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

He told us to give it about 10 seconds just before he got on. So I think we're live now. So thanks for joining in everyone, and I'm thrilled to welcome Brian Miller from Tyler Technology. Brian has been -- Tyler Technologies, plural, sorry. Brian's been CFO since 2008. I think he's been with the company for going on 25 years now, something like that. So he's obviously, if you take a look at the share price, done an excellent job over time. And so we're pleased to have Brian here, so thank you.

So Brian, let's jump right in here with probably a very traditional question and get you to sort of give a quick overview of Tyler. And I'm going to be honest with you. I talk to a lot of clients, when they sort of ask for once we talk about a couple of large-cap names, which there's always interest in, then they're sort of saying, what else is interesting, and Tyler is one of the names I always highlight. So I know some investors are pretty interested and some have been sort of maybe educated at least a little by me, but it's probably better coming from you. So maybe a quick overview for those of us who aren't familiar with Tyler Technologies.

Sure, Dan, and thanks for having me here. Yes, Tyler is an enterprise software company, a vertical software company focused on the public sector vertical market. So we have a very wide range of software solutions that automate essential sort of back-office functions of government. Historically, our focus has primarily been on local governments. But in recent years, we, mostly through acquisitions and particularly through a large acquisition this year, have been expanding more into the state and federal levels. But still today, our business is primarily focused on the local level, so cities, counties and school districts, local agencies. As I said, we have the broadest set of solutions for the public sector of anyone in the market. Market is very, very fragmented, so historically served by a lot of niche companies typically that would have a narrow product focus and often a narrow geographic focus. Sort of our core product areas are financials, ERP systems, accounting, human resource, payroll. Does include a number of applications, things like utility billing or parks and recreation, things like that. Courts & Justice, so court case management, jury, prosecutor, probation, jail systems. Public Safety, which is an adjacent market, things like 911 systems, [indiscernible] dispatch, police, fire and ambulance records. Property tax solutions is a big part of our business. Civic services, licensing and permitting, land records, those are the kinds of things we do. In schools, we do grades, attendance, scheduling, bus transportation systems, ERP, so really a very broad range of solutions. We've historically been primarily on-premises with a license and maintenance model but have, over an extended period of time, shifted our business more to focus on the cloud and really now have a cloud-first approach with 2/3 of our new business coming to us through the cloud and now north of 80% of our revenues are recurring from either maintenance or subscriptions or transactions.

Okay, great. Great. I think that's a pretty good introduction. So it seems like the second quarter was pretty good. There were a lot of moving parts and I'm going to ask you some questions later about NIC, so maybe we could minimize those comments right now. But if you just -- second quarter seemed pretty good, a lot of moving parts just because of the acquisition. So maybe you want to highlight in your view how the quarter was and maybe a couple of key points that we should all take away from that?

Yes. I think you -- you said it was a good quarter. We exceeded our expectations and our plan and exceeded Street's expectations by a pretty wide range. So if you look at Tyler just on its own without including the NIC acquisition, our organic growth was about 12.5%, so above -- certainly well above last year. But -- and that is off of the quarter that was probably the most impacted by COVID, so probably off the low point. And our guidance for the full year is for high single-digit growth, which after kind of 2% growth last year. So kind of back to what our -- kind of what we've said is our targets of 8% to 10% organic growth. We did the NIC acquisition in late April so they were included in our results for a couple of months. So yes, when you look at the broad numbers, they're a bit skewed by that. Our bookings, we've talked about the impact of COVID in all the events of last year. On our business, really, we still grew but low single digits. We saw a lot of sales processes paused or new processes, RFPs that we expected to see that didn't happen because local governments were, on 1 hand, distracted or had other priorities. They didn't initially adapt to work remotely probably as well as a lot of private sector enterprises did. So initially, they were like, "Well, we'll just put this on hold until we're all back in the office and back to normal." When that didn't happen, towards the latter part of the year, certainly, deals that were already in the pipeline started moving again. We were doing remote demos, remote site visits and executing contracts. And so bookings were coming back in the latter part of the year, but there were still RFPs, new business coming into the pipeline was somewhat depressed. We didn't think there was any change to the underlying demand because generally, people are buying a new system from us or subscribing to a new system because their old system is at end of life and it's kind of the nondiscretionary decision. They may be able to postpone the timing but they're going to have to replace that system. As we've moved into the first part of this year and on into the second quarter, we've seen that start to come back. In most cases across our product lines, market activity, RFPs are back to pre-pandemic levels, in some cases, exceeding them, other cases, not quite there, but trending towards that. And then general governments are much more comfortable with their budgets now. They had concerns last year about what the impact of COVID would be on their budgets, what their expenses would be, what their -- what the hit to revenues would be, and whether the federal government is going to step in. As it turned out, the revenue hits weren't nearly as bad as people expected. For local governments, property tax is their biggest revenue source. And certainly, the real estate market has continued to be very strong in a lot of -- most places. Property taxes are not under a lot of pressure. So governments are much more comfortable with their budget. And now there's this massive stimulus coming. So I think what we're seeing is things back to normal and we expect to grow from there. Our bookings were up about 6.6% on an organic basis in Q2 and trending upwards. So we feel pretty good about sort of the market getting back to normal and us seeing some potentially new opportunities as a result of some of the challenges governments have had during COVID.

