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

Yes. Well, the other biggest component here is obviously that low teens, you mentioned around new logo counterintuitively, governments aren't being created every day. There's very little change in terms of the composure of counties and systems. So what you're really talking about is penetration of logos. I think from my vantage point, that just seems -- it's so incredibly evergreen. We've seen that be the biggest portion of the SaaS growth for a very long time. So anything internal that you would say has been most meaningful about getting these customers from 1 or 2 products to some of the biggest consumers up to high-single digits or low-double digits. How can you continue to grow the SaaS base at low double digits off of basically upselling logo penetration?

Yes. So there is a big opportunity. And if you looked at all of the governments across the country, every city counting school district, all the state agencies and looked at all the systems they're using to run all their back office functions. I think you'd find that probably half of those, maybe more than half of those our legacy systems. So there are systems that are either homegrown systems, some of these systems written in COBOL in the '70s. They are systems from vendors, on-prem systems from vendors who if not out of business are not competitive today. They don't have a cloud offering. At some point, they didn't invest in technology. So they don't have a product anybody would buy today, but they're still supporting a big part of the systems that are being used. And so as those systems get to end of life and need to be replaced, they won't be replaced by the current vendor. So that creates an opportunity. Now on one hand, that's kind of hard to accelerate that but it also creates a very steady constant flow that is, like I said, at least half of the market that still will be replaced at some point in the not too distant future. So it creates that steady but never explosive growth. And we continue to have strong win rates, very strong competitive position across the major functional areas of government. So we kind of win more than our share as those turn over, and we continue to gain share. But increasingly, as we go from that -- that's how we capture new logos. But as we go from this 2 or 3 products per customer to 8 to 10 products or suites of products, we have this opportunity by having the largest customer base out there of being able to really have an advantage when it comes time for them to buy that next product or the next product and also cross-sell within a suite of products. So, someone that has our court system selling them a jail system, a jury system, a probation system. And there are a whole lot of structural reasons why that why we should have that advantage. The products are integrated. It creates an easier workflow for our customers. We have common elements like security and sign-on and dashboards and data and analytics players that make it easier to have more products from Tyler. We've made some structural changes over the last couple of years to make sure that we're eliminating barriers to cross-sell. So we've made modifications to our commission structures, our quota structures, go-to-market approaches to try to better -- be in a better position to take advantage of the cross-sell and upsell opportunity. Also, as we make acquisitions or as we build things through internal R&D, it gives us more products to sell and cross-sell. So I think over time, you'll see more and more of our growth coming from the existing customer base. While we still kind of have that sort of constant opportunity to capture new logos, but more and more of an opportunity to expand within the existing customers.

Yes. Well, let's turn to AI as sort of a monetization opportunity for a new application category for you. What are the sort of top sort of commercialized AI products for you today, ones that can kind of create incremental revenue and where is the highest adoption in terms of where in the customer base.

So, I kind of bucket our AI product in a couple of categories. One would be sort of our more mature ones, those that we've had for, in some cases, 3 or 4 years that came from acquisitions, for the most part that are generating more than $20 million a year of revenues today. These are things like we have a product called Document Automation, which was the company we acquired that partnered with our court group that basically automate data entry into the court system. We have a product called priority-based budgeting that uses AI to dig deeply into an entity's spending and help them better allocate budget funds to things that are higher priority and identify areas where they're spending money that doesn't meet their priorities. So things that have high ROIs kind of clearly demonstrate a lot of value that customers are willing to pay for and that are generally priced based on some sort of outcome-based pricing that reflects the kind of savings that they'll get. Then we have new opportunities, things that we're developing today that are more agenetic solutions. And we've talked about at our Investor Day, we talked about a road map where by the end of the year, we should have around 25 new agentic solutions across our product portfolio. And these are things that solve again, product problems that our clients have every day, most of which are related to not enough people to do the work they have to do. So things like an agent in our licensing and permitting system to review building permit applications rather than waiting for a clerk, you might have a 6-month backlog of those applications sitting on their desk. So using AI to do something in minutes that would take a clerk day to do. And it's not necessarily that they're going to go fire a bunch of clerks is that they don't have enough to start with, that they're short-staffed. And so there are these backlogs of cases being -- waiting to be entered into the court system. Things like report writing for police officers in our public safety system using AI, but government-grade AI, not ChatGPT, but something that they are comfortable with the data how it's used, how it's protected, and the accuracy and the trustworthy around very sensitive things like police reports. So those are the kinds of things that we're rolling out. We've said that we'll have these agents across our products at least in sort of the early pilots by the end of the year. Those will then progress to a broader pilot group that will serve as the initial references in our space. They want to know it works somewhere else. They're very curious about AI. They're interested. They have a lot of concerns, but they also want those references. They want early adopters to say, yes, it works to prove up the ROI case, the efficiency gains and the reliability. And so we think we'll be there by in the middle of next year with a broader group of products. And so we're really talking about second half of next year before we start to see more meaningful renews. But making really good progress around it, and we're comfortable that we're going to be a winner with AI and that our customers want that from us.

