Perfect. Get things kicked off. I'm Clarke Jeffries. I'm on the software research team here at Piper Sandler. Pleased to have Brian Miller, EVP and CFO of Tyler Technologies. Thanks for joining us in Nashville.
Yeah, great to be here.
Yeah, absolutely. We'll be running through some prepared Q&A, and then have some availability for questions in the room, so just keep that in mind. Why don't we kick things off with a level set on Tyler, maybe an overview for everyone in the room. What market does Tyler serve, and what's the scale of the business today?
Yeah, we're an enterprise software company, exclusively serving the public sector market. We serve cities, counties, local agencies, state governments, and a little bit at the federal level, but exclusively public sector. We're very broad in terms of the breadth of products we provide public sector clients, all mission-critical applications that run essential functions of government. The things like property tax systems, 911 systems, financial systems, licensing and permitting, really anything that a government uses in the back office, so all essential products. We're approaching $2 billion in revenues. We have about 40,000 installations of our products across 13,000 to 14,000 different local government jurisdictions. So we, by far, have the broadest set of product solutions and the biggest customer base in this space.
It's a big vertical market, and we're, you know, a very clear leader in that space.
Yeah, perfect. Well, for the, you know, the claim to fame of being in a stable sector, such as, you know, serving the government, it feels like a lot has happened in the last 12 months. And I think that's probably due to the extensive look we got in terms of your vision for 2030. A lot of goals for long-term transformation in the model, particularly on the SaaS transition, and I want to touch on some of these longer-term items. But firstly, maybe some near-term discussion, principally the demand environment.
Mm-hmm.
You know, how would you characterize the demand picture at the current moment?
Yeah, we've pretty consistently, in recent quarters, been talking about it being a very robust environment. Especially as we look at really pretty early leading indicators, the number of RFPs we're seeing in the market, primarily, those are clearly back to pre-COVID highs, and in most cases, above that. So we're really seeing almost an all-time high in terms of the number of deals we're seeing coming into the market, the number of demos we're doing, so how those deals are progressing through the pipeline. All those things are very, very active. I think in general, the budget backdrops for most governments, whether it's local, state, or federal, are pretty strong. Things like property taxes, which are generally the biggest revenue source for local government, not a lot of pressure there.
Property values are high. There's so that environment's strong. Sales taxes are high, you know, employment, things related to that, building permits and business licenses. So generally, a really strong economic background, and then that's supplemented by the federal stimulus funds coming through the ARPA Act.
Yeah, absolutely. We talked about that for the past few quarters. Then, you know, let's turn to our attention to the, maybe the big three topics for long-term transformation, and that's the SaaS transition, payments, and then, you know, subsequent margin expansion. First, on the SaaS transition, you've given this framework of reaching, you know, $2 billion in recurring revenue, $1.8 billion of SaaS, you know, roughly equal to total revenue in the prior year. Seems like this is gonna come off three main drivers, and that's new private cloud migrations and then on-premise migrations. These sort of three cohorts.
Mm-hmm.
Wanted to touch on all of these three to kind of conceptualize them. Firstly, on new clients, you know, you, you put out this new client number that you disclose quarterly. Who are these new clients that you're engaging with? How should we think about new clients at this point that are engaging with the SaaS products?
Yeah. Well, our default is for SaaS for all of our new clients today. Really, until 2019, we were a hybrid model, so we offered all of our major products in either traditional on-prem license and maintenance model or in a cloud model, mostly hosted in our Tyler Private Cloud at our data centers, and paid for on a subscription. And we were cloud agnostic. We let customers decide which model they chose, or they preferred. Didn't really try to drive them one way or another. And so we really had almost a 20-year period where we very gradually transitioned as more and more new customers chose the cloud. And as you can imagine, in the public sector, and particularly local government, they're not the first adopters of anything.
