Good morning, everyone. My name is Alexei Gogolev, and today I'm delighted to welcome at our Boston TMC event, Tyler, CFO, Brian Miller. Thank you for being with us today, Brian. Great to see you, especially considering that we just met at this wonderful event at San Antonio, your customer conference.
It's been a busy week.
It has been a great week. Maybe we could start with some feedback from the conference. Can you share with us what are the main takeaways, what surprised you the most at the conference, and maybe what is top of mind for your clients?
Sure. We had our annual user conference this week, Tyler Connect, was, if not the best attended ever, but very close to it. About, I think, 5,600 customers, close to 1,000 Tyler employees. A very energetic, well-attended event. I do not know that there were big surprises. I would say the themes from Tyler that were most common were quite a bit around AI. Our customers have a growing interest and curiosity around AI. As with most things in the public sector, they are not typically looking to be the first to adopt almost anything. There is a strong and growing interest in AI and how it can affect their operations, especially with this growing theme around government of a focus on efficiency. AI is certainly one of the tools that we think can help them achieve some of those goals.
We've got a lot of initiatives. I'm sure we'll talk a little bit more about them, but a lot of initiatives around AI, both from Tyler's internal use, but especially in our products. That was a common theme. We talked a lot about customer experience and improving the way that customers experience Tyler, especially as more and more of our customers have multiple products from Tyler. As Tyler has grown, both organically and through acquisition, it's created, over time, a little bit of friction in how customers deal with us when they have multiple products. We've got a lot of effort around smoothing that out a bit and helping pave the way for more customers to buy more products from us. We have a new role of Chief Client Officer and a new person in that role.
He was kind of front and center and spent a lot of time talking to customers around that. Those are probably the two biggest themes around the conference.
That's a good segue to my question about your new solutions, some of which were announced at the event. How does AI inform the development of those new products? Could we see some of the AI features embedded in your existing products, as well as what is the potential monetization path of those existing products?
Yeah, sure. There's a lot there. There already are some AI features in our products, and some products, especially some that we've acquired more recently, that are really sort of fully AI-based. We did three acquisitions in the second half of 2023 that were all products that were really driven by AI, one in the priority-based budgeting space. Sort of redoing how governments look at budgeting and how they can use AI as a tool to determine priorities and help them allocate their funds to best align with where their priorities are. One in the sort of document management data entry space in our court solution, and then one around sort of inspections and helping determine how they do field augmentation.
Three products that are fully AI-based, but there are a lot of AI features that we've said that every major product, every flagship product has an AI roadmap. Really, by the end of this year, we'll have either already embedded AI features or features under production. Really kind of three areas. One around decision-making, so helping clients have the data to make better decisions through the use of AI. The second around productivity, so probably the more common area around things like automating data entry. Then the third around citizen engagement, so making it easier for citizens to interact with government with things like agents and chatbots. As I said, we've already got some of those in production.
We, for example, recently went live with a Citizen Engagement Portal for the state of Indiana that uses AI to help citizens navigate looking for information or conducting a transaction with the state. Some of those things are already in production, more to come. In terms of monetization, there's a couple of different sort of approaches, but primarily we're looking at sort of a SaaS-based model, but with pricing based on the value that's provided, that it's, in many cases, pretty easy to tie it to efficiencies, cost savings, revenue increases. I'm really looking to sort of have a value-based pricing model, but with a recurring revenue stream.
Great. Thank you. At the conference, I found it interesting that both Lynn, Jeff, and Russell, all the top management, have been discussing data center closures multiple times. I was hoping maybe you can tell us a bit more how you think you could contribute to the gross margin from greater volumes on the public cloud that you are experiencing right now.
Sure. Yeah, back in 2019, when we really kind of made the transition from, or made the decision to fully transition from sort of a hybrid model with both on-prem solutions and cloud solutions to kind of cloud-first and fully in the cloud, one of the key decisions at that time was that we did not want to be in the data center business anymore. We had traditionally hosted our cloud customers in a private cloud, primarily in two data centers that Tyler operated, one in Dallas and one in Maine. Clearly, that was not a model that really could scale well. The public cloud was much more cost-effective and certainly a competitive market.
