Conference Transcript - TYL 2026-09-15

Clarke Jeffries, Analyst — Piper Sandler

We can go ahead and get started. My name is Clark Jeffries. I'm part of the technology research practice here at Piper Sandler. I'm very pleased to have Brian Miller, EVP and CFO of Tyler Technologies. Thank you for joining us.

Brian K. Miller, CFO

Thanks for having me.

Clarke Jeffries, Analyst — Piper Sandler

Yeah, welcome to Nashville. Those of you who might not be familiar with Tyler, maybe we can give us a little intro on where the business is at in 2026.

Brian K. Miller, CFO

Yeah, sure. We are, if you're not familiar with Tyler, we're the leading provider of software for the public sector. We focus exclusively on the public sector. We have by far the widest set of solutions for public sector entities across federal, federal is really small, but federal, state, and local governments. We also have by far the biggest customer base of anyone in the public sector, so we have about 50,000 installations of our products across about 16,000 different government entities. And about a third of our revenues today are also transaction-based. So we have a growing transaction business with payments that are embedded across our software solutions and other transaction-based offerings. Just had an investor day in June, laid out new, updated, and raised targets for our 2030 Tyler Vision, where we're talking about roughly a 20% SAS CAGR through 2030, a 10% to 12% transaction growth CAGR, and operating margins going from the mid-20s to the mid-30s over that time period. So laid out a lot of recent information about our plans there, and we're excited about the opportunities for us over the next few years.

Clarke Jeffries, Analyst — Piper Sandler

Yeah, and we'll absolutely get into the model transition and some specific levers within transaction and SaaS. But, you know, I think one of the big things we had talked about coming out of the pandemic were the new challenges for state and local governments. They're dealing with increasing incursion from cyber threats. They're working with a more distributed work policy than before. Just what are the main frictions and considerations that you see in your customers today?

Brian K. Miller, CFO

AI is a new wrinkle in all of this and so what's new what's the same about this market we always get a question around budgetary cycles but maybe you can just talk about the market in general yeah I mean the market doesn't change a lot and it's got a lot of characteristics that if you're in the government market it's very attractive but if you're not in it it might be viewed as less attractive I think the constant is the governments always need to do more with less. They never have enough budget, even in a really good economy. And when things are booming, there's never enough money or enough resources. So that's always a factor. Today, there's an awful lot of pressure around staffing challenges. And they're going to get worse because governments are really facing a big wave of retirements over the next five years, the silver tsunami, they're calling it. But they really just don't have enough people to do the things they need to get done. Part of the reason behind that is that often they have old technology, and that old technology, that they have inefficient processes that are governed by old technology. So they can't, they don't have online access for citizen self-service. They struggle with remote work because of some of their systems, which also then leads to them struggling to hire people. So a lot of this stuff is interrelated, but at the core, a lot of it has to do with staffing challenges and this general sort of theme or drive to improve government efficiency. And DOGE obviously was a big talking point, but beyond DOGE at the federal level, there's a general goal of improving government efficiency, and technology is really the way they're going to do that. And so that's good for us. And we're seeing people start to, in some cases, replace old technology sooner than when it absolutely has to be replaced when it's dying, but recognizing that there is an ROI and there are efficiency gains by updating their technology. And AI will, over time, be one of those things.

Clarke Jeffries, Analyst — Piper Sandler

Well, let's dive into sort of drivers of the business. I mean, one of the biggest pillars of the story of recent years has been that SaaS transition. You mentioned the analyst save that happened this year. One of the standouts, I guess, in my mind, was the SaaS caper, you know, and we went from a high teens target to 20%. What specific items gave you the confidence in raising those targets? What are the inputs that went from 2023 to 2026 where we got to a 20% a year?

