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

Welcome to the 25th Annual Needham Growth Conference. My name is Joshua Reilly, and I'm an analyst on the enterprise software team here. This afternoon, we have Brian Miller, CFO of Tyler Technologies. Thanks, Brian, for attending.

Yes, happy to be here.

Investors are broadly familiar with Tyler, I think, at this point, but the business mix has changed over the last couple of years with a much bigger mix of payments. Maybe you can provide a brief overview and then touch on the strategy, which now includes this bigger mix of payments following the NIC and some other smaller payments acquisitions.

Yes, definitely, our focus on the payments and payment specifically transactions broadly has increased, particularly since the acquisition of NIC in April of 2021. We already had a payments initiative at Tyler, like a lot of software companies whose software interacts with payments. But our -- pre NIC, our strategy was mostly around being a reseller of payment processing services and getting a small revenue share of the payments. NIC, for those of you that aren't familiar with the NIC acquisition was a public company focused on the public sector, but mostly on the transactional type business around providing digital access to government and processing transactions with government, think of things like renewing your driver's license through your motor vehicle registration or getting a fishing license and doing that digitally and then making a payment with it. So NIC would build the systems that facilitate access to that information, facilitate that transaction and then process the payments associated with that. So they have a very sophisticated platform for payments and specifically government payments, most of that done at the state level. And so with NIC, Tyler and NIC combined, have about $600 million a year today of transaction-based revenues, most of that around the payments. And so we're really accelerating the increase in payments driving that from using NIC's platform, which is very active at the state level. So taking that platform and driving it down to the local government space where Tyler has a huge customer base of thousands of local government customers and being able to not only provide payments associated with a Tyler back-end system like a utility billing system, to processing your utility bill payment or traffic tickets, those sorts of things but to do enterprise-wide payments associated with any payment that a city or a county might take. So where NIC has a very deep sophisticated platform for payments, we've got the relationships and the back-end software at the local level. So there's a big cross-sell opportunity there to continue to expand that even while NIC continues to expand their state level payment business by either adding new states or federal agencies or increasing the volumes as people look to do more things digitally with the government.

Great. The macro, everybody's favorite topic has impacted a lot of your software peers as we know, while your business has generally been unaffected thus far. What can you tell investors about prior cycles, how they impacted Tyler and any potential timing or differences in the cycle impacting local government budgets, possibly how things could be different in this cycle as well from real estate valuations?

Yes. I get that question a lot. And fortunately, I guess, a lot of our senior management team has been around for a while. And so most of us were here in 2008, 2009, 2010. And again, back at 2000, early 2000. So we've seen some down cycles. Each one is a little bit different that we really can draw on our experiences and how the company performed in. So yes, your initial observation is correct. Tyler is pretty recession-resistant, not totally immune, but pretty resistant. Generally, our customers on the software side are acquiring new software from us because their old software is at end of life. So governments tend to use systems much longer than the private sector really until they die. And so generally, when it come -- when they do reach that point where for whatever reason, they've decided that now they have to replace the system it's a fairly nondiscretionary decision. So they may move the timing a bit. They may say, well, this is a bad year from a budget perspective, I can do it next year. But it's not that they can generally say I'm never going to replace the public safety system or I'm going to just not have a court system. So pretty resistant demand. And I think -- when we think back about, say, the last recession and what's similar or different. Back then, we were mostly a license business. Today, we're mostly a SaaS business. So 2008, 2009, we were about 50% recurring revenues. Today, we're north of 80%. We believe the recurring revenues are pretty much rock solid. There are things like maintenance and subscriptions for mission-critical systems, again, payments around things that are fairly nondiscretionary, utility bills, renewing your auto registration, those kinds of things. So the much higher percentage of recurring revenues, and we believe those are pretty rock solid. In the new business market, people are acquiring new software systems. Again, back then, we were mostly a license business. So acquiring a new system required a big upfront capital outlay. Today, in the SaaS model, it requires a much smaller initial payment, you're just starting a new subscription. So there's less of a barrier to moving into a new system because of the capital requirement. And -- so we believe -- again, we look back at 2008, 2009, we saw over sort of an 8-quarter period, a decline in licenses. And at the bottom, they were off about 20%. That translated to a year where our revenues were flat because the recurring revenues were pretty much unaffected. Today, with a much higher percentage of recurring revenues and smaller license component, we believe that the impact of delayed deals, should there be more of that around a tougher economic environment would be much less impactful. And we would tend to see a more stable business than we saw even 10 or 15 years ago.