We entered into our first partnership with AWS to be our primary public cloud provider and started the process of both putting all of our new customers into AWS, but then the process of shifting our private data center customers over to AWS and set out a timeline for doing that, which we have stuck to. The plan was always to close the first data center, the Dallas data center, in mid-2024, which we did last year and exited all the customers out of there. The second data center is on track to close at the end of 2025. As we've worked through this migration of those customers, we've been able to reduce our CapEx. There's certainly a big part of our CapEx has been historically around those data centers.
Also, we've had what we call bubble costs or duplicate costs because as we start moving those customers over to AWS, we start paying AWS to host those customers. We have a lot of fixed costs around the data center that do not go away until it fully closes. We saw some margin improvement. Some of the margin improvement we've seen this year is related to the first data center closure, but there still are growing bubble costs around the second data center. We will really see that impact next year. As we continue to scale at AWS, our unit costs get lower. We also have, last year, entered into a new agreement with them that further recognized the scale that we're doing with them and that we will be going forward.
Unit costs getting lower, greater efficiencies, and then also part of that margin expansion has been and will continue to be around the release of cloud-optimized versions of our product. We have a lot of products that were originally built to be deployed on-prem and have not been optimized or super efficient in the cloud. We have had projects underway to modify the architecture to take advantage of the cloud and particularly AWS features. As we have released those, we have seen really better than expected efficiencies and lower operating costs. That continues to be part of the margin expansion story as we continue with that effort.
Another important theme at the conference was cloud living. Can you elaborate a bit more on that, the phase two of your cloud transformation? What were the other features of phase one, which is about to be completed?
Yeah, so phase one, which is still ongoing, but really kind of what started back in 2019 of the transition to the cloud and moving from cloud-agnostic to cloud-first really was around several things: exiting the data centers and fully moving customers into the AWS environment, the development and release of cloud-optimized products that I just talked about. The third big effort there was really around version consolidation. Tyler has a lot of products. That's one of our greatest strengths is that we have the broadest product offering for the public sector of any software provider across almost every sort of essential functional area of state, local, and a little bit at the federal level. That's a big strength of Tyler. It creates big cross-sell opportunities. It makes each of our products more valuable because we have this breadth of products and domain expertise.
It also complicates things that we have a lot of products, and we've also historically supported multiple versions of a lot of products. A tremendous amount of our development resources and our support resources have historically been devoted to supporting products that are not the current version of products. As we move to the cloud, our goal is to have one cloud version that everyone's on, everyone upgrades at the same time. We've had an effort around version consolidation, sunsetting those older versions of products, moving those customers to the current versions of products either before or when they migrate to the cloud, and sort of furthering that effort. We've had a lot of progress with that over the last couple of years. There's still more work to be done. That's more of the sort of phase one that continues on.
Those have really been the big efforts around the first phase of the cloud transition, which is really kind of about where the customers are hosted and what efficiencies we get from that. Phase two, or what we refer to internally as cloud living, is really about sort of maximizing the benefit to our customers and to Tyler of having ultimately the entire customer base in the cloud. It is really that process of getting everyone on one single stream of code, everyone on the same version, everyone upgrades at the same time, everyone is always on the current version and does not fall behind in terms of the version that they are on and the features that they are using. It makes it easier for people who have multiple products for those products to work seamlessly together because they are all the current version.
It really kind of taking advantage of the cloud and that process to just make the process easier for customers. Continuous upgrades, continuous release of new features and functionality rather than big bang upgrades on an annual basis. Enabling customers to, again, have a better experience with Tyler and really get the benefits of being in the cloud.
Switching gears slightly, you've earlier talked about the appointment of Andrew Cole as Chief Client Officer. Can you talk about how Tyler is balancing the need for client satisfaction with pushing further the cross-sell?