Brian K. Miller, CFO

Yeah, some of it is the progress we've made from 23 to 25 and that we're sort of ahead of schedule. Some of it are the acquisitions we've made over that time frame, and we kind of laid out in our capital allocation presentation how the acquisitions or our acquisitions over the last five years have a CAGR that's about twice Tyler's core growth rate. So the acquisitions we've made in recent years are growing at a 24% CAGR. So as we continue to make acquisitions, along with the ones we've already made, they're contributing to higher growth. But when you look at kind of what builds up to that 20% SAS CAGR, it's sort of a low teens growth from our news logo SAS sales and expansions with our existing customers, including kind of the regular pricing we get. We also have very, very low attrition. We typically, over a very long period of time, only have gross retention of 98% to 99%. Our customers don't get acquired, and they don't go out of business. So they are very sticky. So we start out with a good starting point there. So low teens growth from new SaaS and expansion, and then mid-single-digit contribution from our on-premise customers flipping or moving to SaaS. So we typically get a 1.7x uplift from maintenance to SaaS. So that's contributing sort of mid-single digits on top of that. And we expect that contribution to continue to increase over the next four to five years as we continue to make progress with migrating our on-prem customers. We've had 22 straight quarters of more than 20% SaaS growth. So we've got a pretty good base that we're working on. and we do expect the flipped contribution to continue to increase over the next few years.

Clarke Jeffries, Analyst — Piper Sandler

Yeah, maybe we can talk about that in terms of another part of the target set moved up was it used to be 75% to 85% conversion and now it's kind of 85%. Plus, what's the cadence of expected conversion now? I mean, top part of that L curve or S curve and specifically, I think we talk about this within the realm of there might be the largest customers into the statewide port systems that might be the last movers, but dollar-wise, how concentrated is it and is that pretty much one of the bigger swing factors and when the timing will come through?

Brian K. Miller, CFO

Yeah, that's certainly a factor in that pace of flips moving from on-prem to the cloud. we do expect it to grow the volume and basically the dollar amount of maintenance that's converting to the cloud each year over the next three or four years I think at one point we viewed it as more of a bell-shaped curve progression and now we view it more of a steady progression it won't necessarily be a straight line and the lumpiness of when the big customers people who have multi-million dollar annual maintenance agreements move will make it a little bit lumpy But we do expect over the next three to four years, a year-over-year increase in each of those years. Again, it won't necessarily be linear. And if you look at our current on-prem base, it is more heavily weighted to large customers. So we have, for example, 17 statewide court systems. Two of those were deployed in the cloud from the start. but of the 15 that were on-premise, only one of those has moved to the cloud so far. We have big customers like New York City's property tax system and Cook County, Chicago's courts and tax systems that are still on-prem. We do expect they'll all move to the cloud, but they're more complex and have different considerations. So we do see those more over the next three to four years and how they fall may make that progression a little bit lumpy.

Clarke Jeffries, Analyst — Piper Sandler

Did any of those larger contracts have like a longer duration as part of their consideration or flips, or they are all at this point just maintenance?

Brian K. Miller, CFO

Everybody pretty much is on annual maintenance agreements, so there's not really contractual considerations. There's a lot of different things that go into when somebody decides to flip. It could be hardware. You know, it could be that they know that in 2028 they're going to have to replace a lot of hardware and there are servers in their data center and they don't want to do that, but that's when they're going to make the change. It could be just how it fits in their overall IT roadmap. The Los Angeles County, for example, largest county in the country, has a client for multiple Tyler products. They flipped their licensing and permitting system last year to the cloud, But their court system is much further down the road, just as they stage all of the things that they have to manage. Sometimes cybersecurity, going the other way, accelerating a flip, sometimes cybersecurity is a big event. Somebody has a ransomware attack, and they want to move to the cloud, unfortunately, afterwards. But also people that see their neighbors or the town next door suffering a ransomware attack because their on-prem network is vulnerable and then they want to move to the cloud. So there are a lot of different considerations around each of them. I think the biggest thing in the near term, we've talked a lot about carrots and sticks or incentives and disincentives, which are increasingly being communicated to clients. But just last quarter, we had a communication with every on-prem client letting them know that over the next few months that we're going to be sitting down with each of them and starting to really map out a more concrete plan for their move to the cloud, that it's not an indefinite, open-ended option to stay on-prem and talking about what those incentives and disincentives are and what impact those will have, but really starting to more formalize that process and not just sort of let the inertia that can kind of set in in public sector sometimes take place.

