All right. Well, good morning and welcome to the Needham Growth Conference. My name is Josh Riley, and I'm an analyst on the enterprise software team. This morning, we are excited to have Tyler Technologies, which I will note is my top pick for 2026. And we're excited to have Brian Miller, the CFO today for Fireside Chat. So, Brian, thanks for taking the time today. Maybe you could start with, you know, maybe a quick overview of Tyler. I think probably most people are familiar with what you do. So maybe a little bit more focus on the operational highlights that you achieved in 2025, because there was a number of those.
Yeah, thanks for having me. Yeah, as you know, we're an enterprise software company, a vertical software company focused on the public sector vertical. narrowly focused on that vertical but it's a really big vertical we provide a wide range of essential software applications that manage mission critical functions of government things like property taxes courts public safety erp licensing and permitting so a wide range of products we've got by far the broadest set of solutions for the public sector along with the biggest customer base in the public sector. So about 45,000 solutions installed across about 15,000 different jurisdictions. We also have a large and growing transaction-based business where we process payments or provide software under transaction-based arrangements, getting paid through convenience fees or other service fees. And that continues to be a growth driver for us. As we look back on 25, we did complete a lot of milestones. We continue to make a lot of progress on our cloud transition. We're in the middle of a multi-year cloud transition where we're accelerating the pace of migrations of our on-prem customers to the cloud. There's a number of operational things around the cloud transition as well that we've made progress on releasing cloud-optimized versions of products or continuing development efforts on those. A version consolidation, so eliminating multiple versions of many of our products that have been deployed on-prem. So we're well on track to achieve our 2030 revenue and margin goals that we set out at our investor day a couple of years ago and made progress towards that. We completed four acquisitions during the year, so it became a little bit more active. All those were relatively small tuck-in acquisitions, but one in the school ERP space, one around electronic warrants in our courts and public safety space. We acquired a couple called emergency networking that added fire and EMS capabilities around our public safety solution, and then MyGov in the community development area. So, you know, a lot of good things going on as we exit the year, and I think the key is that we're well on track towards achieving those longer term targets that we've
set up. Got it. That's helpful. All right. So let's get right to it. So I think it'd be helpful to kind of maybe set the stage discussing the new SAS ARR, you know, which you had a really strong trajectory in 23 and 24. And then, you know, we haven't obviously reported Q4 yet, but is likely down year over year in 2025. Can we just discuss, you know, maybe what drove the trajectory up and then down in 2025, and then the puts and takes to a recovery in 2026?
Yeah, from a new SaaS bookings, so either primarily new logos or a new complete suite of products for an existing customer, 2024 was an exceptionally strong year. 2025 was a good year, But 2024 created a really tough comp for us. And there were a couple of reasons around that. One, we saw in 2024, especially in the second half of 2024, an exceptionally strong number or high number of large deals. And there really wasn't a specific reason for that. Some of it is just the lumpiness, the randomness of when large deals in the pipeline happen to get to that signing stage. And there were a bunch of those in the second half of last year. And our typical sales cycles can be a year, 18 months long. And in some cases, for example, a statewide courts deal, it can be multiple years long. And in that lumpiness, the second half of 24 was really strong. We've said that the pipeline, the composition of our pipeline is kind of normal. So there are large deals in our pipeline, but we didn't see as many of those in 2025. We also saw some pull forward of deals that would have naturally fallen in 2025 into 2024 as a result of the commitment deadline for ARPA, for stimulus funds from ARPA. Sorry, got a click there. So that pulled some deals into the second half of last year that would have fallen in 25, also created a little bit more of a hard comp. And then the last thing was, particularly in the first half of 2025, we did see some noise and uncertainty in the market as a result of Doge tariffs, the new administration that created not a change in demand or a drop in demand, but some pauses in the market as governments, especially local governments, tried to figure out if there was something that they needed to be worried about. about. And ultimately, I think by mid-year, they came to the conclusion that, yeah, Doge tariffs, none of that stuff really affected them and that their processes were moving forward with Tyler. But it did create some slowdowns in the first part of the year. As I said, by the second half, I think largely that's behind us. And we're not really seeing any lingering impacts or really actual fundamental demand changes, but there was some sort of unusual noise out there.
