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

Good morning everyone. Good morning. I'm Hala Elsherbini and I'm the Senior Director of Investor Relations and it's my pleasure to welcome you to Tyler's 2023 Investor Day. It's really great to see everybody here this morning in person, and I'd like to thank everybody for joining us on the live stream. We've got a full agenda. We get this. We've got a full agenda, and Lynn will kick us off in a moment, but I do want to just cover a few housekeeping items. Of course, our safe harbor statement. I'm not going to read the fine print. But as you may know, many of the comments made today are considered forward-looking under Federal Securities Law. And as described on our -- in our filings. These statements are subject to numerous risks and uncertainties and could cause future results to differ from those expressed today. And we're not obligated to publicly update or revise these forward-looking statements. And this is our statement regarding the use of non-GAAP measures, and we have provided a reconciliation of GAAP to non-GAAP measures in our appendix. So looking at the agenda and the flow for today, we do have 5 presentations, and we have 3 Q&A sessions. So we'll have a lot of time to get to questions. So if you'll keep your questions primarily focused on the presentations and the topics just discussed, at the end of the day, we'll have a Q&A session that will cover all the topics discussed during today. We will be also taking questions from the audience. And so during the live stream, please go ahead and submit your questions, and we'll gather those, and we'll take as many of those as we can during the day. We'll have a couple of breaks and then we will plan to wrap up at 12:30 with lunch to follow next door. And lastly, I do want to mention that we'll have our presentations available on the website later this afternoon. With that, please join me in welcoming Lynn Moore, President and CEO.

Thanks Hala, and good morning everyone. As Hala mentioned I'm Lynn Moore. I'm President and CEO of Tyler Technologies and welcome to Tyler's Investor Day. A few of you'll have asked me out in the hallway, how long has it been since our last Investor Day, and it's been over 4 years. But this is actually the first time we've done something like this before. We've usually done it in conjunction with Connect. And when I think about it has been 4 years, there's a lot that's happened at Tyler in the last 4 to 5 years since our last Investor Day. We've had a lot -- a few new strategic initiatives. We've had a lot of investments. And really, when you look today, we're quite a bit different company than we were 5 years ago. Five years ago, we did about $840 million in revenues. Last year, we did $1.85 billion in revenues. We're a little bit more complex today. We've got a little more pieces of the puzzle going on. And so really part of the goal for today is really to put all this into perspective. I'm going to start off by outlining a little bit about who we are and what we've been doing. I'm going to talk about where we're going and how we're going to get there. And then I'll close, we'll talk a little bit about what we're going to look like in the future. And then throughout the rest of the day, you're going to get a little more detail on each of these things. So let's start off with who we are. Tyler's unique story. Tyler is the leader in providing software solutions to the public sector. We're the largest company whose sole focus is the public sector. Last year, we did $1.85 billion in revenues, and this year, we'll do about $1.95 billion in revenues. Last year, 80% of those revenues were recurring. This year, it will be about 83%. Our gross client retention rate is about 98%. And our free cash flow traditionally outpaces our non-GAAP net income by almost 15%. So when I talk about us being a leader and being #1, what makes us #1 on in this highly fragmented market. Really, it's 5 core strengths that we've been leveraging for over 25 years. So let's take a look at each one of those. Our first strength is delivering the broadest, most integrated portfolio of public sector solutions. No other company has the full suite of market-leading solutions across all of the major functions of the public sector like Tyler has. So think about areas like public administration, ERP, HR, payroll, utility billing, permitting and licensing, appraisal and tax in courts, criminal -- civil case management, criminal case management, probation, supervision, e-filing, public safety corrections, CAD 911, records management, things in schools, school ERP, school transportation, our data and insight solution, our payments platform, our HHS solutions. And the thing about all of these solution functionality to the public sector. These are all nondiscretionary items. These are solutions they need to do their job in today's world. The fact that our applications are integrated is one of the things that really differentiates us against our competitors. Most of our competitors really only offer single-point solutions. Our second strength is our singular focus with deep domain expertise. The public sector is all we do. We've been doing it for over 25 years. We know this market. We understand this market. In fact, about 40% of our employees have worked in the public sector, which gives us key insights to how the public sector works and the things that they need. What you see here on this slide really are the things that differentiate us from our competitors, where the local regional niche players or they're large multi-focused national players. And you can see that singular focus is there. The other things that are on that list are things that I'm going to be talking about more of our strengths. Our third strength is our large installed base. Today, we have over 13,000 client locations with over 40,000 applications. I often say to people I talk to our client base is our best asset. And why do I say that? The public sector is really a slow-moving market. And so when you think about 13,000 client locations, 40,000 applications, what I tell them is you don't just develop that over years, it takes decades to develop that. Our client base provides really significant cross-sell and upsell opportunities. In fact, our installed sales is our fastest-growing channel within Tyler. So if you step back for a minute and think about some of the things I just said, if you take our installed base, along with our broad suite of products, and then you couple that with our 98% gross retention rate, the combination of all those 3 things really creates an efficient moat against our competitors. Our fourth strength is our strategic innovation focused on long-term results. Now there's 2 parts to that: strategic innovation focused on long-term results to take a disciplined, patient, long-term approach. And that's what we do at Tyler. When we make investments, we're not really looking for what's it going to do for us next quarter and sometimes not even next year. We're making investments and say, what's it going to do for us 3 years from now, 5 years from now, even 10 years from now. And one thing that's always been the case since I've been at Tyler is we never compromise long-term vision for short-term results. We're always playing the long game, and I think that's a real strength of ours. Our final strength is M&A. M&A has been part of our DNA since the beginning, and I say this M&A is part of our DNA, but M&A has been part of our DNA since the beginning of Tyler. It's how we were put together. When we look at M&A, we generally look for things like voids or gaps in our current product offerings, maybe something that's on our R&D road map, and it's a way to get to market quicker. We also look for opportunities where we can take a product and really accelerate its growth faster than that company could or certainly faster than what we're growing inside of Tyler. A great example of this is an acquisition we did in the fall of 2018, a company called CaseloadPRO. It's now our enterprise supervision product. That company at the time was doing a little less than $3 million in revenues. We paid about $9 million for it. The founders have built a great product, but they didn't have the resources and the ability to grow it and leverage it in a fast way. Since that acquisition, we've signed over $83 million in contracts with CaseloadPro, sorry, enterprise supervision. We take a very disciplined approach to valuations. It's one of the reasons most of the companies we buy are not from auctions or broker-led processes. Most of the companies we end up buying are companies that we know, we find ourselves in the field. We're familiar with them. We're familiar with their products, familiar with their culture. And a lot of times, what happens is you get a founder who wants to accelerate, he wants to grow his business doesn't have the resources. They're really focused on their clients and their employees, and that's where we're a really good fit. We've got a good reputation in the market as being a good acquirer. So I talked a little bit about our strengths. Let's talk a little bit about our track record and what we've been doing over the past 5 years. So Tyler is a software company was put together in February of 1998. I joined Tyler in September of '98. And so when I think about these last 25 years and think about the next 7 years or the rest of the decade and even farther and beyond, I really look at Tyler's 3 distinct phases. Let's talk a little about each one of those. The first phase was really the first 20 years of Tyler. And at that time, we were really focused on building our leadership position in core verticals, primarily at the local government level. We acquired 38 companies, including our cornerstone applications, Enterprise Justice, Enterprise ERP, Enterprise A&T, Enterprise Public Safety, ERP Pro. During this time, we were really hyper focused on becoming a leader in each of those core verticals. And specifically, we were focused on capturing clients. I talked earlier about how we really understand this market. And what we've always known is that the long-term value of clients in this particular market is very compelling. That actually led to our philosophy of going to market, which was for 20 years, our approach is what we call cloud agnostic. We have been offering solutions both on-prem and in a hosted version for over 20 years. And it was important to us to not necessarily focus on one or the other because there were some competitors who only did one and some competitors only did the other. And if you're only doing one, you were missing out on part of the market. And so our focus for 20 years was let's get as many customers as we can. At the end of that 20-year period, as I mentioned earlier, our revenues were about $840 million and about 64% of those recurring. The next phase is really what I've talked about the last 5 years. And did I skip one? -- skipped -- sorry about that. So over the last 5 years, what have we been doing? Well, the first thing we've been doing is we continue to do the things that we did for the first 20 years that made us very successful. We call the blocking and tackling, expanding our leadership position in those core verticals at the local level. That also included some elevated R&D that we started in 2017, 2018 really to help boost that leadership position. At the same time, over the last 5 years, we've had some new strategic initiatives and even more strategic investments. I'd say the 2 biggest ones of those initiatives have been: number one, changing our approach to the market from cloud agnostic to cloud first and all of that entailed in becoming a cloud company. The second was a series of investments where we really expanded our TAM into the state and federal and really with a focus on payments. So Tyler had been doing payments for many, many years, but it wasn't something that we really focused on. But we saw the unique opportunity that we had with payments given our installed base, given our applications, and you'll hear a little bit more about that in a little bit. So why did we do that? Why did we make those shifts, the strategic shifts and those additional investments? It was really to set the stage for a new period of sustained growth and free cash flow generation. On the cloud side, 2023 is a revenue inflection point in our cloud journey. It's the first time when our SaaS business is going to outpace our license and maintenance revenues. And over the last few years, we've been really diligent integrating NIC. We've created a unified payments team with a go-to-market strategy. We've also created the foundations for enhanced cross-sell opportunities through their state enterprise contracts. Again, you're going to hear a little bit more about these throughout the morning. So we talk about setting the stage for future growth. What's our strategy? First thing, I think we need to always reset, what's our goal? What are we always trying to do? And our goals are simple: grow recurring revenues, expand margins, generate more and more free cash flow. And again, to do that, we're going to continue to do things that we've done for the last 25 years. But in addition, I think there are 4 areas where that really can drive elevated growth, elevated free cash flow as we look out to 2030, in some cases, actually beyond 2030. And again, these are the areas that we're going to do deeper dives in for the rest of the morning, but I'd like to touch on each one of them briefly now. So our first growth pillar, probably not a surprise to many of you is leverage that installed base. I mentioned earlier, it's our greatest asset, provides fertile ground for cross sells and upsells. Right now, each client location averages about 3 applications, 3 products, and we think the opportunity is multiples of that. We're going to continue to make strategic acquisitions to get more products into that base. And one of the things I've been focusing on with the management team this year is an enhanced and renewed focus on client satisfaction. If this is one of our major growth pillars, we got to have happy clients because if we don't have happy clients, they're not going to buy more products, they're not going to flip to the cloud. They're not going to buy our payment solutions. So again, leveraging our installed base is one of our first growth pillars. Our second growth pillar is to continue expanding our TAM into the state and federal markets. So the recent acquisitions of Socrata, which is our data and insights platform, MicroPact, our low-code platform, NIC, which is now our Digital Solutions division and their state enterprise contracts, they actually fit together in a very unique way that can create a compelling offering for the state and federal markets. Bruce Graham is going to go in a little more detail of those as soon as I'm done on the stage. Our third growth pillar, completing our transition to a cloud-first company and to a next-generation SaaS company. This is going to fuel both top and bottom line growth. It involves things like optimizing our products for the cloud, consolidating product versions, closing our private data centers, migrating or flipping our on-premise clients to AWS. Jeff Puckett is going to go into detail of that a little bit later this morning as well. Finally, our fourth growth pillar, enhancing citizen engagement and growing our transaction business. How citizens interact with the government has always been a key part of our Connected Communities vision. And as it relates to payments, we believe we have a very differentiated offering that allows us to command superior pricing in our markets. Bret Dix is going to go in a little more detail about how we're going to accomplish that. Okay. So we've talked a little bit about Tyler's strengths. We've talked about our strategic shifts. We've talked about this period of investment, setting up the stage for next growth. So where are we going? What are we going to look like in 2030. Again, our core goals: grow recurring revenue, expand margins, expand free cash flow. As we look to 2030, we expect our recurring revenues will grow at a 10% to 12% organic growth rate. And at the end of 2030, we'll be at $3.6 billion to $3.8 billion. Again, this is on an organic basis. This is not taking into account any acquisitions between now and the end of the decade. We also expect to expand our blended operating margins to 30% or more by 2030. I do not expect that margin expansion necessarily be linear, however. We also expect that free cash flow margins will be in the high 20s. And that in 2030, we will do -- we will deliver about $1 billion in free cash flow. What's important is, a lot of you all have seen -- I've seen notes that some of the analysts have put out, you see it in our proxy. This year also, we actually started aligning our long-term compensation of our executives to these targets. So in summary, Tyler has a clear strategic direction to deliver long-term ARR and free cash flow growth. The investments and strategic shift that we've made over the past 5 years have really set the stage for us to deliver on these 2030 goals. Now it's up to us to go out and execute, something we've got a pretty good track record of. We've got a great leadership team. They're aligned and focused on these objectives. I talked earlier about me being here for 25 years, and it's funny because it's hard for me to believe sometimes I've been with Tyler for 25 years. And at times, when I talk about it, it seems like it's just been a blip of an eye and at times, it feels like it's been every bit of 25 years. And if there's any time I ever get confused, has it been a blip of an eye or 25 -- or through 25 years, all I do is look in the mirror. And so now it's pretty much been 25 years. But one of the things that I said to the management team and one of the things I've said to the board is, in my 25 years at Tyler, there's never been a point in time when I've been more excited to be part of Tyler. There's never been a point in time when I'm more excited about the future of Tyler than I am here today. And it's because of these investments, it's because of this strategy, it's because of this executive team that's all aligned and pulling in one direction. I've never seen the company so aligned at the executive level, which falls all the way throughout the organization it is today. And it actually makes it pretty fun to come to work every day, even after 25 years. So we're going to hear a little bit more about each of these things I talked about this morning in more detail. There'll be plenty of Q&A sessions throughout the day. But right now, I'd like to turn it over to Bruce Graham, our Senior Strategy Adviser to talk about leveraging our installed base and the state and federal opportunity.

