Conference Transcript - TYL 2026-08-12

Operator

Good afternoon, everyone. Welcome to the 29th Annual Oppenheimer Technology Conference. Super happy to have with us Tyler Technologies. Representing Tyler will be EVP CFO Brian Miller. Brian, welcome.

Brian Miller, CFO

Thanks. Good to be here.

Operator

And for everyone in the audience, this is a fireside format. I'll run through a series of questions with Brian, but we also have the option for some audience participation. Please feel free to dump some questions that you might have into the conference portal, and I will get to those kind of on the back half of this presentation. So with that, Brian, look, I think everyone generally knows Tyler in this room, but perhaps just a quick background on Tyler and the products capabilities that you guys offer to customers.

Brian Miller, CFO

Yeah, you bet. For starters, we serve exclusively the public sector, so focused on governments, primarily domestic governments. We're about 98% domestic in the U.S. Most of the 2% is Canada. We provide a very broad range of software applications that really power the mission-critical functions of government. We're about 75-ish percent local So cities, county, school districts, local agencies, roughly 20, a little over 20% state governments, and most of that is through a transaction funded model providing access to back-end systems through portals and building those interfaces to enable citizens to conduct business with state governments. We also have state government software applications as well, and then less than 5% with the federal government. But we have by far the broadest set of solutions for the public sector and the biggest customer base. So we have about, I think, 16,000 distinct government entities that are our customers and roughly 50,000 systems installed across those customers. We also have a transaction business with embedded payments and software, including software provided under a transaction-funded model that complements the core software business as well.

Operator

Fantastic. Really appreciate that backdrop. Maybe taking a wider lens to the Tyler business first, you guys just had your investor day a couple months back. You laid out some new financial targets, specifically bumping up your recurring revenue ranges, also a 15% increase to your free cash flow targets. We'd love to just kind of get your view on what was the primary drivers for that increased confidence? What are some of the factors that are underpinning that growth rate, those margins?

Brian Miller, CFO

Yeah, sure. At our previous Investor Day in 2023, we had laid out targets for 2030, which was certainly something new for us to go out seven years with targets. But there was a lot going on in the company around that time. We had done the acquisition of NIC, our largest acquisition ever. So we had this new transactions business. We were sort of at the inflection point in our cloud transition at that point and are both around revenues and margins. So we had a lot of things going on then. And so we had laid out these 2030 targets as well as some interim targets for 2025. So at our investor day in June, we certainly outlined how we had done versus those 2025 targets. And in pretty much, well, in every case, we had either met or exceeded the 2025 targets, and then we recalibrated the 2030 targets. And again, in every case, either they were unchanged, but in almost all cases, they were raised. So part of the revisions and the increases to our 2030 targets was based on our sort of outperformance through 2025. So, the fact that we were ahead of track in terms of our, certainly our margin expansion, we were ahead of track by a wide range on our cash flow target there. We were making the kind of progress we expected around flips of our on-prem customers to the So, a lot of that, the higher assumptions are based on what we've already accomplished through 2025, as well as some new opportunities. So our transaction-based business is more mature now, and we have had success in our go-to-market with embedding payments with our software solutions. So we had more visibility around that. We've made significant progress on our cloud transition around things like version consolidation, eliminating multiple versions of products, exiting our data, our proprietary data centers and moving exclusively into the AWS world. So those things all kind of colored how we look at the next five years going forward. We so that the targets for SAS revenue growth that we previously targeted high teens CAGR through 2030. Now for the last five years we're targeting around a 20% CAGR 10% growth in transactions and we framed all of this as exclusive of M&A and incremental AI contributions. So laid out a lot of reasons why we think AI wasn't part of the conversation in 2023. It certainly is now. We laid out in great detail the reasons why we think Tyler is a winner in AI in our space. But at this point, being too early to really put dollars on how much incremental revenues over the next five years. But that should be incremental. And we also have historically been consistently active with acquisitions. But any further contribution from future acquisitions is also not included in those growth targets.

