, where that falls out. Yeah. I think when, you know, we talk about what we're seeing in the market, it's a couple of things probably. I mean, you know, it certainly reinforces the principle that, you know, the things that we're providing are essential functionality. I think it reinforces the principle that, you know, we went through some periods of time where there might have been a little pent-up demand coming out of COVID, and also the continued shift towards modernization and digitization of local government. You know, we also see where, you know, we talk about the labor markets, for example, and how the labor markets are affecting different companies, but they're also affecting our clients. As there's labor shortages and turnovers with our clients, it's also creating challenges for our clients, which is having them really point to and use technology to help bridge that gap. There's just a lot of things going on right now. It's a good market right now, and it's... I don't know how I'd characterize this to my expectation, but I'm pretty happy with where the market is right now. On the free cash flow, and I think a little bit on the bookings growth that Lynn was just mentioning. It's interesting, you know, our overall bookings growth was on an organic basis around 7%, but our subscription bookings on an organic basis were almost 24%. Very close to the same number our revenue growth was. The real strength is in the bookings, both the SaaS and the transaction bookings. On the free cash flow, yeah, the $130 million-$131 million estimated incremental cash taxes this year related to Section 174 is a bit higher than we had talked about on the fourth quarter call. As we've got more information and gotten into the calculations more, that impact is a little bit higher this year. I think it's $73 million that applies to really the deposit for last year's taxes. About $58 million this year. That impact does continue to decline each year, but we have a two-year impact or catch up in this year. That impact should decline year-over-year until after five years, it's sort of neutral. We made the biggest piece of that in mid-April. I think it was around $85 million, and then I think the impact is around I think in the $15 million range or it's roughly equal in each of the last three quarters. On a free cash flow basis overall, I think our free cash flow margin, excluding the Section 174 impact is, I'd say the range is in the, you know, kinda 18%-20% margin range. More in the mid-teens range and including the impact of the Section 174 change, it's kinda high single, low double-digit free cash flow margin. The impact's pretty meaningful this year. Your next question comes from Saket Kalia from Barclays. Your line is open. Okay, great. Hey, good morning, Lynn. Good morning, Brian. Thanks for taking my question here. Brian, maybe for you. appreciate the additional disclosure, I think on SaaS bookings ARR. I think that was what we called in the supplement. I think that grew mid-single digits this quarter off of a very tough compare. I was just wondering if you could just talk a little bit about how that sort of how you sort of think about that trending through the year, and maybe just introduce us to that metric a little bit. just relatedly on disclosure, can you just talk about some of the other changes here? Like, I think appraisal, you know, is a metric that we used to get before. I think that's gotten consolidated somewhere else. Just talk to us a little bit about some of the disclosure changes here and what you want us to focus on in terms of the new. Yeah. Appraisal is certainly a much smaller piece of our business, appraisal services. It's an important service that we provide often to customers that we also have sold or will sell a property tax system to. It's, you know, now well under 2% of our revenues. We've consolidated that line into the professional services line. And again, the focus, as you've seen from some of the things we've talked about, really it's around subscriptions, revenue growth, recurring revenues. We've given some detail breaking that out between the SaaS revenues and the transaction-based revenues, which would be things like payments, our Digital Solutions portals, e-filing, those sorts of things. In the SaaS bookings detail, you're correct, it grew sort of mid-single digits. That's really just referring to basically new logo SaaS deals. There's additional SaaS bookings in the upsells, pricing increases, inside sales of additional products to existing customers. The metric we really think is important is the bookings growth number for subscriptions overall, which are the transactions and SaaS revenues, and that was 23.6% this quarter. Your next question comes the line of Peter Heckmann of D.A. Davidson. Your line is open. Thank you. Good morning. Just a couple quick questions. You've done a fabulous job of reducing net leverage, post the acquisition of NIC. How are you thinking about the potential for M&A? How does that landscape look, as well as valuations? Then, you really have focused mainly on deleveraging and not so much on the share repurchase plan. I mean, what are your thoughts there in terms of resuming share repurchase at some level of net leverage? Yeah, sure, Pete. I think, you're right. Our focus still continues to be reduction of debt. You know, that's our primary focus with our use of capital. It's interesting, our