Got it. All right. So then as we think about net new ARR for SaaS, there's three components, the new SaaS ARR, the migrations, and then the cross-sell. Do you guys think about the aggregate of that number in terms of building the pipeline, or are you more focused on one of those categories versus another? How do you kind of think about the business operational dynamics there?
Yeah, it's really the aggregate of all those. I mean, it's all about generating new ARR, and that really does come from three different sources, and we're focused on all three of those. So the migration of our on-prem clients to SaaS continues to grow. That's sort of a multi-year process. We've talked about a target of migrating more than 80% of our on-prem clients to the cloud by 2030. We're on track for that. We still think we're a couple of years out from sort of the peak of that, especially with respect to larger clients. but we expect that generally the trend is that the number of flips of on-prem customers and especially the ARR from those flips will continue to expand over the next couple of years and then hit a peak and then we'll continue to work through that base of on-prem customers. And we can talk more about kind of what the things we're doing that we can control or what some of the dynamics behind the pace of those flips is, but that continues to be a big focus. Cross-sell continues to be a major opportunity. We've talked about that as one of the key pillars of growth in our Tyler 2030 plan as we look to expand our footprint with existing clients from today an average of two or three products to as much as eight or ten products per customer. So we've got a number of initiatives underway to facilitate and accelerate that process. One of those things last year, we established a new state-focused sales team to help accelerate our ability to leverage the state relationships that came to us through the NIC acquisition and sort of make that bridge between those relationships and Tyler software products that we can sell into that market. We continue to make acquisitions and build products that give us more things to cross-sell. And we've also got some pretty significant initiatives going on around improving and unifying our client experience with Tyler to create a stronger foundation of customer satisfaction to also enable more cross-sells. And then lastly, we continue to add new logos, and there's still a big opportunity there. Today, we have at least a product in about 15,000 different jurisdictions, so a distinct city or county or school district, and there are more than 50,000 of those in the U.S. So even though our customer base of 15,000 is bigger than anyone else's, it's still not anywhere close to saturating the market. And so as new opportunities arise, often because an aging system, a system that may be 20 or 30 years old, has reached end of life, that creates more opportunities for us to gain new logos.
Got it. All right. Obviously, AI, everybody wants to know what's going on there. maybe a couple items, you've signaled that there's more spend coming in 2026. Maybe you could touch on that a little bit. And then just more broadly, I think one of the things that's a little underappreciated, and I tried to highlight this in my top pick note, was that a lot of your systems are systems of record versus standalone applications, and you have to have a place for the data at the end of the day. How does that kind of insulate you from some of this adjacent AI risk that I don't think is well understood by investors at this point.