Okay. Good morning. Great to have you all here. I'd say welcome to the surface of the sun here in Dallas. We're -- it's only 96 today. So this is a pleasant day, it's going to be hundreds and hundreds next week, and you guys will go back to home, and say, why does anybody live there? I can't understand it, but we do. And this is when all good Texas get out of here, though we're all ready to leave. So my goal to follow Lynn is to talk through executing our vision and really showing how this view that we have, this space that we're in that we believe there's a tremendous opportunity and how over the last 5 years we've gone about setting that stage and beginning to make that reality or that vision reality. So I'm going to talk through the opportunity, talk through the vision, go through the set of steps that we've taken, try to begin to give you more context on this. I know you guys are left brain, you like to talk about the numbers. I'm going to try to talk strategy a little bit with you, and I'll try to help you with how that all fits and then we'll show you some results and give you some numbers that you can begin to kind of take back home. So let's talk about the opportunity. So for us, as Lynn said, really, the biggest single opportunity is 40,000 installations of our software that are out there. This is -- we kind of throw this number around. And I would just put to you, there's not a close #2 here. I don't even know who that would be that is in the ballpark here. And when you look at our presence in every branch of local government realized that 40,000 installations is 1 vote at a time, 1 city council, 1 set of county commissioners brick by brick, we built this. And it also is not just the last 2 decades, I mean, John Marr Senior started Munis back in the '60s and began to serve local government, Dusty Womble in the '80s, started INCODE. I mean these are all businesses that have been working in this space for a long, long time, and it's taken us that to begin to build this kind of installed base. So we looked at that and said, "Well, is that it? Is that all there really is"? And in reality, when we looked at the installed base, we said no, there's way more opportunity here still to go. Just looking at the customers we were serving today. We did some internal analysis. And when we actually looked, this is not with cloud, this isn't with payments, this is just our internal customers that are already using our software, places we're installed. We have 10x the recurring revenue we're currently getting. That was several years ago when we looked and said, how much is available to us within our current customers, not new customers, these are customers that we're already serving. And yet for us, we had to begin to think differently about the company. We had to begin to say, well, what else would we do in order to go after this opportunity. And so we undertook a multistep strategy, and I do want to just kind of put context on that. We had a great runway, but we said we're really not taking advantage of our position. We're not taking advantage of the presence that we have. And we're going to have to think differently about this. The stock at the time was around 200. I built -- when I joined in '08, I was the division President for Courts & Justice, stock was about 11. We had a great run to get to that point, to get to where we were in 2017. And yet we knew, hey, to be the company we want to be and what we think is possible to unlock the power of this, we're going to have to make some moves. And we began to do that and we called that strategy Connected Communities. And it was a way to talk with our clients. It was a way to talk to many of you about exactly how are we thinking differently about this market. And what I want to try to do is kind of explain to you Connected Communities, how that -- how we've gone about making that vision a reality over the last several years. And then again, where we're beginning to see early results on that. So there are 5 steps that we have in hindsight now, we'd say that these 5 steps is what's allowed connected communities to happen and has positioned the company very differently than where we were in 2017. And I'm going to kind of walk you through each one of these. So the first was we just launched the vision. And we actually -- if you remember, many of you I know have been with us a long time. This was in 2017. We launched the Connected Communities vision. We told our investors, we told our clients this is going to take about a decade for us because this is a huge shift for the company, and these are investments that we're going to have to make over that time. And we began that process, and this was the initial vision, and I'm actually pretty proud of this because we've stayed within these frameworks during that time. And they've kind of acted as guardrails for us as we've gone on this journey, we said there's going to be a family. We're going to think about a family of products, and I'll explain that more here in a moment. We want our products to have a common foundation because at that point, they were all built off of different technology stacks. We wanted to have shared data be something that all of our customers begin to take advantage of. And finally, we were focused on civic engagement and resident engagement. Then personalized portals was the idea for us. And we said those are all tenants of our Connected Communities vision. So this family of products, I want to just take a moment on this and just walk through this just so you get it. And I know we're not supposed to talk about how a watch is made, you just want what the time is, but I do want to help you get this a little bit. The biggest fundamental problem, and these are I believe this is a market we know in government is that government is siloed. And that we all think every conspiracy theorists think that, hey, they know what you're doing. Let me assure you they don't. The left-hand hardly ever knows what the right hand is doing in local government. Between here and when you leave at DFW Airport, you're going to travel through probably 4 different counties. You may travel through 8 to 10 cities. You're going to go through in every one of those cities has got multiples of departments and agencies that make them up. And then you're going to go to a regional airport that's its own little island. Each one of those are little data silos. Each one of those operate independently, and we've made a fine living selling to each one of those independent agencies. But what we had to do was say, well, how do we begin to think differently about this problem? We were the best street fighters selling and going after each one of those individual markets. But to begin to unlock the power of our presence, we had to begin to say how do we think about these in terms of suites, -- how do we think about these in terms of connected processes. And so what you see here are some of the major processes within government. And just to give you a sense of why this is important. So this is -- in the justice system, there's a process called pretrial assessment. And I just want to walk through this so you get the concept. I won't keep doing this. I'm just so important to our strategy. I think you have to kind of get the idea. So when you look at this, you have an arresting officer on a Friday night in Dallas, they arrest somebody, they book them in, that's a city PD going to a county jail where they're going to book them in. When they do that, they've got to confer with the DA who's a district DA, maybe a state's attorney, may be local, may be elected. They're also going to have to work with the judge, who may be by the state might be county, might be district. What you're seeing here with the colors, those are 3 different systems purchased independently overall. Those are 3 vendors that we would compete with for each one of those different markets. So what we began to do was say, we have to have the best product in public safety, which is law enforcement. We had the best product in courts. We're going to have the best product in corrections and supervision. Each one of those and what our products are going to do is work in a pre-integrated way. So even though these solutions are purchased independently out of the box, they work across the suite. They work across these upstream and downstream processes. To make that super practical for you, what that ultimately means is that we win the demo. So when I'm demoing, when our team is demoing, the court solution or the [ jail ] solution or pick any one of those, if we already have a presence in there, we've got a nice strategic advantage because out of the box, it does things that we're the only ones that can do because it's already in there. So realize, again, we have 55% of the courts market. That's who uses our software. So in 55% of the markets, we're already there. And as we build these out and when we go compete for these opportunities, now we can go in and do things that we've never been able to do before. And that agency not only solves their individual problem, they're actually starting to work within an enterprise process. That's what we mean when we say a family of products, a set of connected processes. So what we've grouped that into is the suites that you see. But underneath each one of those are individual product teams with these products, and we've been investing for the last 6 years, we have teams working on this. These development dollars we talked about have been focused on these kinds of initiatives in order for our products to win the demo and over time, increase our percentages because it begins to be a network effect. The more products that we have in there, the more we're able to do things out of the box that only we can do. And our products then win the demo. And over time, that's how we build a sustainable advantage that we've talked about. So that was the first piece. The second piece was begin migrating all of our clients to the cloud. And Jeff is going to speak here in a moment about the operational benefits, and they are legion and going to the cloud for a company like us. I want to just talk about the strategic benefits because this, for us, turned out to be a real godsend. I mean to be able to take local government clients and move into the cloud makes everything about Connected Communities easier because think about the challenges that local government has with locally implemented systems. These systems -- so these are on-premise for us, and we know this again very well. These are various vintages, whether or not they -- it's not uncommon. They're locked in some broom closet someplace, aging gracefully there and multiple versions of our technology deployed. And so for us to go after a big vision like Connected Communities is pretty tough. If everybody is going to just do that in their own individual on-premise systems. So the cloud solves a ton of that for us. Now the ability to keep them on the latest version to unlock new features to do things like data sharing that I don't have to do a pull from that local system. I just have to get permission to get that put into the cloud because we've already got that. And that's why for us, not only are there a ton of operational benefits that Jeff will tell you about, there's a load of strategic benefits that we get as clients move to the cloud. The third piece was adding Socrata and they were the leading data and public sector platform, really the best in their market. Many of you had covered them, I think, before that. When we started with them and the journey that we've been on with Socrata was to first take them and second, to really begin to say, all right, well, what are the insights and the solutions that would be within each domain that are unique to that area like courts, like planning, like economic insights, begin to build that in each area. But the biggest move that we've made here, I spoke about a common foundation, and the biggest move here is that we've made Socrata, the data platform for every Tyler product. So it's the platform for Connected Communities overall. And I know this year's big idea is AI, and we're big fans of AI and excited about it. Last year's big idea was data. Everybody remember that. And oh man, we just got to unlock the data. There's billions of dollars in the data. Well, that's what we've been doing here. Let me explain to you kind of how. So the big challenge with data is not making data pretty. There's a load of companies can make data pretty. What's tough is getting the data out of the transaction systems, getting it out of the systems of record. So one of the investments that we've made is that all of the Tyler solutions now, all of our systems of record out of the box have a data that have Socrata as the data platform. And I am a fifth generation Texan. So -- and when I think about this term and our Socrata team don't like it, I say that each one of these has a data pump in them because you know what a pump jack is, you got to know what a pump jack is, right? -- oil coming out of the ground, right? We have data pumps in every one of these products that is pumping data into the cloud that now through our tool to normalizing that data and visualizing it and doing all the things that Socrata is able to do makes it actionable for the key people on top of that system that want to use that system, but now they're working off of real-time transaction data that is from the systems record at local government. That hasn't happened before. And this all happens out of the box, by the way. Again, the heavy lift was the integration. That's eliminated now for Tyler systems. Given our market size, given our presence -- that gives us a real advantage as we compete in this space. Fourth piece was acquiring MicroPact. And this company, there was clearly a presence that they had in state and federal. We were excited about that. They gave us a move into a TAM that and enlarged our TAM in a way that we didn't have before. But the piece that we're particularly excited about was the low-code platform that came with them. We knew that as we moved into the state market, I mean -- and I'm sure we always expressed this well, but cuts in government, commercial off-the-shelf software in government is a fundamentally disruptive technology. We've been living off that since 2000, meaning instead of custom code, we come in with a repeatable solution that's able to have higher reliability and be able to deliver the results. In state government and federal government, there's just fewer customers. And so the ability to have a highly reusable solution was tougher. Well, low code is better than custom, it's way better than custom, and that begins to give us a low-code platform for that market. Gartner said that. They said, "Look, by 2030, 35% of the solutions in state and federal are going to be replaced by low code. What they loved about this and what we loved about this is we knew as we moved into state market now and federal markets, we had the best of both. We're going to be selling our COTS products to state and federal, but now we've also got a low-code platform that we can begin to use that allows us to build repeatability means we're not a systems integrator in the sense of a classic custom developer, but we really get the platform that we need to compete in that space. And that brings me to NIC, which is our fifth piece. And I would say the final piece. I don't think there's a sixth move here of this. This was what we needed. This is the acquisition that really is such a cornerstone for us of where we wanted to be as a company and so excited about what they brought. And they brought this expertise in state government. They brought an expertise in payments. They brought in expertise in civic engagement. So first, just -- they have 18,000 applications that they have developed. If you're in 1 of 29 states that I'll show here in a moment, [indiscernible], you're using software that they've built. They're the experts in civic engagement. Again, I don't think there's a close #2 in terms of who's built at this level. By the way, realize as these get modernized, we're using our low-code platform to do that, that I just spoke to you about. And when we do that, we're uncovering opportunities for repeatability, reusability, new solutions that we can sell that are unique in this space. The other thing that was so excited about them is they have an expertise in trying to simplify government across multiple levels. This is what these applications have done. They had a product called Gov2Go that we loved and still doing several million users using that application, kind of proved its metal during COVID in terms of the volume that it can bring and allowed us to begin to have a platform that we could use, coupled with other solutions that we've acquired like MyCivic, that begin to allow us to meet this particular need. But those 2 things aside, and Brett's going to talk to you about payments, I'm not going to go into that at this point. The thing that NIC brought for us that we just did not have is this expertise in state partners. This deep set of expertise and experts and relationships. For most of us, that world of state, like courts, we had a little bit of relationships there. The rest of Tyler not much. It was kind of a necessary evil when we had to deal with state government because the legislature would pass new changes, new laws, we'd have to change all of our systems. We didn't kind of know what they were doing. Well, that's -- they were exactly the same. NIC was that way about local government. That looked to them like a really messy environment. So this is the perfect marriage in that way because they bring this expertise in state government, these are 30-year relationships in some cases. What they also brought is this culture of innovation, of integration. Our people are product people, and that's in the best sense of that word. We know how to go build and deliver excellent products that meet specific needs. What NIC brought was this process -- of this culture of integration. And when you think about as we zoom out on these problems as we go multiproduct, we needed more and more integration and innovation. And that's what they brought to us with dedicated state teams that have been doing this for their whole career. They've been doing it with custom and low-code, now they have off-the-shelf solutions. They have our products, coupled with their culture that has been so powerful. So when you put all that together, and I know everybody's got a bake-off slide like this, I really want you to absorb this for just a moment. And I've been here in this space a long time. I've been computing longer than I'd like to care. And I say this with no hyperbole. There has never existed a company at scale that serving government that has this breadth of capabilities, never been before in the history of computing, full stop, and I'll debate that with anybody. We've never had a company that had local presence like we have, 40,000 installations -- now we've got relationships with 29 states. We've got all the pieces in between. We've got this data platform built into the product. This hasn't existed folks. You're watching it come to life. And now we're here, as Lynn said, the stage is set for that. And that's what's been so fun for us. And I appreciate your patience and your investment as we have built this because this is now, we believe we can go against anybody. We compete against Deloitte on the high end. They don't have a local presence. They can't do what we do there. We compete against Salesforce. They don't have what we have in terms of partnership and years of expertise. They don't have the local presence that we have. We compete with small SIs or regional SIs, national SIs. They don't have relationships that we do with the state. They don't have our presence. It just hasn't existed. And that's the part that begins to set us up. And that's the results that we're beginning to see. And that's the part to kind of move to the next because these are early days in this early innings, as Lynn likes to say. So the first thing that it's done is expand our TAM. This is dramatic. It's more than doubled our TAM since 2017. And TAM is something analysts get pretty excited about. I'm a sales guy. I can tell you what we get excited about is I get to compete for deals so I didn't get to use to compete for. All of a sudden, our deals get bigger. Our sales teams, by the way, we told them dream bigger, and they like that because they're making some money on that. All of a sudden, their commission checks are a lot bigger because they're competing for bigger deals on that. And we're doing multiple complex deals that now begin to allow us to put it all together overall. The other thing that happens is our acquisitions. When we take an acquisition that fits within a suite, we move it through this channel, it is like putting it on steroids, and Lynn mentioned CaseloadPro. So just to frame that out for a moment, I mentioned before that we had a really good courts product. We had a pretty good county jail product, solid law enforcement and all that. What we didn't have was a parole probation. Well, in most of the country, courts have jurisdiction over parole probation on that. So CaseloadPro was 3 former probation officers, in Modesto, California, that loved our story, loved and wanted to be a part. As Lynn said, they wanted to be a part of making a bigger difference. These folks had a passion to make a difference in this market and reduced recidivism. That was what they were about. So we purchased them. Rename them. The growth on this has been crazy. This is just the ARR, by the way. This is in total revenue, 80% CAGR since 2018. I could have put 5 others up here. They wouldn't let me because we just limited the time that I had on this. This is normal for us when we build out these suites, and it guides our acquisition strategy. We don't have to do this through brokers often. We find the right company. In this case, they were already in Amazon Cloud. So it worked in that way. And this product is going crazy. Just as an example, L.A. criminal courts, they were running our court software. They selected CaseloadPro to be the parole probation -- they're supervision solution for all of L.A. Arizona, state of Arizona, same thing, looked up and made it the statewide solution. That's the power of this kind of approach in acquisitions. This is what we've seen now, and Lynn spoke about upsells and cross-sells. This is an attempt to try to show you what we're actually seeing overall. So 2 things that are going on here. These are new multiproduct sales, so not just sales that are the Classic, hey we sold to a specific agency, but this is where we had multiple agencies buying multiple products at the same time with one contract and sales back into the base, back into our installed base. So our expansion sales, what we're seeing is that's growing 15% CAGR a year. This is not slowing down. As our teams get comfortable figuring out how to do this and deliver this and as our customers figure out this is our strategy. This has become the norm for us. Just to give you another example here and this one I love because it's just so real. So this is a top 20 county customer. Current customer of ours that's in the justice side. Our existing ARR, $2.25 million. We do the courts there, we do the county jail, do jury. That's our ARR pretty solid for one county in the U.S. When you look at what we have from products we've developed, still available to us. It's another almost $5 million in ARR available for upsell. When you look at what we've acquired, it's another 10. So within that one client that we're serving well and helping them do some very difficult work to implement our software, we can grow that another 5x -- I'm sorry, get my math right, it's 7x on that, pretty incredible that we're able to do within that one. So the next thing for us that we wanted to begin to truly say how do we put all this together was working with NIC and these 29 state master contracts. These are broad contracts that are focused on digital solutions for government. Again, you had -- in each one of these, we have a state capital team that wasn't an IC team, the average in size between 10 and 30 in terms of the size of those teams, deep expertise in these markets. And yet we weren't getting all the traction here that we wanted. And so we began a process of working team by team, state by state, where we would work with the state GM, we'd identify the key priorities of the governor. We would look at the installed base that Tyler had again. So think about that we're unlocking this because it's different. We're unlocking the installed base for each state that we work with, prioritize those and then begin to identify and develop some of these opportunities. The best example I could give you -- and I can give you a load here, but the one again that we're a little limited on is a deal that we've already announced with the Kansas Department of revenue. It's a great example of what we've seen. So Tyler, before NIC had 105 independent county assessors. So these are people that tell you, here's your new property tax bill. You guys love them. They always sign it. They say, here's what it's in the check, not usually the most popular people in the block, right? County assessors, those were -- they all happen to be running our assessment, Tyler Assessment and Tax Pro product. They had a problem, though, where if you're an independent county assessor, those systems didn't share data. Those independent county assessors would say, okay, I've got only got one Amazon warehouse in my county and somebody would protest it, they wouldn't have a way to justify their valuation, which is kind of fundamental in that market or they maybe have one McDonald's. So what we said, we approached the Kansas Department of Revenue, said, "What if, since all those systems already have these data pumps in them, what if we pulled all the up into a Socrata cloud. It would allow each of them to share data to where now they could do a proper valuation, they could justify and have a defendable valuation. And oh, by the way, for you, [ K-door ] you can now begin to do forecasting. You can begin to do analytics real-time that you've never been able to do before. They love that idea. $650,000 ARR, a huge deal for our Socrata business. By the way, one -- and this is a small, relatively small state, realize that, guess what? This is highly repeatable. We -- there's a lot of these places. We have a 52% share in property and tax across the U.S. So we'll leverage our presence and do these kinds of deals bigger and better than we've ever done before. So I'm not kidding when I want -- I had about 6 examples. I said you don't have that much time. So I can -- all I can share with you is this. We have identified in this process, 221 of these multiyear opportunities. We have $90 million in qualified ARR that's currently in our pipeline. You will see us announce and deliver some of the biggest deals that we've ever done. And they're going to be deals like [ K-door ], others, where we're able to now put all these layers together. The state partners, Socrata, MicroPact, the solutions that were brought there and then what we have with the NIC relationships and our -- the power -- leveraging the power of our base. Okay. To wrap it up. So our installed base, as we said, created this unprecedented opportunity. We wanted to take advantage of that. We've made a series of moves since 2017, and you've seen those moves. We envision largely that those are done now and that we have completed that. The stage is set as Lynn said. And -- and as I said, and I put up that one bake-off chart, there isn't another company that's positioned like we are to go deliver on this. And that's why we are so excited. As Lynn said, we're just getting started on this. I've been here since '08. These are the things, working on these problems. It's frustrating for all of us in our form of government to see how difficult it is for them to do the basic things. And we're now positioned to actually help make that happen. And when we do that, guess what, we make a lot of money along the way on there. And we're solving the problems that matter and we're doing really some good for our shareholders. So with that, I'm going to turn it over now to Jeff Puckett. I would tell you that Jeff is a long-term friend. He's been in the company longer than Lynn because he actually was with one of the companies that was acquired. He -- he is now our COO. And the beautiful thing about Jeff is that he's done every job. He's been a Head of Development. He's been Head of Sales. He's ran one of our divisions. So when he comes in as the COO and begins to encourage and not just encourage but force people to adhere, they know that, guess what, he's got the chops. He understands the tradeoffs that have to be made. So I think you're in for a treat. Here's Jeff. Thank you.

