Tyler Technologies Inc Q3 FY2025 Earnings Call

Hello, and welcome to today's Tyler Technologies Third Quarter 2025 Conference Call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. And as a reminder, this conference is being recorded today, October 30, 2025. I would like to turn the call over to Hala Elsherbini, Tyler's Senior Director of Investor Relations. Please go ahead.

Thank you, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer; and Brian Miller, our Chief Financial Officer. After I give the safe harbor statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and update our annual guidance for 2025. Lynn will end with some additional comments, and then we'll take your questions. During this call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits. Such statements are considered forward-looking statements under the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Also in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We have also posted on the Investor Relations section of our website under the Financials tab, a schedule with supplemental information, including information about quarterly recurring revenues and bookings. On the Events and Presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Lynn?

Thanks, Hala. Third quarter results once again exceeded expectations across our key revenue and profitability measures, continuing the momentum we saw in the first half of the year. Total revenues grew by almost 10%, led by 20% SaaS revenue growth and 11.5% transaction revenue growth. We're also pleased to report solid bookings in Q3 as total SaaS bookings grew 5% sequentially and rose 5.8% year-over-year to reach a new all-time high. Our results reflect a high level of execution across our team as we advance our cloud strategy to lead the public sector's digital transformation. Our leading sales indicators, including RFP and demo activity, remained steady, reflecting a healthy new business pipeline. Throughout the year, we have not seen any fundamental change in public sector demand nor have we seen any material impact on demand from DOGE or related initiatives or more recently, the federal government shutdown. As we've discussed previously, we view efficiency mandates as a long-term tailwind for our software and services across a large replacement market of aging mission-critical systems. We continue to operate in a resilient budget environment with allocations increasingly directed towards technology investments as a key lever for maximizing efficiency and productivity. We are executing our strategic priorities from a position of strength, grounded in durable fundamentals that reinforce our leadership position and competitive differentiators. Our four key growth pillars remain central to this strategy: Completing our cloud transition, leveraging our large client base, growing our payments business and expanding into new markets. Operationalizing our cloud-first strategy is fully embedded as the cornerstone of how we deliver, innovate, and scale. Our cloud living approach will bring together technology and talent to drive agility and continuous improvement, ensuring consistency across releases and improving time to value for clients. Building on this foundation, our purpose-built AI innovation is amplifying the power of the cloud, creating more seamless connected client experiences, deepening relationships, and expanding cross-sell and upsell opportunities across our portfolio. I'd like to highlight a few third quarter wins that illustrate progress against our growth objectives with a broader list of key deals included in our quarterly earnings deck. We continue to gain traction with our AI-driven solutions. Significant deals this quarter include the contract with Hillsborough County, Florida, the state's third largest county for document automation, adding $953,000 in ARR and a contract with the State of Arizona for our priority-based budgeting solution. We also signed a contract with the South Carolina Department of Administration for our resident engagement solution, adding to our growing roster of state clients, unlocking streamlined government services access through our AI-powered resident assistant. We continue to build momentum in the public safety market with competitive wins that demonstrate the breadth of our integrated offering and market strength. Public safety deals this quarter included contracts with Coweta County, Georgia in the metropolitan area of Atlanta for our full enterprise public safety suite and a cross-sell win with the City of Columbia, Missouri, an existing enterprise ERP client. We're also pleased to see market success from our recent acquisition, Emergency Networking, with the first statewide win for our National Emergency Response Information System with the state of Pennsylvania, serving more than 2,000 fire agencies across the state. Finally, we signed a statewide contract with the Colorado Department of Corrections for our Inmate Services Financial suite, which is expected to generate approximately $2 million in transaction-based ARR. Now I'd like Brian to provide more detail on the results for the quarter and our updated annual guidance for '25.