Sure. Yeah, again, with the strength of Tyler, one of the strengths being the breadth of products that we have, we've said that our average customer has two to three products from Tyler and could have eight to ten or potentially more. Certainly, as we make more acquisitions and build more products, that number continues to grow. We have talked quite a bit about how important cross-sell is to us as an opportunity to grow. We have got this very loyal, very sticky customer base, and we should have what we like to think of as an unfair advantage in selling them more and more products, either within a suite of products. If someone has a court system, a case management system from us, selling them a probation system or a prosecutor system or a jury system or new suites of products.
A lot of cross-sell opportunities, things like leveraging the customer base to sell them payment services or data and analytics platforms. A lot of opportunities there. That is really one of the key pillars of our growth strategy. In order to sell people more products, you need to have happy customers that want to buy more products and want to add things like payments from Tyler. We have really a heightened focus on client satisfaction and improving the client experience. As I said, we have grown both organically, but a lot through acquisitions as well. A lot of our products came to us through acquisitions.
Because of the way Tyler has sort of grown over the years, we have moved from, in the past, where clients generally experienced Tyler with one product or a narrow set of products and had sort of a siloed relationship. Now, as more customers have more products from us, we've created some friction in that relationship because they have multiple interactions with Tyler, different support units, which might be using different back-end systems to manage those processes. Really, a lot of it is around creating the consistency around the processes, around the tools we use. We talk a lot about one door to Tyler so they shouldn't have to figure out which door to come through, that any door will get them to the right place.
Really, a lot of it is around processes, tools, and making that experience more seamless and just an easier process for our clients. Chief Client Officer is a new role to Tyler. Tyler really experienced strong individual and Andrew Coll, who's now will really be responsible for all of that across Tyler, which really includes our professional services operations as well as our support organizations. This is not just a totally new initiative. We've certainly had a focus on this for a while, but clearly a very heightened focus, a lot of effort going into it. We already have made progress in standardizing some of the tools and systems we use on the back end.
I think what we've heard from clients this year at Connect, I think some of the feedback we've gotten from you and some of the other analysts that spent time with clients at Connect this year, the feedback's positive around that. We are excited about the opportunity we have to continue to drive an improving relationship with clients.
It sounds like there could be some savings on the back end based on some of those initiatives.
Yeah. Not only does it make our business more complex, this ongoing standardization, another internal phrase is one Tyler. Having the same systems in place to manage something like support across the entire company does result in the savings. It makes business less complicated. We're standardizing on common solutions, and it does help us from a cost perspective as well to get everybody on consistent processes. It ultimately enables us to cross-utilize people better and reduce costs while providing better service. AI is a part of that as well from an internal use. Support is one of those areas where we're investing in AI tools to help answer routine questions and help our customer support people find answers easier. Support and professional services are two of the areas where we're making AI investments internally.
Makes sense. When we talk about the cloud transition for your customers, you have mentioned you're still on the left side of the so-called bell curve in terms of getting customers to flip to the cloud. What percentage of customers and, I guess, dollars are currently on the cloud? What are your key targets here?
Yeah. So in the new business space, again, since 2019, when we really made that switch to cloud-first and really signaled that we were moving towards not selling anything on-prem anymore and sort of gradually have phased that out. That move has been very successful. Last quarter, I think it was 96% of our new software contract value was in the cloud and only 4% on-prem. Most of that is sales back to current on-prem customers. We've also been migrating the thousands of customers that already have solutions on-prem to the cloud for a number of years, but that also accelerated starting in 2019. When we, again, look back at 2019, we were about 50% of the new business was in the cloud and 50% was still on-prem. With the new business, that's almost entirely switched to the cloud.
We have started to accelerate the migration of those on-prem customers to the cloud. A couple of gating items around that, one of them being version consolidation. Customers generally need to upgrade to the current version of the product either before or when they move to the cloud. The efforts we have had around version consolidation have helped facilitate the acceleration of that move. We have gotten more customers in a position to be able to move to the cloud. Sticks and carrots seem to have been the theme of the phrase that came up a lot at our investor session at Connect. We have generally used carrots at this point. We have signaled to customers that increasingly new features and functionality, including things like AI functionality, will only be available in the cloud version.