Thank you, Bruce. Bruce is right, I've been with Tyler for 31 years and for the last 15 or so of those years. One of my aspirations has been not to follow Bruce on stage at any kind of speaking event, but that always seems to happen. So I'm often known as that guy who talked after Bruce Graham. Lynn mentioned that Tyler is not the same company that it was several years ago. And really to understand Tyler today, you have to understand the software side of our business and in particular, the cloud transformation that we're undergoing. And you also have to understand the transaction side of our business. So the rest of this investor meeting. The agenda structured such that I'm going to spend some time talking about cloud, we're going to stop. We're going to do a Q&A. My friend, Bret Dixon, is going to come up and talk about the transaction side of our business and we're going to stop and do a Q&A. And then Brian Miller is going to get up and put all of that together for you, so you can see how all of those combined and how our financials will transform over the next few years. So let's get started with the cloud transformation. So the 3 things I'm going to talk about here is give you an update on that cloud-first road map. I'm going to talk about the things that we're doing that are drivers to margin improvement. And then how those things combine to impact this Tyler 2030 vision. I think it's helpful. I know a lot of you know this story, but I think it's helpful to just take a step back and talk about how we got to where we are today. Tyler's first cloud customer was actually in 2000. So we've been doing cloud software for over 20 years. In 2011, we opened our second data center. The first one was in May and the second one we opened is in Dallas. And then by 2016, about 30% of our new total contract value that we sold was Software-as-a-Service. That's not that long ago. We were just at 30%. And then about 2019, we kind of hit a tipping point, and you'll see that in the graph here in just a minute. We crossed that 50% boundary. That was when we launched this cloud-first initiative, and we also signed a strategic collaboration agreement with AWS. So in 2020 and 2021, we really started significant investments in accelerating this cloud transition. I'll talk a little bit more about this in a minute. And those of you who have followed us closely for several years, we talked about the fact that we were making significant cloud investments during this time frame. We started deploying our first clients in AWS. And about in 2022 last year, we settled on a strategy and approach to close our private cloud data centers and to begin accelerating migration of our on-premise customers and our private cloud customers into AWS. So that brings us up to current state to today. Our priorities now are around evacuating closing those private cloud data centers. On launching our cloud optimized releases and on accelerating our on-premise maintenance to SaaS conversions. So let's talk about the way that you can evaluate where we are in that journey. And there's lots of different ways we can talk about this. I'd like you to keep in mind as I go through this, that we have dozens of major products that are widely deployed and hundreds of SKUs, right? So this is a very complex story, but my job and Bret's job, when he gets up and talks about transactions is just try to simplify that for you. So I want you to think about this in 3 different dimensions. The first dimension is new clients. Our goal here is to get 100% of new client contracts as Software-as-a-Service contracts that are deployed in the public cloud. That's our goal. The second dimension is addressing all of those customers with the last 20 years, we have put into our private cloud. And our goal there is to evacuate all of those customers from our private cloud to move them into AWS and basically get out of the data center business. And then the third goal is to take that large inventory of local installations on-premises installations that we have been doing for 25 years. Take all of those customers, flip them into away from a maintenance agreement into a Software-as-a-Service agreement and move their information into the cloud. I want to talk about each one of these different lanes independently. So in the first lane, the first driver has to do with new customers. So this chart, I think, tells a really interesting story, kind of echoes what I said a moment ago that in 20 -- late 2018, or early 2019 was when we kind of crossed this 50% boundary. That was when that cloud-first initiative really kicked into gear. And we have now grown that to about 87% of our total contract value is coming in a Software-as-a-Service. So we're -- in this first dimension, we're getting pretty close to the finish line on that first dimension. And just an example of what happens when we sell a customer as a Software-as-a-Service arrangement versus a license arrangement. And this example you're looking at here you'll see a customer that paid us $1 million upfront in a license fee, a onetime license fee, then they pay us 21%, so $200,000 or so a year in annual maintenance. That maintenance usually we see to start recognizing that maintenance the first year. So it's a significant revenue bump that first year when you signed that contract. If instead, we sell them a Software-as-a-service arrangement, we are effectively doubling their recurring revenue stream, but at the cost of not having that benefit of that onetime bump. So that creates both a headwind, short term and a tailwind. And that you've been seeing that flow through our financial statements over the past few years as we've been accelerating this. So the second dimension. So we have these 2 private cloud data centers. When we made this cloud-first decision, those 2 data centers were pretty close to being full. We were about at a point where we're going to have to add a third. So by signing this agreement with AWS by changing our strategy, by starting to encourage customers in this direction, what we're able to do is to avoid adding that third data center and start to draw down the presence and the capacity that's in our existing private cloud data centers. So we're on track right now by the end of this year. We'll be at about 60% towards our goal of having reduced our presence in those private cloud data centers to be able to shut those both down over the next 2 years. Then in the third dimension, and this is the dimension that is, we're going to be living with for the next several years. Our goal is to migrate or flip our on-premises installations, about 75% to 85% of them by the end of the decade. Now the 2 questions everyone always asks about this slide is, why can't you go faster? And why only 75% to 85%. So let's just take a minute and talk about why can't you go faster question. So one of the things Lynn said that I want to pick up on is that we always take the long view here. These are customers that we have multiyear, in some cases, multi-decade relationships with. Our promise to those customers is that when we go through this transition, we're not going to leave anybody behind, right? And moving them before they're ready to move before there's a clear, safe path for them to move is not in their interest. And so we don't think it's in our interest. Even if there's some short-term financial tailwind by doing that. So we're trying to calibrate the pace of this to have the most positive outcomes for our customers. Why only 75% to 85%? Well, a couple of things are happening. One is we're not at 100% new contract value as Software-as-a-Service. We're still signing some license agreements. Again, I mentioned at the beginning, there's a lot of diversity of products here. We've had many SKUs. Some of them are at 100%, some of them are at 30%. So we're still signing contracts. So we're still adding to that maintenance stream. And by the time we get to the end of the decade, there will still be some products that have not gotten to that state yet, we can migrate all their customers. But this will have a big impact on our financials, and we'll talk about that in a moment. We're at about 15% of that goal at this point in time. And again, what happens when we do a cloud flip? This slide is a little different than the one I showed you a minute ago, so I want to make sure I speak to this. The last slide that I showed you showed that when we signed a new contract with a customer, that we are effectively doubling their maintenance if we sign as SaaS, right? So they pay about 2x for Software-as-a-Service as they would for a maintenance fee in terms of recurring revenue. When we flip a customer from maintenance to SaaS, that number is a little different. It can be as low as 1.5 and as high as 2.2, the average comes out to about 1.7. Well, why isn't it 2.0? Well, a couple of reasons. One is if they've recently signed a license fee, then we're going to give them some credits for that license fee they just paid to get them to move to SaaS. If they've been a long-time customer and they've had multiple price increases, rate increases over time, they may be actually closer to our SaaS price than a customer who's relatively new. So we basically tailor our migration plan and a pricing strategy for each customer taking into account their particular situation. And so that results in that 1.7 factor for flips. So again, taking a step back, if you look at all 3 of these dimensions, we're getting pretty close to the finish line in the first dimension. We're on track to finish the second dimension within the next 2 years. And then the story that we're going to be talking about over the next 7 years is the migration of those on-premises customers. So let's talk about how these different initiatives impact margins. There's really 3 areas that I'm going to talk about. The first one is this private cloud evacuation. The second one is the optimization of Tyler solutions, those investments that I talked about that we began in 2019 and 2020. And the third one is version consolidation. Now I'm saving the most impact one for last. This version consolidation thing is a big deal, but hold that thought, I'll get to that in a minute. Let's start with the one that's easiest for everyone to understand, and that's the private cloud evacuation. Now I think it's understandable to say that operating data centers is not Tyler's core business. Our core business is building software. We've gotten really good at operating data centers, but we're not as good as AWS or Microsoft or any of those other providers where that's their focus. We can't match the ongoing investments that AWS has in security and micro services and other infrastructure. So we also have an ongoing need to make capital investments just to maintain our existing capacity. I think when we shut down these 2 data centers, we're avoiding about a little north of $20 million in capital expenditures that we were just about to have to start making just to keep that current capacity intact. So the second driver that's going to impact margins is the optimization of our solutions. And everyone always thinks about this as kind of a binary, you start it and then you finish it. So what are you going to be done? Well, it's a little more complex than that. There were -- when we started these investments, there were really 3 different sets of goals. The very first goal across all of our major products was to make sure that taking all of those products that have been running very successfully in our private cloud for 20 years, that when we moved them into the public cloud, that they operated at least as, if not more, cost effectively as they did before, right? So that was the first goal. We've already achieved that. So what we're into now are the second 2 goals, which are about optimizing, taking advantage of micro services, doing additional automations to accelerate onboarding and migrations and ultimately, getting into things like multi-tenancy. What you'll see over the next 7 years is us introducing the last 2 dimensions, but our first goal we have already achieved. The third margin driver is version consolidation. And so again, it's important to understand that when you have a large on-prem set of installations, the diversity of environments, the diversity of software versions. All of that equates to additional cost, right? A typical on-premises customer lags behind the current production version of the software by anywhere from 2 to 5 years. And they're sometimes outliers where they get into the 7-, 8-, 9-year range. Why does that happen? Well, there's lots of reasons for it, but a lot of it has to do with a customer does installation, they're happy. Everything is stable and kind of they take the attitude of, don't touch anything, right? And new release comes out when we provide a new release of software, we can break things when we do that, right? We have -- when you have thousands of customers operating in multiple different kinds of environments and you send out a release, the more customers you have and the more diversity, the likelihood that you're actually going to break something goes up to almost 100%. So the more that we can simplify that operating model, the more that it can be consistent, the better it is for our customers, the better job we can do and not breaking things. And the side benefit is it's a lot less expensive for us to do that. So this is the biggest payoff for us that we'll start to experience as we move customers to the cloud and consolidate customers onto single versions. This impacts our support teams, our development teams. It impacts our security teams. It impacts professional services, the level of effort to do implementations. Everything about the software side of our business is impacted by the negative of this version diversity that we have out there. So this is a big deal for us. So collectively, -- over the next 7 years, as we approach 2030, we expect these improvements that are currently underway to contribute 400 to 500 basis points to Tyler's overall gross margin. Now we've talked to enough of you to know that what you would really like us to be able to do is to talk about our software gross margin, our transaction gross margin separately. Our financial statements today make that difficult to do, and that is something we are working on. So to them, characterizing this just in terms of Tyler's overall blended gross margin. Okay. Finally, the impact of this transaction on Tyler 2030. So again, just a reminder that this shift from a license model to a SaaS model has created both headwinds and tailwinds. And you've been seeing that flow through our financial statements for the past several years. Good news. We really -- right now, we are at the inflection point where the tailwind from the SaaS growth is exceeding the headwind from the declining license fees. That happens this year. And it's one of the reasons why we started talking about margin improvements starting to come in '24 -- and by 2030, our revenues will grow our software revenues. So SaaS plus maintenance. That blended software recurring revenue will grow to be $2 billion. In the early years, '22 to '25, the SaaS CAGR will be about 20% declining to the high teens in the bottom half of the decade. The maintenance stream is going to decline by 1% to 2%, and that will start to accelerate to the low double digits to low teens in the bottom half of the decade. So again, why is that not going to zero? Well, again, we're still adding customers that are still going on maintenance. Those customers that are on maintenance are getting price increases. And there are some products that we've got, some legacy products that will never ever go to the cloud. They'll stay as on-prem software until they're retired. So that's what the model looks like, again, later on the Brian talks, he's going to put this together for you in a bigger picture of Tyler. So you'll see a version of this -- another version of this slide later in Brian's presentation. So in summary, this -- we are accelerating this transition and will continue to accelerate it. There's 3 dimensions to the transition. All of them are progressing well. We're happy with progress in all 3 dimensions. We expect these improvements to contribute 400 to 500 basis points of gross margin improvement by 2030. And the revenue mix will shift from about 27% Software-as-a-Service this year to 48% Software-as-a-Service by 2030. And when you see Brian's comprehensive model, you're going to see why the additional leverage we get from that transition really creates a big tailwind for us. So that's what I've got for you for the story for Software-as-a-Service and for the cloud transition. We're going to take a break now for about 10 minutes. We've given you lots of content, collect your thoughts, organize your questions. We're going to come back up here after the break, and we're going to do a Q&A. And then after that, Bret Dixon is going to come up and talk about the transaction business, and we'll do the same thing again. [Break]

Okay, everybody. We're going to get everybody to come back into the room and settle in for a minute so we can start our Q&A session.

All right. Make sure everybody is here, everybody is coming back in. Great. So we'll go to our first Q&A session. And I would like to ask Lynn back up to the stage. And I'd also like to introduce Brian Miller, CFO, to come join as well as Jeff and Bruce. Also joining us for this Q&A is Russell Gainford, our Senior Vice President, Cloud Strategy and Operations. All right, so this session we are going to have 40 minutes and for the audience here we do have 2 mics one on each side. So if you'll just raise your hand. And I will ask if you also just please state your name and your company. And just real quick, we'll also be taking some questions from the live stream. So anybody on the live stream, please go ahead and submit your questions in the box. And let's go to Saket first over here.

And if I would ask if you could really speak clearly and loudly in the mic because there's an echo sometimes up here, and it's hard to hear.

Excellent. Can you hear me okay? Excellent. Hey, folks, Saket Kalia at Barclays. Thanks so much for the presentation really helpful on a going forward to the second half as well. Jeff, maybe I'll focus this question for you. As you think about those 3 dimensions of the transition, I think number 2 and 3 were really interesting, the flipping of maintenance customers and the transitioning of customers from private cloud into AWS. Clearly, there are some things that you can't control. These are government customers, Ryan. I'm curious what you can control to maybe accelerate that if you were able to, if that makes sense?

Sure. Yes. So the question is essentially, what can we do to make it go faster. What is within our control. Let me talk for just about what kind of work is involved in flipping a customer. It's not necessarily what you might think. The technical task of moving the customer from on-prem into the cloud is actually not that difficult. And the more of that we can automate the easier that process becomes. The real problem goes back to this version consolidation problem, right? So if you've got a on-premises customer and they have allowed themselves and we have allowed them to get 2, 3, 5, 7 years behind the times in terms of the distance from the current production version. Before we can move them to the cloud, we have got to get them caught up, right? We've got to get those versions get them up to the cloud product version. And that's a pretty disruptive experience for a customer to take multiple years of software at one time. There could even be a training impact that has to occur. So what we have to do is go to each customer kind of access what their current state is, figure out what needs to be done to get them moved along and then execute that in the least disruptive way possible and in a way that's acceptable to them. So from our standpoint, in terms of the things that we can do to accelerate this overall process, independent long before a customer has ever agreed to flip into a cloud arrangement. We have a parallel project going on across multiple divisions who are focusing on getting those -- getting them caught up to the current production version right? So that's really the long tent pole in that effort. Is that to help?

Yes.

Okay. We'll go to Alex right here.

Alex Zukin, Wolfe Research. First, thank you for a very efficient and impactful Analyst Day presentation. So at a high level, you're basically guiding to a higher growth rate over the next, call it, 8 years, 10% to 11% organically than you've guided to before for the total company, which I believe was somewhere in the 8% to 10% range. And I think what you've said is part of it is going to come from the flips. Part of it is going to come from the upsells and part of it is going to come from the payment attach. Can you stack rank like where do you feel more -- in those 3 buckets, where is more of that going to come from? And if we think about the margin opportunities exiting that, you talked a little bit about gross margins and the efficiencies presumably, there's going to be efficiencies you're selling more product. But what's kind of the barrier? Like what's the aspirational margin target for the...

You're going to love Brian's presentation...

One thing I would point out when you talk about the growth rates we talked about those, those growth rates you've talked about so far were for the recurring revenues. So maintenance and subscription, so that basically the software recurring revenues. You'll see a little bit different growth rates on transaction revenues and then, of course, professional services is not a fast-growing business. We don't want it to be. So you'll -- I'll wrap this all up with those growth rates. But I will talk -- I will say, in terms of margins, the whole -- when we talk about our overall margin improvement between now and 2030, the biggest drivers are those things related to the cloud that Jeff talked about. Those are the biggest payments is a smaller impact, but still a positive impact on margins. And then OpEx is a much smaller impact, but there's some impact from that as well.

Not to jump ahead into Brian's presentation, we're going to hold that slide. Yes, you will see gross margin aspirations for those -- each of those 2 pieces of the business based on the way our financials are currently constructed today.

Terrell Tillman, Truist Securities. I'll echo the other analyst commentary on all the great content. Thank you for all of that. At Connect, I mean, cloud, cloud was a big deal and a lot of different reasons why they're very motivated now. What I'm curious about is, as we get into '24 and '25 and the propensity is increasing for them to the -- on-prem customers and the other one is in private cloud to move to public cloud, is there a change or an evolution on their actual interest to look at the other products at the time of that? Because I see that 3 modules in the 8 to 10, that is such a low-hanging fruit. I know it's easier said than done. Is there a greater interest. Hey, we'll look at those other tools now or now it's very much heads down though. And it's -- we just got to get to public cloud first.

So I'll start and then maybe Jeff and Russell, you can jump in. Absolutely. We view the opportunity when we flip someone to the cloud is a perfect upsell opportunity. So we talk about cross-sells. This is really what we believe is a huge fertile ground for upsells as we move into the cloud. Jeff, Russell, you want to add?

I would just add to that, that -- somebody asked a question during the break along these lines. I used to run our sales team at Tyler before my current job. And the guidance that I would give to a sales rep who was asking what they should focus on right now would be, hey, focus on getting that flip transaction done. If there's low hanging fruit that we can capture, great, let's go get it. But if not, we'll go back to the next year for that next piece, right? And I think that's probably consistent with the way most of the heads of sales look at it is let's not try to boil the ocean in one transaction. We'll do transactions with these customers every single year. Focus on getting the flip. Our role 2 priorities right now on our sales teams are these cloud flips and payments. And you'll see in Brett's presentation after this one, why payments is a priority for us.

I think the only thing I would add to that is when we do go back, because I totally agree, getting the flip is that first priority, right? That's a project in itself. But we have been investing heavily in common design frameworks and patterns our Tyler Forge recently was open source, and it's a public sector kind of design system. So when we go back to the customer and we show them some of our other solutions. It looks very similar and has the same user experience as the products they have today. which really helps when we want to do that additional cross-selling.

And one other comment. It works the other way, too. We have had some instances where customers came to us wanting a new product, but really to get that new product, they needed to move their old stuff into the cloud. And so all of these things do interact, but we look at this customer relationship with a very long horizon.