Thanks, Lynn. Total revenues for the quarter were $595.9 million, up 9.7%. Subscriptions revenue increased by 15.5%. Within subscription, SaaS revenues grew 20% to $199.8 million. As we've discussed previously, there is often a lag from the signing of a new SaaS deal or flip to the start of revenue recognition that can vary from one to several quarters. Because of this, as well as the timing of SaaS renewals and related price increases, SaaS revenue growth and SaaS bookings, both year-over-year and sequentially, may fluctuate from quarter to quarter. Transaction revenues grew 11.5% to $201.3 million, driven by higher transaction volumes from both new and existing clients, increased adoption and deployment of new transaction-based services and higher revenues from third-party payment processing partners. Total bookings for Q3 were up 2.6% year-over-year. Total SaaS bookings, including new SaaS deals, flips of on-premises clients, expansions, and renewals reached a new quarterly high, up 5% sequentially from Q2 and up 5.8% year-over-year. This bookings growth was driven by higher flips as well as expansions and renewals from our installed base. Total ARR from new SaaS deals and flips signed this quarter was approximately $30.8 million, up 8.5% sequentially from Q2 and down 3.3% from last year. ARR from flips rose 64%, while new SaaS ARR declined 39% against a difficult comparison from the exceptional number of large deals last year. As a reminder, the lumpiness of large deal timing was also evident in last year's fourth quarter new SaaS bookings, which also included several large deals. Our total annualized recurring revenue was approximately $2.05 billion, up 10.7%. Our non-GAAP operating margin expanded to 26.6%, up 120 basis points from last year, reflecting a continued positive shift in revenue mix towards higher-margin SaaS and transaction revenues and efficiency gains across our cloud operations. Cash flows from operations and free cash flow were solid at $255.2 million and $247.6 million, respectively, down slightly year-over-year, mainly due to the timing of working capital changes. We ended the quarter with $600 million of convertible debt outstanding and cash and investments of approximately $973 million. Our annual guidance for 2025 is as follows: we expect total revenues will be between $2.335 billion and $2.360 billion, the midpoint of our guidance implies growth of approximately 10%. We expect GAAP diluted EPS will be between $7.28 and $7.48 and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate. We expect non-GAAP diluted EPS will be between $11.30 and $11.50. Our estimated non-GAAP tax rate for 2025 is expected to be 22.5%. We expect our free cash flow margin will be between 25% and 27%. We expect research and development expense will be in the range of $202 million to $205 million. Other details of our guidance are included in our earnings release and in the Q3 earnings deck posted on our website. In addition, while we are currently in the middle of our 2026 planning process, I want to share an early view of our revenue outlook for next year while we continue to evaluate our investment priorities. For 2026, we currently expect SaaS revenues to grow approximately 20%, and we anticipate total recurring revenue growth will be within our long-term target range of 10% to 12%, excluding the impact of the wind-down of the Texas payments contract. Our 2025 guidance and 2026 revenue outlook reflects solid progress towards our 2030 goals, although long-term growth and margin expansion will not be linear. Now I'd like to turn the call back to Lynn.

Thanks, Brian. We're pleased that our third quarter performance again surpassed expectations, and I remain confident in our ability to deliver sustained growth through our unique competitive strengths that position us to lead our clients' digital transformation through enhanced cloud capabilities, improved client experience, and the next wave of AI modernization. We remain on track to achieve our 2030 targets, executing well and delivering across all key priorities. Importantly, our 2030 plan did not contemplate potential additive growth from M&A or AI, but we expect upside potential from both of those growth opportunities. Our balance sheet remains healthy, and we currently have more than $1 billion in cash and short-term investments. Our $600 million convertible debt matures in March of '26. Based on our internal modeling and interest rate movement since we issued the convert, it has proven to be an efficient component of the financing of the NIC acquisition. As we grow free cash flow, our historical capital allocation priorities remain unchanged and include internal investments, M&A and opportunistic share repurchases. We repurchased approximately 300,000 shares in Q3 in part to offset potential dilution from our convertible debt. Following our repurchases, the stock saw further weakness to levels we believe represent an attractive long-term value proposition, but most of the decline took place after our blackout period commenced. On the M&A front, we have closed two acquisitions this year, MyGov and Emergency Networking, and our M&A pipeline is active. We continue to follow our proven playbook, adding competitive products or functionality that are adjacent to or complementary with our existing core business. We expect to leverage our established sales channels and client base to grow acquired businesses faster than Tyler's overall growth rate. Looking ahead to 2026 and beyond, you'll see us take a more proactive intentional approach to M&A within our general guidelines while staying disciplined on valuation. Over recent years, we've discussed a higher bar for M&A. Yet since the NIC acquisition, we've closed 11 transactions of varying sizes for a total purchase price of nearly $400 million. The higher bar reflected both management bandwidth and balance sheet considerations. Going forward, we'll continue our disciplined valuation approach and consider management bandwidth, but I'd expect to use our significant free cash flow and if circumstances warrant reasonable levels of debt to drive future growth through M&A and when appropriate, fund opportunistic share repurchases. Now I'd like to make a few comments addressing some of the market noise around AI. For more than 25 years, Tyler has successfully navigated the public sector through successive waves of technological transformation from the emergence of web browsers in the dot-com revolution to mobile computing, cloud migration, and now artificial intelligence. Each shift brought similar promises. New entrants with new technology would disrupt established players. And each time, we learn the same fundamental lesson: technology alone never wins. In the public sector, durable outcomes come from deep domain expertise, trusted client partnerships, and disciplined execution. That's been our edge, and it still is. Today, we are building on those same principles and expect to guide the public sector into the next era, one that's driven by AI. And we are confident that no company is better positioned than Tyler to lead this transformation. AI's effectiveness depends on quality data. Our 15,000-plus clients generate vast amounts of data daily through our systems, and they trust us to govern it responsibly. Through well-structured data partnerships and governance frameworks, we can leverage this client data with appropriate permissions and safeguards to build AI solutions that truly understand government operations and complex workflows. Our clients are ready, and they're seeing results. Early deployments of products like document automation and priority-based budgeting are delivering 10% to 30% productivity gains and 2 to 3x ROI on targeted processes while maintaining the level of reliability and trust that our clients demand. Looking ahead, I view our AI opportunities in three categories. First, internal efficiencies where we'll invest and set specific ROI targets. For example, we're currently scaling our investments in AI tooling for all 2,000 of our product development team members, rolling out the tooling, training, and enablement required to innovate and deliver at the speed of AI. Second, competitive differentiation with existing products to win more business and provide more meaningful upsell opportunities. And finally, new products through M&A or internal development that drive revenue growth. Agentic AI, operating as a digital extension of the workforce, has a natural path to monetization because it delivers clear, obvious, and measurable outcomes, such as hours saved, backlogs reduced, or revenue recovered. When that value is proven, we believe Tyler can capture a fair share of the ROI by simply as a predictable annual SaaS fee tied to the value. It's also interesting to note that some of our forward-thinking clients are starting to blend their software and labor budgets, allocating more of the latter towards their digital workforce. As digital labor shows impact, agencies can reallocate portions of labor spend to software. If this trend continues, we believe it will further expand Tyler's opportunity. In summary, and in my opinion, some of the noise around AI and vertical software has been a bit overblown. I've quipped that AI itself is fueling displacement fears, and there's still significant hype, reminiscent of the dot-com era. With every technology cycle or transformation, there are shifts to redefine markets and leadership positions, and yet Tyler continues to endure, thrive, and lead. To me, the question people should ask is, who is best positioned to lead the public sector through this next transformative cycle? I contend it's Tyler. Now we'd like to open the line for Q&A.