So and that's almost not fair of that answer because you touched on 3 really big questions I have for you. So I kind of have to take them in some order and so this may be disjointed it a little bit. But I guess I want to touch on the recovery a little bit because you said things are back to normal already. And I remember the sort of 2009 recovery where it really took a pretty long time, it seem like to get back to what you think of as a normal level. So maybe can you compare why, contrast a little bit why it's come back so quickly this time around?

Yes. Our management team, for the most part, was around at Tyler during the recession a decade or 12 years ago. And so we've drawn some parallels to that and, in some cases, drawn on our experience during that situation, in some ways similar, in some ways different from the current situation. In 2008, 2009, we saw -- with the financial crisis, we saw it was a slower decline. So I think we had 8 straight quarters of year-over-year declines in our license revenues, which at the time, really sort of reflected new business. And at the bottom, I think revenues -- license revenues were off about 20%. Our total revenues were flat because our recurring revenues really weren't affected. And then there was about an 8 straight quarters of growth from there, so an 8-quarter recovery to get back to normal. And then we had the next year, so the year after, I think 2010, we had 7% growth. And then the year after that, we had 17% growth because there was a lot of catch-up. In this case, the slowdown came a lot faster, when COVID came and March came around and everybody went home. Things slowdown much quicker and there was an event. And it seems that the recovery, I know that it's still a little choppy and there's still certainly issues around COVID but that the recovery has happened faster and -- the activity, at least in our market space of government saying, "Yes, I need to replace the system. Yes, I need a new application. I can go ahead and move forward with that.", that happened faster. And then the other wildcard here, the difference here is that the federal stimulus, which I'm sure we'll touch on, is massively larger in this case. In the recession, there were some federal aid but there wasn't anywhere near this massive direct aid to state and local governments from the central government that enables them not only to make up for the direct impacts of COVID or the shortfalls they saw, but really provides significant incremental money that they have available to make investments, including investments in IT infrastructure or systems upgrades.

Yes. So I guess on note, we'll just continue down this road for another minute because I went back and looked at the stimulus bill from loosely 10 years ago or so, and I came up with maybe a maximum of $60 billion that could have been even tangentially related to sort of supporting local governments. But you really -- I couldn't really break it down further than that, so I don't really know where that money went necessarily. But when I compare that number to what Tyler sort of experienced over the next couple of years, though there wasn't obviously a step-up. And I know that Lynn said on the call potentially hundreds of billions of dollars available in stimulus money this time around. So I guess I'm hoping you can maybe sort of compare and contrast then versus now.

Yes. And you're right, the stimulus was -- it wasn't as clearly defined or it's hard to come up with exactly what came to governments, what they could use for Tyler in the last time. And here, last year, first, there was the CARES Act, and that was really intended to provide a mostly really to make up for direct impacts of COVID. So it was, I want to say, $125 billion of a -- to state and -- it was state and local governments, mostly to states and a little bit to large local governments but not fairly widely distributed and it was fairly narrow in what they could use it for. Then the American Rescue Plan this year, significantly larger, so it's $350 billion of direct aid to state and local governments. And that's, I think, $195 billion for states and $130 billion for local governments, another $25 billion for tribes and territories. There's $167 billion for schools. So all of those kind of in our marketplace. It's much less restrictive. There's not a lot of restrictions on what they can use it for. They can't use it, for example, to fund pension deficits, but they're pretty broad in what they can use it for. They get half of it this year and half of it next year and they've got until the end of 2024 to spend it. And the amount of the stimulus is significantly more than the actual shortfalls they saw. I saw a study that said that federal, state and local governments were $56 billion in the whole across fiscal 2020 to 2022 so across 2 fiscal years basically because of the impacts of COVID. And so obviously, that's only a fraction of the amount of the stimulus. So this really should be new money that's able to fund things like systems upgrades, which have been a lot of the shortfalls and a lot of government systems have really come to the forefront as they've tried to adapt to working remotely. And we've seen some highly publicized things like state unemployment systems that couldn't handle the volume or didn't work online and really weren't functional when they needed them the most.