Real quick here because there's a couple of questions kind of related to this, may not kind of more from a financial perspective. But what would be the average SaaS ARR per customer of the $2 billion target and is that about 150,000 per customer? And does that include additional product upsells? Is that something.

Well, the $2 billion target for our SaaS revenues in 2030 would include upsells along the way. So that's part of the growth getting there. I actually don't know what we would have for an average customer number. There's a wide range of customers. I mean we have customers that pay us a $10,000 a year and we have customers that pay us multiple millions of dollars a year. The example Bruce gave with a large county and it's justice system is paying us a couple of million dollars a year. So I'm not sure the average would be too meaningful, but there's a wide range.

Jonathan?

This is Jonathan Ho from William Blair. Let me echo my thanks as well. Just in terms of the NIC acquisition, you've had this business for a little bit of time now. And yet the presentation, it seems to suggest that we're still in the early innings of seeing some of that synergy materialize -- can you help us understand a little bit better what your expectations are for the time frame and also how you measure the success of the NIC acquisition?

I'll start, Jonathan, Bruce, you've been working hard with the state opportunities. You got to remember, Jonathan, when we first bought NIC, we talked about sort of our goals, and our first goal was don't break it. And so everything we do, I talked earlier about our long-term approach to everything, and we do that even with any acquisition we do, particularly one is accomplished and is successful as NIC is we weren't going to rush things. Talk about barriers going forward and where we are slow, how fast are we -- I go back to my comments the stage is set right now, getting alignment across Tyler on a unified payments team with a go-to-market strategy is not something that's very easy. You've got different divisions doing different things. You've got what I call P&L territorialism, who gets credit for this, who gets credit for that because it all impacts their bonus. That stuff you've got to work for. Beyond the strategy of how are we going to go to market going forward? What's the product road map going to be? Who's going to control that? How are we going to do sales. That stuff, what we're trying to do our day in and day out stuff takes time to work through. And then on the state enterprise side, Bruce, why don't you talk a little bit more about these SAM meetings that you've been doing?

The SAM, the structured assessment meetings that I kind of laid out the diagram for, I would just say to you, the reason -- I mean, one, NIC is a very successful business. We paid $2 billion for them. And then we had obviously great sales teams, as Lynn said before. Getting those 2 organizations to understand how together, they could do more. And one, very local government focused, all of a sudden, they have access to state agencies. And then we've worked with Elizabeth and with that whole team just deal by deal of working through examples and for example, South Carolina, their governor, we were in there with Student Transportation, which is a local product that we had. Well, now South Carolina said, we're going to make that a statewide solution. We're going to have the whole state go to our student transportation solution in that. Well, that's something we turns out. We have a pretty good presence in other states like that, and now we start to replicate that going forward. So we say we're in early days because we're still crafting one by one. Here's what works in your market and then others see it and begin to replicate it going forward. We'll triple the number of deals this year that we did last year through that combination, and we would expect to triple that again, next year. And the deals the numbers that I shared there -- I meant to say this in the state, those are all accretive by the way. Those are not built into plans. That $90 million of ARR, that is not because we already had a plan. Those -- our NIC team had a plan. All of the divisions already had plans and yet we've identified and starting to develop these deals. Some of them will close this year, some will take next year and the year beyond. These are complex deals that you'll see to be cumulative going forward.

Yes. I think it speaks to what we always talk about, it's a slow-moving market. We think we're at the point, where we've done all the work internally. We're starting to see the results. But even when Bruce talks about qualified leads, these are things that we think will close in like the next 2 years. The other thing is you've got to remember, when we acquired them, there was a huge education process that had to go on. And we started off by trying to educate all of the state GMs and all of their salespeople about all the Tyler products and all that portfolio. And by the way, everybody has got their own -- everybody had their own plans that year, everybody has had their own goals to go achieve. And it's kind of -- it's the sort of diligent approach that we take to most things.

We'll go to Josh and then Alex, I know you have a follow-up after.

Josh Reilly from Needham. And nice presentation today. As you're moving to the public cloud here, how do we think about the mix going to single tenant versus multi-tenant today? And is there a goal as you get to 2030 to get that higher mix of multi-tenant and will you have a preference to get customers on multi-tenant?

I'll start and then Russell, you can fill in the details. I think what you're going to see is a little bit of a bell curve. There are going to be in our portfolio over the next few years, a mix of single tenant and multi-tenant environments, products. You'll also see a lot of hybrid products. Products where one portion of the application like the user interface and application tier is multi-tenant, but the database is still single tenant. And again, all of these products are on a journey that had a different starting point. They have different technical considerations. So we're trying not to force a particular template on every single product line, but that's kind of the answer I would give. Russell, can you add to that?

Yes. I would just -- I would add, so even when we started this and along with some of the acquisitions along the way, we do have many multi-tenant products inside Tyler's portfolio today. The investments we made in 2019 for many of our flagships is beginning to release this year, which will include a set of multi-tenancy options for each of those major products. And so whether it's our enterprise ERP product lines, appraisal and tax product lines, permitting and licensing, all those products that are coming out this year, all those investments we've made along the way are being released and they umbreleasing into a multi-tenant environment. We do expect and we will move towards over time, going back to version consolidation, we will move customers over time when they're ready and we're ready into those environments to operate at scale inside those multi-tenant environments. Not every product will be there on the same time line as Jeff mentioned, but a big chunk are moving this year, and we'll continue to invest to move the rest.

It's in Brian's slide.

Alex Zukin from Wolfe Research. So I guess maybe since we're not going to talking about Brian's slide. Let's talk the carrots and sticks associated with the cloud migrations, maybe start with carrots like security and maybe what percentage of customers are you finding that's a really important driver for a flip, maybe Gen AI. I know that the topic du jour, how customers are pursuing that may Bruce, you could talk to that. Is that starting to even become a conversation starter for a reason to move? And then maybe Brian or Lynn, you can talk about do you ever plan and support for certain products or introduce discounting strategies more aggressively to incentivize and drive flips and what you're doing there from a sales perspective as well.

So there were several questions in your question. Let me just -- let me start with kind of generically the way you framed it as a characteristic approach. I've been through several product retirements in my career. And I think they always follow a pattern. And it's a bell curve pattern, right? You have -- at the beginning, you have early adopters then you start to get into the vast majority of your installed base who will move if you give them the right incentives, right? That's where we are today. We're in that, if we can give them the right incentives, they'll move. A lot of the early adopters I think are already there. And to your point about what drove that, I would say, probably over the last few years, as we've been going down this path, security is absolutely the #1 motivator for customers to move into the cloud. And we've heard that from our customers over and over and over again and I think some of you all who went to Connect conference and talk to customers heard the same kind of thing. That probably is the biggest driver. But COVID also accelerated that push. People figured out, hey, having to have personnel that have hands on physical equipment isn't so fun when there's some kind of disruption, right? Going forward, as we get to the very end of that bell curve, again, looking backwards on my career, when you are down to a small number of customers that just won't move and they're not part of that big community of users anymore. Yes, maintaining them on an older version of the software on-premises going to start to get more and more expensive. And eventually, the unit economics of that will -- it will make sense to them of, okay, I need to move.

And I think one of the other big drivers that's high on the list of people choosing to move and it's not getting better is just their ability to deal with the infrastructure and particularly with the people. So the same thing we have the competition for talent. As the workforce ages, particularly in the government space and those people retire, being able to attract people to fill those jobs being able to pay market rates, all of those things are big challenges for them. So to the extent they can eliminate replacing an applications administrator or a security person by moving those solutions to the cloud. That solves the problem that a lot of governments face and it's not getting easier for them.

And to supplement what Jeff said, I think we talked about this on the break. We had a client last quarter out in Arizona, and we had tried the carrot approach. We've been pushing them to move to the cloud and flip and for whatever reason, they were not doing so. Fast forward to not too long ago, they had a ransomware attack and shortly thereafter, they were signing up to flip into the cloud.

I think we're a long way away from getting to that what you characterized as the stick approach for the foreseeable future. And again, it goes back to what I said earlier. We want customers to move, but we want them to move because they're ready to move. So part of this -- on our part is education. Part of it is sitting down with them and looking at their infrastructure spend and figuring out when a good time would be. Some customers are ready -- that they want to move but they want to get the full value out of the equipment they've already purchased first. So there's lots of dynamics when you're sitting down and talking to a customer about timing.

Yes. We also have a long history in our DNA at Tyler and I talked about the early years in capturing market share and being a leader in verticals and the long-term value of clients. One of our mantras is always don't put your client into a buying opportunity or making a new buying decision. So we want to cooperate with our clients at some point down the road, will there be more of a stick approach. I mean you can imagine things you're not going to get new upgrades, you're not going to get the same kind of support. But I think to Jeff's point, we're not there yet.

Okay. I think Clark, you've got a -- and then we'll go to Terry for a follow-up.

Clark Jeffries at Piper Sandler. I think we've spent a good amount of time on the macro view of how the subscription transition gets there. And maybe a follow-up to the previous question about. Maybe on the micro level, just as we think about the capacity, you're doing a few hundred flips currently, tens of thousands of on-premise customers. Maybe walk through what are the ways you can get leverage in the migrations? Is it new versions being closer to the cloud version and it can be automated, is it going to be going to those customers off cycle? Could you just help us think through the micro level that capacity?

I would say, again, what it really does boil down to for most customers is making sure that, if you were to go to every customer and you would have a cloud readiness checklist, right? The first, second and third item on that checklist would be, are they running the current production version of the software? If all of those are yes, then there really are no -- there's very little in the way of logistical hurdles to making them migrate. The conversation is different. It's about timing and all that kind of stuff. So in parallel to this flip program where we're actually going out, we're contracting with customers. We're flipping them and you're right. We're doing, I think, in 2023, about 500 or so flips is what is expected for the year. That will need to ramp up that to north of probably 750 a year. And when we look at customers, we've given you lots of numbers, 40,000 installations, 15,000 customers, 13,000. There's about 5,000 customers of those that are already in our private cloud. So those don't count. We're not going to have to flip those. We're already paying a SaaS fees. And the balance of them, typically, those customers have multiple products, and we're going to typically sit down with them and come up with an arrangement to flip all of them at once, not do them one at a time. So you'll get some multipliers in there in terms of the rate, but I really do think that what's going to -- if we hope for acceleration in this effort in the out years, what's going to do it is our divisions out there working with their installed bases today, getting them caught up to the current production version of the software, so that when we approach them to do a flip, there's not a roadblock.

Yes. So just to be clear, that 500, say, flips that we might do this year, would be a much higher number in terms of the application. So each of those customers might have 3 or 4 applications, so it might be 1,500 or 2,000 of 20-some-thousand on-prem applications.

Terry follow up?

Terry Tillman, again Truist. I was hoping to talk about data pumps.

We were hoping to talk about it, too.

It feels like that's going to be in a title maybe for somebody. But -- so with Socrata, you all had that for a while, though. But -- so it does seem like it's more and more resonating, and I think you all gave the example in Kansas. And it seems like it's strategically it's hitting more often now. What changed? Or what was the inflection point in that? And then going forward, it sounds like -- it's like a data pump and all the apps you said. So is it a real direct monetization play? Or does it end up creating an opportunity to just sell the other products and go bigger? I'm just trying to understand the best monetization approach.

Do you want to cover it? Get the 2 questions in there.

I would say, one, I think the inflection point was, I think, Jeff, at the time the product line is reporting to Jeff, and we made the decision to make Socrata the common data foundation that was 2019, 2020? Great. that was the inflection point because -- and then again, we have to build that into each product when you think about it. We've got to get that rolled out and each product has to have this pre-integration into the cloud. I would say you'll see both. It does enhance every product because now our traditional enterprise ERP products or every product we have has got advanced analytics that allow them to win the demo just for that particular area. At the same time, we will directly monetize this by doing solutions that have never been done before, like that Kansas Department of revenue, that -- nobody knew you could do that. They didn't ask and we approached them and said, "Hey, what if". We're working on problems that we've -- that are at a scale because of all these dynamics that things like economic development. We -- in New Jersey, we do -- they signed up for an economic insight. So we have data coming from all of our transaction systems now into an economic insights for the New Jersey Economic Development Board. That model, when you couple that with our property, our tax data, all the other data that we have becomes a first of its kind, kind of a solution. And in certain states, they're very focused on economic development. And this begins to give the governor and that -- the Department of Revenue and those, a chance to do things they've never done. Another example, we have -- it turns out that we have some states where we have -- with our school ERP solution, we have 85% of the school districts in several states, run our school ERP solution. So now through NIC, we've connected with the Department of Education. And we said, "Wouldn't you like just to eliminate all of the reporting that comes to you quarterly from these districts, what if we could turn that into an Education Insights solution. And because they have very long-term relationships and because we have this presence and those systems are pre-integrated, we're able to offer that and monetize that for that department. So there's real value in that way. For the DOE, they've never had this before. It eliminates, in our case, some reporting that's kind of onerous that we didn't enjoy and yet it makes the state a much wiser. It gives them becomes a smarter agency in that way. I can do this all day long, by the way, I'll quit. But I'm just saying there is a lot available in those areas. And that's why it was so exciting. When all that began to hit and now we had relationships with key decision makers that could work off this transaction data that existed in our systems, it's opened up a lot of interesting doors.

I would say, too, that when we acquired Socrata, their business model was to really treat this as kind of a generic platform. But the problem with that is there's lots of generic platforms out there. And selling someone a generic platform requires them to know what they want, then requires them to have some internal expertise. That's not always the case in state and local government. And so we took a little bit different approach. And so in addition to building all these data connectors, the data pumps that none of our technical people like that term. But in addition to building those, what we also did is for each of our major products, we built really compelling out-of-the-box turnkey data solutions that were applicable to that customer. So whether it's a finance department or public safety and like, for example, in -- when we acquired NIC -- they had a couple of contracts, big contracts, big state contracts that are up for renewals. And one of the things that Socrata was able to do is come in and offer them a solution that provided a way to do fraud detection, for example, right? So now they've got a differentiating capability in their portfolio. And these are not Snowflakes. These are not one-off solutions. These are things that can be repeated from customer to customer to customer. So that approach of giving customers an out-of-the-box solution for data that doesn't require them to have an onboard data scientists to make sense of it. That's the value that we can bring to that equation. You also asked a question about AI. And I know probably the lots of Investor Days, there's lots of companies that are kind of tripping all over themselves to get out in front of the AI train. I know it's going to be no surprise to anyone in the room. I don't think that state and local government is going to lead the way in the AI transformation. But it does have a place, and we can talk a little bit about where we're going with it. Lynn, do you want to?

Yes. I mean, for sure. I mean, AI we've got a team that's looking at AI right now. We've got a task force that's being put together. We do think there's a lot of applicability in our business, both on the OpEx side and operational savings as well as some potential revenue-generating side. When you think about just some of our day-to-day things that are more mundane routine tasks that AI could do even in perhaps the support world or a lot of implementation tasks even in some -- in the Dev world. We do think there's a significant opportunity. We're probably not going to be on the forefront. There's also other companies out there that are going to be doing things that we'll be able to leverage over time. But we're looking at it hard, and we're looking at it seriously because the potential is there. Our task force is really going to come back with recommendations. And I think part of the thing is like a lot of things we have at Tyler. We've got a lot of stuff going on, and it's how do we prioritize and look at resources going forward to sort of pinpoint where we think our best uses of AI is today. Russell, you got?

Everything Bruce talked to as well. We all know that generative AI and large language models, they're based on the data that you provide them. And so all of our strategy with our data and insights really takes us a long way there. And we're already talking with our task force and customers, and Lynn mentioned like support use cases. One of the areas that we think long term, though, generative AI that we're excited about is really what Brian talked about earlier, which is the workforce issues that we see in public sector and using generative AI to help supplement and the productivity for our customers and the work that they do daily. So -- it was just a couple of months ago, I think they published a study saying that since the pandemic that if you look at March of this year that all private sector jobs that have been lost have been filled and some had actually gained, but the public sector in totality was down 650,000 from February 2020 -- that's 450,000 in state and municipal. So there's a shortage there. You've probably seen the articles and teaching shortages, and you've seen the information as the generations head to retirement. We say generative AI, just like in all industries, but specifically with the silos and public sector, helping customers move and be more productive in those areas and really the future for it. So as our task force comes back and we continue with customers, we're excited to continue to look at it.

Do we have a question right there?

It's Darren Bacon from Prime cap. Thank you for the presentation so far today. It's been a very useful discussion. I think you did a great job describing how Tyler has changed in very significant ways over the last 5 or 6 years and the way -- and where you want to go over the next 5 or 6 or more. I would love to just hear a little bit more about how you feel that your customer base maybe has changed, right? With respect to their motivations, their desire or their goals around digital transformation or the factors that are influencing their buying decisions, either if they're coming new to your products from that very fragmented landscape you described or if they're already a customer, but you're hoping to upsell them into many more solutions or to your cloud products or things like that. I would guess most people in the audience here, we follow a lot of software companies and have maybe at least a little sense of what the business buyer is looking for. But when you're talking about a state and local government official or decision-maker, how is their viewpoint evolving in a world of digital transformation and big data and all the factors that might affect them differently than it affects sort of the private sector?

Well, I'll start. I mean, the move to digital transformation. It was slowly coming. COVID jump-started it. And then some of the things coming out of COVID have really lit the fire. So Russell just mentioned workforce issues that are going on. They're increasingly got to do more with less. And as more and more people retire out of that public sector, one of the things I used to talk about with the management team is you look at your kids, look at how they use technology, look how they view technology. Those are our clients of the future. And so we have to be there. And they're starting to embrace it in ways, look at security and what we just talked earlier about movement to the cloud. So I would say that our clients are embracing transformative technologies. They need to do more with less. They're embracing data, being able to make more actionable decisions on key data and insights. The things that we offer to automate their systems, automate their processes. I think we're in a time right now where that's only accelerating and it's going to continue for some period of time. Bruce, Jeff Anything to add.