So they're much more slow to adopt new technologies or new ways of doing things, including the cloud. So we went sort of from resistance to gradual acceptance and now a strong preference. So in 2019, we really signaled a shift there, and we said, "We're not cloud neutral anymore. We're cloud first, and we have a strong preference for our new customers to come to us in the cloud." And we put into place a lot of actions to make that happen more rapidly.
And so 2019 was the first year that more than 50% of our new business came to us in the cloud, and now we're at about 85% of our new business coming in the cloud, and there's really just a couple of products that still have any meaningful license sales left. So we shifted, you know, our sales focus, our sales compensation, actually, for a number of products that we no longer sell those on-prem, while the market was continuing to increasingly be open to the cloud. And the biggest drivers of those new customers coming to us. Well, two things. The biggest driver for a new customer coming to us, period, is if they have an old system that is at end of life. So governments are not profit-motivated, they're not ROI-driven, they don't have competition.
So they're not buying software for the same reason, you know, Tyler might buy a new system, a new ERP system, to, to become more efficient, to, have better business intelligence, and there's an ROI to that. The governments tend to use systems as long as they possibly can, until they really get to end of life, where they're not supported. You know, a COBOL system that was developed 40 years ago, that there aren't any more COBOL programmers around left to run it. You know, basic technology that's, that's needed today that doesn't exist in those systems. So they have a system that is at end of life, and replacing it is kind of a non-discretionary process. That's kind of the core driver of the business.
Now, today, as I said, like, 85% of the new business is coming to us in the cloud. Then we have a migration strategy for our existing customers, but most of those are. And the thing that has driven that shift in preference to the cloud, there's a couple of big factors. One is people and infrastructure. So governments, like the public sector, but even more so, struggle with managing the infrastructure around what can be kind of complex systems, so especially competing for talent, IT talent. A lot of people left the public sector during COVID, and they haven't refilled all of those jobs. And a lot of those were in technology, where there was, you know, obviously a lot of movement in technology and people changing to remote work.
Governments who generally weren't set up to do remote work and didn't have systems to support that. So, they've got a lot of open positions in IT and struggling to compete with the private sector to pay people market rates and attract them to come to work there. And then I think the second big factor is cybersecurity, that governments, like the private sector, have a lot of concerns around that, a lot of ransomware attacks in the public sector, and probably more so than the private sector, a lack of confidence in their their processes and their skills and their abilities around protecting their their own networks and their own systems. So moving those systems to the cloud helped alleviate a lot of those concerns.
Mm-hmm. And one, I think, I think that's kind of unique about the public sector is there's not customer growth, right?
Yeah.
The number of governments are the number of governments, save for strange scenarios.
Yeah
- where counties merge. So how should we think about net wins? I mean, when you have a net win of a new system, where they have an old system that wasn't a Tyler system, is this a client you already have some footprint at, and this is, you may be a courts customer, but now you win them as ERP, and that's a net win, but they're already a Tyler customer?
Yeah. Yeah, it's a mix, and cross-sell is a big part of our opportunity. And you're correct, there's not many new governments being created. The flip side of that is, on the attrition side, we don't have attrition from... Our customers don't get acquired, and they don't go out of business. So, we have very low attrition, you know, in the 1% range. So, so it provides a lot of stability around your customer base. The new wins, and where we gain market share, and we think broadly, if you look at all the systems that governments use across the country and where they came from, you find that certainly more than half of those systems today are non-competitive.
They're either homegrown systems that were custom developed, or they're systems that came from a vendor who's no longer competitive in the new business market. They may still be collecting maintenance, supporting the system, but at some point, they didn't invest in new technology. They don't have a product that anyone would buy today. So as those systems get to end of life, that replacement is an opportunity for someone like Tyler. And we tend to have relatively high win rates across all of our product suites. We win more than 50% of the business we compete for, so generally, we're winning more than our competitors put together. So we continue to gain market share as the systems turn over.