While we'll support their on-prem systems for extended periods of time, the new features and functionality that they'll want will only be available in the cloud. We've continued to accelerate the migration of on-prem customers. We talked about a target of by 2030 of having 85% or more of our customer base, our on-prem customer base, migrated to the cloud. We view it as sort of a bell-shaped curve of the pace of those migrations and that the peak of that curve would be in the 2027-2028 timeframe, especially with respect to some of our bigger customers that are more complex. One of the other factors that's increasingly a factor in customers' desire to move to the cloud, sometimes to move to the cloud very rapidly, is cybersecurity and the growing incidence of ransomware attacks in the public sector.
Often a client that either suffers a ransomware attack with their on-prem systems or sees a peer or neighbor jurisdiction have a ransomware attack becomes motivated to move to the cloud very, very rapidly. We've seen some of those where customers flip to the cloud almost over a weekend. Unfortunately, that continues to be a growing factor. If you step back and actually look at our entire customer base from a revenue perspective, on average, when a customer moves from on-prem to the cloud, it's about a, say, a 1.7-1.8 times uplift in revenue going from maintenance to SaaS. If you convert our existing maintenance revenues to a cloud equivalent, so multiply it by 1.7-1.75, and compare that to our current SaaS revenues, we're almost 50/50. It's like 52% still on-prem and 48% in the cloud.
That'll continue to shift both the number of flips and the average ARR from flips. We think will continue to grow through the 2027, 2028 timeframe. We'll be more on the downside at some point. More of the sticks will come in, which would primarily be pricing for maintenance with larger increases around that to drive customers or maybe some of the laggard customers to the cloud. I think we're still a little bit away from that.
Despite this very encouraging commentary about the flips and migrations, there was one comment during the conference call recently around the elongation of sales cycles. You specifically highlighted some of your customers utilizing consultants in their decision process. Can you maybe elaborate a bit more if you've had any additional conversations in that sense? How do you see this evolving?
Excuse me. Yes. We mentioned the use of consultants by clients in purchasing processes as a factor, really a pretty minor factor, but one of the factors around a little bit longer sales cycles that we saw in Q1. On average, it's less than 10% of our processes are led by a consultant from the client's perspective. This is using a consultant to help them manage the RFP process, the evaluating vendors, and sometimes even negotiating contracts. Tends to be larger contracts. On average, I'd say it adds maybe 60 days to a sales process, which are long in our space anyhow. Governments move slowly. A typical sales process for a mid-sized ERP product might already be, say, call it 12 months, but 12-18 months. Typically, when there's a consultant involved, it adds a couple of months to the process.
It doesn't really change the outcomes. In some cases, we're not really a lot of difference in win rates. In some cases, we're more successful when consultants are involved. As I said, it's less than 10% of deals, but marginally we've seen a little bit more, which probably really reflects there's more bigger deals in our pipeline because it tends to be larger opportunities that are using consultants. A relatively small factor. I think the bigger factor that contributed to a little bit longer sales processes in Q1 was just the general noise in the environment. While a lot of these external factors that really cause turmoil in general in the first quarter, things like tariffs and all the back and forth on tariffs or geopolitical events, largely those don't really affect customers in our space, especially local governments.
I think that also was confirmed by some of the notes I've seen from Connect from people talking to customers who pretty much unanimously said they're not seeing any impact and don't expect to see it affect their buying. We did see clients that had processes underway pause a little bit and say, "I need to, one, there's just a lot of noise here, a lot of distraction, and I need to make sure that it doesn't really affect me." I think it just generally kind of brought noise and turmoil that slowed things down. Ultimately, our outlook for sales for the year isn't any different than we started the year. We haven't seen deals lost to competitors or deals fall out of the pipeline. Just a little bit of slowing of timing, but again, largely timing.
You're actually one of the few companies that raised guidance for the year. Can you talk about some of the components that drove that increase?
Sure. Mostly we just had a really strong first quarter. Earnings were not only above consensus, but above our internal plan a lot, both revenues and earnings. We raised revenue guidance and earnings as well for the year, which is fairly unusual for us for a first quarter. A lot of the outperformance was on the transaction side of our business where we saw higher volumes around a wide range of transaction services that we provide. Some of it was a little bit faster implementations of some of our cloud conversions as well. Timing a little bit sooner in the year. We raised our guidance to take into account and reflect that outperformance in the first quarter.