So maybe Bruce can pick up on this. So you guys saw Bruce's presentation that talked about systems interoperating with each other. And I know from a person who doesn't live in this world every day, you kind of look at that and say, "Well, of course, that's the way it should work. I've seen Bruce give that a different version of that presentation to customers on multiple occasions, talking to state and local CIOs, elected officials, and the uniform response is head nodding of, "Oh, thank God, " yes, this is what we need. So I think there's a couple of things going on here. One is the workforce in state and local government is getting younger. When I started in this business, you could not try the big yellow tablet out of the judge's hand, right? That's -- now you have new judges in their 40s coming on the bench and they have an expectation. They're like, what is all this, right? So that's definitely a factor. But I also think, in some cases, where technology has progressed organically in their organizations has kind of reached a point where, okay, they needed to do more and they're going to need to do big things. They're going to need systems to interoperate. They're going to need to make data-driven decisions. And so seeing that pitch that Bruce did and then going, "Yes, this is what we need. " This is because those are real problems.

That's the only thing I would -- I just think that's very much what we're seeing. There's a generation coming up. I mean, I don't have to be a rocket scientist to say the federal government is kind of a mess right now, right? I mean, not too encouraging. I've been doing these state reviews. There's a generation of governors coming up, both red and blue, that have different expectations. And then that trickles all the way through there. And I think analytics data is not going away. They expect to be able to get to that -- that's one reason we've invested and doubled down on that. And I think the expectations are going to be different going forward. We also -- in that one chart shows that we're seeing more and more I'd say maybe enlightened purchasing and saying, "Hey, let's solve a bigger problem here. " And when you begin to solve some bigger problems to say you have a suite and connected communities really makes a lot of sense.

Yes. And going back to my comments earlier, and I was talking with Bruce on the break about the excitement of the management team at Tyler and seeing the opportunities ahead. Part of it goes back to my presentation and Bruce's presentations that -- we're the only company out there who can do all this for them. And that's pretty exciting.

Okay. I think we have time for one more follow-up from Jonathan.

Jonathan Ho from William Blair. We just -- so one thing that I wanted to think a little bit more broadly about was Tyler as a broader platform or suite of solutions. How often is your ability to tie into a broader set of systems, the winning factor for some of these competitions? And does that maybe lead to a broader sort of visionary sale to more CIOs or sort of higher-level executives versus more traditional project managers?

I do -- that's what we were trying to -- we are seeing when we're able to tell that bigger story of how all these pieces begin to -- how we're thinking about this. I think we're seeing CIOs and senior decision makers begin to opt towards that. The challenge is every agency is purchasing independently often. When they realize that we've been creating an enterprise architecture underneath this that over time, as they put more into it, they're able to do more, that is exciting because otherwise, it's a very, very difficult problem. I was -- I've worked with CIOs who was in a top consulting firm working with some of the largest companies in the world in their problems. The problems facing City and County and State CIOs are the most complex that there are. It's -- there's no boss. There's no CEO. And so we've tried to create this underlying enterprise architecture that they can tap into and over time, has a network effect that begins to have more value the more pieces that are put in place. And I think for CIOs that embrace that kind of understand it, we've seen that be a real difference maker.

Yes. And Jonathan, if you remember in Bruce's presentation, he had a slide on that, multi-suite deals as well as it wasn't all 100% multi-suite deals, it was also cross-sells, but that's been growing at about a 15% CAGR over the last 3 or 4 years.

Okay. Well, this concludes our first Q&A session. So thank you all to our panelists and giving you time to get on stage and I'll introduce our next session.

Okay. So now I'd like to introduce Bret Dixon, President of our State and Federal Group.

Am I on? Great. Okay. Nice to see you this morning. Thank you for taking the time to learn more about Tyler. I'll tell you, if Bruce was a self-professed sales guy, he said that right? Jeff is a superior operator. I don't know that he said that, but he is. Unfortunately, I am a teacher. So you're going to wind up perhaps learning more about payments than you ever bargained for. But just hang in there. I think there'll be some nuggets in here that will help you understand why we are so excited about payments being a growth driver for us. As any good teacher would do, I'm going to give you the answers to the test right upfront. Our clients, they value our payments solution. Key word is value. Payments is going to enhance Tyler's cash flow. It will put pressure on our margins, but maybe not for the reason that you think, we'll talk about that. And then finally, payments is a part of transaction revenue. Transaction revenue is a P&L line item that made up of multiple revenue-generating products. Payments is the biggest component of transactions, and it will grow faster than the projected 10% to 13%, but it is a part of that, all right. So let's get into payments. First thing we're going to do is talk a little bit of history, how we got here, one has been long there. We will talk about the product and what makes it unique. And then we'll end with how we're driving growth in the marketplace. And it will correlate with a lot of things that you've heard, and we think it's very, very practical. Okay. So why in the world with Tyler want to get into the payments business. Why do we think we can become a dominant player in the government space. First, a little context. We all know the government funds itself by bringing dollars in, taxes, fines, fees, permits, so on and so forth. We also know that government spends a lot of money. They disperse a lot of money to citizens, to other businesses to other agencies. These bringing money in and sending money out is measured in the trillions of dollars, over billions of transaction. Here's the hook. Many of Tyler's products that we sell and have already sold facilitate those payments. They initiate those payments coming in or out. So it's a natural extension of our product set and it's a natural extension of our service to our clients. We were interested in payments early on, but we were early in our payments journey and then we purchased NIC. Immediately, our payments installed base grew by 600%. But what was even more important is we acquired a product that was deep in features -- government features, by the way, because all NIC did was government work. So they understood government and their payments product was built for government. The other thing that we got with NIC acquisition is executives and team members that had a deep expertise in payments. So it has accelerated Tyler's journey into the payments marketplace. That's one of the reasons their expertise in -- NIC's expertise is one of the reasons that we have consolidated payments into one payments organization. So we took the Tyler Payments team, merged it with the NIC payments team and then our rapid financial solutions acquisition that we made in the fourth quarter of 2022, we've taken all 3 of those companies, and we put them into one payment organization. Now just a side note, this is not winning. This is just true. That's not easy to do. 3 companies, 3 product road maps, 3 cultures, 3 set of processes, 3 management structures. We've got to put into one cohesive organization geared towards growth. We've done that heavy lifting. And it -- I'm making it sound like my job is so hard. It was actually not that hard because these people are excited about the opportunity that is in front of us. This payments organization now interfaces every day with all the Tyler verticals with all the Tyler divisions. We work with them on their installed base with their customers. We work with their sales teams. We also work with their support teams and their implementation teams. So that is happening right now. That is working right now. By the way, over the last 2 years, we've doubled our dollars processed and we're just getting started. We're just not in start -- so that's a little bit of how we got here. Now let's move into the product. And this is where I'm going to ask you to really bear with me here. This is the teaching part. I'm just warning you, okay? So here we go. It is a unique offering. Now if I do a good job of explaining this, then the rest of this presentation is going to make a lot of sense. So just bear with me on this slide right here. This is meant to represent a payments life cycle, okay? starting at the core application all the way through resolution. The light blue part is the Tyler part. This is what we do to facilitate a payment. The dark blue part are 2 institutions, a processor that in layman's terms is a special network that gives you access to all the card and banks, okay, in a payment life cycle. So put a pin in that. We're going to come back to that blue part in a little bit. Right now, I just want to talk about this -- the light blue part. I want you to focus all the way to the software solutions icon. That's where our payment mindset begins, not at the payment engine, where a lot of people begin, not at the payment engine in a generic portal, but all the way to the core systems that initiate payment. And there's 2 things, I want you to understand about that. Here's the first. We own a lot of those products. So that's utility billing. That's permitting. That's business registration that's veterans benefits, that's e-filing. Those are the products and many more that we built, we implement, we support on behalf of our clients. 40,000 of them plus another 18,000 at NIC. What owning those products allows us to do, you see that portal. That's how the citizens and the end users interface with the payment engine. The fact that we own those software products allows us to build very purpose-driven portals into the payments engine and into those software solutions that gives citizens and end users a very unique experience, a very rich experience. It also eliminates an integration point. So now you're a software provider is also your payments provider. So you don't have to deal with 2 companies on that connection there. Our customers really like that. So that's the first point of starting at the software solutions. Follow me on the second one. Because we build as a company, we build those solutions. That means we are heavily invested in understanding workflow. We understand government culture. We understand government compliance needs. We understand government reporting. We understand how departments work between one another. We understand how they like to deal with their constituents. All of those attributes get reflected in our payment engine. For instance, our payment engine is configurable, just like any good software company would make a product, it's configurable. Maybe a bank, I don't know. Pure-play, I don't know, but a software company certainly has a configurable payment engine. What that allows us to do is to configure into a customer's business process, their preferences as opposed to having their preferences and their business process defined by the payment engine. We can adapt. Speaking of Adapt, we're not afraid of integration. I may have state agencies that need to integrate to a state accounting system, not a problem for us. We're a software company. We know that doesn't scare us. You may want us to integrate with an interactive voice response unit or a mobile device or a cash register, can do, not a problem. We're a software company. So those attributes are reflected in our payment engine. Reconciliation, a pretty common process. Reconciliation just means when the card carrier -- or the bank says, yes, that's a good, that's good on that charge has got to reconcile all the way back to the software solution. We do that very elegantly, but we also manage just like government people need to have this managed for them. We manage refunds, disputes, returns, those types of things. We do that very elegantly for government, okay, for government. Now I could go on and on to geeking out a little bit here. I'll stop with those -- there are other features that we could talk about that are specific for government. Here's the last one I'll call your attention to. With the acquisition of Rapid Financial Solutions, we are now a government provider of payment services for payments coming in, but we can also manage your payments going out. So again, one hand to shake, so there are more, but that's -- you get the idea, built for government. What this does, when we go head-to-head with our competitors, admittedly, a lot of times it talks about, okay, how much does it cost? What's the price? We can quickly change that discussion to a value-based discussion, not a price-based discussion because of the uniqueness of our system. Again, we're dealing with government, right? But I'll give you an example of what that looks like. I'm sure you know this, but the way you fund payments -- or payment contracts, it is 1 of 2 ways, really 3, but the first way is a dollar or cents per transaction. The second is we're going to charge you a percentage of the transaction amount or -- third is a combination of both of those. But I picked 2 admittedly extreme examples that speaks to value. So that first competitor, we were up against a competitor that was well to charge less than 10% -- or $0.10 per transaction. Our price was $3, we won, we won. Another one that was transaction amount based. They were charging a [ $1.5 ]. We charged over 80% more and we won. And it went apples-to-apples because nobody would do that. It was value driven. So if our price is a premium price for a premium solution, that's a good thing to know. Another thing that you got to know when you understand the payments business is what type of contract you're signing with your clients. And you've heard Lynn and Brian talk a lot about, well, it's a gross contractor or a net contract. We're going to explain the difference between the 2. But I will say before we get there, the majority of our contracts -- or majority of our revenue is generated by gross payment contracts. Gross payment contracts are really good for free cash flow. They do put pressure on our margins. We are projecting about a 200 basis point effect, negative effect on Tyler overall margins, given the -- our gross revenue contribution of payments. So let's talk about the difference between the 2, okay? This is part of the teaching part again. But you remember the life cycle piece that we talked about, that dark blue part, where you had the processor, the specialized network that gets you into the card institutions. Those 2 things are necessary to complete a payment process. Those 2 institutions also would like to get paid and well they should. They provide a valuable service. So there are -- out of every transaction, those 2 institutions take a piece of that transaction. Also, you need to understand that the interchange or the bank card fees, those fees are volatile. They move up and down because of various circumstances. Okay? So understand that. Now we're back to talking to a customer. A lot of times, our customers value, I said a lot of times, the majority of the times, they value 2 things: simplicity and predictability. So when it comes to the payment life cycle, they come to Tyler and they say, we really value simplicity. We don't want the administration burden of paying the processor or the interchange. We don't want that. And we, for sure, don't want to bear that risk of fluctuating fees. So Tyler, would you pay those people and bear that risk on our behalf. We say, yes, we'll do that. We'll do that. So now on a gross contract, we're charging for the Tyler value add, the payments value add. We're charging for the processor and the interchange fee and we're pricing in risk, okay? So revenue gets accelerated on that, but so do our expenses because when that payment comes through, we got to turn right around and pass that expense through to the processor. So our expenses are up. That's what puts pressure on our margins. However, if we're on the right side of risk, our cash flow works out really well. okay? That's gross -- That's a gross contract. That contract is a lot simpler. That contract says the customer is willing to pay the processor and the interchange fees, all they want to do is pay Tyler for its value add, for its payment services, and we're happy to do that. That's less revenue. It's also less expense, so our margins are higher. So that is the difference between gross and net and it matters to our P&L, which ones our clients pick. We don't have a whole lot of influence over which one they choose. And I'll be just candid with you. We don't really care that much because they're both really good contracts and the service we provide to our client is very, very good. It deepens our relationship with that client. Whether it's a gross contract or whether it's a net contract, in true Tyler fashion, we are still looking for efficiencies. And there are some efficiencies that we can drive in our payments business. Just quickly, the combination of contracts that we have, the higher value contract, the more they value the added services that we can put in place, the better our margins will be. For instance, disbursements, the Rapid Financials. Those margins tend to be a little bit higher. So the higher mix of disbursement transactions we can put into our business, the better our margin is going to be. Economies of scale, I already touched on this, but we're going to grow our payments business substantially. But we're not going to go hire a sales force, we already got one. We're not going to go hire a huge support infrastructure. We'll make a change here and there, but we already got one. We're not going to go hire a new implementation team, we already got some. So we're able to scale better this payment business because we're going to exploit some of the investments that already exist. And finally, interchange optimization, there are some tools that we can acquire. There are some processes that we can build. There are some certifications that we can achieve such that we can get deeper discounts with the processor and the interchange for ourselves. So those are things that we're also working on. Over the next 7 years, you can see we have some room for margin improvement to Tyler as a whole. That's not just the payments business, that's on Tyler as a whole, okay? All right. So that's the product. Now you guys -- if you get tired of doing what you're doing, you can sell for us. Multiple growth drivers. There's 4 of them. They're pretty practical. The first 2 are leveraging our installed base, like you've heard all morning long. Second one is working out -- or the third one is working outside our installed base. We'll talk to that. And then the fourth is scaling our recent acquisition, which is Rapid Financial Solutions. So let's just spend a minute on each one of them. Okay. Here's another slide. This is a scary one for me to put up in front of you guys because we believe the state and local acquiring TAM, that's payments coming in to state and local governments is $30 billion. Yes, we actually believe that. We actually believe it's more than that, but that's as much as we can allow ourselves to put on the slide here because it's such a huge TAM. But I'll tell you what I'm not asking you to believe that just because I believe it. What I'm asking you to consider is that in our local installed base, that's our cities, our K-12 schools, our local install base for the products that we have already in place, we believe there's over $1 billion of addressable market. At the end of '22, we own less than 10% of that market. So if our product is as good as I advertised earlier, we should own a lot more of that. We should go get after a lot more on that, and that's what we're focused on. Here's a great example. The city bought our tax system in 2016. 6 years later -- oh, by the way, they had an incumbent payment provider that they hooked to our product. 6 years later, we go in and we start showing them, guess what, our purpose-built portal and how we automated many of the reconciliation processes. It was so compelling to them that they were willing to make a switch to Tyler payment and relieve the bank of their responsibilities. That was a great win. It's a great example. With payments now, the ARR that we're earning from that particular account has tripled. So we see opportunities like that. That's an example of that $1.3 billion of TAM. Growth driver number two, same play, but this is in the state market. We think there's over $2 billion in the 29 states that we have contracts with, that we have teams on the ground, we think there's over $2 billion of TAM in those places, payments TAM. We -- NIC has been at this game a little longer than traditional Tyler. So their market share is a little bigger, but there is still plenty of room to grow. Let me give you an example of how this works. They call this land and expand, and this is a great story. In 2021, prior to acquisition, quite frankly, I wish Tyler could claim this, but this is all NIC. A coalition of 19 state agencies signed a contract with NIC to do payments in the State of Florida. Since that time, over 20 incremental agencies have signed up on that contract. They've also, after they've experienced NIC, now they've experienced Tyler, they have added on premium services to the payment contract. For instance, you heard Jeff talk about fraud detection powered by data and insights or formerly Socrata, very, very powerful add-on. So the implications there are the results of the premium ads and the new agencies. If I took from the first quarter of 2022, which is first year of implementation to the first quarter of 2023, 82% increase in transactions processed just in this state alone. That's earned us over $1 million incremental revenue from the original contract or really just from what we did in Q2 to Q3 -- I mean, I'm sorry, -- what we did from first quarter 2022 to first quarter of 2023, we've added an incremental $1 million from 2021, the original contract, land and expand. Obviously, our focus is going to be on our installed base right now, but we are opportunistic looking for opportunities in agencies that do not have a Tyler presence or Tyler software and opportunistic is the word right now. Over time, we will begin to become more aggressive in marketing, more aggressive in sales, in non-installed base environments. These will be new named cities, new named state agencies where this would be the first Tyler experience that they would have. So we will grow in that space. But right now, we are focused on our installed base. And lastly, scaling Rapid Financial Solutions. Rapid when we acquired them, they were -- the large percentage of their business was government business. And they were focused primarily on the justice space. So they served courts, jury payments, and they were big into the corrections world. We think there is an incremental $0.5 billion of opportunity in Tyler's installed base for Rapid, just in the justice space. We think there's over $4 billion of opportunity in other areas, again, our installed base in the state and in the local. Now I just can't let this pass, I told you the acquiring or the incoming payments TAM was $30 billion. The TAM for disbursements is $30 billion. It's a different $30 billion. It's a different $30 billion. So this is incremental to the other. So this is just what we can do in the installed base as we develop new case types. Here is a great example. Within weeks of the acquisition of Rapid, the GM -- the NIC GM in Indiana had a relationship with an agency called Indiana Childcare Development Fund. What this agency did is it pushed supplemental revenue to over 3,000 childcare providers that served underprivileged families. These childcare providers get funds every month from this agency and they can take it any way they want it, meaning you want to check, we'll cut you a check. You want an ACH, you want a wire transfer, you want a Venmo, you want a PayPal, you want a debit card, we will fund you however you want. That is one of our clients. And speaking of purpose-built portals, you want Venmo this week, but you want -- this month, but you want debit card the next month, no problem. Just go into your portal and switch it, configuration, purpose-built portal, built for government, perfect illustration of what we can do with Rapid. By the way, this solution, we think, is repeatable. We think we can take this to 28 other states, maybe 50 other states. Okay. So that's how we're going to market. The impact of this, as I've already said, from '20 -- from now to FY '30 transaction revenue, 20% (sic) [ 10% ] to 13% payments are part of that. Transaction revenue aspirations is in the low 50s from a margin standpoint. Brian is going to talk -- Brian, you can talk more about that in your presentation. Now you're ready for the test. Our clients really are liking our product because of the value that it brings as a government player. Our cash flow will be substantial contribution, Brian will show that to you. And we've got a good plan on going to market exploiting our installed base. I appreciate your attention this morning. I think we're going to do Q&A now, Hala, you coming back up. Thank you.