Given the breadth of our product offerings now, a lot of those systems, those opportunities, are coming from places where we already have a presence. So, broadly, we have, our average customer has two to three products from Tyler and could have eight or 10 products. That's a big part of our growth strategy is the cross-sell opportunity and what we've done in creating what we call our Connected Communities vision and creating a more compelling reason why that next system and the next one and the next one should come from Tyler.
Because not only do we have strong features and functionality and already an internal relationship and reputation, but there are integrations between these products that make them work better together, that makes data flow seamlessly from solution to solution, where we have a common service bus and common single sign-on and security payment engine workflow. Those things flow across all of the Tyler products, so they work together more effectively and creates a stronger cross-sell opportunity. And often, that we can bypass a competitive situation and have a sole source deal for add-on sales, either cross-sells within a suite of products. So someone, for example, that has our court system that manages civil or criminal court cases, but we also have a jury system, a prosecutor system, a probation system, a jail system, a system for managing civil serving documents.
So, once we get sort of a customer with one of those solutions, like the court case management system, we can, over time, add those ancillary solutions. And then across suites of products, so moving from courts to public safety and to property tax and to ERP and have those systems work effectively together. It co-creates a really compelling cross-sell opportunity, which is increasingly a focus of ours to drive, because the core market, that replacement market, it's kind of a steady market growth, kind of historically high single, you know, 8% to 10% kind of growth. But now we have an opportunity to take that into the low double digits, say 10%-13% growth, by increasing the pace of the cross-sells.
Yeah, that was gonna be my next question, is you have this high teens-20% CAGR in SaaS for this, you know, next 7-year-
Yeah
framework. You know, what component is market share versus the replacement market? It sounds like low double-digit replacement, and then single digit contributor to market share gains. And surprising that, you know, in the post-cloud-first era, it's been predominantly market share, you know, meaning more-
Yeah, it has been. So there's kind of that higher CAGR in SaaS is really a component, partially of the mix shift, which is slowing, because now we're through the shift in the new business. A lot of that is already coming into us in SaaS. So that was at the expense of licenses and maintenance. So it's. There's some of that left to run. There's more of it coming from the cross-sell and the increased penetration of existing customers. And then from the flip to the migrations of on-prem customers, will continue to drive that elevated level of SaaS growth over the next several years.
Mm-hmm. And I think another layer to this is not necessarily the product level, but it's actually the customer group, because historically, you were serving local municipalities-
Mm-hmm.
not a lot of federal and state business. Some, but predominantly, you know, cities and counties. You know, are we at a point where state is gonna start to grow as a portion of the mix? Is that on the heels of the payments business, which we'll get into?
Yeah.
I mean, seems like there have been a lot of big deal announcements at the state level in the last few years.
Yeah, you're right. I mean, historically, prior to the acquisition of NIC in 2021, we were primarily focused on the local government market. We were probably 85% local government, 15%, state, and almost no federal. In fact, the systems we had at the state level tended to be court systems, tax systems, that were actually used at the county level, but a state would buy them, so that all the counties would be on the same system. With the acquisition of NIC in 2021, we gained these very deep state relationships. So we have a lot of Tyler products, software products that have applicability at the state level, things like licensing and permitting systems, our data and analytics platform, property taxes and courts, public safety as well. But we...
That wasn't our focus, so we didn't have those deep relationships. We didn't have sales forces that were focused on the state market. It just wasn't a market we had moved into in a big way yet. NIC brought us these deep state relationships. They were 95% state and about 5% federal, and almost no local presence, and different sort of complementary business. They were mostly transactional, providing the portals and the access to these back-end systems at the state level. So, so to do things like renew your driver's license or your motor vehicle registration, or get a fishing license, or apply for unemployment benefits, anything you would do at the state level with these back-end systems, they would provide that digital front end. And then if there was a payment involved, they typically processed that payment.
