Thank you, Rob, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. After I give the Safe Harbor statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and update our annual guidance for 2024. 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 those projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks.
Also, in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We have also posted on the Investor Relations section of our website, under the Financials tab, schedules with supplemental information, including information about quarterly recurring revenues and bookings.
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 corresponding period of last year unless we specify otherwise. Lynn?
Thanks, Hala. We carried our momentum from the first half of the year into the third quarter and delivered remarkably strong results. The quarter was highlighted by strong top and bottomline performance even as we saw a more pronounced shift towards SaaS and our new software contract mix, particularly in public safety, where expected on-premise license deals shifted to SaaS contracts in the quarter resulting in license revenues that were below plan. SaaS and transaction revenues fueled our growth and both exceeded our expectations. Our non-GAAP operating margin expanded to 25.4%, benefiting from our cloud efficiency initiatives and improved professional services margins, and free cash flow reached a new quarterly high.
As we've discussed in the past, our progress towards our 2025 and 2030 targets will not be linear. But our results through the first nine months of this year bolster our confidence in achieving those targets. We are beginning to see benefits from our cloud operations initiatives with efficiencies reflected in our results somewhat ahead of plan. Recurring revenues grew 12.1% and comprised 85% of our total revenues. Our SaaS revenues growth of 20.3% represents our 15th consecutive quarter of SaaS revenue growth of 20% or more, consistent with our target of a 20% CAGR in SaaS revenues through 2025.
The public sector market remains robust, supported by healthy budgets and an increased focus on modernizing aging mission-critical systems through cloud adoption. The strong market activity we've discussed for the past few quarters along with excellent execution by our sales teams, is reflected in our new software bookings this quarter with our new SaaS contract value of approximately $105.6 million, up 78% over last year. Our leading market position, anchored by our deep domain expertise and large installed base forms the foundation of our long-term strategic focus on four key growth drivers: executing our cloud-first strategy, leveraging our unmatched installed base, expanding into new markets and growing our payments business. Our cloud-first strategy is a pivotal driver of our success and continues to shape our future in our cloud living culture. We are leading with cloud across our product portfolio as the public sector market continues to embrace digital modernization and choose Tyler's next-generation cloud solutions.
Additionally, we've made substantial progress with our cloud optimization efforts, driving efficiencies and scalability while also making solid progress on version consolidation to further accelerate on-premise client migrations and enable clients to easily expand their mission-critical applications in the cloud. The pendulum is continuing to shift to the cloud with both new and existing clients, and we are seeing a growing trend of client-driven SaaS adoption. This is especially apparent in areas that have previously lagged the rest of our market in terms of cloud adoption, most notably the public safety market along with the state and federal market with our application platform. Overall, SaaS arrangements comprised 97% of our new software contract value in the third quarter. For the second consecutive quarter, 100% of our public safety new contract value was SaaS compared to only 28% a year ago.
It was also a great quarter for flip signings as we signed a total of 108 flips of on-premises clients. The total contract value from flips was more than triple that of last year's third quarter, and the average ARR of flips rose 37.2%. Our courts and justice business was very active in the third quarter. Our largest deal in the quarter was a contract with Kentucky Court of Justice for Enterprise Justice suite, including case manager, e-filing, and court analytics in addition to payments. The initial six-year term represents $35 million in total contract value, although only $10.6 million was recorded in bookings in backlog this quarter due to contract provisions.
ARR starts at approximately $2.5 million and grows to $6.5 million in year six, in addition to payments processing under a gross revenue model. Of note, the first six years of SaaS fees totaling $29 million was prepaid in October using ARPA funds. Other successful Tyler court clients and in particular, the North Carolina Administrative Office of the Courts served as strong references in this competitive sales process that span more than 12 years. Kentucky is our 17th statewide courts client and our third statewide enterprise justice solution deployed in the cloud.
We also signed a three-year $9.6 million SaaS contract for our Enterprise Justice suite with the Phoenix, Arizona Municipal Court. That agreement includes a cooperative master purchase agreement provision that enabled the Arizona Supreme Court to designate Tyler as a preferred software provider for all 170 courts in the state, including superior, justice, and municipal courts, with the alternative option being the state's aging legacy system. We're excited about the opportunity to expand our partnership across Arizona courts with significant potential ARR.
Other notable third-quarter SaaS deals include a $12 million, five-year contract with the city of St. Petersburg, Florida, the fifth largest in the state, for enterprise permitting and licensing and enterprise ERP utility billing solutions along with payments. We signed six SaaS contracts for our enterprise public safety solution, including two of the fastest-growing cities in the US, the City of Frisco, Texas Police Department for $750,000 in ARR, and the City of Round Rock, Texas police for $730,000 in ARR.
