Tyler Technologies, Inc. ($TYL)

All right. I think we'll get started. Thanks, everyone, for joining us. We have the pleasure of hosting today, Brian Miller, the CFO of Tyler Technologies. I'm Matt VanVliet, the Application and Software analyst here at Cantor. I'll kick it off with a few questions, but would love to have some audience participation. If you have any questions, feel free to raise your hand, and we'll get those answered as well.

But I guess maybe we'll start off from kind of the high level of software is not much in favor these days, especially the application layer with investors. But I guess if we take a step back in terms of what you're actually hearing from your customers, how much demand are your customers asking for on AI? What's maybe the impediment to adopt it more quickly? And maybe for those a little less familiar, Tyler primarily sells to the public sector. So think of your local governments, school systems, things of that nature. So maybe not the fastest adopters of technology ever, but how is AI changing the discussion you're having with your customers?

Yes. So you're right. We're exclusively in the public sector market, and that's really different from the private sector or enterprise market in a lot of ways, but especially around how they acquire technology, what drives them to do that, how they operate. And rarely our government is looking to be the first to implement new technology. We've seen that with a very long transition to the cloud and their reluctance to embrace the cloud for a long time. And they're risk averse. They're not -- they don't have competition. So that often governs kind of how they look at new technology. They don't like change. And so they typically wait until they see things really proven elsewhere and see other governments to use something successfully. And it seems to be the same around AI. We're having a lot of conversations with our clients. It was a big topic last year at our user conference, and I'm sure it will be again in May at our user conference this year. But in terms of new business like RFPs or new business conversations, AI is really not a topic much there. They're curious. You can't help but hear about AI every like 2 minutes somewhere. So they're curious, they kind of want to understand more, but they're not asking for it right now or saying it's got to be in new purchasing decisions. They're not allocating a lot of budget to AI. And it's not the kind of thing that they'll do themselves. So Tyler is investing in AI around our products, looking for things that really solve practical real-world problems that our customers have. A lot of those stem from staffing shortages. Governments for the most part, don't have enough workers. And often, that's because their processes are really inefficient because they have old technology, paper-based, don't have online access for citizen self-service, that sort of stuff. So AI can kind of continue to help solve some of those problems. But as far as why we think we have the right to win and the opportunity to bring AI to our customers around our solutions is really kind of 3 main things. One is the domain expertise that we have deep domain expertise in these very complex workflows and processes around things like public safety, 911 systems, Courts & Justice, licensing and permitting, property taxes. So very specific but very complex operations. So we've built the system of record. We have years or decades of experience around those, really deep expertise in our people and in our products. The second is the trust and the relationships. So we often have decades-long relationships with these clients, and they trust us, and they look to us to bring them new technologies and show them how to use that around the systems that they have that operate mission-critical, essential functions of government. So they typically -- again, they don't trust kind of new entrants. They're not taking a chance very often. So that trust is important. And the third thing is around data that we have data from thousands of customers. We've got about 45,000 installations of our products across 15,000 different jurisdictions. So millions of transactions that are flowing through our systems that we have the data to be able to build models and incorporate into AI effectively. So there are -- we have some products today that are AI-driven. Some of those came from acquisitions, but those products are live solving problems being used fairly widely. One is a product in the courts area that called document automation that automates data entry, so a pretty simple process, but solves a bottleneck that the courts have. So taking data out of a document that comes into the court system and creating the case style electronically or digitally rather than court having to do that. We sold that to a large county in Florida in Q3, just an idea of kind of the revenue there. The customer is paying $750,000 a year in maintenance for their on-prem court system. They're paying us $950,000 a year for the document automation for the AI add-on, but saving $2 million a year in labor costs. Application reviews of product are an AI add-on that we currently are piloting around our licensing and permitting system. So we're one of the -- probably the largest provider of those kinds of systems for governments across the country. So think about a building permit where a lot of places, it might be a 6-month backlog to get a building permit approved because there aren't enough clerks to do the work. So using AI to automate that process and do something in a few minutes that might take clerks days to do. So those kind of applications, often -- we're even finding that customers are taking this -- the funds for these out of labor budgets rather than IT budgets because they do see it as a replacement for people that they otherwise are struggling to find. I guess the other area really is around agents. So resident engagement, we've deployed resident engagement portals now in 6 states. So again, building on the relationships we have with the state governments and the deep understanding we have of how a state government works and all the complexities there. So building resident engagement portals to answer questions and help citizens find information. We just signed in Q4, our first county level customer for the resident engagement portal in Fairfax County, Virginia. So those are kind of an idea of some of the things we're investing. And we have some things in -- as I said, some things that are already out there, some that are in pilot that will roll out more broadly this year. But again, I think the adoption will be probably slower than you would think, but consistent with what we've seen in the past in the public sector.