Okay. We're going to go right into Q&A. Just remind you that we've got our mics here, and then we're going to take questions from the audience, but I would like to invite Lynn back, Brian, Jeff, to come on back and Bret back to the stage, please. This will be 20 minutes, and we'll invite Elizabeth -- Liz Thomas. So Liz Thomas is coming to the stage. She is Chief Operating Officer of Digital Solutions Division and then Elizabeth Proudfit, our President, is coming right in right now.

So Liz and Elizabeth are our payments experts. We've got a bunch of them, but on stage, you've got technical questions. Not that Bret can't handle and he did a fabulous job, but they are experts.

Okay. We'll get started. All right. Saket, we'll start with you, and then we'll go to Terry.

Saket Kalia from Barclays. Bret, really enjoyed your session. I wish my college professors were like you, by the way. Listen, I've got a couple of blocking and tackling questions on payments, if that's okay. So it's going to be a couple of parts, right? So the first one, 10% to 13% growth, CAGR growth in payments, what do you think the market grows at? And so of that 10%, 13%, and what do you think you have to go out and get in terms of market share gains? Even qualitative.

Yes. I mean, I'm not sure I have a great perspective on the market because it is such a differentiated market. I mean there's the pure play payments processors. Ours is a lot different. But I think you saw it in Bret's presentation. I mean what we're really looking to do is increase that local market base from the 10% roughly that we have. If we can double that and move that. That's a big part of the growth driver. We see tremendous expansion with disbursements and that's a big part of what's driving our growth. And you can see there, we have such a small part of that market. And it really can be the easy button in our state enterprise relationships. You saw how quickly we're able to add the Rapid add-on just to that GM relationship, no RFP, no new contract. It was an SOW, so I think if we can rapidly capture some of that market potential, I think that that's going to drive that 10% to 13% CAGR.

I would also add from the market perspective, what we saw during the pandemic for both payments and transactions is so many folks migrated online, right? So governments provided it online, and we're seeing that sustained. So we're just going to see that number grow and grow in terms of capturing the IVR, the mobile, the online payments because today, people still have the opportunity to put a check in an envelope and send it into government, but so many people came online, and we believe they're going to stay online.

So I have a perspective, but I'm going to do it as a question and let them [ correct ] me but payments is not new. It's not new, but doing payments well and doing it at scale in government, that's what's changing. And we're winning market share, not just from first time, but we're stealing market share from others. Is that -- would you agree with that?

Yes. I mean, I would certainly agree with that. We've seen that in the market, and you really hit on the whole citizen experience and value-added payments. We're seeing more of a focus of our government partners away from the back-end processing and how to extend that platform and make it as secure and seamless and easy as possible for citizens and businesses to stay in compliance and offer payments online and through different channels. So we are definitely seeing that.

One thing I would add, sorry, not to belabor the answer, but Bruce even referenced our Gov2Go platform. Some of those you think about it. I mean government is at the point where they're expecting citizens to have the same -- or residents have the same experience that you have when you're buying something on Amazon, right? They want that ease of being able to renew your driver's license. They want the wallet functionality. They want all the bells and whistles, and we're able to provide that to them, and we're able to combine that with a resident or citizen experience that's kind of unparalleled for government.

Got it. And sorry, just a quick follow-up. I thought it was interesting how the TAM for acquiring like collections and disbursements are pretty similar. The follow-up question is, what is the -- what are we calling the Tyler Payment Solutions business or what does the Tyler Payment Solutions business sort of look like in terms of that mix, disbursements versus payments? And is there a difference in sort of margins between those 2?

Yes. I can take that one. So right now, obviously, Rapid is really our first foray into disbursement. So it's a very small percentage of our overall transaction revenue base. You kind of saw it in the 2022 perspective. We obviously expect that to increase, and we do see higher margins in the disbursement business. There's lower interchange that you have to account for. So I wouldn't say materially. It's not double, but it's definitely a higher margin.

Yes, I'd say for Rapid, their low-hanging fruit, as Bret outlined, is in the justice space. And that's where we've got all our relationships. So in the near term, that's what we're going to go after. In the long term, he put up on his slide all the different things in government that involve disbursements that we still touch, but we'd have to still build that out a little bit. So in the near term, we're really going to concentrate on the justice space as it relates to disbursements.

Terry?

It's me again, Terry Tillman from Truist Securities. I just have a 2-part question, so it's a lot easier this time. The 300 people sales team. I don't know what that means. I don't know if that's up a lot. I don't know if it's down some, but it does seem like a bit of an army or a brigade, so like. How are we doing in terms of those 300 folks? And maybe they're not all just quota-carrying reps, but how is productivity with that sales team and like how enabled they are to sell this stuff right now versus going to taking some time? And then the second part is on premium services like the fraud detection, I'm curious like what's the attach rate on that at this point? And is that kind of early days? Or have you been doing it for a while?

So I'll take the first one, and I'll let them answer about the premium one. The 300 salespeople are -- the salespeople that already exist and what I'll call legacy Tyler, Tyler pre NIC. So those are -- and then it adds their sales team to that number. So it's -- I think it's 318, I think it was the number I got for quota-carrying sales rep, that's not managers, that's not sales ops. Those are people that are already on our payroll, they are used to selling Tyler products. And those are the people that already have relationships in the field that now are going to go back into the installed base, places they've already been, products they've already sold and say, here's an upsell opportunity for payments. So that's the 300 people.

Yes. And let me add to that. So for example, our ERP space, every new deal, our salespeople are quoting payments. And our inside sales, every -- they're pushing inside sales payments all across. So it is, it's leveraging our current sales channel across the local opportunities that Bret outlined.

So in terms of their -- we're pretty early. Of the 300, we might have had a few that really were passionate about payments and really understood it. And we're in the process of now educating our -- we've probably been doing it for 2 years now, educating the team on payments. Dane Womble who runs the local side of our business, he's been after payments for years. So he has certain people that understand it and have sold. We had a payments business before we bought NIC. But getting the entire sales force passionate about payments where I would say we're 60% into that, and that's a guess, but we'll get them all payments enabled in short order. That's whole sales. No, we like it that way. We could have gone and done that, but these people already know how things work in the space. They've already sold things in the space.

To have relationships.

Yes.

Yes.

I would say from our division standpoint, Bret mentioned the [ 18 ] which is our quota-carrying sales folks, but we're also getting our general managers who run those 29 enterprise states that Bruce showed getting them really energized. And I think from our standpoint, from a payments standpoint, we have so many new tools available to them. So you mentioned fraud detection as well. We're using that D&I platform. We used it to help secure one of our payments contracts and preserve our pricing to be able to show the power of analytics for payment processing. We talked about some of those other use cases. but it's such a powerful use case at the state government level with all of that transaction data coming through. And I was in the room when we showed it to the Department of Financial Services in Florida and their eyes just lit up. It's the first time they've ever seen all of that information. So the next turn of that, of course, is fraud detection. And so we're working with some of our power agencies across our state enterprise to be the design partner on that type of solution and using that DNI platform to uncover some of that fraud, especially within the DMV space.

To your question, I'd say we're really early in that attachment rate. There's a lot of space to -- or room to grow.

To the question of the sales engagement, though, I would add one additional thing. I know some of you all went to Connect. We had sessions at Connect on payments. Every single one of them were standing remotely, right? It was -- there's a lot of enthusiasm for this in our installed base.

[ Alex ]?

So I guess -- sorry, Aleksandr Zukin, Wolfe Research. The growth rates, if you break them down by gross versus net, and why not just go all net in -- with regards to, I know this is a Brian question. And then if I think about from a strategic point of view, given every salesperson right now is really focused on it, it's upselling, it's cross-selling it -- at the end of the line, like is this a way that you're winning market share on the overall software business by selling payments and how much at the end of it, like if you think about a tail, like what's the aspirational goal for every customer that's an ERP customer or an application customer, what percentage of the ARR is going to come from payments?

So in terms of the percentage of ARR, Brian is going to cover that in his presentation. And I think to the point of why don't we just make all the contracts net, I'll be honest with you, when we acquired NIC, I asked exactly the same question, right? Because our history has been optimizing around margins, right? But they educated us pretty quickly that -- and it goes back to Bret's presentation, the free cash flow generation of the gross contracts is so compelling that even though it does put pressure, downward pressure on margins, which one do you want to play for? Do you want to play for the margin number or what is free cash flow more important. And I think the conclusion that we all came to pretty quickly was it's the cash.

You'll see what we predict our free cash flow from payments on transactions through -- in 2030. There's some competitive reasons why we don't want to break everything down minutely; but in the long run, since one of our goals is to maximize free cash flow generation, we think that's a better play.

Other than a negative impact on margins, we make more money, we keep more cash in the gross model.

We'll take Clarke and then we'll take one from the audience.

Clarke Jeffries, Piper Sandler. When you think about NIC, historically, a high single-digit growth business, thinking about that 10% to 13%, I just wanted to maybe be granular there. What's the contribution from Rapid and disbursement versus what's incremental in the NIC business from cross-sell or other opportunities?

I'll let Liz try to answer the Rapid piece. But at a high level, NIC didn't have access to the local client base that we've got. They didn't have access to all the systems that Bret outlined is the differentiator. So it's really bringing that combination together and then they didn't have access to our 300 salespeople. So that's the thing that drives that growth a lot higher than what NIC could do on its own, unless I missed something.

No, I think that's exactly right. And I think from a Rapid perspective or disbursements in general, right? I would say that we see that as this small fraction right now, we would see that growing to maybe 1/4 to 1/3 of our overall transaction base potentially disbursements in general at the end of 2030. So obviously, that's growing at a pretty rapid clip.

It's from a small base...

No point intended on the Rapid.

It's a very small base, right?

From a very small base. So yes, we definitely see that, but we see growth in the acquiring market, too. The Tyler local installed base is big. And I think that's when you think about the easy button, that's obviously what we want to attack first, both on acquiring and disbursements.

I would add one more thing. Just go back to Bruce's slide, those 200-plus deals, the $90 million that's all new to NIC, right? That's -- those are all those new tools. That's the local market within our state enterprise market. That's what gets me excited.

And then just some clarification on the monetization, what portion of the state or the local entity is paying the transaction fee versus passing it on to the customer? And then maybe just when we think about premium services, are they in the pricing of transaction fees? Or are they may be like flat contract rates that just apply to any kind of volume?

I can take that one. All of the above. When you think about it, I would say the majority of our contracts are a citizen or resident paid, so a user paid business. We do have some absorbed model contracts, and we would use that term when the entity, the government entity is absorbing those fees on behalf of the user. But -- so that's kind of the mix majority, I would say, are passed on. And then second part of your question, okay, remind me of the second part -- sorry. Yes, that's when -- I mean that -- it is a mix. So that actually is why we use the term transaction revenue versus specific payments revenue. So especially in the historical NIC base, there are a lot of our services that we actually price in, you could call it an embedded model where that transaction fee, that value add fee is combined with your payment processing. It's not separately identified. It might be a flat rate for the customer and say, this is your fee to process this. This is going to cover the payment portion on a gross basis. It's also going to cover that interactive -- the portal that has been built to interact with a citizen, whether it's renewing their license, whatever they need to do that ultimately generates that payment. So there are quite a few of our services that are priced on that embedded model.

To Liz' point, our favorite contracts are all of the above, gross and net combined. And it's just -- Florida is a perfect example. We have $3 a transaction for some of the previous premium services. We have the 2.75% for one of the absorbed services. It's -- we like all of the above, I mean diversity in the portfolio.

Okay. So one question from the live stream here. I think we've kind of covered a lot of this around gross margins. But one is, how do you ensure still driving towards the gross margin improvement in payments, if you're agnostic really to the mix? Does that really -- that just really comes down to the terms of the contract? Or are there any other factors?

So the question is about how are we driving?

Overall gross margin improvement in payments, how are you driving that if you're really agnostic?

Well, we're improving margins in both models. And Bret talked about, I think, 3 things that drive that.

Yes. I mean 2 of them focused on expense, one of them is focused on higher revenue volume. So -- I'm sorry, different contract mix, but our revenue will grow. We're not going to have to add -- start from scratch on support. We're [ not ] going to have to start from scratch on implementation. So as our revenue grows, we're not going to be matching dollar of revenue in dollar of spend.

So in your gross versus net mix today, I think that -- what they're basically asking is if we're agnostic, if we don't care whether it's a gross or net, how can we -- and the answer to that question really is we're not depending upon more net contracts to drive that margin up, right?

So yes, exactly. I think when you think about it, we're already starting with 93% of our revenue being the gross model. So if we do happen to increase that mix on net contracts, yes, that will contribute to higher margin. But outside of that, even with the large gross base, we definitely believe there's things that we can do operationally to start to improve that overall contribution.

They broke down the gross versus net at 93.7% today. And as you look out in the future, I mean, step back and also think about our client base. Our client base is generally risk-averse. We talked earlier about workforce and labor issues. So when you say to a client, well, you're going to take on the administrative burden, well, that's more people they need. When you're going to take on the risk of interchange fees and merchant fees that's risk, and they tend to be risk averse. And so I think that's why that mix stays. And right now, I don't anticipate that mix changing substantially over time.

Right. And just keep in mind that for -- like for state and local government, for them to be able to fund those fluctuations, they have to go get an appropriation for that. It's a big deal. It's very difficult for them to do that.

So Liz and Elizabeth speak to as we add premium services to a contract, we see agencies go out and adjust their payment fees to us. And specifically, if it's passed on, then to Jeff's point, it's not a budget item. So we can go back -- I think we can go back in and we can add $0.10 per transaction for a fraud feature and that gets passed on to the end user many times or to the citizen many times. Is that accurate?

Yes.

So that's a way selling premium services, we can increase our margins there.

Okay. Well, I think we've actually run out of time for this session. So this concludes the second session. So thank you again to our panelists. And we're going to take a 10-minute break before our final presentation. [break]

All right. Well, please join me in welcoming Brian Miller, Chief Financial Officer to the stage. Talk about our financial numbers.