Operator

Understood. And maybe diving into one of the areas that you guys are progressing on, it's been out there for a while. You guys are kind of at the turning point for the cloud migration. I would just kind of love an update on how you're thinking about the path to the peaks. How does that underpin your confidence in that 20% plus SaaS revenue growth? Again, I know there's a lot of back and forth on SaaS bookings and whatnot, but I feel like at the end of the day, as you guys progress with that cloud migration, that's probably the most important piece to getting to some of those targets.

Brian Miller, CFO

Yeah, that's broadly the cloud transition. is the biggest margin contributor. And we've talked about adding almost 1,000 basis points of operating margin between now, we were at 26% last year, to target in the mid-30s by 2030. And the cloud operations, cloud transition is probably the biggest contributor to that. So there are a number of different vectors around that. One of those is version consolidation. So where with many of our products, especially in the on-prem world, we have historically supported multiple versions of those products, which has become very expensive from a support and development standpoint. So we've made a lot of progress in consolidation and sunsetting older versions, getting customers more and more customers on the current version, which in turn puts them in a position to move to the cloud. We still have some work to do around that, but we've seen some margin improvements from that, and there's more to come. We now are at mid to high 90s in terms of the percentage of our new business that's cloud. We only, in a couple of products, sell a very limited number of new licenses. Public Safety is one where we still sell some licenses, but that even has moved pretty rapidly towards embracing the cloud. So in the new business market, we're pretty much there in terms of almost being all cloud. The biggest thing is the progress we've made and what's left to come around flipping or migrating our on-prem customers to the cloud. So today, we still have a big base, more than $400 million of annual maintenance revenues from on-prem customers. We had previously set a target of 75 to 80% of those on-prem clients in 23 moving to the cloud by 2030. We have upped that now to a target of about 85% flipping by 2030. We have various incentives and disincentives or carrots and sticks, if you will, that support our effort to move those customers. As you get further down the curve, you get into where there are more customers who just are subject to inertia, which is fairly common in government, that they need a little bit of a push. They're not resisting moving to the cloud. They understand the benefits of being in the cloud. Easier to stay on current versions of the software, a better client experience from easier upgrades and new releases don't have to worry about all the the headaches that they face with with internal systems whether it's staffing technical roles buying hardware managing cyber security so they understand all that but there's still a lot of places that just go well I'm going to move at some point but I don't have a firm deadline so we have increasingly told customers that new features and functionality will only be available to customers in the cloud. So they'll still be supported on-prem, but there'll be new features and functionality, including a lot of things involving AI that they will want, but only be available in the cloud. We've also told customers just this past quarter, our CEO sent a letter to every on-prem customer telling them that over the coming months, we'll be sitting down with them and mapping out a strategy, a pathway to the cloud, that it's not an open-ended, forever on-prem opportunity, and that we'll be working out those pathways. We'll understand what their concerns are, what their needs are, if they need help. We're hearing from a lot of customers that they want to move but they need help kind of selling it internally whether it's a cfo trying to work with the cio to to get that move prioritized where they need to get more budget and understand the saving internal savings that will be that'll offset the the cost of moving to the cloud so working with customers on that but also those conversations involve what are the disincentives And those are mainly that at some point, if they remain on-premise, their maintenance will increase significantly, which reflects our higher costs of supporting a smaller and smaller number of on-prem customers. And then ultimately, there'll be a point at which there will be end of life for support for on-prem products. So all that's kind of supporting this 85% moving by 2030. And, you know, there's a lot of activity going on around that and a more proactive role as we continue to evolve into this next phase of our cloud transition.

Operator

Understood. So that does seem to set at least a relatively high floor in terms of that SaaS revenue growth. The other piece of the equation is the new SaaS bookings. and you did see a rebound in the first half of the year compared to last year. How should we think about that pipeline? What kind of visibility do you have in terms of being able to execute and close on some of those transactions to keep that 20% SaaS number? Or I guess to the extent that it doesn't impact that 20% number that much, it would be great to get a sense of what that application is.