Right. Yes, the business mix has changed quite a bit there. With the MicroPact acquisition several years ago and now the NIC acquisition, you've really moved beyond just serving local government and now state and federal are important growing portions of your business. How do you think about the strategy with serving these customers? And do partners become more important to the process with this group?

Yes. Yes, Tyler, we've always been a company that's solely focused on public sector. We view public sector pretty broadly. In the past, again, pre NIC and pre MicroPact, we were mostly local. It's just kind of how we grew up. That's where our initial focus was. That's where most of our initial acquisitions were, and we built out a very broad portfolio and a very clear leader and the largest company serving the local government needs. But we always viewed other levels of government as part of our market. MicroPact, as you said, was an acquisition 4 or 5 years ago that got us more into the federal space. Their business is roughly 65% federal and 35% state. And they have a low-code development platform that is used for a variety of uses in state and federal agencies, things like background checks or licensing processes or EOC claims. And so they have a platform that is sold and implemented both through our internal teams and through a pretty wide partner network. And then we've also built off of that platform a number of sort of prebuilt products that we sell directly into state and federal agencies. So that really kind of was our kick start into the federal space. And then NIC was almost all state space. And so that got us into the transaction and payment space, mostly at the state level, as I just talked about, we're looking to take that payment platform and drive it down into the local level because we have the relationships and the sales organizations that they didn't have there. There's a big cross-selling effort going in the other direction where NIC has these very deep relationships with 31 state enterprise contracts. And these contracts are very broad and provide them the ability to provide digital government services. And so we have dozens of software products that have applicability at the state level, but we haven't historically had the sales organizations or the relationships there. So we're able now to leverage the NIC relationships. These -- the way they're very deeply embedded with [ CIOs ] and agency heads and governors, very deeply embedded with their initiatives and where their pain points are. And so we're able to leverage that to sell Tyler software products into the state government agencies through the NIC relationships. So that's really how we're primarily looking to continue to grow at the state level. I don't know that partners become more important there. The federal space is really where we've seen partners become more important. And so as we continue to grow there, we'll continue to work through that network.

Got it. If you look at the ERP business, it's historically you've been successful with Tier 2 and Tier 3 cities. But now with that product set moving fully to the cloud, do you think some Tier 1 cities that before who maybe thought they needed a lot of customization in their software would be more willing to accept Tyler's cloud ERP? Or how do you kind of see this market evolving?

Yes. ERP is our biggest sort of single product category on the software side. And it's accounting, human resources, payroll. It's the one area where we do see frequent competition from horizontal companies like Oracle, SAP, Workday [indiscernible]. In most of our other product areas, we compete with narrower sort of niche companies that just do things like public safety or property taxes or courts. So we do have a different set of competition. As I said, it's our biggest product, our single biggest revenue-generating suites of products. We have a couple of different products for -- one for smaller and midsize governments, one for midsize and larger governments. And so we're pretty broad there where we've been -- and we have a lot of success. We're pretty much the clear leader in public sector ERP. We win -- we have win rates in excess of 50%. So we're winning more business than our competitors put together in the public sector space. Tier 1 or in some cases, they call it Tier 0. So the very biggest cities and counties, the New Yorks and Chicagos and L.A. have not typically been our market because they've typically looked for as you said, a really high level of customization, maybe based on an Oracle platform or SAP, but years long implementations, massive customization, that's not really our model. Our model in that space is much more off the shelf. So we're really strong from just below that, all the way down almost to the bottom and then the very lowest tier kind of is the kind of QuickBooks market, and we don't really have a presence there. But everywhere in between, we're really strong. And I think in general, we don't see big changes coming in that desire for customization and the appetite for those massive projects at the highest tier. Where we're very successful in is that we not only have the ERP solution, but we have dozens of other applications that the horizontal companies don't have that are integrated with that, things like a utility billing system or licensing and permitting system or even down to something like a cemetery management system. And so we do really well when someone is looking for a whole suite of products from one vendor. But if they're looking for just a very high level, maybe best-in-class HR system, they might -- in the top tier, they might be focused elsewhere. We do believe that as more and more bigger governments figure out that customization isn't necessarily a great thing and that their needs aren't necessarily that different from everyone else that our model becomes more attractive at the highest tier, but we're really happy dominating those middle tiers in that space. We have other products where we're the big player in Tier 1. So like courts, we have 8 of the top 10 counties in the country. We do have L.A., Chicago, Dallas, Atlanta, Miami, [ property tax ] similar. We have a New York City's property tax system, for example. So the biggest taxing jurisdiction in the country. And then also, I'd say the other thing that's helping drive us to be more competitive at the upper end of the market or some of the things that we have that again are unique. So with our data and analytics platform that came from the acquisition of Socrata a few years ago, we now have really advanced data and analytics sort of business intelligence capabilities that layer on top of all of our core products that are proving to be a real competitive distinction for us.