I'd say in some cases around some of the pricing, like pricing with some of the transaction-based revenues, we know that that will carry through the year, and we took that into account. In terms of elevated volumes, we really didn't raise expectations for the rest of the year, but we just recognized the results from Q1. Really strong first quarter didn't really change our outlook for the rest of the year in a significant way, but did reflect that in the full year guide.
I think at the consumer conference, Lynn mentioned that competitive positioning, as you just suggested, hasn't really changed. Apart from, I think he mentioned that public safety is the space where you've gained some market share. Can you talk a little bit about who you're displacing and what does your competitive space look like? Who are you typically seeing at RFPs?
Specifically in public safety or just across the board?
Broader as well.
Yeah. We have different competitors in each of our sort of sub-verticals or product areas. So the people we compete with in the ERP space are largely different than the competitors in the public safety space, and those are different than the people we compete with in the court space, and those are different than the ones in the property tax space. We have a wide range of competitors. For the most part, they're kind of point solutions or niche companies that have a narrow product focus, sometimes very narrow, and sometimes a narrow geographic focus. Public admin or ERP is really the one area that we see significant competition from horizontal players like a Workday or Oracle or SAP or Infor. Although those bigger horizontal companies, we tend to see more in larger opportunities. They tend not to scale down as far as we do.
Public safety, particularly, is an area that we've done really well in competitively. We've made a lot of investments in our product there. There's two parts to public safety. There's computer-aided dispatch, which is 911 systems, and then police, fire, and ambulance records management. We've done a number of sort of tuck-in acquisitions that have added features and functionality around our core products. We've invested in those products to scale them up into the upper tiers of the market. We primarily compete there with Motorola, Hexagon, a private equity-owned company called CentralSquare that's just as public sector, public admin, and public safety, as well as some smaller cloud companies. We have invested a lot in our cloud solution there.
Sort of before the market in public safety, which has kind of been the last segment of our space to embrace the cloud, but they really have in a big way in the last year or two. We feel like we're really kind of a leader in terms of having a cloud solution in the public safety space. We have been really successful in continuing to gain market share, especially more towards the upper end of the market. I think last year we won four or five state police agencies. These are tier one kinds of deals where we're competing head-to-head with those bigger competitors. A lot of success going on there. One of our strengths in public safety is that we're the leading provider of court systems.
The interface and the integration of those two solutions is something that's unique to Tyler and provides a lot of value to our customers. Largely, we're not seeing a big change, as you said, in the competitive landscape. Not a ton of new entrants. I think our space in general, the public sector space, it's a great space if you're in it. It's got a lot of characteristics that are really attractive. It's very sticky. It's very stable. There's a huge universe of customers or prospects that are using 20- and 30-year-old solutions that will need to be replaced, and largely those are non-discretionary decisions to replace those. It's a very, very steady market, but it's also a slow-moving market. It's a little bit hard to create demand or accelerate that process.
It tends to be a market that is harder to enter, but a great market once you're in it. That leads to what we talked about in terms of a tremendous cross-sell opportunity. Given the presence we have in the space, the opportunity ahead of us to continue to grow with our customer base and continue to add new logos at the same time.
Thank you, Brian. In the last few seconds that we have, can you maybe mention the key growth algorithms for your top line going forward? How much should we expect from cross-sell, new logos, upsell?
Yeah. We haven't specifically kind of broken it out by those two pieces. We do expect the cross-sells and the existing customer base. As we go from two or three to eight to ten products a customer will be a growing part of that. We continue to still have a huge opportunity with new logos. We've talked about basically low double-digit growth expectations through our 2030 plan on an organic basis, and we clearly will supplement that with acquisitions to get to, I think, $3.6 billion-$3.8 billion is our target from an organic perspective by 2030.
Thank you very much, Brian. Thank you for coming.
You bet.
Appreciate your time.