Okay. Hello, everyone, and good morning. Welcome to day three of the UBS Tech Conference. My name's Taylor McGinnis. I head up coverage here of the SMIDCAP application SaaS names. And in this session, we have Tyler CFO Brian. So, Brian, thanks so much for joining us.
You bet. Thanks for having me.
Yes. Brian, maybe a good place to start would just be at a high level in terms of what you're seeing in the demand environment. I know you guys talked at the start of this year that there was some disruption on your most recent earnings call. It sounds like you didn't see any big impact from changes with DOGE or the government shutdown. So maybe you just could give a state of what you're seeing today.
Yeah, absolutely. As you know, we serve exclusively the public sector. So we're really focused on what's going on in that market. And we've seen a pretty stable demand environment over the last several quarters. We've talked about, really, for the last, I guess, almost two years, an active market that demand, as we look at leading indicators like the number of RFPs we're seeing each quarter, how those deals are progressing through the pipeline, all are at least stable at kind of elevated levels. So we're seeing a really consistently strong demand. There was some disruption, not really affecting the actual demand, but the timing in the first quarter. There were a couple of things, excuse me, specific to Tyler. We saw some pull forward of demand or of bookings into the fourth quarter of last year because of the expiration of the federal stimulus, the ARPA funds.
And then we saw, around all the noise around the new administration, around DOGE, around tariffs, all the things that were going on in the first quarter, there were some pauses in processes as our customers or prospects tried to figure out, did any of this really affect them? Ultimately, I think the conclusion was, for the most part, no. It didn't really change what they were looking to do with Tyler or currently doing with Tyler. And that's all pretty normalized by now. And then the federal government shutdown, even in the most recent quarter, had no material impact on us. Less than 5% of our businesses with the federal government, and it really wasn't any kind of trickle-down effect. So whatever disruption was in the beginning of the year really seemed to kind of work its way out. And it's a good demand environment right now.
Perfect. And how are you thinking about those demand trends going into 2026? So as we wrap up 2025 and you're speaking with your customers, how would you characterize state and local government willingness to modernize next year? What are you hearing around spending initiatives compared to what we saw this past year?
Yeah, I think it really seems to be more of a continuation of the same. Again, all those leading indicators, the number of RFPs we're seeing each quarter continue to be very consistent. There does seem to have been, when we think back about DOGE, and the increased focus on government efficiency does seem to be starting to have a bit of an impact on potentially accelerating some demand. Ultimately, the way governments get more efficient is to use technology more effectively. Often, their processes are inefficient because they're governed by very old technology that doesn't allow them to have online access or citizen self-service or support remote work.
And so as this focus continues, whether it's specifically around DOGE, but just this general focus at really all levels of government on getting more efficient, it's a bit of a change in thinking of how governments have historically looked at replacing technology or buying new software. They've, excuse me, historically waited until the old system died. And that's been the catalyst for buying a new system. Today, there's a little bit more of an emphasis or a view from an ROI perspective and how this can help them get more efficient. So we're seeing signs that some governments are much more willing to replace systems sooner than when they actually are on the verge of death. So that's a positive.
And we think that things move slowly in government, but we think that a subtle shift in their thinking that they're still very early in the modernization cycle, certainly lagging behind the private sector. And we're seeing often we replace systems that are more than 20 years old. So a lot of runway for us.
Yeah. I want to talk about that runway. But before we get there, I think if I reflect on 2025, in my conversations with a lot of investors, I think there was greater appetite to own vertical software players over horizontal seat-based SaaS companies where there's a lot of concern on potential AI disruption. There's concern on where are we in the maturity curve. So maybe on the first part on AI, I'm curious for how Tyler is evolving its product strategy to make sure it's keeping up with the trends that we're seeing in AI. So one common frame that we hear in our conversations is that in order for AI to be effective, it has to be domain-specific, right, and tailored to specific use cases. So is that something that Tyler's experience in its own development of AI?
Maybe you could just talk about whether or not that gives Tyler sustainable moat as these trends continue to emerge?