So they have, as you can imagine, these very deep... They have 28, well, 30 state relationships, 28 enterprise relationships, and 2 payments-only relationships, where they really are the front end for really all of the state government's back-end systems. And so they're deeply embedded with the CIOs, with the agency heads, in knowing what initiatives are coming down the road, where their pain points are. And so the idea of the one of the theses around the acquisition was it gave us this access to sell Tyler software into state governments through these relationships and actually through the contract vehicles they have. And so, and often, again, without a competitive process. So we get an earlier look at needs, they can make that connection to help bring in the right Tyler team with a product that solves the need.
We've seen, I'd say, more success and more opportunities than we imagined when we did the acquisition.
Yeah.
A lot of these are longer-term opportunities, and they're still developing, but we have a pretty deep pipeline that's continuing to grow, and we've done 20 or 25 different kinds of cross-sells with different Tyler products into NIC contracts. And so that continues to be an opportunity on the software side. And then there's a reverse opportunity to sell the NIC payments platform into our local government customers.
Yeah, it's very interesting. Not only local versus state, but front end versus back end-
Mm-hmm.
- because largest parts that you... You know, where historic Tyler were ERP, you know, HR and payroll, case management, like, back-office processes. So, interesting. Maybe switching gears to private cloud. You know, for a long time, you were offering a hosted version for clients that wanted to make a cloud transition, but you, you know, were offering that in your own data centers. Now, a couple of years on and signing an agreement with AWS, and so part of this is a technical shift to AWS versioning for your products. Could you talk briefly about the concept of readiness within those private cloud customers, and what needs to be done to get out of data centers and have every cloud customer on an AWS version?
Yeah, that's a big, a big focus for us these days, and really has been since 2019, in parallel with making that shift to cloud first. We made the decision that we didn't really wanna be in the data center business long term. We operate two private data centers, where our historically, we've hosted our cloud customers. We've had to continue to invest in those at a growing rate as we've grown our customer base there, and we certainly don't have the ability to scale that the way, you know, a public cloud provider can do. And the pricing in the public cloud has certainly come down over time, and so economically, it was beneficial and, and from just a, a scale perspective.
So in 2019, we also entered into our first agreement with AWS to be our primary public cloud provider. We're not necessarily exclusive. We have customers who run in other environments, but that is our primary partner. So moving clients out of— and so we set out and established a roadmap for evacuating our data centers and moving our existing customers into AWS. Today, all of our new customers go directly into AWS, and we're well down the road in moving out of our data centers. The actual... The technology and the effort around moving a customer out of our data center is not... is fairly minimal. We have to understand, you know, what other applications they might have integrated.
We have to understand their readiness from, you know, their CIO and their, you know, IT team's capacity, but the actual lift and shift is typically not a big deal. The bigger deal for us has really been around the product optimization. So a lot of our core products were originally developed to be deployed on-prem, and so they're not optimized to run super efficiently in the cloud. So the hosting costs are higher than we'd like them to be. And so also starting in 2019, we embarked on a number of development efforts to optimize our products to be as efficiently deployed in AWS as possible. Those because we don't wanna move a bunch of clients over to a less efficient version.
Throughout this year, really, we've been deploying those optimized versions with live clients. By the end of this year, we're pretty much there with cloud-optimized versions of all of our major products. So that coincides with our plans to continue to accelerate the shifts. We expect to be out of the first data center, around the middle of next year, and the second data center around the end of 2025. That's meaningful from a margin perspective, because while we're in this transition, we have what we call bubble costs or duplicate costs, because a lot of the costs around running our data center are fixed costs.
And so, as we move a customer out and move them to AWS, we start paying AWS, but we don't necessarily shed a lot of costs until we can completely close the data center. So, it's important to us to stick to that timeline and be able to evacuate those data centers over the next couple of years.
Wanted to check if there are any questions that want to be asked in the room?