That actually leads into my next question. Socrata, now known as Data & Insights if you go and speak to the different Tyler reps, which I get to do, it's kind of interesting. They get pretty excited about it. I don't know if there's some type of compensation bump they get there.

There is always compensation that the sales rep [indiscernible].

But which -- if you look at the different product lines, it seems like there's a bunch of them, which are you most excited about in terms of like actually driving material growth in the near-term? And maybe which are a little more in development and might be coming in a few years?

Yes. we have taken the technology that we got through the Socrata acquisition and built really products on top of each of our major core products. to take advantage of the Data & Insight's capabilities and to help further our connected communities initiatives, so being able to pull data out of these siloed systems and let internal government decision makers and managers have better access to better information to make better decisions, but also to enable them to share data and information across jurisdictions in a region and to make that information more transparent to the public. So it's -- it's an exciting topic for governments at a lot of different perspectives. I think we've had a lot of success with our financial insights. So the layer that sits on top of our ERP systems. Public safety has proven to be a real competitive advantage for us, where we compete with companies like Motorola or Axon or Central Square in that space. So we have really advanced capabilities there around insights into things like crime mapping, helping the command center determine where to send resources and allocate resources. So public safety has been a big competitive edge there. And tax and assessment is sort of one of those areas that hits newer, but is really growing. We had a really -- and this kind of ties back with NIC as well and the cross-sell opportunity there. We had a great win recently in the State of Kansas with our assessment insights. So we have a -- Tyler already has a statewide property tax system in the state of Kansas. But it's used at the county level. So each of the counties in the state has their own sort of siloed tax system. NIC has a state relationship, enterprise relationship in the State of Kansas and provides a lot of digital government services there. But the State Department of Revenue wanted to have better insight into all of the tax information that sits in these county silos. The counties wanted to be able to share information with each other understand information about how properties were valued and assessed and the public wanted better access to information. So through the NIC contract and their relationship, we were able to introduce our assessment analytics tool and sell it to the state to sit on top of all of these systems. So it's really sort of a 3-way arrangement that NIC was really the key to putting it together and us winning that but it provided a solution that really makes a difference to a bunch of different constituents in the state.

I think that's a great example of how the acquisitions you've made have been integrated successfully and the cross-sell is flowing nicely and everything is fitting together really well.

Yes. The exciting thing is with NIC where there's really sort of cross-sell going in 2 directions, selling NIC payments into Tyler customers and Tyler software into NIC customers. They were just in the very early stages. We spent the first better part of the first year after the acquisition, really getting to understand what each side had and what those needs were and what we could cross-sell and building those relationships to facilitate the cross-selling. And now we're starting to see really a nicely growing pipeline, seeing nice wins like the Kansas win across a number of different Tyler products, but I think we've had something like 16 wins in the last year that we're cross-selling Tyler into NIC relationships. But more importantly, the pipeline is growing much quicker than that. And so I'd say we feel -- we thought there was a significant opportunity when we made the acquisition. But as we sit here today, I think we're more excited about the number of opportunities and how the companies are able to work together to take advantage of those.

That's great. Moving on to 1 of my favorite topics, the competitive landscape in public safety has been shifting quite a bit here. We've got some new startups, not doing as well. We've got some other new startups emerging and then some of the legacy vendors losing market share, all while we know from the Q3 call for you guys that public safety is finally beginning to take cloud deployments. How do you see this market evolving in this year, I guess, now 2023? And how should investors think about the number of RFPs relative to the last couple of years?