Very helpful. And maybe, I guess, as you think about planning for '26, even into '27, how are budgets for your target customers looking? How much growth is there annually? How much visibility do you have in that? And then how do you build that into a go-to-market plan and forecasting out?

Yes. Generally, the budget backdrop for governments, and we're about 75% local governments and cities, counties, school districts, local agencies, 20% to 25% state and less than 5% federal. And generally, at the state and local level, especially the local level, budgets are pretty solid. We've said for the last several quarters that the level of activity we're seeing in the market has been stable at elevated levels. So really solid number of RFPs, new sales demos, the way processes are moving. So the pipelines are strong. Our win rates are consistently very strong. We're generally a leader in those areas where we have core products. And a lot of the demand -- the core demand is driven by aging systems that have to be replaced, people that had a system that's 20, 25, sometimes 30 or 40 years old that is at end of life. And so replacing that is a fairly nondiscretionary decision. And that creates a stable kind of never explosive, but very stable level of business. And then on top of that, I think we're seeing some incremental demand that's being driven by this increased focus on government efficiency. So DOGE obviously, was a big topic a year or so ago. But even before that, governments were starting to look. I mean we saw a number of states that had efficiency commissions or something like that. And governments are really starting to maybe look at how they use technology differently and seeing technology is really the way they get more efficient. So governments have always had a need to do more with less. They never have enough money or enough budget even when times are great. So they're starting, I think, at some level to say, yes, I could use the system for another 10 years. But if I replace it now, I'll get these benefits and actually kind of look at it almost on an ROI basis that is not how they've typically looked at acquiring the technology. So I think that's providing some incremental level of activity. So yes, our market is good. I think we're expecting to see solid bookings growth this year and our guidance is for overall growth in the low double-digit range and SaaS growth north of 20%, which would be that our SaaS has been growing more than 20% in the last 3 or 4 years.

And maybe on that topic, we're kind of in the middle -- probably the middle innings now of this cloud migration. You've re-architected a lot of your products on the AWS infrastructure. Maybe talk about, one, from the demand side, what that's unlocked moving to the cloud. You talked about shortage of not only staff, but maybe budget in general to do hardware refreshes. What is that influencing on the demand side? And then on your end, how is that helping reduce OpEx or changing the economics of your product when you move to the cloud [indiscernible]?