Yeah, it's a little frustrating to us that we feel like we've been sort of painted with the same brush around this narrative of risk from AI to the core business that a lot of software companies have. And we think there's certainly some differences in the public sector and in our business that insulate us from that somewhat. But, you know, the short version is we see AI as an opportunity to increase the value of our products to drive higher revenue rather than a risk of replacing our products. So, as you said, our systems are systems of record that manage very complex mission-critical functions like courts and public safety and taxes. These are very complex workflows, essential systems that form the foundation of what our government clients do. The products are built on deep domain expertise. Often we have been in these businesses expanding our product functionality for decades. And there's also decades-long relationships with a lot of these clients. So there's a deep level of trust between our clients and Tyler for us to manage and provide the tools they need to manage these essential functions. And so they also have the trust, we believe, that we will bring them AI solutions that solve problems for them, but solutions that they can trust. I think the third thing is that we have a massive amount of data. So if you think about the millions of court filings that we're processing or the millions of utility bill transactions or property tax bills we're managing. So we have a huge amount of data that provides value and provides the foundation for us to build better models and trustworthy models that they can rely on as they incorporate AI into these solutions. So our strategy is really focused on incorporating AI functionality into our core products, in many cases to solve common basic problems they have, like staffing shortages. So often across governments, especially local governments, state and local governments, they have a shortage of staff. They're faced with a lot of retirements, an aging workforce, difficulty competing with the private sector for employees. And so they struggle to get essential things done. And so to the extent that we can provide AI tools that enable them to sort of do more with less, they see value to that, and we believe that creates more value in our products, creates a competitive advantage, and that they'll look, again, look to Tyler to provide those things. We're seeing good early results with monetizing products like document automation, which is a product that actually came from an acquisition in the court space a couple of years ago. Basically uses AI to identify data elements in a court filing and do the data entry rather than a clerk having to look at the document, create a case in the system. AI does that. So priority-based budgeting is another one of those solutions that uses AI to assist a government with identifying areas to reallocate funds within their budget to address higher priority areas. so we're seeing meaningful incremental revenue from selling those products in the case of priority-based budgeting or in case of document automation in the court space we've seen new ARR streams that are higher than the existing ARR from either the maintenance or the SAS from the core product. But that is justified by labor savings of two to three X of what they're paying us for that product. So I guess the last thing I'd point out is that we have very, very little seat-based pricing. So most of Tyler's pricing is tied to some measure of the size of the application. So the number of parcels of property that the county has, the number of 911 calls that the public safety agency responds to, as opposed to the number of seats. So in terms of risk to existing recurring revenue base from lower headcounts, that's not really a factor for Tyler.
Got it. That's super helpful. All right. So you've made some small acquisitions, which are working on nicely. You mentioned the CSI document automation. But going forward, if you look at the investments, is it going to be a combination of M&A and build internally, or is it going to be more of the focus of continuing to acquire AI functionality?
I think it's a combination. We're developing a growing amount of R&D to AI functionality or AI-focused projects, again, prioritizing those things that we believe we can monetize that can provide the greatest impact to our customers and solve practical problems that they have, whether it's, again, automating a routine process that they do over and over, like data entry or the review of a license application, or providing agents. We've done that at the state level. In a number of states, we're providing resident engagement portals using AI agents that we've developed based on our deep domain expertise of how state government works. to provide, you know, access to citizens to information or to answer questions. So, you know, a lot of that is through internally driven AI or internally driven R&D. We're working with major providers like Anthropic and OpenAI using some of those tools. But a lot, you know, an elevated level of R&D, certainly as we go into 2026, that's focused on AI. And I'd say AI capabilities continue to be one of the factors we evaluate as we look at M&A candidates. I don't think we'll necessarily do a bunch of, you know, just solely AI-focused acquisitions. But I think just like we look at, is there a payments opportunity? What is the cross-sell opportunity? I think we'll look at what either the AI current capabilities or the opportunity to integrate AI into an acquired product would be so that that continues to be, you know, one of the things we consider in an acquisition.
Got it. You know, you've highlighted recently, you've been talking about this a bit more, three key areas of investment priorities, AI products, which you've kind of hit on, next to product competitiveness, and then improved service delivery. On the product competitiveness, you know, what's driving the increased investment there? Are you seeing any changes in the competitive landscape driving these investments?
Yeah, there's not really any fundamental change in the competitive landscape that's driving those investments. But, you know, we have good competitors in each of our product areas, each of our sub-verticals. We generally have a leadership position in our core products, things like ERP or courts or public safety. But we're constantly looking to strengthen that competitive position and to continue to innovate. AI is certainly one of those areas, but we always have various initiatives, often based on client feedback, on in some cases what we see competitors doing, but more often where we're innovating and identifying areas where we can invest in products and sometimes solve problems that clients don't fully understand they have yet. And so this is just a continuation of that. I'd say that given our really strong cash flow position and our capabilities, especially as we look to leverage more of our R&D efforts across multiple Tyler products, as we're doing with AI, This is just a time, as we go into 2026, where we think there can be maybe a little bit of an elevated level of those investments to drive continued strengthening of those competitive positions.