Yes. So I just -- I guess I would highlight for investors who are listening right now, Tyler is -- we have about $1.55 billion in revenue for our total estimate for 2021, so that's going to be in the ballpark probably of what others are expecting. Hundreds of billions of dollars is just a significant jump from $1.5 billion. So are you seeing conversations like pick up already in like your pipeline or sort of I know you just reported 6 weeks ago or so. But are you already seeing like different conversations?

Yes. I think a lot of it, at this point is in the conversation stage. So I think what's happened to date is that governments with -- and most state and local governments have June year-ends so they just put new budgets in place July 1. There are some that are September like Texas, some that are December, but the vast majority just went into place with new budgets July 1. And at least in the near term, they're certainly much more comfortable with those budgets, knowing that there's sort of this backstop from the stimulus coming. I would say for the most part, they haven't allocated stimulus money or put it in their budgets or put spending in there yet because it is pretty fresh. So most of them are in the process of determining what they want to spend it on. And it's not just software and IT. I mean, there's roads, there's building infrastructure. There's all kinds of areas where governments could spend this money. And so I'm sure there's a lot in each of these jurisdictions. There's conversations going on and people raising their hands, wanting a piece of it. So those things are taking place. Certainly, our inside sales organizations that primarily talk to our existing customer base and sell them more things and talk about what their issues are and what their needs are and what Tyler can do for them, as well as our field sales reps that are primarily dealing with new customers, all of them are having conversations around what our customers' and prospects' needs are, how the stimulus funding can be used to help them with things they'd like to buy from Tyler. But I'd say at this point, we haven't seen a lot of what you -- a formal RFP or a purchase order contract yet. Again, there's 3 years they have to spend this money, and I think they're being thoughtful about it and looking -- determining what their priorities are. But we certainly know that system shortfalls, IT needs are one of the things that in a lot of governments are very high priority, and we expect that we'll see a meaningful share of the stimulus money.

Yes. I just -- I guess I just want to sort of put that in context for investors though, like even if we're talking about a fraction of 1% of what could be around $400 billion of total stimulus money, that's still theoretically could be hundreds of millions of dollars in new revenue to Tyler or just over the -- just from this over the course of a couple of years. So here's an area where it could really make an impact. Like Microsoft, for example, won that JEDI contract a year ago or so, and it literally made 0 -- this $10 billion, had made no difference to the valuation and this is sort of the opposite of that. So...

And I'd just caution that this will play out over time that our sales cycles are long so there still be a sales cycle. We have competition. And like I said, there's a lot of competing competition for those dollars within a city or a state. And -- but we certainly know that they have needs that we have products and services to address and this gives them more flexibility around that.

So I have a follow-up there still but I want to jump to a different topic because it's probably the #1 instead of maybe the #2 set of questions you get. And that, of course, is the NIC acquisition, which seemed like if you were following the industry, you could have sort of -- you've sort of been waiting for, for a long time. So it's a deal that makes a 100% sense from an investor standpoint. But I guess, why now? My main takeaway from the quarter incidentally on NIC was that like the cross-selling opportunities seemed great and they're coming fast and furious in what is generally a kind of a slow-moving area. So maybe if you could sort of give us an update on NIC and even if there's anything exciting that's happened since the quarterly update?