Central to our growth is leveraging our unmatched installed base and expanding our addressable market through strategic cross-sell and upsell activity that unlocks significant expansion opportunities with both new and existing clients. A key cross-sell win this quarter was a multiyear strategic contract with the Texas Office of Court Administration for our Texas Connected Justice Data Cloud. This includes alliance exchange, enterprise data platform, open data platform, and our digital solutions division's engagement builder platform. This integrated solution captures real-time online data across every jurisdiction in the state. This multiyear engagement exemplifies our connected communities vision by creating a digital infrastructure for data sharing and decision-useful business intelligence and reporting.
The contract adds $1.5 million in ARR and is the first of its kind in a large population state, paving the way for additional add-on opportunities. Another significant cross-sell win was a contract for the modernization of 18 different boards with the Illinois Department of Financial and Professional Regulation for our state regulatory application platform suite which also brings in augmented field operations, formerly ARInspect. The three-year contract leveraged our Illinois state enterprise agreement and represents $9.2 million in total contract value, with a seven-year option that adds $12.5 million in total contract value. We're pleased to see an increasing number of our clients modernizing their enterprise solutions using our application platform.
Driving payments adoption of our differentiated payments business is another key element in our growth strategy. In the third quarter, we signed 268 new payment deals across Tyler software clients, representing approximately $8.6 million in projected ARR. Riverside County, an existing property and recording software client, is our first enterprise payments win in California. This collaborative effort expanded from initial property and recording payments contracts to processing payments for more than 10 agencies across the county, which is the fourth most populated county in California.
In our enterprise portal business, we secured extensions for our digital government and payment processing services in five states, which includes winning competitive rebids for state enterprise portals in New Jersey and Indiana. We also expanded our scope with the state of Indiana to include resident engagement identity proofing for approximately $1 million in additional ARR.
This builds on Tyler's chatbot front-end technology recently deployed representing the first AI project for Indiana and its residents. This solution was provided through a joint effort with our AI task force and our Indian state enterprise team in collaboration with the Indiana Office of Technology.
Now I'd like Brian to provide more detail on the results for the quarter and our updated annual guidance for 2024.
Brian Miller
Thanks, Lynn. Total revenues for the quarter were $543.3 million, up 9.8% and organically grew 9.4%. Subscriptions revenue increased 17.6% and organically rose 17.3%. Within subscription, SaaS revenues grew 20.3% to $166.6 million and grew organically 19.7% against a tough comparison with last year's third quarter. Keep in mind that there's often a lag from the signing of a new SaaS dealer flip to the start of revenue recognition, they can vary from one to several quarters.
Because of this, as well as the timing of SaaS renewals and related price increases, SaaS revenue growth both year-over-year and sequentially may fluctuate from quarter to quarter. Transaction revenues grew 15.2% to $180.5 million, driven by higher transaction volumes from both new and existing clients, including the August go-live of the California Department of Parks and Recreation. SaaS deals comprised approximately 97% of our Q3 new software contract value compared to 80% last year. During the quarter, we added 181 new SaaS arrangements and converted 108 existing on-premises clients to SaaS, with a total contract value of approximately $141 million. In Q3 of last year, we added 161 new SaaS arrangements and had 79 flips with a total contract value of approximately $71 million.
The average ARR from new SaaS contracts increased 38% over last year. The average ARR associated with our Q3 flips increased 37% over last year as larger clients such as Cobb County, Georgia and Providence, Rhode Island flipped to the cloud. Our total annualized recurring revenue was approximately $1.85 billion, up 12.1% and organically grew 11.8%.
We entered 2024 expecting operating margin expansion after experiencing the margin trough from our cloud transition in 2023. Our non-GAAP operating margin in the third quarter was 25.4% up 60 basis points from last year. The margin expansion reflects the impact of our cloud efficiency initiatives, along with effective operating expense management and improved professional services margins. As we discussed on previous calls, merchant and interchange fees from our payment business under the gross revenue model have a meaningful impact on our overall margins as they are passed through to clients and are included in both revenues and cost of revenues. We incurred merchant fees of approximately $42 million in Q3 compared to $36 million last year.
Because of strong earnings and effective working capital management, both cash flows, operations and free cash flow reached new quarterly highs at $263.7 million and $252.9 million respectively, with free cash flow up 55.5%. Cash flow in the quarter was positively impacted by the deferral to the fourth quarter of approximately $14 million of federal tax payments.
We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $548 million. Our net leverage at quarter end was approximately 0.1 times trailing 12-month pro forma EBITDA. In September, we replaced our existing $500 million unsecured revolving credit facility with a new facility that matures in 2029, increasing the size to $700 million in improving terms. This new revolver further improves our available liquidity and provide us with maximum flexibility to address potential financing needs. Our updated 2024 annual guidance is as follows: we expect total revenues will be between $2.125 billion and $2.145 billion.