Yeah, absolutely. We've got a lot going on with AI. And we would agree that to be effective, it does need to be domain-specific. And we think that's where in the public sector that Tyler has the opportunity to really be the leader for our clients in bringing them to AI. Really, to get the value from AI, we see initially it's around automating repetitive tasks, things they do every day over and over again that are labor-intensive. And so to really be effective around that, you need deep domain expertise in those complex workflows. And the things we automate are mission-critical. They're essential functions for government, things like public safety, 911 systems, courts, property taxes, licensing, and permitting. So all these things are really essential functions for government.
And we have decades of deep domain expertise that's built into our software that's delivered through the people that support the software and implement the software. And so we believe we can bring that domain expertise to create effective AI tools within those products. So we have that deep domain expertise in these complex workflows, and we can combine that with the models. The other thing is reliability and trust. They really seem that the agents really want to please people and give answers. And sometimes those answers can be wrong. And so we have the deep domain expertise to make sure that that doesn't happen. And we've seen that in some competitive models. We've seen in some areas like resident engagement, answering questions from citizens. So again, yeah, I'd say that deep domain expertise is really key. And that's where we really shine.
With respect to a moat, it's really a couple of things from Tyler's perspective around governance and trust. So we have really strong processes in place with government-specific evaluations to make sure that the solutions can be trusted. And then we have a lot of data. So we've got 50,000 solutions installed across 15,000 different government customers. So they produce tremendous amounts of data that we have access to that can build better insights in those solutions. And then lastly, I think in terms of our longer-term view around building a moat, our customers don't compete with each other. They work together. It's very different than the private sector. So they like to share information. And so we really see a path towards building an ecosystem for agentic development.
As our customers, as we build solutions for customers and our customers build agents on their own, that this can create an ecosystem around Tyler solutions with AI that can provide more of a competitive advantage for us.
Perfect, and of those use cases that you mentioned earlier, I'm curious which ones you think are getting the most traction or which areas is the government prioritizing to automate, and maybe as a second part to that question, I know it's very early days, and as you mentioned earlier, the government's slow to modernize, but just in terms of when you think we could start to see more widespread adoption of AI, just what are your thoughts there?
Yeah. I think, again, those use cases are really currently focused on low-risk, highly repetitive types of operations, so things like data entry, permit reviews. But they really span kind of all aspects of the public sector, things that can provide real-time and labor savings. So governments are really looking for very practical things that they understand that can solve actual problems they have. And staffing shortages is a big problem at government, really all levels of government, but particularly local governments where our focus is. We really see a high interest in AI, probably at a speed that's kind of faster than we've seen in other areas, like even the move to the cloud. But they're typically not wanting to be the very first to do anything. So we really see it accelerating over the next one to two years. We have some products already in place.
So around those sort of highly repetitive tasks, we have a product called Document Automation that came from an acquisition a couple of years ago that was a partner of ours in the court space that automates data entry in the court system. So while our court system is completely digital, there's no paper in the courts anymore. Documents come into the courts electronically and stay digital throughout the life of a case. But a clerk still has to do data entry and create a case in the Tyler Court Case Management System. So Document Automation uses AI to identify those data elements, create the case automatically. And so tremendous labor savings. That's a product that we're currently selling to our existing customer base and new courts customers. And they're getting a lot of value out of it.
We're seeing in some cases savings of Tampa, Florida. Hillsborough County bought it last quarter. They're going to pay us about $950,000 a year SaaS fee for the Document Automation AI application. But they believe it'll save them well over $2 million a year in labor costs. Beyond that, sort of higher risk scenarios require or will require more complex changes to workflows. And so we see those probably evolving over many years with the normal pace of things in the government space. But we really do see a lot of momentum over the next couple of years.
Perfect. And I would imagine with the introduction of the cloud, you already started to see the competitive landscape shift. I would imagine there's going to be a next evolution of that with the emergence of AI. So could you talk about just what you're seeing in the competitive environment in terms of AI? Who do you see as the biggest competitors today? Would that be the government creating their own in-house solutions? Is there native AI companies that you guys are tracking closely? Maybe it's just the incumbent SaaS firms themselves. But what are you seeing in terms of the competitive landscape and how that might be shifting with AI?