Got it. All right. So moving on to cloud migrations, you know, I'm curious, what's your, you know, if you look at ultimately what you did in terms of volume of cloud migrations in 25, was it consistent with your expectations? And how have you internally kind of thought out how the dynamics of the arc of the peak in 2027 and 28, what type of internal modeling or visibility do you feel that you ultimately had into coming up with those assessments and numbers?
Yeah, I'd say the high level 25 was pretty much in line with what we expected. No really big surprises, positive or negative, around the pace or the size of cloud flips. We continued to see the average size of flips grow. And none of this is exactly linear. Certainly, from quarter to quarter, it depends on just, is there a big client that flipped that quarter or just the timing? It's definitely plotting the trajectory is not a science. There are a lot of factors that go into that, that influence when on-prem clients flip to the cloud, some of which we can influence and some of which we can't. I'd say that clearly we've set out this target of 2030, again, going back to 2023 when we had our last investor day, we said that by 2030, we expected that around 80% or more than 80% of that client base that was still on-prem would have migrated to the cloud by 2030. And we are on track to achieve that. We've said it wouldn't be in a straight line. It would be, we generally envision somewhat of a bell-shaped curve to that pattern. We think the peak or the top of that curve is still a couple of years out. We know that our remaining on-prem customer base is a little bit more heavily weighted towards big customers, which is not a surprise that they have, more complex IT roadmaps. They've got competing priorities and the process, their overall roadmap around the cloud may be stretched out longer than a smaller client. Some of the things we can't control are the client's budget situation. So typically there is an uplift to Tyler, although in most cases that's kind of cost neutral to the client because they're replacing internal costs, costs of hardware, costs of people that are managing systems in-house with hosting costs and SaaS fees to Tyler. So generally, it's kind of cost neutral, but they may have some effort on their side, their internal IT priorities. Sometimes it's when their hardware refreshment comes up. So if two years from now, they're going to have to replace a lot of servers in the data center, that's when they're targeting flipping to the cloud. because they're going to run out that hardware and and then not look to replace it sometimes uh cyber security events uh you know ransomware attack can change that timeline generally accelerate it if either they or one of their peers experiences a ransomware attack in their on-prem systems often they're motivated to recover in the cloud and stay in the cloud after that we've made a lot of progress around version consolidation. So getting clients who are not on the current version of the software on the current version, which is sort of a prerequisite for moving to the cloud. And so we've put a growing number of clients in addition to flip to the cloud. And then in things we can control, we're also in terms of incentives or carrots and sticks, we're increasingly telling clients that while we'll support their on-prem products for an extended period of time that new features and functionality will only be available in the cloud. And so, for example, with our court system last year, we told clients at the beginning of 25 that the release in 25 would be the last on-prem release that had new features. In some cases, we expect that as we move forward to use maintenance pricing to incentivize clients to move to the cloud, so higher increases in maintenance for on-prem customers to provide more of a financial incentive. And while we haven't announced any end of support for on-prem for any of our on-prem products at this point, that does remain an option further down the road, certainly with a lot of notice to clients. And so, but again, as I said, a lot of our larger clients are still on-prem and especially around those clients, we generally have an expectation that more of those flips are kind of two to three years away from us. But we're really engaged with, I'd say at some level, with virtually every client around developing a roadmap because it's not a question anymore of if they're going to move to the cloud. Pretty much with every customer, they know that they will end up in the cloud and it's a matter of just kind of how that timetable fits.
Gotcha. One of the things that I think has kind of led to your historically attractive multiple has been your very strong gross dollar retention. Now with AI, obviously there's a lot of market concern that there could be some impact to that. How do you kind of think about gross dollar retention going forward and how does service delivery ultimately play a role in that retention figure as well?
