Tyler Technologies, Inc. (TYL) Earnings Call Transcript & Summary

Hi, and -- everyone, and welcome to our fireside chat with Brian Miller, Executive Vice President, CFO and Treasurer of Tyler Technologies. We hope everyone in the investor audience has had a good conference and a great summer, despite it's been a tough couple of quarters. And we hope you enjoy our Q&A with Brian today. So as a reminder, this will be a moderated Q&A format with myself and Brian, and then we'll open it up to audience Q&A after our conversation ends. [Operator Instructions] My name is James Hopkins. I'm a Vice President in investment banking at Deutsche Bank covering the software sector. Again, with me is Brian Miller from Tyler, who, in addition to being CFO of Tyler, was previously an airline company CFO and also a graduate of Texas A&M. So welcome, Brian. Thank you for joining us. Just -- how are you doing today?

Doing well, and thanks for having me here.

Yes. Happy to. If you don't mind, for those in the audience who might be a little less familiar with Tyler, could you provide maybe a bit of an overview of the company? And just some detail around where it's been since you joined in the late '90s and where you see it going in the future.

Sure. Yes. This is my 23rd year at Tyler. We -- and have been here really through its entire life as a software company, although I had a prior life in another business. Tyler is an enterprise software company, a vertical software company focused on the public sector vertical market, and really within that, primarily on local governments, so cities, counties, school districts, local agencies are primarily our customer base. 80% to 85% of our revenues are from local governments, 10% to 15% from state governments and about 5% from the federal government. We're -- we have a very broad set of mission-critical software applications that automate central functions of government, ranging from financial systems, ERP to utility billing, Courts & Justice, public safety 911 and police, fire and ambulance systems, property taxes, licensing and permitting. So really, by far, the broadest array of software products for the public sector. We've been a very steady, sort of, high single, low double-digit grower. We -- I think our organic growth over the last 20 years has been at about an 11% compound annual growth rate with another couple of points from acquisitions. So we've been a very steady, sort of, low double-digit grower for a very long time and continue to enjoy a really strong competitive position in what is a very big vertical market. And just, sort of, kind of where we've come from. So shortly after I joined the company, as we were starting to get into the software space, mostly through acquisitions, if you look back, kind of, at 2000, so 20 years ago, our stock was $1 a share. We had a $50 million market cap with 50 million shares outstanding. Our revenues were well under $100 million and only about 1/3 of those were recurring. I think we finished 2000 with about $2 million in cash and $100 million in debt. And so today, we're at about $1.1 billion in revenues. Our market cap is about $13.5 billion. Of those revenues, about 75% are recurring. And we have an extremely strong balance sheet with over $600 million in cash and no debt. So have a lot of flexibility and ability to invest at a high level as we continue to grow.

Yes. That's pretty phenomenal growth since you've been with the company. And congratulations on surpassing the $1 billion revenue mark, which I think you hit last year for the first time. Pretty incredible growth. I believe Tyler accounts for something like over 5%, maybe 6% of the 0.5 million software systems that are deployed at state and local government entities. Obviously, these are impressive numbers, but it seems like you've got -- you mentioned you have a strong balance sheet to enable further growth, but it doesn't seem like with that 6%, you've still got a lot of runway. How do you think about or how would you describe, kind of, what or who you compete with and your momentum there in terms of turning that 6% into something greater just in terms of a market penetration standpoint?