Yeah, I mean, there's kind of two aspects to that. There's internal, and we use a lot of different tools, we use a lot of CrowdStrike. And then a lot of the security, and so we've got a number of different tools around our data centers. The security is one of the advantages that AWS brings, certainly because of their investments and the tools they use. So, you know, as opposed to us having to manage that around our own data centers and making increasing investments there and adding more tools and more capabilities, you know, those all come with the AWS centers.
I'd say our clients generally believe that, and one of the reasons they've moved to our private cloud over the years is they believe we can do a better job than they can around protecting those environments. And we believe that the environment at AWS, and our clients do, is going to be stronger and more secure than what Tyler would be able to scale to. So, you know, ransomware and cyberattacks is a big problem for, well, for everybody, but certainly for government in general. And you hear about a lot of them that are high profile, and there are a lot of them that you don't hear about. And I'd say that's, you know, today, maybe the biggest driver of people being interested in moving to the cloud. Mm-hmm.
Well, most of our products are written on the Microsoft stack of technology, so mostly SQL Server. Most- mostly Microsoft stack. Yeah.
All right. Maybe fast-forwarding to some, maybe to discussion about payments. You know, interesting to see that be an ex- you know, an expectation to be a double-digit CAGR business. Do you wanna briefly talk about some of the new opportunities that are emerging in payments in terms of Rapid and-
Yeah
... and disbursement? Some of the premium services that were talked about, I think.
Yeah. So just as, you know, sort of background, Tyler has a lot of software systems that we provide to governments that actually facilitate payments. We're big on bill presentment, so things like a utility billing system or a traffic court system and facilitate paying traffic tickets or a licensing and permitting system, paying for a building permit or a business license or a hunting license. A parks and recreation system, property taxes. So a lot of our systems facilitate payments, but historically, Tyler really wasn't in the payments business, and we, prior to the acquisition of NIC, we partnered with third parties and brought in payment providers, and we'd get a revenue share. NIC had a very, very robust payments business, processing north of $50 billion a year in payments at the state level.
All the payments associated with their portals, and in two states where NIC is the exclusive payment provider, Texas and Florida, which are both big states. So lots of capabilities, a really robust platform are there, and a lot of technology that we would have looked to build out internally over the years. And all that infrastructure came with the acquisition. So our real opportunity from the cross-sell there is taking that NIC platform and driving it down into our local government customers. And there's sort of two different ways to go at that. One is with new software sales. So we have integrated the technology with our software solutions. So a utility billing system comes bundled with a payment solution that provides advanced capabilities like automatic reconciliation, the customer portal, a mobile platform.
So those things that enable us to get premium pricing. We've also done an acquisition last year called Rapid Financial Solutions, which has brought us capabilities around disbursement. So rather than inbound payments, outbound payments, they mostly were focused around the courts and corrections, so making payments for like, things like jury duty. So giving you a debit card when you leave jury duty, rather than them sending you a $10 check in the mail, you know, a week later. And we believe that, that disbursement side, which we are just, you know, just at the very beginning of, represents an opportunity to grow much faster than the traditional acquiring business and, and really, you know, almost doubles the TAM available to us around payments.
Certainly. Well, I think we're nearing up on time, but maybe one last lightning round question about the steady state of the business in terms of margins by the time we get to 2030. I think, you know, you're on this journey through a cloud transition, and you hope to go back to a higher watermark for operating margins. But, you know, how do you think about expansion potential beyond that? You know, is payments going to be a significant long-term driver of margins? You know, how much more could be in the SaaS business?
Yeah, I think we've talked about over the next seven years, the margin drivers and the things behind that. But I think beyond that, payments and particularly disbursements, so higher value, higher premium pricing and disbursements do carry a higher margin. So I think the growth on that will extend for a long time. There'll still be more flips from customers beyond that, that'll continue to provide margin uplift. And I think the third thing is the opportunity to move more towards more of our products being multi-tenant, as opposed to single tenant, and getting more cloud efficiencies around that.
Perfect. Brian, I think we're out of time-
Okay.
Thank you very much.
Thanks a lot.