Your first question comes from the line of Alex Zukin of Wolfe Research.

I'll start with a tactical question about some of the numbers and then follow up with a broader one. Brian, could you help us understand the decline in net new annual SaaS bookings year-to-date in the quarter, especially given the tough comparisons from last year? However, there is confidence in SaaS revenue growth for next year at 20%. Can you provide some context on when the implementations or conversions from the previously booked business need to occur to reach that target? How much visibility do you have on this compared to previous years, and could you offer some estimates for next year? Additionally, why did you pull some of the segmented guidance for this year? Please address these two points, and then I’ll have a broader question.

Yes. As we look ahead, this is a preliminary view of 2026 as we develop our plans. We anticipate that SaaS revenue growth will be around 20%. This outlook is based on various factors that influence SaaS revenue growth. One component is new SaaS bookings, including those anticipated for next year and those already secured. There may be a delay of one to multiple quarters before these deals translate into revenue, as some are phased in. Therefore, part of that growth will arise from this year's bookings and even last year's bookings as they come online. Additionally, we expect continued growth in flips, both in quantity and size. Our projections for flips in the coming year are included in this assessment. Furthermore, most new SaaS bookings stem from add-on sales to existing customers rather than new customer deals. We also account for the pricing impact of annual increases we see on renewals. Considering all these factors, we believe we have good visibility for a typical year, which supports our confidence in achieving the 20% growth target next year.

And on your question about segmented guidance, I assume you're asking about the breaking out revenue guidance by line item. We've given that early in the year to help with modeling in general. But now that we're down to the fourth quarter, we really don't have any significant changes around what we've given in the past. So we've tried to simplify things a bit and just go with the overall revenue guidance.

Got it. Lynn, you mentioned that there hasn't been much impact from budgets and budget cycles in DOGE, which is understandable. However, the comments regarding M&A seemed a bit more focused. Can you clarify how much we should expect from organic growth in terms of total top line contribution for fiscal '26 and beyond? Is there a shift in expectations regarding M&A, or do you believe there might be more potential due to a broader opportunity set with AI? What message do you want us to take from that comment?

I think really the signal is, one, we've done two deals this year. They were relatively small. We do have an active pipeline. They're not necessarily large deals. I wouldn't expect '26 to have a meaningful impact more than that sort of 1%-ish range, assuming other deals may or may not go. Really, the comment is based around the fact that, hey, the last several years, we've talked about the need to strengthen our balance sheet, and we've talked about management bandwidth, not just because of M&A deals, but also we have a lot of strategic initiatives going on. And throughout this year, as you know, we've gotten to the point where we have the cash on the balance sheet to pay off the convert. We are getting past some major hurdles on some of these internal investments and strategic initiatives even as more are spinning up. And I just feel like we're more in a place now where we can actually be a little more proactive, whereas over the last few years, I think we've been a little more reactive, more responding to brokers instead of other types of deals. Now to be fair, the Emergency Networking deal that we did this year, that was something we proactively went after. They were a partner of ours. That's a proven model for us. We get to know them out in the market. Our ability to close on deals when we knock on doors or we establish a relationship versus a broker bringing it to us is much higher. And I think we're just in a position where I feel like we have more of the ability, both, again, from a balance sheet perspective and a management perspective, everything to sort of go back to more of our traditional approach pre-NIC.