Everyone. I think it's still morning. I am neither a teacher nor a sales guy. So I'm a finance guy. So you may be disappointed in the present -- in my presenting skills, but I think you like our numbers as I move to. So you've heard from our previous presenters about our strategies around things like cloud transition, leveraging our customer base with upsells and cross-sells, payments certainly and other revenue drivers, and you've seen some of the growth rates we've talked about around those. So now I really want to focus on our growth algorithm in both midterm and longer term. So we're really talking about a 3- and 7-year models and how that plays out as we move into this sort of new area of growth for Tyler. So our long-term financial algorithm is really pretty simple. We couple organic revenue growth that is expanding at a higher rate, margin expansion over a long period of time, and that creates really strong free cash flow. We use that cash flow wisely to create additional growth opportunities and ultimately drive more cash flow and build more shareholder value over time. So as you guys all know, we have historically provided a lot of financial measures, well, a lot of different metrics around our financial performance, and one of our goals has been to simplify that over time. So now we're really focusing on what we think are the 2 key metrics to be the best measures of our progress going forward. So the first one of those is recurring revenue, and there are 2 flavors of that: software, which is made up of SaaS and maintenance; and transactions, which is made up of the payments and the portal revenues and the things that you heard about in the last presentation. And so those 2 have different growth rates, and they have different margin profiles. And you've heard some of that, and I'm going to try to tie that all together and how that leads into Tyler's long-term consolidated metrics. With -- the second metric is free cash flow. And that ultimately is what fuels our growth and fuels our innovation. And so we're going to talk a little bit more about that, and that's going to be one of the metrics that we'll be much more focused on going forward. We've always been internally focused on that, but externally focused. You'll hear a lot more around that. For example, in the past, we haven't actually guided to free cash flow, and that will be something we'll be doing going forward. So let me tell you where we are with respect to each of these measures and how we see them growing in the future. So recurring revenue growth has been very strong over the last 5 years, a 22% CAGR. That is not organic, but that's overall. It's been really driven by our cloud transition and the growth in our SaaS revenues and by the expansion of our transactional business when we acquired NIC in 2021. So you can see the CAGR for transactions has been 56% with a good chunk of that being inorganic. Our SaaS growth, which is organic has been about 27% CAGR over 5 years and a 4% growth in maintenance. We have a very powerful free cash flow generating engine, given the highly recurring nature of our revenues. Our average conversion of free cash flow relative to non-GAAP net income has been about 114% over the last 5 years. And over the next few years, we really expect that our free cash flow margins will expand significantly from our current year levels. In the near term, as we've talked about on our last couple of earnings calls, our free cash flow will be pressured by additional cash taxes because of the change in taxes around 174 -- section 174. The biggest part of that impact will be recognized this year and there will be a declining impact over the next 5 years. So by the time we get to the latter part of the Tyler 2030 model, there's no additional impact from that. So now let's talk about how we view using the cash flow and what our priorities are for capital allocation. So we have 3 very clear priorities for capital allocation. Those are in order of importance, paying down debt, strategic acquisitions and being opportunistic around share repurchases. So talking about the first priority, deleveraging and paying down our debt remains our very first priority for use of capital, especially in today's interest rate environment. We really view paying down debt as a form of investing in our business because it frees up capacity on our balance sheet to make other investments things like M&A as well as internal investments. So we've made tremendous progress towards paying down our debt since we acquired NIC in 2021. We've paid down $900 million of term debt over that time period, and we've delevered down to about 1.5x net leverage ratio today and expect that to be about 1.3x by the end of this year. Most of our debt now is our $600 million convert. It's due in 2026, and it has an interest rate of 0.25 point and a conversion price of [ $4.93 ]. So now let's look at the second priority, and that's M&A. You've heard about some of these things. Bruce talked a little bit about it. Lynn talked some about it. But as Lynn said, M&A is really a part of Tyler's DNA. We've completed 55 acquisitions over the last 25 years and 17 of those in the last 5 years. We've used about a little over 75% of our free cash flow during the last 5 years on acquisitions. So these acquisitions fill in gaps in our product offerings, expand our TAM, drive higher growth because we can leverage our sales organizations, leverage our customer base. And generally, the things that we're acquiring, we expect to grow faster than Tyler's core growth rate and to be accretive to earnings relatively quickly. So we have a disciplined approach to valuations as well that we've maintained across the years at times that's made us a somewhat frustrated acquirer, but we have a very strong history of executing really well on acquisitions, and we expect with the cash we generate over the next 7 years to continue to be an active acquirer. And the last thing in our priorities is share repurchases. There have been times when we've been very active and had great opportunities for share repurchases. We bought back 28 million shares of our stock really in the last 20 years. But you can see in the last 2 to 3 years, we've been less active or not active in the last 2 years with respect to buybacks as we've had other priorities, especially around paying down debt. I would note that because we choose to issue net shares under our equity plans. So as employees receive shares under our RSUs and PSUs, we withhold shares and then pay the taxes in cash rather than issuing the shares, letting the employees sell them and play taxes. So in effect, that's a sort of an effective repurchase of some of our stock that we'd otherwise be issuing and experiencing dilution from. And that's accounted for about $91 million in the last 3 years. Now let me tell you about how we see our financial model evolving over the next 3 to 7 years. So this is a little bit of the charts that you've seen before, layer -- a couple of charts you've seen before, but layered on top of each other. So we're modeling a high-teens CAGR for SaaS and a 10% to 13% CAGR for transactions over this 7-year period. So as you can see, SaaS revenue and transactional revenues will be the major drivers of our growth. In addition, this is all organic, but in addition, M&A could add significantly to that, given the cash flow that we'll generate over that time period. By 2030, we aspired software gross margins in the 70% range and transaction gross margins in the high 40s to low 50s. So let me tell you a little bit about our pathway to double-digit revenue growth. So I want to show you the major drivers of that, all of which you've already heard about in previous presentations. So you heard from Jeff about the opportunity that we have from flipping on-prem clients to SaaS, so the first 2 boxes there. Bruce talked about some of the factors like cross-sell, upsell, that should accelerate both net new -- net expansion and net new software SaaS revenues. And then Brett talked about the opportunity to drive additional growth through higher growth rates in our transactional business. On top of that, M&A should drive additional growth, potentially 200 to 300 basis points of annual growth over that period on average. So the result is an estimated CAGR for total recurring revenues of 10% to 12% before M&A. So what you see here is a depiction of the relative contribution of different drivers of margin expansion as we go forward. So we've got the growth side and now the margin side. Jeff detailed really some of the biggest drivers of the margin improvements, which are related to the cloud transition, things like consolidating versions, exiting our proprietary data centers, optimizing our products for the cloud. And while transaction margins will remain below our software margins, it's important to note that there is a significant opportunity for us to improve those margins over time, the things we just heard about around our ability to have premium margins compared to commodity processors in the payment space. We also expect to improve our professional services margins over the next few years and to get some leverage from SG&A and sales and marketing as we continue to scale the business. So as you can see, the path to 30% plus operating margins by 2030 really mostly comes at the gross margin level. So these things that decide, cloud ops, payments, services. And then more limited opportunity from the operating expense side, but still a couple of points coming out of that. So this is kind of how we see the margins playing out from the roughly 23% non-GAAP operating margin that are -- that would be the midpoint of our guidance for this year to 30% plus in 2030. So with higher revenue growth and margin improvement, we also expect our free cash flow margin to expand. We expect it to grow from today, including the impact of the Section 174 changes in the 10%, 11% range into the high 20s by 2030, with free cash flow reaching $1 billion, 2/3 of that free cash flow will come from our software business and about 1/3 coming from the transaction business. So to the question of why do we want to be in the payments business, that's really the answer. So our blended free cash flow margin will be in the high 20s with software in the mid-30s and transactions in the mid-20s. So what you see here is our target models. We put this all together, what does our target model look like in 2025 and what does it look like in 2030. So a bunch of stuff here. And we've talked about the revenue growth side. So we would expect to be in the low $2 billion range in 2025 and in the mid-$3 billion range in 2030 with growing our recurring part of that revenue to 90% or more. We expect to see low double-digit organic growth in the recurring revenues. I just showed you that, and we expect total revenue growth to be in the 9% to 10% range. Services, which is a much smaller piece of our business will grow at a slower rate. And of course, maintenance is embedded in that -- the decline in maintenance is embedded in that recurring revenue growth rate. OP margin, you can see going from expanding to 47% to 48% in 2025 in the mid-50s by 2030. So roughly 100 basis points a year on the average over that 7 years. I would point out, and we do not expect that to happen in a linear fashion. But as we talk about that full period, that's our expectation. I'd also point out that M&A has the potential to drive both growth higher as well as margins higher. So our free cash flow, you can see what I talked about, going to 17% to 19% in 2025 as the impact of Section 174 goes away and in the high 20s by 2030. So now I want to go back to what we talked about in terms of being our primary metrics to measure our performance and show you where those targets are. So again, recurring revenues, we're expecting a 10% to 12% long-term CAGR for that segment of our revenues. In the software business, the SaaS business growing 9% to 12% and transactions growing 10% to 13%. Free cash flow, again, $1 billion in free cash flow by 2030 and high 20s free cash flow margin by that time. So to conclude, we're really building on a 25-year track record that Tyler has had in this -- of success in the software space and building on that very valuable client base that we talked about to really move into a new growth model for Tyler. We've detailed a clear set of growth and margin expansion drivers that are driven primarily by our accelerated shift to the cloud and by the expansion of our transaction business. And recurring revenues and cash flow will be the primary factors we look at to measure our success. So now we're going to move into our final Q&A session, and I'm going to ask Lynn and Jeff to come back up. We're also going to have our 3 group presidents joining us. You've already met Brett, also Rusty Smith, who's President of our Justice Group; and Dane Womble who's President of our Public Administration group. So this will be an opportunity to ask questions really about anything, but certainly about the financial numbers. But also if you have questions about specific products, business units at a more detailed level, we've got our product teams here.

We have 40 minutes for this session here, and we'll go ahead and get started. Alex, we'll go to you. Thanks.

Alex Zukin, Wolfe Research. So I guess my 2 questions. It's nice -- it's a great framework for operating margin leverage. I'll stick there for the first question. Are you so efficient to -- it's unusual to see over a 7-year time frame, not that much incremental margins from the OpEx side. So is that because you're super-efficient, you're reserving the right to your dry powder to make more investments? And then can you just maybe walk through some of those commentaries around where you said it's not linear or is it mostly nonlinear. Can you give us a little better handle for the model?

Yes. I'll start out on the efficiency side. In general, I'd say our sales and marketing organization is very efficient already because of the nature of our sales in the way we're -- A lot of our sales are coming into our installed base. So we do think there are additional efficiencies, particularly as we focus on new -- on leveraging our current customer base, those are more efficient sales processes. But -- and we think as we scale to roughly twice the size that there'll be opportunities to leverage G&A. But we haven't built a lot of those into the plan right now. And the second part about the linearity?

Yes. Just mechanically, I actually have a -- I'll save that question for later. The other question actually is maybe for Lynn, right? This is a long-term plan. I don't think you guys have had such a long-term plan before that you're signing up. For the last few years relative to the macro economy, your end market has seen some meaningful tailwinds. What are you assuming from a macro backdrop perspective specific to your market. Where is this like not that risky aspirational? And where are kind of the groups, if you will, of your assumptions predicated on?

Yes. I think it's a lot of -- it's a couple of things. It's -- we talked a lot about our strategy. We talked about our unique position in the market. We talk about the needs of the public sector. Yes, there have been some tailwinds. Yes, there's been some money, budgets have not been impacted. We generally assume that's going to stay somewhat constant. Obviously, there can be any major macro disruption that changes everything. We're talking about 7 years out. The near-term one is the one at 2025. And my guess is, we'll be back here in 2025, and we'll be reassessing. When you look out to 2030, I view these right now as are they achievable? Yes. Are they slam dunks? No? Is there opportunity to beat it? I do think there is opportunity to beat it. You mentioned some OpEx savings. We're not modeling a lot of OpEx savings in there, but in the back of my mind, I see some areas where I think we should have some OpEx savings. So there's a lot of moving pieces. I wouldn't say these are aspirational goals. Again, I think they are achievable goals. And particularly, one of the things I talked about in my opening session was the alignment we have now within Tyler. I've never seen a time at Tyler when the executive team was so aligned in such a unified manner. We talk a lot internally. I mentioned at Connect, this whole concept of one Tyler. And that's not to say that we did things wrong in the past. It's just -- we used to operate almost in the silos that our government clients did. We were very distinct divisions with very distinct sales and marketing plans and very distinct opportunities. And the opportunities going forward are really joint opportunities and what we can get -- what we can do together. And I think that's the thing that's got me excited. And I think I'm not going to speak for everybody up here, but since they work for me, they'll probably say the same thing.

Saket. And we'll go to Jonathan.

Excellent Saket Kalia from Barclays. Brian, really appreciate your presentation. Thanks a lot for all the detail. And I appreciate the 2 north stars that you're setting up here. I'd love to just talk a little bit about how you think about free cash flow margin expansion through 2025 versus operating margin expansion? Now Section 174 throws a huge [ runch ] into sort of your base here. But is there any reason why free cash flow margin expansion normalized should be any different than operating margin expansion. Does that make sense?

Yes. Obviously, operating margin is -- drives a lot of the free cash flow growth. But I think one of the things over time as more of our business evolves to recurring in nature, and certainly the case with the payments, but even on the SaaS side, it has better cash flow characteristics. We get paid sooner. So generally, subscriptions like maintenance are paid in advance. We typically don't carry as much receivables around those payments which were generally paid pretty close to the time of the transaction. So over time, as our model evolves to more and more recurring, it has a positive impact on the cash flow characteristics just because we've got more deferred revenue. We're getting paid in advance of doing the worker in the least in advance of recognizing the revenues. So I would expect that, that margin over time would expand faster than our operating margin.

So in terms of your, I guess, overall macro or budget health assumptions. Can you talk about what underpins sort of these medium and long-term assumptions around the spending environment. I don't think we're modeling in a higher -- elevated spending environment from the day nor are we modeling in something that's significantly worse from the day. Obviously, we can't predict that. You're talking 7 years out. I think we're modeling in generally healthy market, maybe not one that's particularly robust or one that's particularly latent.

We've talked about -- The current market is really pretty strong. We've talked about activity, RSPs being in a lot of our product groups that at or near all-time highs. In most cases, the budget environment is still pretty strong for our customers and the stimulus money is still flowing through that. So I think it was the shorter-term model, we're expecting generally similar kinds of conditions, maybe not continuing to become a stronger market, but a similar kind of activity.

I also think when you think about -- there's a question earlier about the digital transformation and the changing workforce. That's not going to reverse fit of doing about face and go. It's probably going to continue on that trend, which is going to require our clients to go out and spend more money on things that will automate and digitize things.

Yes. This is actually Peter Berkley with Evercore. I'm filling in for Kirk Materne here. So just curious, at the state level, is there any real change you see in the competitive dynamics once you sort of get past payments, meaning do you see any of the other large enterprise apps companies showing up more?

Do you want to take that?

Sure. I have seen a change in it. We're competing against SIs. We are seeing surge in the platform players, the ServiceNow, the sales forces, we're seeing that. But I don't think there's any new entrants in there, and we hold our own.

Terry?

Terry Tillman from Truist Securities. This is my last question, I promise. Great job, Brian, on the presentation -- the last presentation and everybody else as well. But the one thing I was going to ask about M&A, it is part of your DNA. So I'm curious though, rapid seems like you deserve a pat on the back, and it's really interesting on the disbursement side now what that can do. But -- what is the appetite in near term? How actionable could M&A be whether it's big, medium or small, just kind of when you look out over the maybe next 3 to 6 months. And I'm not trying to tip your hand to like holes or kind of the waterfront, where maybe some areas that we could see? Could it surprise us or could it just be deeper in some of the product areas now?

Yes, sure. So Brian outlined sort of our capital allocation priorities and debt pay down being the top one. But that's been our top priority since we did the NIC acquisition when we had $1.75 billion in debt. But since then, we've done several hundred million dollars in deals. So our appetite is we're still looking at deals. And the bar may be a little bit higher right now, but we're still looking at them and it is part of our DNA. And one of the reasons why we don't model out exactly what we think M&A can do, we can look in the past and say, well, we've taken x percent of free cash flow, we generally bought companies at x multiple. We don't do that because we're not going to -- we don't pursue deals to pursue deals. We do it for strategic reasons. And if something were to come along in the next 6 months, 9 months, that was a really large deal, say, $1 billion deal, but we really saw the long-term vision and value in it. Remember going back to my comments earlier, we always think about the long term. We'd find a way to make that deal happen. I've had -- I don't know how many deals crossed my desk in the last few weeks, but the bar is probably a little bit higher right now.

Kelly, do you have a question? Sorry. Kelly and then we'll come back to you, Josh.

This is Kelly from Goldman Sachs. Just a question on -- when you look at those targets for 2030, what are the key things you're thinking about in terms of what could drive upside and what could drive downside?

Well, I think upside is really some things around the cloud transition. I think that potential upside. I do think we have some OpEx upside. I think our growth rates could actually be higher, particularly when you add in M&A. Obviously, if our growth rates go up, our margins are going to go up, our free cash flow is going to go up. So to Alex's question, do I think these targets are achievable? Yes. Do I think they're slam dunks? No. It's not Tyler's -- not part of Tyler's DNA to really put out big numbers that we don't -- that we're not certain of. Generally, the way I look at things is, we spent 25 years, I think, building a pretty strong credibility with the market, and part of that is we tell you what we're going to do and then we go do it. And if we tell you it's because we think we're going to do it. And there might be once or twice, we're not going to quite get there, but we're going to tell you because we believe it. And I can tell you that if I say something, then we're going to do everything we can to make it happen. And that's just part of our DNA. I don't -- we don't like to get ahead of our skis. I do think -- even when you look at those ranges, if you took the high end of each of those ranges, you're north of 30%. If you take the low end of those ranges, you're kind of around 30%. I don't know if I answered your question, but I've tried.

I'd almost say, if you don't mind, Lynn, just when you think about the upside is the cross-sell. So the slides that Bruce showed and all of the opportunity that's not even in our plan. And I'll also refer back to the example that he had about Assessment Connect. So just to kind of give you a perspective there. So we had all of the state of Kansas that were using [indiscernible] Pro, so we had all the data, but we didn't have the data platform until Socrata. And then so now we have the data and the data platform, but we didn't have the relationship that NIC brought. So that was a unique opportunity, those $650,000 ARR that we would have never sold without the combination, the combination of these 3 teams working together. So I think those are the things that synergies and the excitement that we have around cross-sell that's going to be potentially upside that we just don't really even have visibility into yet.

Yes. So if you go back to my presentation, to Dan's point, I outlined 4 sort of elevated growth driver's between now and 2030. We're modeling kind of what we think we can do, but I think there's upside in those. But there's a lot of things that can happen between now and then macro environment can change, all kinds of things. But...

And on the downside, probably macro environment would be maybe a risk there. But we have talked about our ability to perform well during a recession or a tougher macro environment. And while we're not recession proof, I think we're probably about as recession-resistant a company as you can find, given very high recurring nature of our business, and it's all around providing essential applications to government or providing payments that are around things like your utility bill or renewing your drivers license that are very predictable as well. So we generally feel that while there could be some macro risk that every company would encounter, I think our ability to deal with that, we feel very confident about.