Yes. It's still an incredibly fragmented market. Historically, this market has been served -- I mean going back 2 or 3 decades has been served by a lot of point solutions, a lot of what I'd call sort of niche players that generally were narrowly product focused and narrowly geographic focused often. So a company that just does court systems in California or tax systems in New York and New Jersey, so federal counties. And so our strategy [ going forward is really ] to create a company that had a wide range of products that worked together and serve really the broader [ market ]. We -- but still a very large portion of systems that are being used by [ the government ] are from legacy kinds of vendors or are homegrown systems. And we think, in fact, that if you looked at all the systems that all the local governments across the country use, you'd find that only about 2/3 of those are either homegrown systems or systems from a vendor who is no longer competitive in the new business market and that only about 1/3 of them came from a vendor who is competitive today. So these systems turn over very slowly. Governments are not profit motivated. They're not ROI driven. They don't have competition. So they tend to keep systems much longer than the private sector would use them, really almost until they're dying. And so when they get to that point where they're no longer reliable or supported, then replacing them is a high priority. So it creates a very steady market, but one in which it's sort of hard for us to create demand. But we do have -- with our core products, we tend to have -- to be a strong leader in the new business market and to have very high win rates as those systems do turnover. So it's a market that we really would see explosive growth, but that we do see very consistent growth, as I described, over a really long period of time. We have different competition in each of the sort of subvertical markets. So the people we compete with in public safety are completely different than the companies we compete with in the property tax segment or the ERP space or the licensing space. So we have a wide range of competition from private equity-backed companies or venture capital-backed start-ups to -- up to some of the large horizontal ERP players like Oracle and SAP.

Got it. That's a really helpful background. And just a quick follow-up maybe on that, if you don't mind. You talk about these -- a lot of -- maybe 2/3 of the systems are homegrown or are from someone who's no longer competitive or really in the market. Do you see, just given what we see in software with sort of this consumerization of IT, people within enterprises insisting on sort of better software, more user-friendly software, just given their own experience as a consumer. Do you see that trend maybe affecting the pace of, sort of, government adoption or leading to sort of more of an inflection point and an increasing rate of government adoption of more cutting-edge software like a Tyler or one of your competitors?

Yes. That really is the case. I mean I think increasingly, even the governments, as I said, don't have competition. They don't really have to be better. There is an ongoing demand or desire from citizens to have a more consumer-like experience when they interact with their government. So -- and a lot of those things are pretty basic, but don't exist across a lot of government functions. So being able to pay a traffic ticket online or a utility bill or being able to look up your tax assessment or file a protest of your property taxes, to do those kinds of things online rather than going down to city hall or calling on the phone, those are the kinds of things that are pretty basic in the private sector that often don't exist in public sector. And I think that kind of experience is increasingly being expected by citizens, and that's -- that will continue to drive replacement of these systems or adding those capabilities to some of the legacy applications. And a lot of what we've done and certainly some of the things we've added even since the onset of COVID are enabling citizens to do more self-service functions, to have better access to data. And government transparency is increasingly important as well. And so the data and analytics capabilities that we bring that can either sit on top of an existing system or be a part of a new system to enable more transparency for citizens is also, I think, an important aspect of the current environment.

Yes. Yes. That makes a lot of sense. And I guess on the topic of the current environment, you mentioned enabling more government services to be delivered remotely to constituents. And there is a lot that your company's technology enables that's pretty critical to the continuity of government. In times when some people might feel unsafe, congregating or cannot, as a matter of policy, you mentioned, I think, the Virtual Courts and you've got computer-aided dispatch solutions for public safety, a way for veterans to submit benefit claims online. Do you have maybe personally an application of your company's products or a customer anecdote that you feel particularly energized by or proud of that's, kind of, come out of this difficult period that you might be able to share with us?

Yes. You mentioned Virtual Courts in there, and that's one that I think we're particularly proud of. That was a product that was under development, and we really accelerated the release in response to the onset of COVID. It's a system that today is primarily focused on our municipal court customers, which would be generally lower complexity, higher volume courts like misdemeanors and traffic courts. But also, we would expect to be able to apply that technology across our broader court solutions over time. But it allows courts to continue to conduct their hearings online, to continue their operations through a virtual offering that's completely integrated with the Tyler court system. It has all the security and -- that you'd expect to have around a court system. We -- and certainly, a lot of places, courts, since the beginning of COVID have been closed. Courthouses are closed. They're not accessible to the public. And courts have not been able to conduct normal operations except in the most urgent cases. And so that certainly had an impact on citizens as well. So we started offering Virtual Courts on a 90-day free trial basis. We're now serving more than 100 courts and 8 million citizens with that product. And just recently, we were recognized by AWS as the best remote work solution across -- on the AWS platform. So that was -- given all of the remote work solutions that have become popular during COVID, that was quite an honor for us. And we would expect that the vast majority of those customers that have tried it on a 90-day free trial basis will continue to be paying customers once that period is over.