Brian Miller, CFO

Certainly part of it. Part of the SaaS growth, I mean, it comes kind of from three places. It's new clients, and that can be both – in our SaaS bookings, it's both brand-new logos, and it's a significant amount of add-on sales to existing customers. So we have a big, big customer base. Our average customer has two to three products from Tyler, and they could, in most cases, have eight to ten products from Tyler. So there's cross-sell opportunities within a suite of products. so a customer that has our court system adding a probation system and then there's a cross new suite so somebody has our court system system selling them an erp system um there are a lot of cross sell and upsell opportunities we've done a lot of things internally with our sales staff around sales compensation and commissions around how we manage quotas to incentivize more cross-sells, how we're adding sales reps that are focused on that. So there's new sales, there's up sales to existing customers, there's certainly pricing on renewals, and then there's the incremental revenue from flips. And typically we're seeing about a 1.7x uplift from maintenance to SaaS as we move those customers. All that adds up to that that 20% CAGR target. In terms of the new sales, what we've said over the last several quarters, I think our commentary has been really pretty consistent, that it's an active market budget. And there's certainly a lot of differences across, whether you're talking about the state of California or whether you're talking about a city in Texas, different budget situations. But But generally, budgets are reasonably stable, underpinned by really solid property tax revenues, which form a big part of the base. So we've said in terms of market activity, leading indicators like RFPs, sales demos, we're seeing a lot of stability there at fairly active levels. So feel good about the pipeline, the activity in the market. But what we have seen over, if you look back really like a year and a half, some volatility in the sales cycles, the second half of 24 was extraordinarily strong. And we saw really outsized bookings growth. That was driven by some large deals, which can be lumpy. And there just sort of were a number of those in the second half of 24. and also by there was a pull forward of bookings from early 25 because there was a deadline for the ARPA stimulus funds. So that in turn had a negative impact in the first part of 25 because some of that business had been pulled forward. And then there was noise around the new administration, around Doge and tariffs and all the noise that came with the new administration that caused a lot of sales cycles to slow as governments tried to figure out what kind of impact all of that might have on them. Ultimately, they figured out that it didn't have a big impact on them and that things sort of normalized as we got into the second half of last year. So we're seeing the benefit of a more, I guess, normalized market, more consistent market right now consistent sales cycles so bookings growth was really good in the first two quarters of this year comps get a little bit harder in the second half of the year but but they're they're kind of more normal from a long-term perspective if we're going to grow sas revenues at around 20 percent our sas bookings need to grow around 20 percent they were a little north of that in in q2 but i would expect over the next few quarters, we'd kind of absent any new external factors, that we'd probably kind of settle in more around that 20% bookings growth that would be more in line with our long-term revenue growth expectations.

Operator

Understood. And that's super helpful in terms of how you laid that out. Maybe shifting gears to sort of the topic du jour for the last couple of years, the AI side of the equation. I realize Tyler is not embedding any uplift, which makes a lot of sense, given a lot of new products waiting for adoption. But you mentioned earlier you feel Tyler has the right to win, at least in the government space. Could you maybe lay out some of the rationale there? What are some of the data points you're seeing from customers that might support your thinking that Tyler is going to be their vendor of choice when they do make those final decisions?