The midpoint of our guidance implies organic growth of approximately 9%. We expect that merchant fees will be up approximately 7% over last year and that implied organic growth, excluding merchant fees would be approximately 20 basis points higher. We expect GAAP diluted EPS will be between $6.13 and $6.28 and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $9.47 and $9.62. We expect our free cash flow margin will be between 21% and 23%, including an estimated impact of approximately $54 million of incremental cash taxes related to Section 174. Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website.
Now I'd like to turn the call back over to Lynn.
H. Lynn Moore
Thanks, Brian. As we close out another strong quarter, I want to highlight the consistently high level of execution and collaboration across our teams, which is even more critical to our ongoing success as we leverage a fully enabled cloud infrastructure to deliver continuous innovation and enhanced client experience. The strength of our One Tyler team is rooted in a shared commitment to excellence and to our mission, vision and values, which drives our ability to execute at high levels. During the quarter, we were recognized by Newsweek as one of America's greenest companies, placing us among the top 500 greenest companies in the United States based on environmental sustainability. We were also named the Newsweek's America's greatest workplaces for parents and families 2024 list.
We're gratified by this recognition of our commitment to fostering a strong inclusive culture with a healthy work-life balance and high-quality benefits. Now we'd like to open up the line for Q&A.
Great. Fantastic. Lots of momentum this quarter on the cloud side. I wanted to maybe dive into that 3x on the TCV of flips up to $36 million. Lynn or Brian, do you think this is a new run rate? Or is this just more of a one-off quarterly dynamic here?
Brian Miller
As we said, these can be a little bit lumpy. This was a strong quarter with some larger flips, but that's a trend that we're seeing, more of our larger customers that have been slower to flip to the cloud, more complicated projects are now starting to move at a faster pace, and the progress we've made with version consolidation over the last couple of years has also helped get us in a position to facilitate that as more of those customers are now on current versions of software and have gone through that upgrade process to put them in a position to move to the cloud.
So I think as we've said in the past, we should expect to continue to see growth in the flip volume and the size of flips, and we sort of envision a bell curve-shaped trend of those over the next three or four years, and we're still kind of moving up the left-hand side of that bell curve. But it could be lumpy from quarter to quarter. But generally, we expect to continue to see the flips growth to achieve the targets we set out for 2030 of 80% to 85% of our on-prem base having moved to the cloud by then.
H. Lynn Moore
Yes. Just to amplify, Ken, Brian is right. It will tend to be lumpy. I don't think I would model this as our quote new run rate which was your question. But we do expect to see this continued momentum.
I'd be curious in terms of what you saw of sales linearity throughout the third quarter and maybe into October? And are you seeing at least lately any pressure of maybe decisions not being made until after the election? Or any impact there? But maybe just overall, what you're seeing in terms of demand linearity?
H. Lynn Moore
Yeah. That's a good question. We're actually not seeing any slowdowns or hesitations due to the election. Generally speaking, when you look across all the business units at Tyler and particularly at our flagship products, most of our divisions are either at or exceeding their sales plans for the year. And so that has been good. The things that we've been talking in the past couple of quarters have continued. And so we're not seeing any slowdown at this point or any pauses due to any macro factors or the election.
Brian Miller
And really not any changes in linearity, we tend not to be super back-end loaded within quarters, and I don't think we've seen any change in that.
Lynn, I had a question about the incremental competition during the quarter. Are you seeing more pressure from players like ServiceNow and intelligence and analytics in Workday and ERP? Or have those competitors subsided as demand in their core markets begins to recover?
H. Lynn Moore
I think generally stepping back, the competitive landscape has been pretty neutral throughout the year. I wouldn't say there has been any significant increased competition or any decreased competition. As you know, all of our -- I think when you look at our -- the subverticals like ERP, we certainly see more competition from players that are more horizontal players like Workday. We see them -- I don't know that we see them a significant amount more than we have in the past. When you talk about ServiceNow and our -- against our platform solution, we see them in that space, but we're kind of a different offering. And a lot of the things that were -- the application platform plays best is are areas where ServiceNow is really probably a little bit bigger and heavier.
So overall, I think the competitive landscape is generally the same. I think our -- when I look at win rates, they've generally been consistent and were consistent in Q3 with what we've been experiencing over the past several quarters and probably a couple of years.
Alexei Gogolev
And Brian, a quick question on 2025 guidance that you've provided last year. Directionally, would you be able to suggest that you think you could see topline growth acceleration next year versus this year. And how are you thinking about free cash flow margin that you provided considering the net working capital improvements that you've just reported?