Yes, sure. So yes, NIC, we closed that acquisition at the end of late April, April 21. By far, the largest acquisition in the company's history, $2.3 billion purchase price. First time, we've acquired a public company. And we've done, I don't know, 45 or 50 acquisitions in the 25 years, I've been here. So different scale, different type of acquisition, but as you said, one that makes all the sense in the world, highly complementary businesses, both exclusively serving the public sector but doing different things and, for the most part, at different levels of government. So Tyler is, as I said, back-office software, off-the-shelf core products that run essential functions of government, mostly at the local level. So our revenues are in the 84% local, 10% or 12% state and less than 5% federal. NIC is 95% at the state level, about 5% at the federal level so greatly expanding our presence with state governments. And NIC has a small handful of software products, but they are primarily providing digital access to state government. So they provide the website, they provide the interfaces to these back-office systems, which could be Tyler systems, but in most cases aren't, and enable citizens or businesses to access information and conduct business with state governments. So they're kind of the -- provide that whole digital interface. And they get paid not by the state writing them a check but by getting transaction fees or user fees for providing that access and that's what funds all of this. So think of renewing your car registration, your license plates, your driver's license, getting a fishing license or a park campground reservation, applying for unemployment benefits, and anything you would do with the state you go through a website that's managed by NIC. And NIC has 28 of these state enterprise contracts. And you pay a fee, so you pay $3 to renew your registration. NIC is also the credit card processor there, so that $3, part of that covers the cost of the credit card transaction and NIC's margin on that as well as provides their portal revenues that fund these projects. So they're almost all recurring or transaction-based revenues. Over a long period of time, there's -- and then they have payment processing revenues as well. And in 3 states, they're just providing the payment services. So they're the payment processor, for example, for -- with a new contract for the state of Florida for all the state payments. So highly recurring revenues, mostly at the state level, and these very tight relationships with the CIOs, agency heads, governor's offices where they're really kind of embedded in providing all this digital access. And so they work with the state governments on their initiatives, on providing additional services to provide more links for the citizens and, in some cases, those have turned into software development projects and building applications. And they're -- historically, they're sort of same-state revenue growth, so once they get a state, they've grown on an average of about 8% a year through more volume of transactions and providing more services. So very complementary, not much overlap. And so there's really, in our view, 2 big opportunities that make 1 plus 1 equals something more than 2. One is the cross-sell opportunity into the NIC customer base from Tyler. So Tyler has a lot of software applications that -- some that are currently installed in states and some that could be applicable to states, but we really haven't had that sales focus, those sales organizations or those relationships. So our business has been mostly at the local level, but we have a bunch of products that we think we could sell into states. NIC has these very broad enterprise contracts and these relationships and these understandings of what's going on in the state government and with their systems. And so we think we can leverage those relationships and leverage those contracts. I want to be in there sooner and to have -- as NIC is in conversation with their state partners and they're aware of an initiative or a need, they can raise their hand and say, "Hey, Tyler has a product. Let us show you that. Let's make that introduction." And that then those products can be bought under those state contracts, in many cases, without there being a formal competitive process that it can be added on to those existing contracts. So that would be mostly incremental business for Tyler, and that's obviously attractive to us. The other side of it is the ability to expand Tyler's payment processing business into the -- at the local level, much more faster -- much more rapidly than we could have done on our own. So Tyler had an initiative around trying to participate in more payments around our systems with our local government customers. We have systems like utility billing systems, traffic court systems, licensing and permitting systems that our systems provide for processing payments. But typically, Tyler has not been a participant in the payment cycle. We just provide the software and the portal. We have -- and when we did so, we did so primarily as a reseller of another payment processor's services. So we just got a few basis points for basically reselling Chase or someone else's processing. NIC is actually a processor. They're a merchant of record. They're collecting revenues and paying the interchange fees and keeping more of a transaction than Tyler would. So the idea is that we can take NIC's very robust payment platform and drive that through our local government relationships and start to sell enterprise payment processing to an entire city rather than just for their utility bills. They're really to ultimately meet all of their payment processing needs. Again, NIC hasn't had those relationships at the state level, hasn't had organization -- sales organizations focused on the state -- I'm sorry, at the local level and so we bring that to them. And so in both cases, we think we can drive a lot of incremental revenues beyond what either the companies would have done on their own through cross-selling these products.

And was there any kind of partnership previously between NIC and Tyler?

No, not really. We both were aware of each other. We both sort of kind of knew what each other did. We had some common clients mostly where we did have some state systems. Our MicroPact platform, which we acquired about 3 years ago. It's a low-code development platform for a wide range of business process management or case management at the state, federal and local levels. They had some state customers, which were NIC portal states so they had some software that basically was installed behind an NIC portal. But they have won those deals on their own. And so they did work together some, and they were very -- our MicroPact group is very enthusiastic about the opportunities for the combination, particularly around their product. But we hadn't really partnered before.

Okay, great. Maybe shifting gears a little bit. Maybe we could talk about deal sizes a little bit. And I know on the quarter, Jacksonville was sort of highlighted as a multitude of products. And that's been happening a little bit more over the last few years. And I guess part of that is the -- your portfolio is broader so you're able to bring more products to [indiscernible]. But maybe can you talk about like maybe where this has come from just over the last few years? And like how that portfolio breadth is helping you win some of these like Jacksonville, which is a pretty big contract for Tyler?