Yeah. We really see probably a pretty limited amount of governments creating their own solutions. And they want simplification. They typically don't have a lot of that expertise, especially when you get into small and mid-sized governments that make up the vast majority of our client base. New entrants really kind of lack that domain expertise. And they don't have the long-term relationships. And they don't have the sales networks. We've got, again, the largest customer base of anyone in the public sector that are using Tyler products throughout their operations. So we believe we're kind of the best position to deliver that. We probably see the most or view the biggest competition as being other SaaS providers like the large ERP providers. Across most of our products, we compete with other vertical companies generally that are narrow.
So in courts, we compete with a set of companies that just do court software. In public safety, we compete with a set of companies that do public safety software. So public admin or ERP is the one area where we see horizontal providers. And so occasionally we do see the large ERP providers like Oracle and Workday and SAP. So those would probably be the ones that we would see as probably that we keep our eye on the most and look at what they're doing as well from a competitive standpoint.
Yeah. That makes sense. Let's shift to the non-AI opportunity. So as I mentioned earlier, I think another key investor debate is just where we are on the maturity curve. So I'm curious if you believe that your focus on public sector and government lends itself to more runway ahead. You mentioned earlier governments are slow to modernize. So maybe you could just talk about the opportunity that's still sitting ahead of Tyler in terms of cross-sell and upsell and where your base is in migrating to the cloud as well too.
Yeah. They're definitely moving at a slower pace than the private sector. Cloud migrations and modernization definitely are not mature yet in the public sector, and we've had a long-term transition to the cloud. We're really almost 100% there in terms of new product sales. Almost everything is sold in the cloud today. Very little new licenses being sold. Public safety is probably the only area where we still see some of that. The rate of adoption or migration to the cloud has really increased over the last 24 months as clients increasingly understand the benefits of moving to the cloud and are moving further along that maturity scale.
From a broad perspective in terms of the penetration in the market, we think that still well over half of the government, half of the systems being used by governments broadly across the U.S. would be considered kind of legacy systems, systems that are either homegrown or systems from a vendor who is no longer competitive. So when those systems get to the point where they need to be replaced, it won't be an upgrade for the existing vendor. It's an opportunity for Tyler. So that's still well over half the market that's out there that turns over relatively slowly. As I said, often we're replacing systems that are 20, sometimes 30, sometimes 40 years old. So in terms of the on-prem base moving to the cloud, if you look at our total customer base today, it's about 50/50 on-prem and in the cloud.
And so we're continuing to accelerate the pace at which our on-prem customers move to the cloud. We really see that peaking probably two to three years out from now, probably more like three years out. And then it'll tail off. It's a little bit different for each product. Public safety is the one that's probably the earliest in that migration timeline. Other areas like ERP are much further along. We've talked about an expectation that by 2030, that 80-plus% of our customer base will be in the cloud. And we're well on track to achieve that.
Yeah. And how would you characterize the current pace of migration activity compared to what we've seen in the past? Because you mentioned you're at this 50/50 split. And I think typically when you get to that point, there's this concern of, okay, if you had a lot of the low-hanging fruit that's moved, right, and might this next tranche take a little longer. It sounds like you guys are pretty comfortable that you could continue to see a good pace of migration for the next two to three years. So maybe you could just tell the audience what's giving you that comfort and if there's any catalyst to push things a little bit faster versus what we've seen.
Yeah. Really, a lot of our expectation is around conversations with clients. I mean, we're talking to every client about their roadmap and when they see the move to the cloud. It's definitely changed over the last couple of years from those conversations being more around why they should move to the cloud, what the benefits are for them. As opposed to now, it's really when are they going to move to the cloud? How does it fit in their overall IT roadmaps? It's influenced by hardware replacements. A lot of times it's when do they see the depreciation of their existing hardware and their data centers running out. So when are they going to be facing a hardware refreshment cycle?
That's kind of the point at which they say, "Okay, then we're going to move to the cloud." Sometimes it's around staffing challenges as governments, especially on the IT side, face a lot of retirements, difficulty hiring and retaining skilled IT workforce. So a lot more difficulty just maintaining their own internal networks. And that often is a catalyst for moving to the cloud. Security challenges, ransomware, FedTax can often accelerate the timeline for moving to the cloud, either when a client experiences it or when they see it in one of their peers or neighboring jurisdictions. So all those things kind of affect it. I'd say that our customer base, our on-prem customer base today is still more heavily weighted towards large customers that tend to move more slowly.