Brian Miller
Sure. Well, we're obviously not ready to give our '25 guidance yet, and we're in our planning process and kind of in the early stages of that. I think what we've talked about is that we're probably a little bit ahead of where we targeted 2025 along the path to our 2030 targets. But we said it's not linear. And being a little bit ahead doesn't necessarily mean where we finish up '25 or 2030 will be significantly ahead of those initial targets.
So we're confident around those. I think specifically on the cash flow side, we're certainly well ahead of that. We're above where we targeted 2025 already. There are some things that have been affected this year that are a little bit more one time. But I think generally, this would be a level we'd look to build off of for 2025. So I do expect that '25, our cash flow will be at least kind of consistent with where we are this year.
Great. On the transaction business, ARR that are meaningful, we're used to seeing that may be down sequentially in 3Q, and it was up this year. I know you had a comment on a go live, but anything else you'd point us towards and drivers of the transaction revenue base? And is the seasonality there at all changing?
Brian Miller
I don't think there's really a change in the seasonality. And typically, the last half of the year is slower in terms of volumes. But that has been offset really by a couple of things. One is the revenues from new payment clients that we've added over the course of the last year, we've been disclosing those numbers. And consistently close to a couple of hundred this quarter, significantly above that in terms of the number of new payments customers that we're adding within our software client base.
And we're also having better experience in getting those clients live faster and getting those revenues flowing faster from the time we sign them to the time that they're onboarded, and that's having a positive impact. And then within the transactions business in general, what we alluded to in terms of some new customers to the California State Parks contract that we signed late last year went live this quarter. That added about $3 million of revenue, although it wasn't a full quarter impact. Various things like in Florida with our payments contract the Florida turnpikes with SunPass went live during the quarter, and that added a couple of million dollars of new revenues.
So it's really a combination of new business as well as increased volume. So we're seeing greater adoption through our client base, and we're working with our clients to help them get more of their citizens doing things online and running through our systems.
H. Lynn Moore
Yes. And to amplify that a little, Michael, I mean, Brian is right. We are starting to experience -- we're learning better. The onboarding efficiencies is bringing revenue recognition faster, which is great. The California State go live, I want to emphasize that for a minute because that's a big deal.
I mean, we signed this contract late last year. In less than three quarters, we were up and live. And remember, this is the largest contract in Tyler's history. And we've talked about this sometimes on the call, and it gets lost sometimes in the numbers. But really, the secret sauce of Tyler is our execution. And it's our sales execution. It's our implementation execution, it's our support, it's management. And it just -- it takes a lot to do what we do.
And we signed over 200 new deals, 100 flips a quarter. That's a lot of business that's going on, and it's the work of our teams and the execution is what provides that referenceability that keeps the engine running. And to get a big go-live in California to go basically on time and on budget is really a great accomplishment for our teams and sets us up not only well to execute on that contract, but then to -- for others to look at that success and duplicate that in other jurisdictions.
Michael Turrin
That color is all super helpful. Just a small follow-on clarification, if I may, on the prior question. I think the primary question we're getting is just on the free cash flow performance. So Brian, just in summarizing some of what you said previously, it sounds like, is there anything you could do to help quantify anything that would fall into the more one-time basket. And it sounds like while you're not updating 2025 targets here, there's no reason to expect margin to go down next year relative to what you're delivering. You're just kind of working through plans. Is that the right takeaway for us at this point?
Brian Miller
Yeah, I think so. We're kind of at a little bit higher level than we had initially planned. I don't know that we would grow in terms of a margin significantly from where we are right now. But again, that's ahead of where we plan to be. The biggest one-time thing, which really will be reflected in the fourth quarter that's reflected in our full year guidance, is what Lynn mentioned around the Kentucky courts contract where they are prepaying or prepaid in October, six years of SaaS payments. So there's a $29 million bump.
That's not a typical situation that we see. We're happy to accept that payment, but it's not typical. So that's the biggest one-time thing we're seeing that pull forward.
It's great to hear the call out from my home state, Kentucky, multiple times. I have one question. It's a multiparter though. I think, Lynn, you've talked in your prepared remarks and it's in the press release around cross-selling success. What I'm curious is have you done things go-to-market kind of organized to kind of drive more of that pattern recognition? And what are some common plays you see for kind of the cross-selling? Like what product in particular seems to stand out?
And then the second part of this question is the reality there's another milestone here for cross-selling success once you get these flips kind of stood up and so maybe we could see a step-up even in more cross-selling once they're kind of stable on new kind of cloud technology?