Yes. even acquisitions. I mean, our profile is we want to find something that's going to grow at a rate faster than Tyler. We want to do something that's going to help elevate Tyler's margins. But if there was a significant investment, either an acquisition or an internal R&D project, something around AI, and we decided it was worth making that investment today and that's going to pull down some margins during that time period, we'll probably do it.

Okay. Josh?

All right. Josh Reilly from Needham. Thanks for the great presentation today. As you move migrations up from kind of this 500 run rate to maybe 750 or higher in the next couple of years, do you have the customer service personnel in place to manage these ramping migrations? Or are you going to have to do some additional hiring there? And then how is this kind of all factored into the model expectations for the next couple of years?

Do you want to take that, Jeff or...?

Sure. There may be some marginal headcount that we need to execute some of this, but it's not -- I don't think it's a material piece of what we've modeled going forward. Rusty?

Yes. Part of that, going back to the slide that Jeff showed, with the evacuation of our current data center, we've been running 2 data centers. So there's personnel that we have a chance to reassign. And so part of our modeling takes that into account. So just to support the notion that incremental staff will really be based on the demand. If the demand and our ability to move those faster, then it would be incrementally more. But there's quite a bit of reassignment and as we're able to collapse versions, move clients to those, then it gives us the room on the OpEx side to be prepared for those migrations.

So when we talk about linearity, the pace of that 1.7x uplift from the flips, how that plays out will be one of the things that drives the linearity of that growth.

One other thing that -- a lever that we have is we have some flex on limited period impact, like if you've got -- are we going to have to hire additional support to get us through this window. We have some flexibility with implementation resources if we needed to flex those into a support environment for a limited period of time. We have the ability to do that. If you're asking, do we have to add significant long-term cost component to get through a period, I agree with Jeff, I think it's immaterial.

Okay. We'll take a question real quick from livestream here. So there's been a lot of discussion on payments with states and locals. Can you discuss the potential opportunities at the federal level?

Yes. I would -- I'll take that. We don't have payments ongoing right now in the federal space, but we do have opportunistic focus there. We do have some applications in the formerly MicroPact Global, now known as our Platform division that would generate payments. So I'd say we are opportunistic in the federal space and then with an eye towards getting more focused, more methodical in that space.

And the same factors that caused us to be competitive in the state and local space also apply in the federal space?

Absolutely.

We also have an outstanding bid with IRS that we're still...

We do. We do yes. We've won it once. So we'll have to win it again.

Okay. Let's take 1 more question from the live stream here. So we talk about -- I missed it. Sorry about that. So part of the growth algorithm at NIC included higher growth from the new portal states in the first 4 to 5 years. Do you think Tyler is likely to win any new U.S. states on the traditional NIC self-funded enterprise model?

I think there's not a 0% chance. We are focused on making new relationships and sustaining the relationships in the 30th, the 31st, 32nd state. So we do push that way. But -- what we're finding now is -- and there may be a state that wants to bundle a bunch of services under a contract. But what we're finding now is, we can go agency by agency in different states, take services or applications that we have built in the 29 states that we have and now offer those to states that aren't under our contract, and there are purchasing vehicles available to us that we can use and then they're good vehicles so that we don't have to have a statewide contract. So we think there's growth in non-NIC states without having to have a state contract.

All right. I think.

But we'll take 1.

Sure. Go ahead.

David Unger, Wells Fargo on for Michael Turrin here today. Just 1 for me. What would it take to bring a buyback up higher in the capital prioritization list. I know it's hard. You mentioned private market valuations are high, but seeing other software companies are initiating buybacks, just curious how we should be thinking about that.

Yes. I mean I think I look at it a couple of different ways. Right now, our capital structure is pretty good. Our annual dilution is really pretty small. When Brian Miller showed that slide and showed sort of what I call an effective buyback through our long-term incentive compensation, on a net share basis, we're experiencing about 0.5% dilution a year. I think right now with the cost of capital and where our valuation is, look, I believe that Tyler 2030 model, when I used to be saying, why don't you go and spend $1 billion on your stock right now? And if I didn't have $800 million in debt, I probably would. I've made that comment a few times that, particularly in the last year when we saw equities, particularly in the tech space drop considerably, we dropped considerably and maybe a little bit more than others, my comment was, if we didn't have over $1 billion in debt, I'd be wanting to go out and buy some right now. At the same time, part of the reason why we have $1 billion debt is why we're so excited about the future. So it's kind of a Catch 22.

Okay. Clarke?

Clarke Jeffries, Piper Sandler, maybe you can help me think through this in terms of -- what are your OpEx growth expectations between the SaaS business and the payments business? If we start from the point of gross margin and the benefit there between the 2 businesses, that specifically what seemed to be like 1/3 of free cash flow from payments wouldn't seem to me like OpEx growth is lower in the payments business, but maybe you can help me think through how drastically versus SaaS OpEx growth will be?

I don't know the number, how to quantify that numbers, but qualitatively, yes, the OpEx should be lower around the payments business. We talked about that a lot of those sales, at least in the near term, are coming through our current existing sales channels into our installed customer base. So the 300 sales reps that are already selling other Tyler products have payments in their bags now. And generally...

Their expenses sitting in software.

Yes. The expenses in the software side right now, but at least it's already in Tyler. I think also that -- so the sales and marketing side is one, the G&A side as well because it's a lot of transaction processing. And so we have the systems and the solutions in place for that. And so there's not a lot of incremental G&A around those -- around more volume from those. And then R&D, there's not as much R&D on that side as well.

So fair to say that the free cash flow margin in the payments business is going to improve at a higher rate than the SaaS business. The SaaS business will have the cloud ops, but then from that point, payments will get higher and higher cash...

I think that's fair. I don't know that it's -- how dramatic that is, but I think over that 7-year period, you would expect that to be the case. But both improved.

Alex, we've got 1 over here.

Alex Zukin from Wolfe Research. I'm -- I want to do 2 separate questions. One on the payments business. So if I -- if the math looks like about, I think, about $1 billion, a little bit over $1 billion in kind of transactional revenues by 2030. On a $60 billion TAM, are you underpunching -- or is that -- you talked about it not being aspirational, which I appreciate. What is the ask -- where should you go as a -- I'm not going to use the M word, but the market leader, let's call it, in this space, if you do the things that you're talking about, why wouldn't -- I also don't fully understand why the payments revenue growth is more linear given the conservative development there. Just help us understand where is the aspirational benefit on that payment side? And then completely separate topic, federal. I think you talked about Socrata and payments there. Is that as far as you want to go? Because it does feel like there's a lot of opportunity on the federal side of the business that could be done through M&A, presumably, so just 2 different topics.

So if I rephrase your question, you're asking me, is our payments growth conservative? That's what you're asking. I think part of it, I'm going to let Brett step in because he's been more involved with the modeling with our Digital Solutions division. I'll go back to what I talked about in my opening remarks, which is we're really just now starting to hit our stride there. We only just now unified the payments team with a go-to-market strategy. We've got a little bit of experience of the growth in payments, but I don't have 2 years of experience in growth in payments. So at this point for me to say, yes, we should be at $3 billion. I don't know what that exactly takes right now. I know we're the market leader. I know we're differentiated. I know we can command premium pricing. And I think it's a big growth factor for us, not only just to 2030, but when we talk about our cloud transition and a lot of that sort of runs through at 2030. I talked earlier about -- some of these are growth drivers that go to 2030 and some of that go beyond 2030, and payments and transactions is the area that is one that has legs and keeps going. Brett, tell me what I messed up.

You messed up. I'm going to give you a little inside baseball answer there. I made a comment a minute ago that 60% of our sales force is trained, which was probably not a good comment. All our sales force knows about payments. It's really more of how confident are they to go drive a payment sales in getting our sales force -- NIC excluded, getting our overall sales force comfortable going and driving that sale is important. Part of their confidence level has to be can we sell that payment and our support organization be able to handle that, our implementation organization be able handle that. We've got a 98% retention rate, and we don't want to screw that up. So convincing sales guys is, no, no, you can trust us on this. We'll get -- it's more of that. So it's kind of an evolution, if you will, as opposed to just go to the sales class for payments and [ go sick them ]. So there's that thing. Also I had a comment earlier, the payments is not new. So there's a lot of payments companies that are embedded in our installed base and in council, unseating an incumbent is hard. So I think tempering our excitement is probably appropriate at this point in time. But I'll speak for myself, I do think there is upside. There is upside there.

An anecdote to support just not having enough experience is, one of the acquisitions that we did about 18 months ago is called VendEngine where they provide the payment services to jails and corrections. And we see -- it's got a great looking TAM. It's new to us. That product line combined with the NIC team, there's 5 states that we are at some point in a sales process with. We will be really interested to see over the next 6 to 12 months how those play out. And those are the types of experiences then that will then better inform what we think the opportunity is. That's just 1 example. There are lots...

And we would not have been able to predict our success rate in the states you're referring to, if we went back in time, 18 months.

That's right. And we're still -- we're looking to see how this play out to inform our future expectations, too.

And let me dovetail just another thing around payments growth and comment earlier about margins and how confident to gain margin going forward. We show that disbursements is a very big TAM. And what we're doing right now is a tiny little piece and very little. For us to go and expand significantly in disbursements, one, we're going to get more legs under ourselves on the acquiring side, but that's going to take investment. And so my comment about, well, if there's investment out there that's going to produce some margin headwinds in the short run, but we see that in long run, we're going to go do that. And if that disrupts something that we're saying might happen in 7 years from now, that's what we're going to do.

What about the federal side?

Payments on the federal side.

Federal business at large.

But you're asking an M&A question.

No, no, this question was do we expect to expand more into federal besides data and insights and payments, I think, was this question?

Again, we're going to be opportunistic on the payments side. Lynn mentioned [ opportunities ]. We've% been on an IRS bid that is tax refunds that we would be 1 of what 2 providers, Elizabeth, that's what we're bidding for. So that is an opportunistic play. We will begin to take some of our federal application like debt benefits I mentioned a minute ago. And that's a perfect disbursement case type. So we will selectively choose our applications that will -- then we'll begin to hook either acquiring or disbursements to those. I think in the federal side, there's going to be a lot of disbursement type thing, disaster relief, things like that would be another case type that we can develop. So it will start out opportunistic payments, then we will begin to hook payments and disbursements to some of the applications that are federal.

Yes. I mean the interesting thing for us to do on the federal side is the same thing that we've done on the state and local side. If we can find a lane where we can build software or technology services that are repeatable, where we can essentially turn it into a Cots-type play then we could get excited about that. A lot of the spending in the federal government is not that. It's one-off, Snowflake, custom built. That's not as attractive to us. With our low-code platform that came from the MicroPact acquisition, we do have a really significant opportunity to expand even just within their customer base. So they have a presence in every major federal agency with some applications but they've got many more opportunities across that. So for example, in the federal government, one of the applications that our platform is used for is background checks and security clearances, we do that for the Department of State. Every agency has background checks and security clearances, and you might think that the federal government has a system for that. But each agency goes out and procures its own system. So we've got the opportunity to replicate that across multiple agencies over time. And it's the same thing with managing things like EOC claims or veterans benefits or licensing things. So we do believe there's a significant opportunity with that platform to continue to grow it.

The short answer, Alex, we've got a federal division. We got a federal sales force, and they're out there selling things other than payments and data and insight.

There's some cool things just to expand on that a little bit is MicroPact. When we acquired them, it was a lot like Socrata when we acquired them. They had a low-code development platform, and that's what they sold. And then they had partners that developed applications, which is a good business. But what we've started doing similar to what Jeff did with D&I is now we're taking that platform and we're building assets underneath that platform that are applications that we can sell in a repeated fashion. So beyond just the platform, we continue to sell that platform. But now those assets that those -- that platform is building, we're packaging as a product and moving into the federal space very, again, opportunistically right now.

And that federal space is the one area where we do significantly partner with SIs and both on the sales side and on the implementation side. So that's a little bit different than our other business, but that gives us the ability to push more software out quicker.

We are seeing growth in there and expect to see good growth in there.

Okay. We'll take 1 more from live audience and then 1 more here real quick. Why is the gap between free cash flow margin and operating margin in 2025 significantly wider than the gap that exists in 2030? It implies more of a hockey stick ramp in free cash flow. So why might that be the case?

Well, part of that is the impact of -- the starting point was Section 174, it's $130 million impact to free cash flow. So you're starting -- it's probably better if you looked at it sort of an adjusted free cash flow that you're starting with, the GAAP free cash flow does grow faster than operating margin, but it's not as dramatic maybe as that slide would indicate given that we're starting at sort of an artificially depressed free cash flow margin because of the $130 million of incremental cash taxes that then will become something like $50 million next year, $40 million the year after. So that's probably the biggest factor there besides what we talked about earlier around the ability to expand the free cash flow.

Yes. Remember, Brett's slide, The government's taking money. They're taking in a lot more from us next year.

Okay. One more question here. Terry, you want to follow up?

Yes, I lied . And it's not what's for lunch. But Terry Tillman from Truist. Brian, 1 question in terms of when folks look at the bookings and backlog PDF you have and then the schedule of [ supplemental information ] there is a lot on both of those. There was consternation with some investors that was talking to about backlog a couple of quarters ago. And like there's so many kind of moving parts. Have you all thought about maybe condensing -- I mean, I know a lot of effort goes into this. But sometimes it's kind of [ death ] by 1,000 kind of metrics. And so going forward, is there a thought on of all -- of both of those PDFs and looking at each one of them, like what should we really focus on that can kind of better capture 2 distinct kind of financial streams?

Yes, they're really the things around ARR and recurring revenues are what we think are most important. And -- and as we've talked about in the past, some of the reporting and the disclosures we do are sort of a product of -- as our models evolve from years ago being a license and maintenance business when bookings and backlog, a lot more played out of backlog was a much more important metric. Now it's much less relevant. And so we've layered on lots of new disclosures and metrics and we recognize that it's -- in some cases, it's kind of hard to figure out which ones are more important and what some of the nuances between those are. So to your example, bookings and backlog, we think, are much less relevant now. There's always a lot of a lot of explanation around those, which means they're not that relevant to us. So I think you will see us eliminate some things that we've talked about in the past and really focus on a fewer number of relevant indicators.

Somebody does notice every time we take a...

We get a question about -- someone will ask about whatever goes away. But there'll be some things that we just won't disclose because they're not really relevant. We used to have a disclosure around new license deals more than $100,000 in a quarter, and that's totally meaningless now. We did take that one away at some point or maybe it's still on that sheet, but yes, we're really looking to simplify and focus on those things that we look at that are the most important metrics.

Potentially, you could see SaaS like the SaaS ARR every quarter with everything versus existing, just adding on additional modules and all of that?

Yes, I'd say we want to provide more transparency around breaking out those. Some things are in the supplemental information, some things that, I think, ultimately, our goal is to have more in the face of the financial statements, but to have better disclosure around those components of what currently is subscriptions on our income statement. So the transactions in SaaS and what's driving those. And also, we want to show you gross margins for each revenue line. And right now, some of those are combined. We have some back-end things to do to get to that point, but I think you'll see our disclosure become a little bit more detailed and especially around the gross margin side.

Okay. Well, I think that's all the time we have for questions. Thank you so much. Great questions.

Okay. Thanks, everybody, for taking the time to join us today. We're certainly very appreciative of the efforts. We hope you found today informative. There's a survey that's out there. We really appreciate your feedback. I appreciate the comments you've made throughout the day. The comments are anonymous. So if you didn't like anything about the day, you didn't like what I did, I won't know it. I'll still talk to you. But we'd really appreciate if you would take the time to fill out the survey, so we can learn a little bit about the things that you like, the things that you didn't like, so that we can improve going forward. So I started off my presentation this morning. sort of talking about had been more than 4 years since our last investor presentation, and I said, a lot has changed, a lot has happened over the last 5 years. We've had some new strategic initiatives. We've had a lot of investments and really we're a little bit of a different company than we were 5 years ago. And I hope that today really shed some light on what we've done over the last 5 years and more importantly, why we've done it over the past 5 years. So in closing, I just kind of revisit a little bit what we heard today. Tyler, it's a one-of-a-kind company. We've got a strong track record of delivering free cash flow and growth. As I mentioned in the last 5 years have been marked by a period of investment and some new strategic initiatives. We believe those investments have really set the stage for a new period of growth and free cash flow, delivering on our goals in Tyler 2030. To recap those goals. In 2030, we expect our revenues to be between $3.6 billion and $3.8 billion, more than 90% of those recurring. Again, that's organic, excluding acquisitions. And we expect free cash flow to be in the high 20s and delivering about $1 billion in free cash flow. And before I close, I want to emphasize that. That's a big deal. When I started at Tyler in 1998, our total revenues from the software business were about $25 million. And I'm standing up on stage talking about delivering $1 billion in free cash flow. So to me, if I'm taking a headline away from today, that's it. And we've got a clear path to do it. We've made a lot of investments. We've -- margins have been compressed. We know that. We've talked to you all about that. We try to show you the path forward, why we did those things. And again, I remember talking to the management team, we started planning this last year. And I started talking to management team, how do we get to $1 billion in operating profit, OP. And then it sort of evolved in, well, how do we get to $1 billion in free cash flow. So again, to me, that's a big headline. It gets me excited. I talked earlier, I think it gets the whole management team excited. I told you it's a great time to be a part of Tyler. The management team is great. We're aligned and focused on trying to deliver on those goals. So again, thanks again for your time today. Thanks again for your interest in Tyler Technologies. For those, I know a lot of people have travel schedules, we do have lunch next door for those who can make it. I think most of the executive team will spend some time over there. We've got travel schedules. We've got some other schedules. I think they'll be there probably for at least 30 minutes or so if you have some more questions. We've got some of our operators here, which I know you guys grill them during Connect, but you can also talk to them today, too. They're happy to chat with you. So again, thanks again.