So that's really why we see that peak probably three years out from now in that kind of time range because more of when those larger ones are currently sort of talking about making the move is more in that kind of time frame. But that can change. But we feel pretty good about this trend of continuing to see both an increasing number of flips from on-prem to cloud as well as the average size of those trending upward as we see bigger clients move.
Yeah. And as you approach this tranche of customers that is larger, more complex, could you talk about how the learnings you've had in the past have now influenced how you're approaching this next tranche of customers in their own migration path? So I guess how has your value proposition evolved from just security benefits? You guys have talked about driving this consistent, let's call it like a 2x revenue uplift. So maybe you could talk about how you see that trending going forward as well.
Yeah. The revenue uplift, 2x, is probably a little generous for a like for like. We're pretty much averaging 1.7x-1.8x, maybe close`r to 2 with upsells and add-on sales. But that's been very consistent, and I think we see that holding true. The initial value proposition was really more around security. It was around leveraging our staff to fill in where they have staffing problems and improving performance around hardware and the data center performance. Going forward, more of the value is coming from accelerating innovation, so clients being able to have a better client experience, not experience disruptive large upgrades that might happen on an annual basis. We've had many clients that skip upgrades, and so that has resulted in a lot of version sprawl for us, so all that kind of gets fixed as everyone moves to one cloud version.
But for the client, it creates a better client experience with much more seamless upgrades and release of new technology. So a much faster time to value from when we release new features and functionality to when the clients actually benefit from that. And then the ability to provide more proactive support to see things that are going on in their systems and reach out to support those rather than waiting to hear from the client. I think the lessons we've learned really are around a very proactive planning process with clients. And we're engaged in that. The actual process of flipping a client from on-prem to the cloud can be relatively short.
But often the planning process is many months long of making sure that they're fully planned for all the things that change and integrations to other solutions, getting all the users trained, all that sort of stuff. So planning. And then I'd say as we've evolved, we've been able to automate more of the processes around the migration to speed up that process and make it easier, less of a lift on the client and less of a lift on Tyler. And we believe we can apply those lessons as we continue to move through bigger clients.
Yeah. You mentioned version sprawl. And I know that's been a strategic priority. So could you talk about how version consolidation is trending amongst your customer base? And under what time frame do you expect to sunset most of the older versions?
Yeah. That's been a big focus for us. Version sprawl occurred for a lot of reasons, but mainly that sort of inertia in a lot of customers. And part of it is generally that releases would bring a lot of change sometimes. And so people would pass on those. And so we get customers that are on older versions of the software that we're supporting, very expensive from a support perspective and from a development resource perspective. So spending a lot of our resources focused on products that aren't our current version. And then clients not really all using our best software. So that's been a big focus of us.
That's been one of sort of the gating items around the pace of migration because as customers move to the cloud and ultimately we get everyone on one version of the software in the cloud, if they're not on the current version, they need to upgrade, so we've been really over the last couple of years sunsetting older versions, continuing to reduce that sprawl and get more and more customers on the current version, which then gets them in position to be able to move to the cloud. We've made a lot of progress on that over the last couple of years, and with some of our biggest products like our Enterprise ERP solution, our Enterprise Justice solution, we're down to where almost all the customers are on one of two most recent versions as opposed to maybe three years ago, seven or eight different versions.
We're starting to see that improvement have an impact on margins, but more of that yet to come over the next couple of years. I think it's still probably a couple-year timeline before we're really down to one version in the cloud of basically every product. We've made a lot of progress there. That's one of the margin drivers that we expect to see over the next couple of years.
Perfect. And let's talk about the cross-sell opportunity. So you've talked about ambitions to get from two to three products to eight to ten per customer. So does Tyler have any initiatives in place to promote that? And what timeline are you thinking around that?
Yeah. We really do. When we go back to our investor day in 2023, one of the key pillars of growth is expanding cross-sell and upsell opportunities. As I said earlier, we've got the largest customer base of anyone serving the public sector with about 15,000 different jurisdictions, about 45,000 solutions installed across those jurisdictions. So the average customer has two or three products from us. In most cases, they could have eight or 10 products. When I talk about products, I'm really kind of talking about a whole suite of products. Within each suite, there are cross-sell and upsell opportunities as well. So one of the big initiatives around that has been a focus on improving client experience because to sell clients more things need to have really happy clients.