Yeah, you're right. We've got a really strong record of gross retention, typically 98% or better. And we've got a lot of consistency in our ability to get annual recurring revenue increases in that 4% to 5% range. So it's also, and then that combined with the cross-sell and up-sell opportunity also leads to really good net revenue retention numbers as well. And I think, you know, with our sole focus, to be fair in the public sector, we do have the benefit that our clients don't get acquired and they don't go out of business. So we kind of start out with a bit of an advantage in terms of gross retention, not having attrition as a result of those factors. But with our sole focus on the public sector, ongoing investments and innovation, we're constantly adding new features, incorporating new technologies. And I think that's a major factor in retention. Our clients are confident that we're going to continue to lead the way in providing the leading products that they use and that our products continue to get better and that they don't ever have to replace a Tyler product because we're always investing in them. We're always kind of maintaining our competitive position in the new business market, and our existing customers get the benefit of that. So they really see a long-term value in acquiring products from Tyler. We also have, you know, a suite approach. So we have tightly integrated products in these suites, in ERP or in public safety reports that provide lots of different applications. And that's attractive that they can get, especially in mid-sized governments, that they can get multiple products from one vendor and it simplifies their business. They'd rather deal with fewer vendors and have those products and not deal with one-off integrations, have those products stay in sync. um so um as we continue to make acquisitions as we continue to to build more products that that becomes a more of a factor in our favor um but in order to protect that revenue base and to grow it through more cross-sell we do have this major initiative underway um today around um continuing to improve and unify our client experience across tyler um so we we created a new role of chief client officer um in 2025 and um andrew call or build that role and and really is overseeing those efforts to uh create uh better processes and people um and systems or standardized systems to create that standard high-level experience that in turn helps underpin strong retention but also helps drive a higher level of add-on sales to existing customers. And that's certainly one of the areas we're making investments as we both in 25 and on in 26.
All right. So as you speak to customers, you know, curious, how are they thinking about allocating budget for adjacent AI solutions to kind of your core system of record products? For example, the document automation, which is proving to be a strong seller, where are the customers getting the budget for a product like that? And what's your confidence that they can handle a higher level of spend as states are probably going to start to tighten up their budgets over the next couple of years, given the macro dynamics?
Yeah, our focus and I think our clients focus is really on AI solutions that have a really clear ROI that really provide a value and that solve problems that are top of mind for the clients. That's not kind of theoretical things that this would be cool to have. It's really where we can demonstrate, like with document automation, that if you add this product and pay us $500,000 a year for it, you're going to save $2 million a year in labor costs. And it's not necessarily that they're going to fire a bunch of people and say that it's that they may have budget for that already, but they can't get the people or retain the people. And so they're not getting work that's essential. They're not getting that done. So those are the kinds of things or, you know, AI agents that can enable, you know, replace the need to have somebody answering the phone to answer questions and free up workers to do more productive things. or reviewing a building permit application using AI rather than having clerks and having backlogs of billing permits, which in turn impacts tax revenues and community development efforts. So all of these things are things that they find high value for. And one of the interesting things is that we're finding that increasingly clients are paying for these out of personnel budgets or staff budgets rather than IT budgets. So they're actually viewing these as providing a replacement for staffing and taking it out of those budgets or viewing it, which is a bit of a, certainly not a bit of a change, a fairly significant change in how governments look at technology. um and um you know that's really kind of where our focuses are we've talked about for example in public safety integrating ai into our records management system to um you know where the average police officer spends two to three hours a day writing reports to free up that time by using ai to assist with report writing and free up time to do the kinds of functions that they're really there for. So that's really kind of how we believe we can both monetize AI features and functionality, but also demonstrate a clear value to customers. And those are the kinds of things they're really looking for.