Your next question comes from the line of Terry Tillman of Truist Securities.

It's good to see this flag in the ground on the 20% SaaS growth. I had a bunch of questions, but I'll keep it to one. And there's a maniacal focus on your supplemental information on your IR section of the website, and it is often on that new SaaS and flips SaaS bookings. I love how you brought up the idea of add-on sales. Could you maybe double-click on kind of approaches you have been taking to be much more programmatic to drive those add-on sales and expansions? And just where are you in kind of getting the benefits of that focused effort?

Yes, Terry, we’ve been concentrating on this for quite a while. Our inside sales teams have consistently exceeded their quotas over the past couple of years, but I would say we are still in the early stages. By the time we reach our 2030 targets, we anticipate having 2 to 3 products per client, and we aim to increase that to 10 to 12 or even more, especially as we engage in more mergers and acquisitions, which will create additional opportunities. We're still in the initial phases of this, but it significantly influences our business strategy. Additionally, regarding Alex's question about the markets, we have observed in recent quarters that request for proposal activity has remained steady, and demo activity is either steady or increasing. However, for some reason, we noted that certain procurements were temporarily paused, but we are beginning to see those come back. We are optimistic about our sales outlook for Q4. For instance, our enterprise ERP solutions saw the highest number of RFPs in Q2 and Q3 that we have experienced in the last two years. This demand, as has historically been the case, typically persists, and we are ready to seize it. This pause in activity seems to have been a brief setback, akin to past events like post-9/11, the Great Recession, or COVID, where activity slowed, but we remained prepared. While this pause wasn’t as significant, it contributes to our confidence as we progress.

Your next question comes from the line of Joshua Reilly of Needham.

Can you just remind us the moving parts of how the Texas payments contract winding down is going to impact transaction revenue for the balance of the year? And then offsetting that is the ramping of the California State Parks deal. Is that at a full run rate now? And are there any other notable payments deals ramping in transactions disrupting the normal seasonality for decline into Q4?

The Texas contract is nearing its conclusion. We now anticipate revenues from Texas for the full year to be in the range of $39 million to $40 million, which is slightly lower than the $41 million we projected last quarter. As we gain more insight into its transition, this is the level we expect. There may be about $4 million to $5 million that carries over into next year. The difference between the $39 million to $40 million this year and that $4 million or $5 million next year will affect next year’s figures. Regarding the California parks, which primarily involve software and services, that contract started last August, so we are seeing the impact of it in this quarter. Moving forward, the revenues from that contract will continue to increase, although it's not fully ramped yet, most of the growth is now part of our baseline projections. There shouldn't be any significant changes to the seasonality. We did mention a large transaction-based deal signed this quarter with the State of Colorado for our inmate services financial suite. This software will be provided under a transaction-based model and is expected to generate a couple of million dollars in annual revenue, but there isn’t any individual deal on the same scale as the one in California.

Yes, Josh, in this quarter, we signed a payments deal with Chesterfield County, Virginia that has fully ramped up. We believe it will be about a $1.5 million deal. There are some other payments transactions currently in the queue that we don't announce details about. However, we feel positive about the trajectory of our payments transaction business.

Your next question comes from the line of Saket Kalia of Barclays.

It's great to hear about the 20% SaaS growth projected for next year. Lynn, I appreciated your insights on AI during your initial comments. I would like to connect that with Tyler's transition to SaaS. As more of our customer base shifts to SaaS, what do you see on Tyler's roadmap that might enhance revenue opportunities related to AI in the public sector? Additionally, have you noticed any changes from competitors as AI becomes a more prominent offering in the public sector? This is a question I've received as well, and I would be interested in your thoughts.

I haven't observed any significant changes from our competitors. Your comparison to SaaS is an apt one. Historically, we had an on-premise licensing model alongside a SaaS offering, and we were cloud agnostic. In 2019, we made a strategic decision to lead the public sector towards the cloud instead of simply reacting to trends. Our current mindset is focused on guiding the public sector through the transformative cycle of AI, where we believe we are ideally positioned. I've mentioned our advantages in terms of data access, deep domain knowledge, and internal resources, as well as partnerships with AWS, OpenAI, and Anthropic. Trust is also crucial; our clients have confidence in us as they embark on this journey, and they seek a reliable partner. This theme was prevalent at our Connect conference last year and continues to resonate with our clients. We are capitalizing on our position by investing in AI, and we have AI-driven products already available. Our plans for next year include increasing our AI investments, but I want to clarify that we won't indulge in the AI hype. We have established products as part of our strategy and will stick to our commitment to transparency about our actions. We're excited about our current standing and the readiness of our clients, but as you know, these changes will take time.