Brian Miller, CFO

Yeah, so like with a lot of things in the public sector, to start with, government has a much slower adoption curve than you're going to see in the private sector. We saw that with SaaS. We've seen it with other technology evolutions. That might not mean it's a decade, but the public sector is going to be much more cautious about embracing AI, about how they use it, and who they get it from. than you'll see in the private sector. What we hear from our clients is certainly they hear a lot about AI. They're very curious about it. They're interested in how it can help them solve real problems. A lot of their real problems stem from staffing shortages. Governments are always having to do more with fewer resources and particularly fewer people. Governments already are very often short-staffed, sometimes because of budget issues, but often just because they have a hard time attracting and retaining staff. They're facing a big wave of retirements, and it's really hard to attract a lot of different roles, but especially technical roles. It's hard to pay market salaries. And so staffing shortages are a big problem with government, which leads to things like long delays in getting a building permit application approved or backlogs in the courts or not enough police officers, all those sorts of things. So they're interested in how AI can help solve those problems. And that's where we're focusing our investments and we're showing them those roadmaps of where Tyler's bringing AI to them around their core systems of record, around the public safety system they have from Tyler around the licensing and permitting system they already have from Tyler. So what we're hearing from our customers is trust is a big factor. So they're typically distrustful of startups and new entrants. They want to see references. They want to know it works somewhere else like them. They're very concerned about their data. Public data can be or public sector data can be very sensitive if you think about courts data public safety data it's a highly regulated environment so they're really concerned about how their data might be used who might get who might use it where it might go they're obviously very concerned about accuracy that these things need to be right so we believe we have the trust of the clients we have often decades-long relationships with them. We have a huge amount of domain expertise. So we built the system of record, which manages very complex workflows. So we understand how these things should work for government. We're not learning on their time. And we have a well-developed sales channel already along with these relationships. So all of those things we think give us advantages in bringing clients AI. So we're hearing from clients, they don't want AI that someone bolts on to their system of record, they want AI that's embedded with it. And that's where our investments are going. So we have some products that are that are fully AI enabled that that are like, standalone products that use AI at the core. And some of those we've had for two or three, four years, things like document automation, which automates data entry in the courts, and eliminates the number of clerks or limits the number of clerks they need to do that work. Priority-based budgeting is a solution that uses AI to assist with the budget development, which is probably the most important thing a government does every year from an administrative standpoint. So allocating budget to, figuring out how to best allocate budget to higher priority initiatives. So in areas where we've seen, we've proven, we've got a large number of users already where we've proven the ROI and the kinds of savings they can get, we're seeing really meaningful uplifts in our revenue as the customers add that. A couple of examples we talked about at our investor day, Tarrant County, Fort Worth, Texas, when they added document automation to automate data entry. It was a 43% uplift from, they were paying us $900,000 a year for the core court management system, added 43% to that annual fee to add document automation, but they're saving a couple million dollars a year in labor costs. Placer County, California, added our supervision assistant to their probation system, 177% uplift from our SAS fee. um so so we're seeing a good uptake from this but again we're in the very early days we're starting to roll out um agents and release agents to the market around each of our core products by the end of the year of this year all of our flagship products will have agentic ai capabilities um that are in what we call private preview stage so it's where it's basically with a handful of pilot customers that are testing it, giving us feedback, collecting references and use cases, and then we move on into the next stage, which would be public preview. So that's where we get a broader range of customers, and these really form that whole cohort of referenceable customers that new sales prospects can talk to and see, yes, it's doing what it says it's we said it would do it's providing the roi we expected the price is justified and the economics work for us and then it moves into kind of general release so we said that by the time we get through all that process given the pace at which governments move we're probably looking at the second half of next year before we see more meaningful contribution from this incremental ai opportunities and and as we talked about investor day all of that is incremental to these targets that we've already set for 2030.

Operator

Understood. Super helpful. You touched on a point where you're addressing some labor issues, Tarrant County saving millions on some of the labor costs. I mean, when you think about Tyler, historically, I mean, we look at it as you're kind of fighting for IT budget. Like, are your customers now maybe shifting labor dollars or, like, what they would have spent for employees over to, you know, I guess the tech budget, if you will? What do you see in there?

Brian Miller, CFO

Absolutely, they are. And that's one of the really interesting things. We highlighted that in Investor Day about how we really think this lets us access something way beyond just the IT budget, but their labor budget, because they're viewing it as – and it's not the case that they're looking to lay off or fire a lot of employees. They don't have enough already to do the things they need to do. For example, in public safety, one of theirs is automating report writing. The average police officer spends two to three hours a day writing reports. There's obviously a lot of places there's not enough police officers. And so to the extent that they can automate that through a trusted, reliable AI solution that's embedded with the product, and that frees up time for, you know, multiplies their force. So we're seeing places, Tarrant County is actually one of those that specifically said, we're paying for this out of our labor budget and not out of our IT budget. So it's not taking away from other projects. And in the case of this product, Tarrant County actually gave it an employee name and an employee ID number because they said, And we really want to emphasize that this is how we view this technology is supplementing our staff and letting us get things done that we can't otherwise get done. So we think it opens up kind of a whole new budget. And then obviously we're having those kind of conversations with our customers around how they should be looking at it.