So yes, we're in, I guess, the latter stages of the cloud transition that's gone on for several years actually, not because we haven't been moving fairly rapidly, but because our market has moved slowly. So really going back to 2019, we moved from sort of a hybrid model offering either on-prem or cloud to offering just cloud in the new business market. But the migration of our decades worth of on-prem customers to the cloud has continued to move kind of gradually, but has accelerated really in the last 4 or 5 years. If you look at our overall customer base today, again, the high 90s percent of our new business is cloud, but our customer base overall in terms of sort of a revenue equivalent is like 53% cloud and 47% still on-prem. We previously hosted our cloud customers in proprietary data centers. In '25, we exited the last of those. So now our clients are fully hosted in AWS. And we continue to migrate the on-prem customers to the cloud. We've said that by 2030, we expect that, say, 80% or 85% or more of our customer base that was on-prem in '23 will have moved to the cloud. We're on track for that. Last quarter was the highest number, both in number and dollar value of flips or on-prem migrations that we've had to date. We said the peak of the flip still will be kind of in the '27, '28, '29 time frame. We see it as a bell curve and kind of the top of that curve is over those 3 years. Our on-prem base is still a bit more heavily weighted towards large customers, the statewide court systems, large places like New York City's property tax system that tend to move even more slowly. But it's really -- I think virtually all of our customers now, it's not a question of are they going to move to the cloud and trying to convince them why they should, but just when our customers all understand the benefits that they get. And not only it's good for Tyler, but it's good for them. It's a better client experience. Local -- and so as we move those customers on-prem customers to cloud, we're typically getting on a like-for-like basis, a 1.7x or 1.8x uplift in revenue moving from maintenance revenues to SaaS. We're also seeing growing opportunities to upsell or cross-sell, sell more products to them as they move to the cloud. So they may be moving a Tyler court system to the cloud, but don't have our jail system or our prosecutor system. So we have a chance to add those on. And in some cases, adding payments processing on as well. So it gives us a good chance to have discussions about other things that they could get from Tyler. From a margin standpoint, a significant part of the margin expansion we've talked about through 2030 is coming from the cloud transition. It's kind of 3 drivers or 3 main drivers. One is version consolidation. So on-prem, we have historically -- we not only have a lot of products, but we have supported multiple versions of many products, which has been expensive from both a support standpoint and a development standpoint. Ultimately, we will have one version of each product in the cloud that everyone's on and everyone upgrades at the same time. So really a true SaaS environment. And as we move towards that, we've been sunsetting older versions, consolidating down to now where we've made a lot of progress with that in most of our major products, almost all of our customers are on 1 of 2 most recent versions. So that puts more customers in a position to move to the cloud. Product -- cloud optimization of products. We've been continually working on optimizing the architecture of our products to take advantage of the features in the cloud and specifically at AWS. So that lowers our hosting costs and improve margin there. We've released a lot of those cloud optimized products and continue to make progress there. So that will help drive some of the margin expansion we expect through 2030. And then part of it is just scale. So the more capacity we use with AWS, the lower the unit costs get. Right now, we still have some -- what we refer to as bubble costs associated with the transition from our data centers to AWS. Those -- a lot of those will roll off after this year. So we've talked about a 30% plus operating profit margin by 2030. We're actually a bit ahead of track on that. But a lot of that's coming from the cloud transition.

Very helpful. And you talked about the ability to upsell in the cloud. Obviously, putting together multiple products is a little easier when it's all kind of on one similar architecture. I guess from the product development side, though, you have this connected communities idea out there of you've made acquisitions in payments, you've made acquisitions in some of the kind of point solutions that sit on top of core systems. As you think about that, what has been the biggest challenge of getting, say, a local community to buy onto the Tyler platform, understanding that each little department has their own little fee. There's no CEO necessarily who dictates from the top or a CIO. So what's sort of the challenge in the market, but then what benefits does that give you from a competitive standpoint with a more connected system across departments?