Your next question comes from the line of Kirk Materne of Evercore ISI.

It's interesting to hear about how some clients are beginning to integrate their software and labor budgets. My question is similar to what Saket asked regarding AI. I understand it's early, but how do you plan to discuss pricing for AI capabilities with your clients? You've maintained a long-standing partnership with them, involving some form of value exchange. Does that dynamic change in an AI context? Are you simply increasing the value provided and, as a result, adjusting prices? Do you have a pricing model based on the number of agents? I'm trying to get a clearer picture, especially as you incorporate more AI features into the ERP suite and your core offerings.

Thank you for the question, Kirk. On the first part, yes, we have had a very small number of clients who have moved funds out of the labor budget to help support that initiative. I mentioned Hillsborough County, Florida. This creates an additional way for us to approach the situation. Your point about Agentic AI and replacing the digital workforce is where we can demonstrate a proven return on investment, and I believe that can be priced appropriately. Additionally, I noted that there will be areas of AI focused on enhancing our competitiveness and potentially improving a suite of products rather than creating standalone modules. However, it is essential that we effectively communicate the value of the ROI, as that will be critical for distinct monetization opportunities.

Your next question comes from the line of Rob Oliver of Baird.

My question is on the customer conversions or pace of flips. Two-part question. One, Lynn, have the drivers of flips changed at all? I know you guys have cited security and certain customers being ready to modernize in the past. And are there additional factors that could offset that like AI readiness or concern on AI? And then for Brian, just around the conversion math, if you could just remind us how that's looking today? And any color around cross-sell on top of that would be helpful.

Yes, Rob, I believe that security has traditionally been a key selling point. However, it is now transitioning toward the value offered by the cloud and the advantages of enhancements and upgrades. We are currently developing a unified approach to communicate with our clients about our messaging regarding the cloud. Presently, we are still favoring a more inviting rather than a punitive approach, but that is evolving. The inviting aspect is the value proposition that clients will gain by adopting cloud solutions versus remaining on-premise. This will also encompass AI features and functionalities, in response to your comment.

And I'll also add that one sort of gating item around the pace of flips and the readiness of clients to flip goes hand-in-hand with our version consolidation. And as we've continued to eliminate older versions of products and move more and more customers onto the current version of products, that puts them in a position to be able to migrate to the cloud where we ultimately have one cloud version of each product. And we've made a lot of progress with that, especially with our core key products over the last couple of years, and we continue to do work on that. But that has put more and more customers in a position, which also supports an increase in the pace of flips over these next couple of years. The math around the flip still sort of on a like-for-like basis, still holding pretty steady at that 1.7 to 1.8x uplift from their maintenance revenues. It's a bit anecdotal at this point, but I think we are seeing an increase in add-on sales, upsells, whether it's additional services or additional modules or products as customers move to the cloud that provides that opportunity to have a conversation with them about other products that they could get from Tyler and deploy in the cloud at the same time. And I think we're more intentional about that today than we may have been in the past.

Your next question comes from the line of Matt VanVliet of Cantor.

I guess when you look at the number of sort of subverticals that you play in, it sounds like some of the Courts & Justice and then the ERP financial side have been particularly strong. the last few quarters. Curious if there have been any areas where you've seen some weakness and maybe any reasons you've identified there, maybe any areas that have shown a little bit more of that ARPA hangover even on the K-12 side, maybe the ESSER funds in addition to ARPA. Just help us understand kind of where in the business is seeing some positives, maybe where some negatives are.

Yes. I would say, Matt, generally, in the first quarter or two, we talked about decisions being delayed, not canceled, but just sort of being delayed, and we attribute a lot of that to post-ARPA. That filtered across product suites. It filtered across our ERP enterprise ERP suite. It did filter across some of our justice solutions. Public safety is having a really great sales year, seeing our Courts & Justice solutions. I think the softness that they saw in the first half really caused by sort of delay of deals that's starting to ramp back up. And as I mentioned, that's the case also with our enterprise ERP. Federal, obviously, has been impacted by a lot of the noise that's out there. But as a reminder, it's a pretty immaterial part of our business.

Your next question comes from the line of Ken Wong of Oppenheimer.