H. Lynn Moore
Yes. Good questions, Terry. I'll start with the second one. The answer to that is, yes. I think part of the part of the equation of doing flips is it brings actually the uptake. We call it more upselling. But yeah, that is part of that equation. And I do think it's something. It's another opportunity for us to be in front of the client. Another opportunity to add additional products as they're making another decision.
On cross-selling, there's a lot of things that go into that. And I would say things that we have done internally over the last year, 12, 18 months have played a significant role in that. I've talked -- I think I've talked about that on some prior calls, things that we've done around how we comp our sales people, how we comp the different divisions, what that basis is. And we've moved to a more of a One Tyler compensation level so that basically, if there are multiple divisions that are contributing to a sales process, we don't have to fight over who's getting the credit because the credit, it shouldn't really matter, it's Tyler wins.
And so we've done things internally that I think have broken down internal barriers that have just sort of, I think, grease the wheels a little bit more. In terms of product suites, it's funny, yeah, some tend to go a little bit more than others. Sometimes you may get some courts and justice products that tie well to our public safety products. Sometimes, for example, we did a significant deal this quarter in Kenosha, Wisconsin. That was our ERP full suite.
It would also include enterprise, appraisal and tax including our municipal justice. Big integrated story, Gartner-led procurement about $1.6 million in ARR. So while there are products that sort of sometimes naturally seem to go together, our integrated story and the Tyler story tends to also sometimes bring products together in deals that you might not necessarily think on the face of it that, that would have been an inclusive sale, but we're seeing that. We also saw that in St. Petersburg, Florida.
I think I mentioned that in my prepared remarks. That was enterprise permanent license, but it also brought in our utility billing and payments. That was almost a $2 million ARR deal. So we're seeing progress and a lot of it is the result of some internal initiatives, and it's just the more success we're having in the market and selling that sort of integrated story of Tyler is resonating.
So after being at the IACP event here, one of the topics that came up was where customers are at in terms of version consolidation. Just wanted to get an update on some of the key product areas where we are at with that. I believe public safety is at around 30%, which might get a bit behind some of the other larger products? And how do you think about the benefit to margins over the next several quarters as you get more up-to-date there?
H. Lynn Moore
No, good question, Josh. I think I talked about on the last call, version consolidation is a big piece of what we call Phase 1 of our cloud transition. And each of our flagship products have been going at different paces because they have different starting points. I would say, generally speaking, sitting here in the fall of 2024, I'm pleased with where we are at version consolidation. I think we're ahead of where I thought we would have been looking back two or three years ago.
And some of our products, this is a heavier lift. But if you look, for example, at our courts and justice, our enterprise justice solution, you look at our enterprise ERP solution, we have an overwhelming number of clients now that are down to one or two versions, far removed from the days of having five, six, seven versions out in the field. I think that's part of what you're seeing with our outperformance this year. We talked about our margin outperformance being driven in part by some of our cloud efficiencies. Those cloud efficiencies are -- our products are getting more optimized to be run in AWS.
But we're also seeing the benefits of that version consolidation. It takes a lot less people to maintain and support fixed bugs on a single version or even two versions than six or seven versions. And that's part of what we're looking at when we start talking about Phase 2 of our cloud strategy, which is what we call cloud living. It's getting all of our clients onto that single version, getting them on really short release cycles, less disruptive, large versions out in the field, higher client set. So I think we're making really good progress there.
I do expect that to continue to help gross margins as we look towards our Tyler 2030 goals, that's where some of that gross margin improvement is going to come. And again, I'm pleased with where we're at right now on version consolidation.
Lynn and Brian, I wanted to ask, given your experience in the space, we're clearly in a really healthy part of the budgeting cycle and the willingness to spend cycle across state and local governments. How should we be thinking about the sustainability of some of the healthy demand that you're seeing. And maybe just level set us on the ARPA funds, how much of a benefit do you think that you're seeing today versus how much could you see in 2025 and 2026 as the funds that are committed to actually get spent?
H. Lynn Moore
Yeah, Gabriela, I think overall, I mean, budgets have been at a pretty good level for, I'd say, a couple of years now. And I can't predict what's going to happen three or five years from now. I can't even predict what's going to happen in two weeks with the election. But I think our outlook right now and what we're seeing in leading sales indicators is we see that continue -- that level staying for the foreseeable future.
Our RFP counts, our demo counts, all those leading sales indicators are strong and are consistent with prior quarters and really the last couple of years. And so those are really the data points that I look at most. I'm sorry, I forgot the second question.
ARPA funds have been an interesting topic over the last several years. There are certain deals that were clearly driven by ARPA funds. We talked about the Kentucky enterprise justice deal where they prepaid that all up front. We also had a significant deal, the Arizona Supreme Court deal that I mentioned in my prepared remarks was also funded by ARPA funds.