Operator

And, again, as we move through these preview customers that we're collecting the data around the ROI and the case studies that can show people with confidence, you know, how the price can be justified. and then the you know great to see that you guys raised the long-term free cash flow margin to the mid-30s but as you can imagine i think the other half of the ai debate is there's just naturally an additional layer of costs right whether it's the inferencing on top of the hosting whether it's you know i guess on the headlines you see all this token maxing yeah because what are you seeing there on the AI cost, how are you guys offsetting whatever potential headwinds could hit gross margins to your OPEX line internally or finding other sources of efficiencies?

Brian Miller, CFO

Yeah. So within the products, there's kind of three different potential pricing approaches. One is kind of the freemium pricing, where some things will ultimately just be embedded in products and not separately billed. It's not really that's not really part of the current products. Um, there's, there'll be others that just are a SAS uplift. Um, and then there's a third that's more kind of what we talked about earlier, more outcome based pricing that this should save you $2 billion a year in labor costs. And so we'll charge you 900,000 or a million dollars. Generally, the volumes are fairly predictable around how many documents are being processed by the courts, how many calls an office typically answers, the tax office answers questions from citizens that can be diverted or deflected with AI. So the numbers are not typically terribly volatile right now, as you might see with, you know, as opposed to a company that's developers are using AI like crazy and their token costs are going through the roof. So within the products, we believe it's fairly predictable, but we have caps on usage so that the pricing needs to reset if they get to, so that we're not exposed or not having exposed on the token costs. on internal usage. We're managing it in a fairly disciplined manner. So we're rolling out that we've highlighted kind of three major areas where we see benefits. Development is probably the one that's furthest along. All of our developers are using AI to increase their productivity. We have various tools in place to monitor and manage the usage and also to make sure we're using the appropriate models and not the ones that are appropriate for the task we're doing and trying to manage the cost that way. We at this point are really putting the savings or the additional capacity back into more output so we've not reduced our development staff we're just using that increased efficiency to to do more development work a lot of that is around ai i think over time we would expect that our development team would grow at a much lower rate than our revenues grow it's same thing with our implementation and support on professional services we're we've had some early initial success in using AI around data conversions and reducing the hours around a new product implementation and also success and support in deflecting calls. And over time, we would expect that those would reduce our support costs. But taking sort of a measured, disciplined approach to it and doing a lot of monitoring along the way as we roll this out to make sure that the costs are not outweighing the benefits.

Operator

Got it. So it stands to reason, maybe at least in the near term, less of that leverage from AI, but as we get deeper towards that 2030 timeframe, some of that should flow through, hit the bottom line.

Brian Miller, CFO

Yeah, we talked about four to five points of margin improvement. I think three, four, four points roughly of margin improvement over the next five years. um that feels like a not terribly aggressive target but uh um but uh we are targeting uh that in within the um uh those kind of three primary areas but we're using it elsewhere i mean always finance is using it marketing is using it sales um there are a lot of of good examples but um but it's being um sort of managed it's it's we're trying not to have it be the wild west and have everybody kind of a free-for-all. We're trying to prove up that, and that's the hard part, is kind of proving up what are the efficiencies you're getting versus what the costs are.

Operator

Got it. And maybe shifting gears a little bit here, you guys have been pretty aggressive buying back stock recently, and then you recently got a kind of convertible offering that just was announced, I think, end of Q1. May, yeah. In May, okay, yeah, sorry, middle of Q2. How should we think about kind of where your kind of capital allocation priorities lie now? Have you kind of done the buyback stuff and now it's on to other things? What's the right thinking, at least as we stand today?