Brian, I wanted to maybe dig in a little deeper on Alex's question about '26 SaaS revenue. You touched on some of the components, the stuff coming off backlog, stuff coming in from new. At this stage in the planning cycle, any sense whether or not '26 might have a larger backlog component that gives you guys the confidence? Like how should we think about that relative to '25 or past years?

Structurally, there isn't a significant difference. Given the substantial deals we executed last year that are still coming through, we may see a slight increase from that backlog. Last year, our SaaS ARR bookings growth was 60% and 50%, but our revenues did not increase at the same rate, indicating that some of those bookings have yet to fully translate into revenue. Additionally, we continue to see growth in sales to our existing customer base, which is where most of the revenue growth is coming from. This growth stems from both pricing strategies and add-on sales, as well as selling additional modules or product suites to current customers. As Lynn mentioned, with our increased acquisitions and product development investments, we have more offerings to sell to these customers. We have also made structural changes within our sales organizations, such as establishing new state sales teams, which enhance our ability to drive more sales to our current customer base. We've discussed our sales dynamics, including the forecast for cross-sells and upsells for the next year based on our pipeline assessment. For several quarters, we've noted that market activity, the number of RFPs, and the number of demos we conduct have remained steady at historically high levels, contributing to a strong business pipeline. However, we do experience long sales cycles for larger deals, which can last a year or even up to 18 months or longer. Nevertheless, the ongoing pipeline activity supports a positive sales outlook moving forward.

Ken, to elaborate on that, 2024 was a record year for sales. We saw a slight dip in Q1 that extended slightly into Q2. However, as we mentioned earlier, this was not a systemic problem or something that persisted. Our sales have been increasing as expected over the year, and we anticipate that growth will continue into Q4. It was merely a brief setback, and there has been no fundamental change in the markets, our offerings, or our competitiveness. We have encountered similar situations in the past. From my viewpoint, our trajectory and our goals for 2030 remain unchanged.

Your next question comes from the line of Jonathan Ho of William Blair.

Can you hear me okay?

Yes.

Sorry. So I just wanted to understand, when it comes to some of your newer products like emergency response and prison transactions, can you help us understand the growth opportunity here and potential cross-sell synergies with some of your other systems?

Yes. Both of those product lines are significant. Our correction resident services have a large total addressable market, which we estimated to be over $100 million when we made the acquisition. It also offered a chance for cross-selling. We combined the relationships we gained in Colorado from the NIC acquisition with our Justice sales team to create new opportunities. The emergency networking acquisition, while small, is crucial because their fire incident reporting system is up-to-date and complies with 2026 regulations, which is important for driving growth. These are smaller deals, but we are excited about the potential. In Pennsylvania, we secured a statewide contract, which has the highest number of fire agencies in the country. Although the initial deal was modest, it has significant expansion possibilities that we are already experiencing. This success will help us replicate and grow our public safety sales across the country.

That's really a key characteristic that we look at in a lot of the acquisitions we do, these tuck-in types that even if they're relatively small at the time we acquire them, we expect them to grow at a rate that's significantly in excess of Tyler's core growth rate as we leverage our sales organization, put that product in the bags of many more sales reps than that business had on its own and sell it to both existing Tyler customers in related products and bundle it in new sales, which is what we're doing with emergency networking. And we've seen that playbook work extremely well over the years. A lot of examples like our Enterprise Supervision product that have proven up that. So that really is a common characteristic of a lot of our acquisitions.

Your next question comes from the line of Gabriela Borges of Goldman Sachs.

Lynn, I wanted to follow up on your comments on AI because there's been some frustration in the software ecosystem this year on just how long it's taking to see real productivity gains in knowledge workers and at the application layer. So my question for you is, there is this perception that government typically moves slower than enterprise. Based on your conversations, what are you seeing in terms of the clients being willing to engage? Are there some products that they're more willing to engage than others for AI use cases specifically? And to the extent there are limiting factors, what are you as a company doing to address those limiting factors directly?

Thank you, Gabriela. Our sector generally moves at a slower pace than the private sector, which influenced our approach about a year ago when we chose to be disciplined. Currently, we notice that clients are more open to engagement, particularly due to workforce challenges. As their workforce ages and they aren't replacing retiring staff, there's a growing need for solutions like Agentic AI and digital workers. In our business, we're observing increased receptiveness in certain areas, particularly in the court sector where document automation from our CSI acquisition is gaining traction. We're also seeing more interest in our ERP solutions, such as priority-based budgeting and AP automation. While I wouldn't say there's been a significant breakthrough, there is certainly an openness to new solutions. We will keep promoting these offerings by demonstrating their ROI value to our clients.