Yes. It's a big opportunity for Tyler. We've talked about cross-sell and upsell as a very important growth pillar. We have, by far, the broadest product offering of anybody serving the public sector market. Most of our competitors, it's still a really fragmented market, historically been served by a lot of point solutions, some of which were companies that were not only narrowly focused from a product perspective, but also narrowly focused from a geographic perspective. So we have the biggest customer base, and we've got the broadest product offering. But we still have a relatively modest market share. If you look at the whole -- all of local government and state government software, we've probably got maybe a mid-teens kind of a market share. Some products are certainly well above that, but just shows you how fragmented it still is. So our average customer has 2 or 3 products from us. And I think of that as like a suite of products. So at a county, they might have our court system and our ERP system, but they could also have our public safety system, our licensing and permitting system, our property tax system. So the average customer could have 8 to 10 products from us. So there's still a really significant opportunity just within our customer base. And then as you said, we've got a really robust payments platform now since the NIC acquisition. It gives us the ability to layer payments on top of that where a lot of our systems like utility billings or traffic cord or property taxes are processing a lot of payments so for us to add that service on top of it. There are -- I guess the biggest limiting factor is just the way that governments buy software is that we historically kind of have to wait until that next system gets to end of life. And then we think we should have a really -- or we know we have a significant advantage in winning that next system. Some of these are very closely integrated like property taxes and courts. That's sort of a whole process. You think about from a 911 call through a police officer being dispatched. So there's a computer dispatch system, there's a records management system. They take the guy to jail. So there's a jail system. Prosecutor files charges. There's a prosecutor system. There's a trial, so there's a case management system. There's a jury system, a probation system. If you think about that whole process, a lot of places that might be 8 different systems from 8 different vendors, maybe 2 of them are homegrown. Some of them are integrated, some of them aren't. So they start all over with data entry along the way. So we're the only company that can provide all of those systems. They rarely would buy all of those at once. But as each of those needs to be replaced, we have a big advantage there because we have a fully integrated system. The data already flows through those -- the interfaces are the same. So it's a fully integrated suite of products. Others like maybe property tax and courts aren't really integrated, but we have common foundational elements like security and sign-on, workflow engines, payment engines, the dashboards, so things that create more value from having more of those systems from Tyler. So we do think that the cloud, as I said, cloud transition gives us an opportunity to accelerate some of those add-on sales. And I guess one other thing that we've -- that we're currently investing pretty significantly in is really around continuing to improve the client experience and provide a more uniform client experience across Tyler products because Tyler is the product of a lot of acquisitions. And as we've evolved and as we have more customers that have multiple products from us, it creates some themes in the client relationships that they may have three 800 numbers they call for support for different products. They may have different professional services teams with different products that have different processes and different back-end systems. So we have -- we created a new position about a year ago, Chief Client Officer, and he's really tasked with really creating that unified experience. So standardizing systems, standardizing processes make it easier for someone to do business with Tyler as they add more products. And that's a very active process right now that we've made a lot of progress with, and I think our customers are seeing that.

And maybe on that front, historically, you've made some of these acquisitions to get into maybe adjacent subverticals. But a lot of times, those were still sold by kind of a dedicated product team. But over the last couple of years, you've really layered on this cross-sell motion and gotten that muscle trained better. What have been sort of the biggest findings? And maybe how have you tweaked that model to understand there's a client relationship and who you can leverage there to sell more products and how has that been sort of a growing pain within Tyler in the last couple of years?

Yes. I think as we have more products and the ability to cross-sell more products, we've had to refine kind of how we go to market and how we do that, where we do have multiple sales teams that are very much product focused and they're experts in that. They have relationships in that, but how we tie those together. And so we've made -- a lot of things we've done, we've changed compensation programs so that making sure everybody is getting paid that's involved in the sale. We've got more -- we've created the kind of the go-to-market strategies about, for example, layering payments onto a software product. So we have a utility billing system or we're selling a utility billing system or we have an existing customer that uses that, and we want to add payments on to that so that we're doing the processing around those payments. So we have a utility billing software sales team we also have -- that's part of our public admin group, but we also have team that's focused on payments. And so how those work together, who kind of takes the lead on that, who does the implementation. And all of that has been standardized and sort of optimized to make sure we're taking advantage of those opportunities. In some areas like with state governments where we have these very deep relationships with 28 states from the NIC acquisition that gave us -- we have these statewide enterprise contracts where we provide a wide range of solutions under a transaction-based model. So it's funded by convenience fees. So it's not -- doesn't have to be budgeted, doesn't have to be appropriated funds. And so we have these deep relationships with CIOs and state governments, but we have many Tyler products that we could sell into state governments through those relationships. But sort of bridging that gap and making sure we're taking advantage of that, there was sort of a need there. And so last year, we created a new state-focused sales organization with sales leaders for each state that bridge between all these Tyler products and these deep relationships we already have at the state level so that there's one sort of point of contact that can kind of manage that. And we're seeing success with that even in the kind of early months of that where that's proving to be effective.