Brian Miller, CFO

Yeah, yeah, with the current valuation at a, I don't know, 15-year low and certainly well below kind of the average valuation we've seen from a cash flow multiple or revenue multiple. We primarily look at cash flow. It's a very compelling opportunity for us. And Lynn talked about this on our last call. Historically, if you go back over the last 25 years, I think we've had three other times where we've seen these very compelling buyback opportunities when we said that the valuation just is not at all aligned with how we see the next three to five year outlook for the company. And we've been very aggressive about buybacks at those times. So yeah, we've always maintained a really conservative balance sheet and tried to keep a lot of flexibility around capital allocation and our three priorities, which can kind of shift around from time to time in terms of where they are, but internal investments in innovation, primarily R&D, which we have continued to increase over the last few years, M&A, which we've been very active with over the last 25 years, and thirdly, stock buybacks. I guess there was a fourth priority going back over the last three years or so was repaying debt. So typically, we've had littler no debt. We did a big acquisition of NIC in 2021, had not an unreasonable amount of debt, but we delivered pretty rapidly, paid that debt off well ahead of schedule. And then the last piece of that was the convert that we paid off in the first quarter. So we ended the first quarter, we had no debt. We had, you know, a strong amount of cash on the balance sheet and then cash flow going forward. So we had an opportunity to do a new convert in May. Very attractive terms. Half a point of interest with the capped call. It's not dilutive until we get well beyond our all time high in the mid six hundreds. So super attractive terms. And unlike the last one when we had a quarter point of interest and interest rates were close to zero. This time we've got a half point of interest but we're earning north of three and a half percent on those funds while they're sitting on our on our balance sheet. So we had put in place a billion dollar share repurchase authorization in February. Through the end of June we had completed 700 a little north of 750 million of that. We are currently very active with that so we're finishing out that first billion dollar repurchase. So we bought back five and a half percent of our stock through June. We then put in place in June a new or I guess in July a new one and a half billion dollar authorization on top of that initial billion dollars. And so we expect to continue to be active through this year if the valuation remains where it is today that that is kind of our first priority we still have done acquisitions we did a a little north of a 200 million acquisition just after earlier this year with for the record and then just a couple weeks ago we did a 30 million acquisition so so we still will have the flexibility to do acquisitions that we find compelling but i think it's as we look at the acquisition landscape it's it's not too likely that we would do a very large acquisition in the near term, part of that doing it with valuations and seller expectations, especially private equity-owned assets. So I think we are continuing to be active with the buyback, and I expect that will be the case throughout this year.

Operator

Got it. And I've got a couple of questions from the audience, both regarding the SaaS revenue growth. So maybe I'll kind of try to lump them in so we can kind of knock it out in this last few minutes. I think the first is kind of what's the SaaS growth contribution excluding flips and then any directional trends to highlight there. And then the second one on that 20 percent SaaS growth in 27. Like how much of that is coming from flips versus new versus add-on versus pricing. So yeah. so kind of similar questions.

Brian Miller, CFO

Yeah. I mean, we've said that flips will continue to, um, be a bigger part of our, that the flips should continue to accelerate over the next three or four years. Um, that we've talked a lot about the incentives and distance incentives that we're using to get to that 85% target of our installed base moving. So flips will continue to be a bigger piece of that revenue growth. Our SaaS revenue growth is a little north of 21% this last quarter. We've set a 20% average over the next five years. So I think over the next three years or so, until we get to that peak, wherever that peak is, flips will continue to be a bigger piece of it but I think we've talked about kind of mid-teens growth excluding flips and flips on average if you look at that 20% breaking it down it's probably you know somewhere around four or five percent from flips the balance from those things you mentioned pricing which is kind of on average four or five percent a year so you've got that from the installed base, we have very low, low turnover, so very little attrition. So there's not a lot on the downside from that. And then new and expansion sales, both new logos and that cross sell to the existing base make up that the other part, which, you know, maybe that's 10% growth. But and we do expect that cross sales and up sales will continue to be a bigger and bigger a piece of that SaaS growth opportunity.

Operator

Got it. That's perfect. I got through all of my questions, got all the audience questions, and we are right up on time. Brian, as always, thank you for all of your insights to the audience. Thank you for joining and thank you for participating in the Q&A. And with that, have a good day.

Brian Miller, CFO

Great. Good to be here. Thank you. Thank you, Brian.