We don't always know and we haven't always known when ARPA is the trigger and what we've said over the past, sometimes, it's not the direct trigger, but it may have freed up other opportunities. There has been a hesitancy sometimes in our business to use ARPA funds given the recurring nature. They sometimes tend to have been used more on one-time things. We saw that sort of in our student transportation business, maybe for a large purchase of hardware, something like that. I think they've been helpful over the last few years. I don't think that has been a major tailwind to growth in sales. That's not what we're hearing from our sales folks.
Brian Miller
But those do -- until the end of '26 to spend those dollars. So some of those things that ARPA funds will be used for may not even have started. They may have been committed but internally, but haven't even started the buying process. And just, for example, like with the Kentucky deal, even though they're using ARPA funds to pay six years of SaaS, that was a 12-year sales process from the time we started talking to them. So the deal didn't materialize because of ARPA funds, but it affected -- so we wouldn't say that, that deal just happened because of ARPA and wouldn't have happened without it, but it certainly benefited the timing of it.
Lynn, maybe for you, just to hit on a little bit of a different topic. Tyler's services has always been really important for your government customers. But it has been interesting to see that business over time grow just a little bit slower than the rest of the software business. So maybe the question is, could you maybe speak to how the services intensity in the business is changing as Tyler becomes more of a SaaS company, and maybe relatedly, Brian, for you, maybe touch on how that impacts margins over time.
H. Lynn Moore
Yes, that's a good question. And actually, I'll start a little bit, too, with what you asked Brian, is part of our outperformance this year has been our services gross margins. And that has been something that we have focused on at a management level over the last couple of years, and you're starting to see some of that. So a good management focus and attention. It's also been a function of the labor market.
So the labor markets have really stabilized. We're seeing a lot less turnover and high turnover in our services areas creates a lot of inefficiencies. It takes a long time for people to get onboarded, up to speed and out and billable. But we've had some other internal initiatives that really help drive those professional services. As we look out over the next several years, I would expect our services to remain relatively flat.
In fact, next year, they may actually decrease a little bit. That's a function of a couple of things. I think it is a function of efficiencies and how we can onboard clients. We've done some internal initiatives around that. It's also a function of in our -- some of our really large implementations, like in courts and justice and a lot of customization work.
We're moving away from that. We don't have as many of those on the horizon and the whole concept of clients having one-off custom applications is something that we are moving. It's part of our cloud living goals as move forward. So it's a number of factors there. It is something that has been a focus of it. But you're right, it has been declining as a percentage of revenues. And as I look out, I would expect it to stay flat to decline as compared to other growth in our revenue lines.
Brian Miller
Yeah. So just as Lynn said, less services in the mix. Services are lowest margin, and in fact, historically, have had a negative margin. So the combination of less services in the mix from all those factors that Lynn mentioned, combined with improving margins on the services we are doing should continue to have a positive impact on our margins. And we pointed that out as one of the not the biggest, but one of the factors in driving towards our 2030 margin targets.
Lynn and Brian, when you talk to clients who are somewhat hesitant to flip, what are some of the reasons why they're so cautious? And ultimately, how do you convince them otherwise?
H. Lynn Moore
I think some of the reasons are just some of the historic reasons, control. You've got people maybe who are not -- have been there a long time. They're used to having control of their systems, control of everything. I think what happens is, we've talked about aging technology, but also aging infrastructure starts to lead to more and more openness to flips. I think you also see the increase in cyber attacks, creating a different sort of demand and new demand for flips.
But I think also we talk a lot about how everything we do is public. Every implementation we do all -- every county, every city looks at their neighbors, looks across jurisdictions to see what's going on. And whatever hesitancy that people may have felt five years ago, seven years ago, as they see their neighboring jurisdictions make those decisions and the success that they're having, and I'll go back to my comment earlier about our success in executing and they see us being able to get them up and live and running in a better environment. I think that starts to break down those barriers as we move forward.
Lynn, I just wanted to go back quickly to the question earlier regarding the ARPA funds. Given the fact that we have a deadline now to obligate these funds, I know you guys have been hesitant to draw a direct line between them and the actual deals. And you alluded to the Kentucky win, which is obviously exciting in courts and justice, but you noted that it was over a decade in the hopper. What, if anything, is your sales force doing now at state and local to be in front of your customers to talk about that commit process, how Tyler products could be useful?
I know the vendor decision doesn't need to be made necessarily by the end of December. But I just -- I guess, another way of asking the previous question from Gabriela in terms of confidence that we might see more deals that could be supportive of that '25 and '26 progress, the deadline by which they need to spend it.
H. Lynn Moore
Yeah, Rob, I don't know that we're doing anything different than we've done in the last couple of years. All of our sales teams have been armed with information on ARPA funds. They're armed with the right marketing materials. They generally know what's around. They've got their talking points.