I believe some of their openness is related to the trust they have in Tyler. We have established deep, long-term relationships, often spanning decades, where we have guided them through various stages of technology. They trust us to help them navigate AI as well, demonstrating the value and ensuring their data is protected while providing transparency, particularly in contrast to a point solution or a startup offering an AI add-on to existing products. They rely on us to understand their needs and integrate that with how we handle their complex workflows. This trust is crucial to their openness to AI.

Yes, I would be remiss if I did not mention our products in the state space, such as resident assistant, resident engagement, and automated field operations. This quarter, we secured a deal with the South Carolina Department of Administration for our resident engagement product, worth approximately $1 million in annual recurring revenue. The solutions we provide help citizens navigate the complex web of government operations, allowing them to find what they need and fulfill their requirements, which is quite compelling.

Your next question comes from the line of Mark Schappel of Loop Capital Markets.

It seems like your public safety business had a strong quarter. Q4 generally performs well for public safety. Could you provide more details about your public safety pipeline and the outlook for Q4?

Yes, Mark, you're right. We had a good quarter in sales in public safety and are seeing strong momentum in that area. I expect positive sales in Q4 as well. We closed several significant deals, and while we don’t always discuss the competitors we surpassed, I'm very pleased with our wins and the competitive challenges we overcame. There is clear momentum, which is generating excitement in our Tyler division. We remain the leader in the public safety sector, particularly concerning cloud solutions. This quarter, we are approximately 93% ahead in year-over-year subscriptions compared to last year, which puts us in a favorable position. However, we are not complacent. We will continue to make competitive investments across the board, but I am confident in our standing.

Great. And then, Brian, just building on an earlier question around flips. I believe flips were growing about 25% this year. Just wondering if you could just comment on growth expectations for flips next year. And also, if you could maybe just provide an update on maybe what percent of the installed base has moved to SaaS.

Yes. We don't guide actually to a flip number, but we have said that the trajectory both into next year and really for the next two or three years, we've talked about a peak in the '27, '28 timeframe. So that trajectory, both in terms of the number of flips and the size of flips. So the average size of flips is increasing. If you look at the cohort of customers that are still on-prem, it's more heavily weighted towards large customers, statewide court systems, large counties. So there is more revenue in that base that's still on-prem. So we do expect that trend to continue to be upward and to the right, but are not giving a specific number for how we expect that to grow. Just like with new sales, there's lumpiness around large flips. And those are a little less predictable about exactly what quarter or even what year they're going to fall in, although we're certainly in conversations with virtually every customer about their long-term plans to move to the cloud. The so that's kind of where we stand on that. The second part of your question, what was that?

It was about the growth expectations for flips next year. What percentage of the installed base has moved to SaaS?

From a revenue standpoint, so if you take the maintenance revenue that we have today and multiply it by 1.75 to make a SaaS equivalent and compare that to our SaaS revenues. So from an equivalent revenue basis, it's about 50-50 right now. So about half of our customer base by revenue is still on-prem and about half is in the cloud.

Your next question comes from the line of Michael Turrin of Wells Fargo.

This is Ron, and I'm filling in for Michael. I wanted to inquire about the cross-sell opportunity. You've been discussing the goal of achieving 8 to 10 products for a few months now. I'm curious about the main factors that will help transition from the current 2 to 3 products that customers have right now. Will this necessitate any mergers and acquisitions or the development of new products?

Yes, Michael. There are several factors influencing this. One factor is our ongoing effort to consolidate all our products into a single cloud version, which will contribute to improvement. We are currently reassessing our overall sales strategy, and I cannot go into specifics at this moment. However, it's clear that this is a significant aspect of how we perceive our clients, approach territories, and evaluate their product assortment. There are additional initiatives as well, such as our effort to transition to the cloud and our client satisfaction initiative aimed at ensuring all our clients are very satisfied, which is crucial for cross-sell and upsell success. If our clients are not satisfied, they will not purchase more from us. We have taken significant strides in this area. As you may know, we brought on Andrew Call as our Chief Client Officer and initiated One Tyler programs focused on enhancing client experience and establishing a more cohesive approach to client success. There are various actions unfolding behind the scenes. It is not attributed to a single factor, and while some initiatives are larger than others, we see substantial opportunities ahead in the next 5 to 10 years.

Your next question comes from the line of Pete Heckmann of D.A. Davidson.

A lot of my questions have been answered, but I have a couple of follow-ups. Can you remind me, this was a significant year for R&D catch-up. What are we thinking in the long term? Based on the framework you provided, you anticipated that R&D would be around 5% of revenue in 2030. However, it seems to be above that now. Should we expect it to plateau and then decrease as revenue grows, or will it continue to grow at an accelerated rate in 2026?