Got it. That's a really interesting point on the personnel versus IT budgets, because that theoretically significantly increases your TAM, right, if you can tap into those budgets versus strictly the IT budgets. So one of the areas I'm pretty excited about is the trajectory of the cloud migrations for your courts and justice suite. You know, that's the area, you know, I've done work in that area, obviously, and I think you probably have the strongest competitive position, arguably, in that product suite versus any of your other ones. And there's an opportunity now to kind of cross-sell the 15 states that you do need to migrate to the cloud as well, which I know you did successfully with Idaho. Any thoughts on the trajectory and then maybe how you're thinking about the cross-sell as well, given Idaho was such a big success on the cross-sell?
Yeah, Quartz is certainly one of the areas where we have some, not the biggest in terms of number of customers, but some of our biggest customers. And we have, I think it's 18 statewide court systems, two of which were cloud-native from the start. One, Idaho was an on-prem customer that has already migrated to the cloud, and the others are still on-prem, and some of those are some of our biggest customers. I think the peak there is still likely, or a lot of the activity there is still likely two to three years out. There's a tremendous amount of planning that goes into these when you think about like the state of idaho it's one customer or any of these states it's one customer in name that the systems are deployed at the county level across the state so you have multiple cios multiple courts administrators you've got integrations to other products at at the county level in each of these systems all of those things have to be planned for and taken into account. So often these are long planning runways. And I'd say we're engaged in discussions with pretty much every one of those customers, but still probably two to three years out before you see the bulk of the activity. I think we'll see some movement this year. I know it was a big success in terms of the movement and it served as a good proof point and reference. So I think we'll probably see some activity there this year, but still a couple of years out from seeing more of those migrations. We have talked about cloud migrations across all products, but particularly in courts as an opportunity to sell more things because often a customer has our court case management system, but they might have someone else's jail system or jury system and their probation system, those products that those vendors may not have cloud options. So it gives us a chance to sort of have a bite at the apple of bringing those products under the Tyler umbrella in a unified integrated solution when they move to the cloud. Idaho was one of those where we saw, you know, our typical uplift from a cloud migration is 1.7 to 1.8x. Idaho, I think, was almost a 4X uplift because of add-on products and services. So, you know, that is something we're focused on as an opportunity around our flips across all products.
Awesome. All right. As we think about the potential for big deals returning in 2026, maybe we can just review, you know, where would these come from besides courts and justice? and where do you typically see these kind of seven-figure ARR opportunities kind of come up?
Yeah, Courts and Justice is certainly where we've seen our largest ARR deals continue to be opportunities in the pipeline in that market. I think tax and appraisal is one of those areas where we've also do statewide or large county deals where we've seen seven-figure deals there. We're a pretty clear leader in that market, especially at the high end. We do have a growing focus on the state market. I talked about our implementation of building out a state-focused sales organization in 2025 that is now in place to really bridge those NIC state enterprise relationships with all of the Tyler products that we can sell into state governments. and we've seen some opportunities there for example like we did in california with the outdoor recreation solution we've seen several resident engagement portal deals again a product that's founded in ai that have been in that seven figure annual arr range so there are opportunities across the board, but those are kind of areas where we really see the biggest large deals. And I'd say the pipeline has a pretty good mix of large deals. It's not that they all got pulled out of the pipeline back in 2024, but they certainly can be lumpy in terms of timing.
All right. I think we got time for one more question. So I'll move to a financial one. As we think about the free cash flow margins for 2026, you still have a net benefit from the Section 174 tax credit reversal. And then I know some of your working capital benefits may not be incrementally up higher again in 26 from 25. Is the net impact then that the 25% to 27% margin that we're kind of looking at for the last couple of years here is still kind of the right way to think about the number going
Yeah, the short answer is yes. We're clearly ahead of pace to our 2030 target, and our guidance for 2025 implied about a 200 basis point free cash flow margin improvement or operating profit margin improvement in 2025, which is ahead of that kind of 100 basis points a year that we need to get through 2030. There are a lot of puts and takes around 2026 free cash flow, but I think that's kind of a fair range for the free cash flow margin.
Got it. All right. Well, with that, I think we are out of time, and I want to thank Brian for the time today and look forward to staying in touch. Thank you. Thank you.