But I'll reiterate, I don't think -- I can't draw a direct correlation over the last few years of ARPA funds to Tyler's performance in a material way. It has definitely been part of the overall environment. But again, as I said, as I look at indicators going out into the future, the things that we track that sort of help us track demand and budgets. Those are remaining pretty consistent right now. So I'm not suggesting that ARPA hasn't been helpful.
I just -- I have not been able to really draw a material one-on-one direct correlation to that other than, obviously, some deals, but the Kentucky deal I think the interesting thing about that is it sometimes -- it highlights really sometimes the long nature of these sales processes and the tenacity of us and the long-term nature of everything we do in our long-term vision and staying power there was 12 years later, and we benefited from cash flow with ARPA funds, but we were going to get that deal whether ARPA funds were available or not.
Can you give us a little bit of sense around the AI opportunity? I think you referenced one large deal and how your customers are maybe thinking about leveraging AI over time and what that means from an upsell perspective.
H. Lynn Moore
Yes. Jonathan, it's -- we're starting to see a little bit of questions in RFPs around AI and what AI technology we're using, how we're leveraging it. I don't think anything right now has changed from what we've said over the last couple of quarters. We're focusing our efforts on sort of right now, trying to decide where exactly we want to put most of our resources behind internal versus external facing solutions. I still continue to believe that there's a lot of applicability pointing inward in things that we can do on repetitive type activity that some of our employees do.
But we have seen an uptick. I mean we made the acquisition of CSI last year. AI is a deep deeply embedded part of that solution is having a lot of success in the market. AR inspect has some AI tools, and I mentioned the ARInspect deal on the portion of the Illinois deal that I talked about earlier. So we're doing things around AI.
Customers are starting to be more open about talking about it. I think a year ago, clients were probably really hesitant. It's not a driver right now in deals, but they're curiosity and their interest is starting to surface. And my guess is we'll hear more about it when we get together connect next year and probably even more about it the following year.
In terms of like the acquisition front, you've got favorable debt terms, you're generating a good amount of cash. How are you guys thinking about acquisitions now? And then in terms of more specifically, is there specific end markets within your business that you're thinking that could benefit from acquisitions more than others? And perhaps what would they be?
H. Lynn Moore
Yeah, Keith, we're viewing it similarly. I mean, I've talked about the last couple of years, our priority is debt pay down. Our cash balances are approaching what our convertibles do in about 16, 17 months. And so we're looking. We always look.
We've been looking, I look at deals every quarter. We're probably a little pickier right now than we might otherwise be. But I do think as we go into 2025 and then into 2026, we're not going to change our standards. We're not going to change our valuation approach. But I do think you'll see us -- I'll probably evaluate more and maybe a deal that we might have said, hey, maybe we don't do it right now, that might tip in that direction.
We don't have anything specific right now in the hopper. We do talk internally about really what's the best area for us to go get our bang for a buck. And should we sort of start being a little more proactive as opposed to reactive. Those are discussions we're having internally. But generally, as it relates to capital, our stance is kind of the same right now, but I can see that evolving over the next 12, 18 months.
John, a question for you. Building on the earlier question on version consolidation which has been somewhat of a gating item to get customers to migrate to the cloud. Could you just discuss some of the carrots and sticks that you're using to encourage customers to move to the latest product release?
John Marr
Well, there's a combination of things. And each of our products are in different stages of using those combination of things. Some of them have been maybe some minor financial considerations. Some of them have been only new feature will be available in the cloud. Some of it will be -- we're no longer going to support a version of the cloud.
We haven't drawn a lot of those hard sticks yet, particularly with our flagships. But it's a variety of things that's going on. I think clients also are starting to realize the benefit and the need to get upgraded. Part of the -- what happened is when particularly when clients have multiple products of ours and those products are on multiple different years of versions. It's really hard for the products to talk.
And I think you also see it with support calls. You've got clients who might have been on a version that's four or five years old and they're having issues, but what they didn't realize is that those issues were corrected in a version three years ago, they just didn't take the upgrade. So it's sales pitch. it's things we're doing internally. It's a variety of things.
It's not one thing. And each one is in a different stage. As I talked before, we're doing multiple cloud transitions, which means we're doing multiple version consolidations at the same time.
Brian Miller
But with respect to version consolidation specifically, I guess you call it a stick, is that we actually are sunsetting older versions and giving clients certainly ample notice. But letting clients know the version they're on, the oldest versions will no longer be supported after a certain date and working with them to move them to the current version before that date. And we've done that with multiple products. We've sunset multiple old versions of our enterprise ERP solution, our enterprise justice solution and have made significant progress in moving those customers to current versions as we discontinue support of the older versions.