In general, as we look at the long term over multiple years, we expect R&D to grow in line with or slightly below our overall revenue growth, so as a percentage of revenue, it would be stable or decline. This year and into the next couple of years, there is an impact on R&D due to a geography change. As we continue to evolve in our cloud transition, resources that were previously classified in cost of sales are being redeployed into R&D. This expense movement is part of the reason for that growth. Looking at this year and into next year, we are anticipating an elevated level of R&D, with actual increases above our revenue growth as we invest in various initiatives, including additional investments around AI.

Okay. That's a helpful reminder about the reallocation. Regarding the deconversion of the Texas payments deal, most of that will occur next year, which will create some challenges. If we're anticipating SaaS growth at 20%, what underlying growth rate for payments should we consider to estimate where subscription growth will land next year? Is it reasonable to think about transaction revenue growth, excluding the Texas payments, being in the mid- to high teens?

I'd say, yes, ex the impact of Texas, low double digit.

Okay, low double digit. Okay. So certainly, on a combined basis, then just because of Texas, we will see subscription revenue growth fall kind of more towards the mid-teens next year versus what looks like it's going to be 18% this year. Is that the right way to think about it?

I think that's generally the way to frame it. The only guidance we've discussed today pertains to total SaaS growth and subscription growth, which we expect to be in the 10% to 12% range. This recurring revenue growth includes SaaS, maintenance, and transactions. You can estimate what that leaves for transactions by applying the 20% to the SaaS growth. It's important to note that this recurring revenue growth does not account for the impact of the Texas transition.

Your next question comes from the line of Trevor Walsh of Citizens.

Brian, I appreciate the insights on the 2026 outlook. Could you share your thoughts on the profitability levers that might be utilized leading into 2026? Additionally, can you provide an update on the data center closure, particularly regarding the site planned for the end of this year and any locations transitioning in the early part of next year? An update on that process would be great.

Sure. Regarding margins, we are not providing guidance for next year. We have indicated that the progression of margins will not be linear over the next several years. They have remained at a relatively high level for the past couple of years. We are slightly ahead of our plan as we've benefited from the cloud transition sooner than expected. Additionally, we have realized some operational expense benefits earlier than anticipated. Therefore, I expect that margin expansion next year will not match the level of expansion we are experiencing this year, but we are definitely on track to meet or exceed the targets we have set for 2030.

Yes. I'd say, Trevor, that's right. We're too early in the process to talk about margins. I will say we have approved and greenlighted some investments that were not in this year's budget that are coming online now, investments in our products, investment in both competitive and AI investments. And I would expect some of that additional elevated investment next year. On the data center closure, you're right. We have exited the Army data center, a huge milestone. Huge congratulations to our teams. We did that a little bit a couple of months early. And we talked about this in '23 about exiting the Dallas data center on time, and now we've done it with the Army data center. One thing I want to caution about that exit is that does not necessarily equate to immediate cost savings. There are some transitional headwind costs that are short term. I'm not prepared to give you a window of that. But clearly, over the long term, it's a tailwind to margins.

Your next question comes from the line of Clarke Jeffries of Piper Sandler.

I wanted to follow up on the discussion regarding flips. Brian, how much is version consolidation still a limiting factor across the product base? Earlier in the year, you mentioned being ahead of schedule with ERP at a 95% level and Justice at 75%. As we look toward 2026, where do we stand on that version consolidation? What are the remaining limiting factors that could impact our capacity for greater flips next year?

Yes. When it comes to our ERP, there are two main initiatives ongoing. One involves consolidating the multiple versions currently in use, and the other focuses on transitioning to our cloud version of the software. These two functions are interconnected, as one is necessary to achieve the other, and we have made substantial progress in this area.

And your last question comes from the line of Charles Strauzer of CJS Securities.

Just on the conversation, just looking at the time it takes a customer to go live in the cloud kind of once they've signed on to flip, are you seeing noticeable improved efficiencies allowing you to convert the customers at a faster clip?

In general, our experience has been quite positive, and I believe we've improved in this area. It varies from one client to another, but there's usually considerable planning done well in advance, often several months or even multiple quarters before they officially start the transition. However, we've had good experiences with the duration from when clients sign to when they actually go live in the cloud. For instance, the Idaho court system transitioned in just a few months. Overall, our experience has been favorable, primarily due to clients planning ahead and integrating this into their IT road maps. We have also encountered situations where, due to ransomware attacks, decisions need to be made quickly, allowing us to move customers to the cloud in just a few days. Therefore, the lead time can vary significantly depending on the client.

Each client has different levels of complexity, and we have been able to do things fairly quickly, although not with complete functionality. However, as we continue to progress, I believe we are becoming more efficient. I am unable to provide a specific quantification of that at this moment.

With no further questions, I'd like to turn the call back over to Lynn Moore for closing remarks.

Thanks, Dale, and thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks again, and have a great day.

This concludes today's conference call. You may now disconnect.