Clarke Jeffries, Analyst — Piper Sandler

Well, the other biggest component here is obviously that motines 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 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 one or two 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 upsell and logo penetration?

Brian K. Miller, CFO

Yeah, so there is a big opportunity. And if you looked at all of the governments across the country, every city, county, 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, are legacy systems. So they're 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 they might 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, 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 two or three products per customer to eight 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 to cross-sell within a suite of products. That's 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 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 layers 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 be in a better position to take advantage of the cross-sell and up-sell 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.

Clarke Jeffries, Analyst — Piper Sandler

Yeah. Well, let's turn to AI as sort of a monetization opportunity or 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's the highest adoption in terms of where in the customer base?

Brian K. Miller, CFO

For starters, I'm impressed that we went 15 minutes without talking about AI. So I kind of bucket our AI products in a couple of categories. One would be sort of our more mature ones, those that we've had for, in some cases, three or four 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 a company we acquired that partnered with our courts group that basically automates 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. And 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 agentic solutions. And we've talked about at our Investor Day, we talked about a roadmap 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 who might have a six-month backlog of those applications sitting on their desk. So using AI to do something in minutes that would take a clerk days to do. and it's not necessarily that they're going to go fire a bunch of clerks. It's that they don't have enough to start with, that they're short-staffed, and so there are these backlogs of cases 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 chat GBT, 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 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 the middle of next year with a broader group of products, and so we're really talking about the second half of next year before we start to see more meaningful revenues, 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.

Clarke Jeffries, Analyst — Piper Sandler

Yeah. Well, I just have a follow-up, and then I'd love to ask any questions that there might be for the room. Just, you know, 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 woodwork and aggressively throw an AI solution into verticals that may have not been attractive in 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?

Brian K. Miller, CFO

Yeah, 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 it. We had a lot of talk about it at our user conferences 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, yeah, 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 that 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 records. So all those things, not only do we think, but we're hearing from our customers that they would rather get that from Tyler. And, you know, 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 are some early adopters that are 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.

Clarke Jeffries, Analyst — Piper Sandler

Yeah. Any questions from the room? We'll continue on. You know, those production agents, I know it's early and you're talking about, you know, later half of 27, where it would be, you know, contributory to the revenue. but any use cases you think that could ascend the level of the document automation or priority-based budgeting or resident engagement, things that have proven to be, you know, kind of, you know, call it eight-ish figure kind of ARR businesses for you?

Brian K. Miller, CFO

Yeah, I think eventually just because of the size of the customer base, we have thousands of ERP systems installed. So some of these things are not real 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, you know, it'll 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. and hundreds of public safety agencies using the police. So individually, these SKUs, all we would expect to be uplift to their SAS fee, but collectively we talk a lot about really this kind of creates a whole new, opens 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 and ID number and to further emphasize that. There are some other places that are unionized where they're facing other hurdles because even though they may have the same problems, there's more pushback on something that could potentially replace people. So seeing different approaches there, But if you look at the total labor TAM, just with our existing customers, it's a multibillion-dollar TAM for those kinds of solutions that could be replaced. Not over a long period of time, but we think that's a really big opportunity.

Clarke Jeffries, Analyst — Piper Sandler

Last one to take us out. just, you know, I think a lot of the time from 2023 to the most recent analyst day was getting groundwork laid, exiting data centers, version consolidation. You know, 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?

Brian K. Miller, CFO

Yeah, I think it's continued progress on all those drivers of 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'll 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 are continuing to. We had a billion-dollar authorization in February that we've now completed and now have a new billion-and-a-half-dollar 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.

Clarke Jeffries, Analyst — Piper Sandler

Alright, Brian, really appreciate you coming out to Nashville.

Brian K. Miller, CFO

Thank you.