term debt now is getting closer to 30% of our overall debt. It started off more at 65%, so about a third. We've kind of flipped that model. We still look at M&A. We still evaluate a lot of M&A opportunities. Clearly, we just did this Rapid Solutions deal last fall. You know, if we see an opportunity like that where we really believe in the long-term strategic value, we're gonna pursue it. I think that's been our take really even when we had a lot higher net leverage profile. You know, that being said, you know, we've got a lot of initiatives going on at Tyler, and we've got a lot of our hands full with a lot of different things. I could see us continuing to do acquisitions like Rapid, but in terms of a larger sort of, more transformational or entering into a whole new space, that's probably not on the near-term horizon. Question comes the line of Charles Strauzer of CJS Securities, Inc. Your line is open. Hi. Good morning. Brian, on the last call, you talked about Q1 being, you know, similar to Q4, in terms of the EPS, but a big ramp in Q2. you know, with the full year guidance essentially unchanged, you know, should we assume that the ramp in Q2 will be less, you know, given that Q1 results were better than expected? I think, you know, We'd still be in the same range for the full year. I'd say we're increasingly confident of that range, and we may be trending a little bit more to the upper end of the range at this point, although it's still early in the year. I think that, yeah, maybe the ramp is. I mean, I think we were still in the ballpark. We did $1.66 last year. We did $1.76 in the first quarter. I think that jump up into Q2 and Q3 and Q4 would be maybe a little less pronounced. Again, we're in the pretty much in the same range. Of Michael Turrin from Wells Fargo Securities. Your line is open. Hey, great. thanks. Good morning. Appreciate you taking the question. The commentary around the demand environment, RFP volume has remained consistently upbeat. Realize there are some moving pieces, the organic growth number of 7%, towards the lower end of the target range. Can you just help us square those things? What is the organic growth number not entirely reflecting relative to demand backdrop, whether it's pipeline bookings or just general mix and transition impacts? Any context you can provide just around your view on that number is helpful. Thank you. I'll take a stab at that. I think most of it's around the lag between the time that we sign a new deal and when revenues start to hit the income statement. When we've talked about our, you know, our SaaS bookings over recent quarters and this quarter in particular being very strong. There's typically a lag, whether it's a new software deal where it might be one q uarter to two quarters, maybe a little bit longer, lag from the time we sign the contract to when the client is environment is set up and we're able to start recognizing revenues. In a really the same sort of things in many of our transaction-based revenue contracts, we sign a new deal for payments, for example, and there might be a, perhaps a quarter or so lag between the time those revenues start to get recognized. At the same time, we see the impact of lower licenses immediately because if those were license deals, we would have recognized all that revenue, or the majority of that revenue pretty much upfront when the very soon after the contract's signed. That would be the biggest factor there. It's the same thing with flips from on-prem to the cloud. We may sign it now, but there's a period of time where that transition takes place, so we don't get the uplift in the revenues immediately. Your next question comes the line of Jonathan Ho from William Blair & Company. Your line is open. Hi. Good morning. Can you talk a little bit about the Data and Insights opportunity that you referenced in the script and, you know, perhaps, you know, what kind of upsell opportunities you're seeing in and around that product grouping? Thank you. Jonathan, I think, I mean, Data and Insights is something that I, you know, when I look out in the future of public sector, that to me is an offering that I can see every single public sector agency needing. It's a very unique offering. We're in a unique position given our large footprint and our ability to surface data across so many different solutions, not only our owns, but even non-Tyler solutions. I think it's something that... Look, we made that investment now five, six years ago, I think we're starting to see more and more demand for it. What we've also seen is internally, we've actually sort of deconstructed the DNI former division within Tyler, and we now sort of have it integrated with each of our divisions so that we're aligning more product with the individual demand. It's something that, you know, I think is a differentiator for us. I think it's always been a differentiator for us. We've seen it even in the last year or so, it's been a differentiator for NIC. When we talk about, you know, a year ago, we were talking about the South Carolina rebid or the early the early renewal of the Texas payments contract. Those were done in part or primarily, or a major factor was our Data and Insights. It's something that we're gonna continue to leverage. I think we're in a unique position with it. It's something that the public sector really needs. Your next question comes to the line of Rob Oliver of