All right. I have one more maybe here. And if anyone has in the audience questions or we can go now. I'll come back to another question...

[indiscernible]?

Yes. So how our business is sort of organized and how it breaks out by revenue. So about somewhere around 30% is what admin. So that would be ERP systems, accounting, human resources, payroll. There's a wide range of applications within there, things like parks and recreation and even down to cemetery management. So they're very specific things for government. And that really differentiates ourselves from a horizontal ERP player like Workday, which doesn't have a utility billing system or a parks and recreation system, those sorts of things. We've got property tax. We're the leader in property tax systems, mass appraisal systems, billing and collection systems. Those are somewhere around 10% of our business. Public safety around the same level. So public safety, we do 2 major parts to it, computer dispatch, which is 911 and records management. There's some other ancillary applications there. Courts & Justice is between 10% and 15% of our business. That's by far our most dominant product. We have about a 55% market share of courts in the U.S. that use our case management system. But we also have jails, prosecutor, probation, jury, all -- that whole suite of products there. Licensing and permitting, community development is kind of less than 5%. In schools, we do some -- in addition to ERP for schools, we have school bus transportation solutions. We're the leader in that space. We have -- and then what we call platform solutions, but it's basically our payment solutions and our state enterprise is around 1/3 of our business.

Any other questions out there? I guess maybe coming back to the one you talked about security. Obviously, building something over the weekend with Vibe coding, getting a product out there is maybe more capable, but what people, I think, sort of lost over is the governance, the cybersecurity, the compliance elements of it. I guess how important is that to differentiating your product? And how is -- how have security incidents actually driven more demand for whether it's the cloud migration or net new products?

It's certainly both. Governments, just like private sector enterprises face a lot of cybersecurity concerns. I think, in general, governments and especially local governments are probably often less sophisticated and less comfortable with their ability to be protected and especially where they're using technology that may be decades old, homegrown mainframe systems that may have a lot of vulnerabilities. And so we see an awful lot of ransomware attacks and cybersecurity incidents in our customer base and throughout our space. So that is a major factor in both customers considering replacing systems and maybe replacing systems even that might have some life left in them, but another concern they have as well as customers flipping to the cloud. We often see customers who aren't planning to move to the cloud in the very near future, have a ransomware attack and move immediately. That's their recovery. And we also then see typically their neighbors and peers, the counties around them, see what happens and have a greater interest in moving. So for example, a little over a year ago, Fulton County, Georgia, which is Atlanta, a big customer of Tyler. Their large courts -- they use our court system, our property tax system. They're our largest jail customer. So a number of systems from Tyler had a county-wide ransomware attack that locked up all of their on-prem systems. And so we were able to actually bring them up in the cloud in a matter of days on a sort of a light version and then move them to the cloud, even though they weren't planning to move in the near future. So we were able to get all of those systems up and running. You can imagine that the jail system is down and they're doing everything manually there, that's a problem. And they were a public safety system or any of these mission-critical systems. So that is a big driver of customers having a greater interest in moving to the cloud. That, coupled with general staffing shortages, governments, especially in IT, have a lot of aging workforces. There's this, I guess, grey tsunami, they call it, the people that are -- this retirement that they're in the middle of and facing more. They lost a lot of employees during COVID, a lot of the workforce that they've had trouble getting back. And especially in IT, they struggle with hiring or replacing people that retire that have a lot of -- wear a lot of hats and have a lot of skills. They have trouble paying market rates for a lot of those skilled people or just generally attracting them to go to work for the county government. So even if they want to keep running these systems, maybe a mainframe homegrown system in-house, they don't have the skills to keep doing that. And so that continues to be a big factor in customers either replacing aging systems, but moving to the cloud at the same time.

All right. Well, I think we're at time. So I appreciate everyone joining us. Brian, thank you for joining us. And on behalf of Cantor, enjoy the rest of the conference. Thank you.

Thank you.