Yes, Jacksonville was actually, I think before we signed that contract, I didn't realize that Jacksonville is a top 10 city in the U.S. in terms of population, and Jacksonville was one of our first Tier 1 clients for public safety. And that's an area, for example, that we have made significant strides in moving up from primarily being mid-market and lower end of the market to having a product that is competitive at the high end of the market and wins an arm's length deal in the Jacksonville. I think there's a couple of things. One, we significantly ramped up our R&D really going back to kind of 2018, 2019 where we had pretty significant increases in our R&D spend around existing products like our public safety product, some around new product development where we have -- we're filling in white space and couldn't find good acquisitions at reasonable prices and chose to build some things. And we've continued to be active in the sort of the tuck-in acquisition space as well. And so as we've added products or enhanced products, invested in them, our portfolio has broadened, the TAM we can go after has expanded. And we filled in suites of products. It does a couple of things. So for example, in our Public Safety space, not only we invested in the core product that we acquired from New World back in 2015, but we've added -- we did an acquisition of a company that added an electronic citation solution system. We bought a company called SceneDoc that does -- a SaaS company that provides mobile field reporting for first responders. We added a company that does software for process service, a lot of [ jury ] software company. So and then we bought Socrata, our data and analytics platform, which really added broad data and analytics capabilities across all of our product offerings. So all these things together, one, create more products we can bundle around the core Public Safety system and make a new deal bigger. They create products that we can sell back into our installed base that wrap around that product. And they make our products more competitive. So we've got a more comprehensive solution with more bells and whistles, if you will, or products that they would otherwise have to interface to something else. The analytics capabilities can significantly strengthen our product set. So all of those things make our products more competitive, make them competitive in larger opportunities, put more products into a deal so the deal size is bigger. And I think all those things have contributed to are becoming more and more competitive and larger opportunities. And that's a strategy that will continue.

Yes. I mean -- and it has been going on for a while. I mean, Cook County, for example, where -- in Chicago, where we live, I know that court system is an Odyssey Court System as a few years ago. So the deals have been getting bigger, that's not necessarily new but it seems like it's gaining steam. So -- but I guess you are touching on another like acquisitions and stuff so I might as well just ask that question, too. So you have done a lot of acquisitions. Some of them have just been absolute home runs like $8 million or $10 million for Wiznet was that -- that became e-filing? I mean, like that's, that is a big business for you now and very profitable, and it was just like literally a few million dollars. And NWS gave you great product, a great product addition in like Public Safety but I think it was a little rocky, probably at first on the integration side for between the product and maybe the service or what have you. So can you talk about the strategy and the portfolio?

Yes. Again, strictly focused on the public sector but looking to broaden our portfolio. So we don't do much in the way of consolidation of acquisitions where we acquire somebody that has another Public Safety system or another ERP system but really a lot of tuck-ins that add products that slot into the suites of products and broaden them or adding capabilities. And in some cases, they get us into a whole new area like Public Safety with New World or, I guess, really with NIC getting us into the state market or the portal or transaction market. And those would continue to be the focus. The opportunities, like you point to some of these companies like Wiznet, that was several years ago, but that was really how we got our e-filing solution, which integrates with our court solution. And that was a few million dollar acquisition and that's now a $60-plus million high-margin business for Tyler that continues to grow and really also enhances the competitiveness of our court system. We look for things that we can leverage our sales organization to put more products in the same sales reps bags, leverage our customer base and sell those things back into our installed base and make our new sales more competitive. And so we have -- we've maintained an ongoing pretty thorough white space analysis where we look at, what are the adjacent areas? What are areas we're not in at all? How do we size those markets? What's the competitive landscape? Most acquisition ideas come from a business unit that's saying, "Here's something we need. Here's someone we partner with. We think that would be a good solution to have in our portfolio." So they sort of start a lot of the conversations. I'd say most of our successful acquisitions have been companies that weren't for sale. People, we've identified a need, identified a space we'd like get into, sometimes companies we already partner with. And we approach them and start a process. We certainly look at a lot of companies that are for sale and have done some successful ones like MicroPact that were -- companies that were being shopped. But in most cases, there are companies that aren't being shopped. We're pretty disciplined about valuation. Certainly, valuations have changed over the years, but ours has as well. So -- but we are pretty disciplined acquirers. We really look for good strategic fits. We sometimes long periods of time without making significant acquisitions and other times are more active. In addition to NIC in the last year, I think we've done 3 or 4 other acquisitions. We closed 2, 2 weeks ago, 1 last week and 1 the week before. One, VendEngine, in the correction space, in the jail space, providing financial services, account management, video visitation, a lot of services for inmates. And we bought a company called ReadySub that's in the software managing student substitute teachers for schools. We bought a company called Arx last week that provides public safety software that fits into our New World, our Public Safety solution, providing some capabilities around analytics and internal affairs sort of side of police departments. So I expect we'll continue to do those. I think right now, we certainly have the balance sheet capacity to do more acquisitions. We've -- even with the debt from the NIC acquisition, we're only leveraged on a net basis about 2.7x. We have a $500 million undrawn revolver, really strong cash flow generation. But I'd say the bar is kind of high right now, given that we're really focused on integrating the companies we've acquired in the last year and with a big focus on really realizing those synergies and those benefits that we think we'll get from NIC. We've got a lot of effort into making these things happen. So the bar is probably a little higher over the next few quarters. I'd be surprised if we did a really big acquisition. But we expect that to be a -- to continue for a long time to be one of the foundations of our growth.