Baird. Your line is open. Great. Thanks. Good morning, guys. Brian, one for you. I know last quarter it seemed like a couple of big deals had slipped out of the quarter, and, you know, the deal sizing I think was a bit more moderate. Just curious if you saw some of those deals close this quarter, and what you're seeing in terms of deal sizing. And then just a quick follow-up. So just on the free cash flow, just to understand that better, is that? You know, is the impact there all of the catch up from 2022 or is there anything else on the tax side that's impacting free cash flow? Thank you. Apologies. Yeah. For the laryngitis here. On the free cash flow, that impact is really pretty much all from the catch up of Section 174, and it's a complicated calculation that's still evolving, the overhead you have to add into it and some of those things. The impact is higher than we initially expected, particularly related to the 2022 amount. The average deal size this quarter was a bit bigger than the average deal size in the first quarter of last year. A couple of those deals that we referred to, and we always have deals that slip from quarter-to-quarter. With the subscription model, it's less impactful. We did have a couple of license deals that, we talked about, in Q4, that we referred to, not by name, that did close this quarter. We had two really nice license deals, with the, for our property or recording product, with two large counties in North Carolina, Wake County and which is Raleigh, and Mecklenburg County, which is Charlotte. We had a nice public safety deal with the Virginia State Police that closed this quarter as well. Generally we've seen those deals that, the timing, shifted a bit. We've seen those, come in. Your next question comes the line of Gabriela Borges from Goldman Sachs. Your line is open. Good morning. Thank you. I wanted to follow up on some of the commentary on margin expansion. Lynn and Brian, as you think about the longer term trajectory for margins, I know you've given us some qualitative color and a little bit of quantitative color as well. Is your expectation that margin progression after this year is likely to be linear, or do you see a period of time when maybe there's an accelerated trajectory for margins? Thank you. Yeah. Gabriela, I don't expect it'll be linear and certainly margins and our targets and broadly how we view the trajectory will be one of the topics we'll be looking to address at the Investor Day. Things are rarely linear. I do think around the timing of flips over the next few years as we accelerate the move of our clients from on-prem to the cloud, the timing of, you know, if that's a J curve or an S curve or how that works, will be a factor in that margin trajectory. I think we're more certain around the timing of the closing of our data centers. We've talked about that in 2024 and towards the end of 2025, closing those two data centers and being able to reduce those bubble costs. Those will have more of an impact in those years. Really can't give much color beyond that right now, but it is something we'll continue to refine our outlook for and we'll be talking about margins will certainly be a significant topic at Investor Day. Yeah. Of course, you know, as we grow out through Tyler 2030 and we talk about our growth in our SaaS and our flips, at the same time, we're actively growing our transaction business and our payments business, which will have a, you know, somewhat of a negative effect. Depending on the growth rates between those two businesses, will have some impact on overall margins. Your next question comes the line of Keith Housum of Northcoast Research. Your line is open. Good morning, guys. Hey, Brian. I know in quarters past, we talked about the servicing revenue and the, you know, staffing up with that unit. Can you perhaps talk about the staffing levels you're currently at? You ever satisfied them? If you have those people now, they're actually able to contribute to the bottom line? I think we've continued to hire new staff and as well as are seeing attrition flow, which is not surprising, given some of the shifts in the broader employment markets. As we've talked about over the last few quarters, we've added new people, new classes on the pro services side, and those people are becoming billable. I think you'll see in Q2 and beyond, you'll see more of the impact of that. We will likely see nice growth in services revenue, which will also help lead, most importantly, to us bringing subscription revenues or SaaS revenues online at a faster pace. I think you'll start to see that, really the impact of those people becoming fully billable in Q2. I think we're pretty well on plan with our efforts to staff up to the capacity we wanna have. Yeah. I think to be clear, you know, we've talked historically over the years about services and our margins on services. You know, services historically is not accretive to margins. We've talked in the past about it maybe even break even or really more of a loss leader. That's likely not to change going forward. I think when I talked earlier about intentionality around other things that we're doing within the business, part of that is things around what we can do to minimize the negative impact of services on overall margins. Your next question comes from line of Clarke Jeffries of Piper Sandler. Your line is open. Hello. Thank you for taking the