Yes. That's great. That's -- congrats on the award from AWS. That's a huge accomplishment. I guess further on the COVID topic, I think there are obviously some negative effects for your customer base when you think of maybe stressed budgets among local governments or income streams affected by less speeding tickets or parking tickets, maybe even depending where you are, broader tax base is reshuffling. How has that impact been from your perspective in terms of customers and their ability to pay being affected? And does that create any kind of larger impetus for Tyler in growing the federal revenue stream more quickly, given there might be more resilience there in terms of the federal budget?

Yes. I think that's fair observation that generally, at least to date, the federal spending seems to be minimally affected. Now federal today is only about 5% of our revenues, and we really, sort of, dipped our toe into that space through the acquisition of MicroPact about a year ago. But it's certainly an area that we've been really pleased with the performance there and are looking to expand both the MicroPact platform more broadly in federal agencies as well as potentially adding more business in that space, either through acquisitions or building out some of the other products. I'd say generally, still have not seen a lot of impact from budget changes, but it does take a while to filter in. As we saw during the recession 10 years ago, there's clearly a lag in when broader economic conditions really, sort of, show up in government budgets. Some new budgets went into place July 1, others will be October 1, others in January. Generally, projects that were already underway or buying processes that were already underway pre COVID are continuing reasonably normally after some initial pauses. Most of the things are funded already. Local governments have a wide range of revenue sources. Property taxes generally are the biggest revenue stream for local governments, often more than half of their budget. Those are pretty stable, and they don't tend to change very rapidly. The property taxes are generally relatively stable. But there are pressure on other revenue streams, like you mentioned, traffic tickets, licensing and permitting, parks and recreation. And then there also have certainly been a lot of unusual expenses related to COVID-19 responses. In some places, things like civil unrest or natural disasters that are putting more pressures on the government. And so we would expect that we would see over the next few quarters likely some projects that -- or buying processes where there are delays. Again, sort of, the essential nature and the replacement of dying systems as the core driver of demand tend to make our customer spending with us a pretty high priority, but there sometimes can be delays in those. We also do think that there likely will be in the, sort of, mid- to longer term some accelerated replacement of systems as a result of the change in the environment and particularly the need to be able to work remotely. So I think some systems that governments might have otherwise thought had many more years of life left in them are proving not to work effectively in this kind of environment. Mainframe systems that only work if the employee can be at a terminal at their desk. So I think certainly seeing renewed interest or expanded interest in some of those solutions like electronic filing for courts or online dispute resolution in courts or online payments business is an area we've been investing in that we would expect to see accelerated interest in as well. So I think there'll be some upside that will help offset some of the delays. But there likely is a bit of a lag from when you see impacts in the private sector to when you see it show up in the public sector.

Got it. That makes sense. And yes, that's, I think, an important point just in terms of remote work being a driver for adoption as well and those legacy systems not really doing the job for members of the government who need to do their jobs remotely. You mentioned the payments opportunity just now that I think is relatively nascent for Tyler or at least is -- represents a smaller segment at maybe $30 million to $50 million of revenue annually. I believe that primarily addresses parking tickets now. But how do you think about the opportunity there for payments, sort of, I guess, use case expansion or volume expansion? And I guess, for the audience, who would you be displacing there? Or what would you be displacing in terms of where those incremental dollars would be coming from?