So I mean, a lot of bolt-on acquisitions and I guess you didn't frame this. But generally, there -- your acquisitions have been pretty small and digestible pretty easily, just to add a feature, at a product. NIC obviously bigger, although I kind of imagine will sort of the norm will still be the smaller sort of bolt-on, let's get this little feature or product into the portfolio kind of deals?

Yes, that's fair. There's a lot -- there's not a lot of really big companies that are strictly in the public sector space. There's a lot of these [ niche ] companies that are really good fits with us. I think we do prefer things to be -- if we have our choice, we'd rather do a little bit bigger deals that just provide us with a little more bang for the effort. But generally, even if we're buying a company with $2 million or $3 million or $5 million of revenues, it's something we think that within Tyler can grow to be much bigger than that. It can be a $25 million or a $50 million revenue stream in Tyler at some point. But yes, I'd say that's kind of where most of them are. NIC, obviously, was a big outlier, first time we bought a public company so a different kind of a deal for us. But as you said earlier, made all the sense in the world from a -- it's not a head-scratcher on how that would work. And one of the interesting things was, I believe it was more than 70% of NIC's shares were held by institutions that also own Tyler. So we already had a big overlap in our -- at least in their investor base with us and we -- and a significant number of Tyler's owners conversely in NIC. So we had a pretty good idea that certainly that our shareholders would share our view that it was a good company and a good acquisition since they owned it already.

Okay, great. I have 1 more question, just 1 more topic I'd like to cover. I got a couple of questions coming in on various means here, but I want to hit this one on my own real quick. And that is, there's -- I cover some companies that are going through model transitions and it's sort of like these first-mile transitions and they work out great. Everyone seems to generally like that the move. It's always a sort of a messy transition. Tyler has never really done that. It's always been this organic thing. So 10 years ago, there was this little stream of subscription revenues. And today, it's maybe 30% of revenues ish. And the bookings number though is really big. It's a majority of bookings are sort of SaaS or subscriptions or what have you. So maybe can you talk about the choice to let that happen organically and like how you see this playing out over the next few years?

Yes. I mean, historically, going way back, so Tyler was mostly or was exclusively on-premise traditional perpetual license and maintenance stream. And then going back, I guess we're going back almost 20 years since we started offering a subscription model as an alternative. Let's call them ASP, an application service provider back then. And we hosted the system in our data center and they pay for it on a subscription basis. And over time, we expanded that across virtually all of our products, and we were kind of cloud-neutral or cloud-agnostic. We said, "We don't care how the customer wants to acquire the software. We'll sell you either way." Sales rep gets the same commission. We just kind of let it go as the market wanted to move there. So we never did do a sort of a forced transition. We didn't stop 1 day and say, "We're not a licensed company anymore. We're a subscription company.", and create that kind of a hole with no licenses, and we've got to build up a subscription stream. So ours just sort of evolved over a long period of time. And governments for a long time were, in some cases, just resistant, actively resistant to the cloud. In other cases, it's just really slow to embrace it. And that's changed in the last few years. And we've seen in this sort of organic shift, we've seen our market choose to move there more quickly. 2019 was the first year that more than half of our new software sales came to us through subscriptions. Last quarter, it was 2/3. Some markets like Public Safety are a little bit further behind. They're less comfortable with the cloud around some of those systems, but they'll get there at some point. So really, a couple of years ago, we shifted -- so I guess that transition has been not very disruptive. It's been a headwind to our revenue growth, a point or 2, because we haven't had those licenses. But now it's built up to where more than half of them are already coming in, in subscriptions, licenses are really small piece of our revenues now. And I think it's shifting from kind of being a headwind to being a little bit of a tailwind. And like you said, like last quarter, our bookings were up 6%, our ARR for new software bookings were up 60%. So they can be kind of lumpy but we've seen certainly that shift. A couple of years ago, we really moved from being sort of this cloud-neutral to a cloud-first approach. And we said, now we really do prefer the cloud along with our customers. We have done things like changing compensation so that there's more of an incentive for our sales reps to sell cloud. We partnered with AWS to be our primary public cloud provider. And we're putting new customers, starting to put new customers into AWS rather than a Tyler data center. And over time, we'll move existing customers out of our centers and get out of the data center business. We're also making significant investments around our products to optimize them to be more efficiently deployed in the cloud. Because a lot of our core products were built and architected to be deployed on-prem, they're not really fully efficient in the cloud. We don't get all the benefits of the cloud. We don't upgrade everyone at the same time. Everyone is not on the same version. And so in some cases, that's a rewrite of products in a native cloud architecture. In other cases, that's modifying the current architecture just to be more efficiently deployed. And we said that we expect that, that process will be complete for all of our major products by the end of 2023. And as we do that and now we have the relationship with AWS, so we have plenty of capacity, we will increasingly move towards more products are only going to be offered in the cloud for new customers. And as we develop this, our migration models, we'll look to accelerate the move of on-prem customers to the cloud, which roughly doubles their annual spend with us. So all that provides a pretty big upside for revenue over the longer term. There's $475 million of annual maintenance revenues that could potentially double as they move to the cloud. And I think we're well along with all the groundwork for that to happen and starting to see that work its way through our processes.