question. Brian, I just wanted to ask, was there a restatement of SaaS revenue in 2022? As I just looked at Q4 as an example, it seems like we were talking about $110 million last quarter, and now it's $120 million supplemental. Was there any change here? There's a very small reclass, I think, of some revenues from transaction revenues to SaaS revenues. Getting those kind of in line with our current recording. Not a significant one. That's reflected in the supplemental data. Your next question comes to line of Joe Goodwin of JMP. Your line is open. Great. Thank you for taking my question. I guess, Lynn and Brian, you know, how different at the product or technology level would you say the current payment portfolio is? NIC, Rapid, everything you have there now that is, you know, built for governments versus other players in the space. Would you say you differentiate, you know, beyond your existing relationships and market presence? Or is there some differentiation on the technology level as well? Yes. We believe the technology is meaningfully differentiated from the more horizontal payment providers. That whether it's the different types of payment channels we can offer, now really robust disbursement capabilities adding to the payment acquiring side. Then really around the reporting, the integration to Tyler's back-end systems that makes reconciliations easier, that makes the client's job easier. It's a meaningful differentiator for us. In fact, it enables us in many instances to be to have really solid pricing and in some cases premium pricing because we provide additional value around that. Rapid was a nice addition to those capabilities. NIC already had very robust capabilities and continues to invest in that payments platform and enhance those. Today, we have a lot of processes underway to further integrate that payment platform into the Tyler back-end systems to create more and more of a competitive edge because of that integration. Yeah. John, I think you can expect at the Investor Day in June for us to provide a little more color, maybe even a little more detail around some of those topics, specifically the topic around differentiation and in the market and what we you know why we're different and the opportunities that we have in front of us. Your next question comes the line of Kirk Materne of Evercore ISI. Your line is open. Yeah, hi, guys. Just to follow up, Lynn, your comment on sort of payments, and maybe I guess I'll drag Brian into this as well. Just on the gross revenue recognition, I assume you all have no real ability to pick which one you want to go with. Meaning I assume net would be easier, but I assume your grosses are required by accounting rules. Is there a certain scale that payments gets to that where the drag from a mix shift perspective becomes less? Meaning Brian, I appreciate you calling out the 100 basis points this quarter. you know, should we expect that to get incrementally better as it just grows in scale? I was just kinda curious about, if there's any flexibility to maybe get to net and then, you know, sort of how we should think about sort of the drag as that part of the business gets bigger. Thanks. Yeah, there's not really a lot of ability to pick and choose how it's accounted for. The difference is really whether we assume the responsibility and the risk for paying those merchant fees and interchange fees, which can vary depending on the type of credit card, whether it's Amex or Visa, whether it's a business card or a personal card. In most cases, our clients prefer for us to handle that so that they know what their fee is. We have a percentage of the transaction that we charge, you know, let's call it 2%. We pay out the merchant fees and interchange fees, and those might be, say, 1.75%, but they can vary around that number. Generally, we also get a per transaction charge as well. We do get a margin on the merchant fees, but it's a pretty slim margin. We also get a transaction fee generally. In a net model, the customer has chosen to pay those merchant fees, interchange fees directly. We're just getting a generally a per transaction charge for the services that we provide. In most cases, the client prefers for us to take that risk, but if we are paying those fees, then we have to do gross accounting. We think it's important, even though there is some margin on those, that we sort of put it back to give you what that impact is on a net basis. If you take those fees out, as we talked about, if you take those out of both revenues and expenses and just sort of leave what we keep, it's a 200 basis point overall operating margin impact on Tyler as a whole. Depending on how fast those grow relative to the rest of Tyler, that impact could be bigger or could be smaller. And that's one of the reasons why we would expect to continue to sort of give you those numbers to, so that you can see the impact of and how that might be trending over time. Yeah. Just to be clear, Kirk, the, it is customer driven, as Brian said. The gross model, while lower margin, actually produces higher free cash flow. It's a benefit to our free cash flow. That was the last question we had for today, so I'd like to hand back to Lynn Moore for closing comments. Thanks, Gavin, and thanks everybody for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Have a great day. That does conclude our conference for today. Thank you for participating.