Yes. Well, I'll just have a follow-up and then I'd love to ask any questions that there might be for the room. Just I think this is the big discussion around this space. And obviously, we as a market of investors and analysts and companies. We're trying to fully assess when shipping software went from scarcity to maybe getting accelerated and becoming not quite commoditized, but much lower hurdle. Doesn't that naturally mean that there'll be companies that come out of the wood work, and aggressively throw an AI solution into verticals that may have not been attractive end markets before for a normal commercial go-to-market. So what do you see on the ground in terms of aggressive AI companies or these government customers trying to maybe feel the temptation to use chatGPT rather than a government-grade solution. What's fact, what's fiction.

Yes. A lot of that is fiction in the public sector and some of that really goes back to the structural differences. Our customers are very risk averse. The technology adoption curve for anything or the adoption curve for any kind of technology in our space, we've seen it with SaaS is much lower than they'll see in the private sector. So our customers are curious. They want to hear -- the -- we had a lot of talk about it at our user conference this last May. The sessions on AI kind of introductions to AI were packed but they're really cautious about it. So the big thing -- and so we're not seeing traction from new entrants in our space. We're seeing our customers say, "Yes, we're hearing from people, but they're telling us, we want it integrated with the system of record. We don't want to bolt it on. We don't want to have to manage that. Our customers don't have Dev teams, they don't have people that are doing this work internally. They want it from someone they trust. And that trust is not only somebody that really has the domain expertise about these very complex workflows, whether it's how police officers do their job, how building permits are issued, how property taxes run. So the deep domain expertise we have they are very concerned about how their data is managed and protected and where it might be used or where it might go if somebody else is in it. So they're comfortable that we're going to do that and obviously, we've got a sales channel and deep relationships, and we built a system of record. So all those things, not only do we think that we're hearing from our customers that they would rather get that from Tyler and that lines up with the solutions we're bringing to market and how we see that playing out. So they're not -- I mean, there's some early adopters that kind of leading-edge people. But generally, they're not wanting to be the first to do anything, and they're waiting for Tyler to help lead them through that process just as we kind of led them to the cloud and continue to do that.

Yes. Any questions from the room? -- Those production agents, I know it's early and you're talking about later half of '27 where it would be a contributory to the revenue. But any use cases you think that could sense the level of the document automation or priority-based budgeting or resident engagement, things that have proven to be kind of, call it, 8-ish figure kind of ARR businesses for you?

Yes. I think eventually, just because of the size of the customer base, and we have thousands of ERP systems installed. So some of these things are not little sexy or not super exciting, but things like automating accounts payable data entry of invoices into the accounts payable system. When you start to multiply that across -- it will be a SaaS uplift -- so when you start to multiply that across hundreds or thousands of customers, they start to get more meaningful. We have hundreds of customers using our licensing and permitting systems, hundreds of public safety agencies using the police. So individually, these SKUs all we would expect to be uplift to their SaaS fee. But collectively, we talk a lot about really this kind of creates a whole new -- open up a whole new TAM for us, and that's the labor budget. So we've typically focused on their IT spend and their IT TAM, but we're seeing real situations where our clients are paying for the AI solution out of their labor budget, Fort Worth, Texas, Tarrant County, with Document Automation said, we are taking this out of the labor budget. We have dollars in the labor budget for these roles. We just can't hire enough people, attract enough people or keep them -- so we'll take some of that budget and pay for the AI solution. They went as far as to give it an employee name an ID number and to further emphasize that. There are some other places that are unionized where that's -- they're facing other hurdles because even though they may have the same problems, there's more pushback on something that can potentially replace people. So seeing different approaches there. But if you look at the total labor TAM and our -- just with our existing customers, it's a multibillion dollar TAM for those kinds of solutions that could be replaced. That's over a long period of time, but we think that's a really big opportunity.

Perfect. Last one to take us out, just I think a lot of the time from 2023 to the most recent Analyst Day was getting groundwork laid, exiting data centers, version consolidation. We've talked about cloud living as something you're trying to embody going forward. But what are you most excited about in 2027? Is it things we've already talked about in agentic? Is it getting to that point of cloud living? What kind of rises to the top?

Yes, I think it's continued progress on all those drivers and margin that we've talked about. I think progress with AI, particularly. And I think we're looking forward to starting to demonstrate some of the proof points along the way that will help continue to make the point that we're going to be a winner with AI, and it's an opportunity for us as opposed to a risk and that we can continue to try to dispel that kind of overriding concern about AI being a threat to SaaS companies. And then I think the last thing that we're excited about that we control is our capital allocation, and we've been very aggressive about buying stock over the course of this year, and they're continuing to. We had a $1 billion authorization from -- in February that we've now completed and now have a new $1.5 billion authorization that we're active with. And so it's one of those opportunities for us that we've seen similar opportunities in the past at times where we've been able to be very aggressive about buying stock back with great results, and this is one of those times.

All right. Brian, I really appreciate you coming out to Nashville.

Thank you.