Great. That is wonderful. I really like the -- just the organic nature of it. It's just from a modeling perspective, it's been much easier than some of these other ones, so thank you.

It's been much less disruptive, Dan.

So a couple of questions that are coming in now from clients, and I want to make sure I understand the question here. The first part is pretty easy. To what extent is the software customized at the client level versus shared across jurisdictions? And how substitutable is that with off-the-shelf software? And then there's just, for example...

At the core, all of our products are considered off-the-shelf software. So we don't build any one-off custom systems for individual customers. And so there's 1 set of code for each product. There are customization layers, I guess, on products and, in some cases, we have multiple products. So in ERP, we have what I'd sort of call small and large. We have Incode for the lower end of the market, Munis for the upper end. Incode tends to be much more out of the box and Munis can be more configurable. In courts, we have 1 courts product Odyssey, but it's installed on a SaaS basis in the smallest county in California, Alpine County, which I think is 1,500 citizens. It's in Los Angeles County, which is the largest county in the country. Los Angeles is highly, I'd say, customized or configured. They have the same court base. They take the same upgrades, but L.A. has a lot more stuff turned on and a lot more customization layer. So our products generally are very configurable. And obviously, we build a lot of interfaces to other adjacent products. So the implementations can be very complex and a big deal, but we are pretty effective in covering a wide range of the market with the same products.

Okay, got it. So this question aligns with one that I had also. And I just wanted to, I don't know, revisit the security incident you had, which was maybe a year ago or so.

Of course, yes.

So I guess it's been pretty quiet from Tyler's perspective on it. So I assume that means it's all good, but maybe you could...

That'd be fair, yes. I mean, we had a ransomware incident actually late in the third quarter of last year. It attacked our internal systems so it did not affect any client systems or any of our hosted systems. There was no data exfiltration, so no data stolen. It was really locked up internal systems that were on-prem. So our cloud systems generally were not affected, but internal systems like our phone systems or some of our financial systems were affected for a period of time. We were able to remediate those, get it back up and running pretty quickly and have made what we believe or we've had a lot of consultants and a lot of outside help around that remediation and ongoing changes that we've made that we think are appropriate to you always try to stay a step ahead of the bad guys. That's difficult, but we certainly have a lot of resources at it and a lot more resources than we had prior to the incident. But no significant financial impact to the company. And as I said, no client systems were affected and no data was exfiltrated.

Okay, good. That's kind of what I was expecting. Here's one that I know I have personally asked you several times over the years and that is about international. But I think it's a good time to revisit the question because portfolio has changed a little bit. So now it's sort of broader or bigger and you have like more arrows to sort of shoot at an international target. So minimal revenues that are -- would be considered international, but maybe you could sort of talk us through your international thinking.

Yes. Today, we're only a couple of percent international and Canada would be the biggest part of that. We have some systems. We've got court system in Australia. We've got a property tax system in the Bahamas and -- but most of our solutions are domestic or at least North America, and that's still our focus. I mean, we've got a lot of runway there. We don't want to get overly distracted with complications to the business, but we recognize that we do have products that could be sold internationally. Again, we don't have typically the sales organizations. A couple of the products that have been acquired in recent years, Socrata, most notably, which has a number of international installations. MicroPact has some international business. And we bought a company that in the sort of in the Courts & Justice space, online dispute resolution solution that has some international applicability. So some of those point solutions that really have good fits. Our focus would mostly be on opportunities in English-speaking countries, countries with a similar justice system or a similar tax system. But the data and analytics platform is SaaS solution is very, very adaptable. And so we've seen some nice opportunities there. So I'd say we'll still be very opportunistic in the sort of the near to midterm about international. But we do believe there's a longer-range opportunity. Just in the near term, we're more focused on kind of addressing all these opportunities we have here in the U.S.