A question for Brian on the sort of the pace of the SaaS revenue I know you had quoted that the volatility of SaaS revenue, the timing of the go-lives from booked to a live system can be variable. But I just wanted to ask, we have two years now where the sequential growth in Q3 is the highest. I wanted to understand if that's purely circumstantial if there's any emerging seasonality to those go live. Any prerogative of these governments to get live on a Q3 or is that just really reflective of typically high Q4 bookings activity?
Brian Miller
Yes. It's probably more the latter. I don't think there's a certain characteristic or something that's causing that. It's probably around the timing, especially bigger customers, and it varies by market. For example, in the schools market, which is smaller for us, but they typically have a big push more in Q2 because they want to have new systems live before a new school year starts. Fiscal years don't really have as much to do with it. So I think it's more circumstantial.
Congrats on another solid quarter. I'll ask maybe a longer-term question. I think it's been alluded to a little bit. But again, as we think about AI, both [ agentic, copilot or system ] and you think about the customers that are starting to ask those questions. You think about the breadth of solutions that you're offering, both to your customers and across the portfolio of products.
As we think about that monetization pathway, is that something we should think about maybe on top of the long-term guidance that you provided at the last Analyst Day through 2030, or is that embedded in there? I ask because it seems like the pace of the innovation wave has moved so fast since you guys fully were even able to contemplate that. So how do we think about those, the top line growth characteristics that could be associated there? And any incremental potential margin degradation or headwinds or thoughts about that? And then I have a quick follow-up.
H. Lynn Moore
Yes, sure, Alex. The short answer is, yes, when we gave our 2030 targets, we did not bake in efficiencies, internal efficiencies on any gross margin lines that were going to be driven by AI nor did we really bake in any sales that were really a result of either new products, products, newly developed products or newly acquired products. To the extent, AI was already in some of our products, we already had sort of some long-term sales road maps. So perhaps a little bit, but not in terms of additional R&D, additional M&A. And so that's the way I would think about it.
I'd just remember that we're taking a very deliberative approach to AI. And while I say that we're hearing more and more customers start to have things in their RFPs around AI. It's not a majority yet. And I think our clients will still be a little bit conservative. But when you start looking out five, seven years, those opportunities are there, and we're not going to wait five to seven years to then spin up initiatives.
We will be doing those along the way. And to the extent there was some major R&D initiative, which hypothetically because that's not right now on [ our ] road map and it adjusted our -- an R&D expense line or something we would obviously signal that and tell you that. But in terms of our long-term targets, no, no significant AI benefits, either margin or revenue were baked in.
Aleksandr Zukin
And to what extent, maybe this is just a clarification. To what extent are you hearing or seeing in sales cycles that those types of questions are actually facilitating or we're amplifying flips or converts either the timeline around them or the momentum or enthusiasm. And then on free cash flow, Brian, again, I think the outperformance obviously both in the quarter and the guide for the full year, very notable. You noted that one Kentucky prepayment contract. How do we think about like when, where and like why those prepayments happen.
And more so, as we look to '25 and beyond, is there any reason to assume that those would happen more frequently or less frequently and kind of changing the complexion of the free cash flow margins.
Brian Miller
Yes. The prepayment was really kind of a one-off thing where at least relative to that size of that were -- and that actually will show up in the fourth quarter cash flow. But that was, again, ARPA funds being used to prepay six years of SaaS payments. I don't think that would be the norm. The thing that I think more consistent with an impact on free cash flow is the characteristics around the transaction business.
That transaction revenues, whether they're payments or e-filing and those sorts of things. We generally get paid at the time of the transaction or very quickly after it. So we're not carrying large receivables there. So the cash flow characteristics of that transaction business are very attractive. And so as it continues to grow even at a tick higher than the rest of our business, that has a positive impact on cash flow.
We've also had really effective management around our receivables and have brought down our DSOs and continue to manage that. And that helps as well that those revenues are typically paid in advance, annually in advance as opposed to carrying long -- bigger receivables. So really, the transaction business is probably the biggest grower of improved margins and cash flow.
H. Lynn Moore
Yes. And the follow-up question on AI and sales. I mean, it's -- clients aren't looking for AI for AI's sake but there are -- when you look at our CSI acquisition, the document redaction solution, there's an ROI involved. There's an ROI for the clients. And that's a big sales point.
They can do things with that system that used to take a lot of people to do, and they've removed that manual labor, that manual toil. And so yes, things like that are driving sales.
Operator
That concludes our question-and-answer session. I will now turn the call back over to President and CEO, Lynn Moore, for closing remarks.
H. Lynn Moore
All right. Thanks, Rob, and thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks, everybody. Have a great day.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.