Got it. Here's a good simple one, simple for me to read anyway and probably a good talking point for you. A question about revenue from like existing customers versus sort of like new customer wins in a quarter or a year. Can you maybe talk about that a little bit?

Yes, I think in the broad sense, if you look at our new contract signings in the quarter, I'd say between 2/3 and 3/4 of those would be new customers, so a new solution for a new customer. And about between 1/4 and 1/3 of those would be add-on sales to existing customers. So either selling a new suite of products to a customer or selling additional products within a suite of products. And I'd expect -- well, we expect both to continue to grow. We continue to have really strong win rates. And -- but we also, as we talked about earlier, through acquisitions or builds, we continue to expand our portfolio, and it gives us more opportunities to go back to our installed base and have add-on sales. And I think in the last couple of quarters, we've seen really a lot of strength in our inside sales, and that's -- I think a lot of that's a function of one, better budget environment; but two, just us having a lot more products in our bag.

Here's a really easy one that I definitely had a note to ask about, and I just -- we didn't get to it. So I'm happy that someone is asking. And that is, can you describe the competitive environment as you sort of, I don't know, [ it done ] like with NIC and as you've gotten maybe some bigger deals, how has that changed?

Yes. I mean it hasn't changed a lot. We still see, in some areas like ERP, the horizontal competitors like an Oracle, SAP and for Workday, we've seen them occasionally most in larger deals, and we compete really effectively, given that we're focused just on government. And so we go much deeper, and we think we have a great story and a great track record of having things that the government really needs and competing pretty effectively against those larger horizontal companies. In most of our areas, we compete with a number of companies that are just narrowly focused on courts or tax or licensing and permitting. And we think probably the biggest competitive advantage to Tyler besides us just having good core products is this whole connected community situation we have where our products work together well, and it creates more value from having another product from Tyler and another product from Tyler because we have common foundational elements like workflow or payment engine or security and sign-on that create more value, and we can integrate so that data can flow from the Public Safety system to the court system to -- or from the land record system to the property tax system and create more value for customers around that. So generally, our win rates, certainly over the last few years, have continued to expand. And I'd say our competitive position continues to grow. And I'd say in the last -- it's one of the things we think we've seen through the COVID pandemic that we've continued to invest at the same level we were , we haven't cut back on the investments. Our cash flow was record last year. We didn't lay off a person, we continue to hire. And so we didn't shut down any initiatives or slowdown on anything. And we certainly know some competitors have. Some that weren't in the same position we're at, maybe a private equity-owned competitor who is highly leveraged and doesn't have the same financial flexibility. So we think we continue to widen the gap by continuing to make strong investments and stay the course even during a more difficult time.

Okay, great. I'm just getting a message. I've been trying to end all these personally at 2:55 and I'm getting a ping that we're supposed to end them at 2:50, so I'm sorry. Maybe if you can give us 30 seconds though, on your biggest worry and I'll [ trump ] all the remaining client questions with that one.

Yes. We don't have any deep, deep strong worries. I'd say our biggest challenge is probably just continued execution. That's, I think, been one of our strengths and probably at the core of our success is that we execute really well. We execute acquisitions well. We execute implementations well. We execute development projects well. But as we get bigger and north of $1.5 billion in revenues, more and more clients, more complex clients, different levels of government, hiring lots of people, all those things become more and more challenging. We feel like our team is up to the challenge and we've got a really deep team with lots of experience. And one of the things we've talked about during COVID that we drew on a lot of experience that we had from the recession when we all went through a different kind of a challenge but in some ways similar. So -- but execution is kind of at the core of all of it. So if we were to not perform as well or have problem implementations or have trouble hiring new people, all those things are challenges. But I think that's where our big focus is. And we put out a deck when we talked about the NIC acquisition in June, and we had 4 objectives for this year. Number one was don't screw up the stuff that works really well. Don't mess up their business, don't mess up our business. We'll get the integration done. We'll get this cross-selling in place. But meanwhile, let's make our plans and not mess it up. And so that's kind of our philosophy of running the company.

So words of wisdom. So I try to live my own life that way, still mess up. Well, Brian, thank you so much for joining us and the insights on Tyler Technologies. It's been insightful for me. Hopefully, it's been good for our investors as well. And I'll talk to you again soon.

You bet. Thank you. Appreciate the opportunity.