And we think we do a really good job of and have high client satisfaction, but we think we need to be even better to help support faster cross-sell. So we created a new C-level position at the beginning of the year, Chief Client Officer, which is new to Tyler, and have a very experienced person that we hired into that role who has a lot of initiatives going on around improving the client-facing aspects of our business around professional services and client support and customer experience. So improving systems, improving processes, adding people. And a lot of those things are really to create a standard, a more consistent client experience. So as customers have historically may have had a relationship with one Tyler product and they had one support number and one support team they dealt with and one sales rep and one professional services team.
And now they have two or three or four and want to add more. They have multiple doors to Tyler, multiple 800 numbers, multiple support teams. And so we're really sort of a product of how we grew up, but we're really moving to standardize those things, have back-end processes that are consistent, have one 800 number for everything. And then we figure out where you need to go within the system and actually using AI to help improve that client experience as well. We've also made changes to our sales organizations and how we go to market, including sales compensation to more effectively support cross-sell efforts. And then lastly, I think using cloud migrations is an opportunity.
When someone is moving from on-prem to the cloud, it creates an opportunity to have a conversation with them about products that may be in the same suite that they don't have from Tyler. They have Tyler's court case management system and they're moving it to the cloud, but they have an on-prem jail system or an on-prem probation system from a different vendor, so it gives us the chance to talk to them about consolidating all that with Tyler in the cloud, and we're starting to see a more intentional focus on that and seeing results around that.
Yeah. I appreciate the thoughts on the client experience initiatives. And you mentioned a little bit how that's influencing cross-sell and how you guys are thinking about product strategy. But could you just give an update on how that's progressing overall? And what metrics are you tracking internally to measure the success of those?
Yeah. And it's not that we just at the beginning of the year decided that client experience was important, but really kind of an accelerated focus on that. And these are things that are moving pretty quickly. At our user conference in May, Andrew Kahl, our Chief Client Officer, talked to clients about changes they should see within the next year.
We expect that at next year's user conference, that we'll be able to stand up there and say, "We told you we're going to do this and this and this, and you should be seeing those things improving your experience with Tyler." A lot of it is the focus on ease of engagement, making it easier for clients to interface with Tyler, more digital channels as opposed to telephone, and using AI as part of that, better communications processes, better training, and then better systems on the back end at Tyler, and consistent systems where everyone is on one CRM system, for example, from multiple systems in the past, then ensuring that service delivery teams all work in a unified manner and that they're all kind of that it's a more coordinated effort.
The metrics really, I think, around support really kind of mean time to resolution and number of cases are things that we're looking closely at. And we're seeing really good progress already in terms of reducing the number of open cases that we have in the support organization. On services, it's kind of attach rate and our services margin. So we've talked about margin improvement targets through 2030. And part of that will come from professional services where we really don't make money or don't make much money. And we want to improve that. And part of that, there's also an AI aspect there where we're using AI or starting to use AI to automate some of the routine processes around professional services like data conversions. And then on client success, it's really looking at net revenue retention and net promoter scores.
Perfect. And Brian, last question for you just to wrap this all up. So looking towards your 2030 goals, maybe you could just help investors think through how you're thinking about balancing organic investment with M&A. I know there was a call mentioned on the last earnings call about taking a more proactive approach. So maybe you could just give a little bit of a color about what you meant by that. And as investors are trying to track your progression to your 2030 goals, what metrics would you highlight that they should be following closely?
Yeah. M&A has always been a part of our story. We've said the bar has been kind of high for the last couple of years because of, one, a lot of internal initiatives that have consumed a lot of management bandwidth, but also our focus on paying down the debt from the NIC acquisition. So both of those things we're further along with. We've paid off all the term debt and now just have to convert that matures next spring. So we've got a lot of cash. We've got a really clean balance sheet. And we've got management bandwidth. So I expect that over the next couple of years, our focus with the same criteria, strong strategic fit, strong cultural fit, reasonable valuations, which can sometimes be the harder part of the equation, that you'll probably see us a little bit more active in terms of M&A.
Actually, we announced one deal yesterday, relatively small deal, but a new deal. And so I think as we continue to drive a little bit more capital allocation towards M&A and potentially using a little bit more of our cash flow and reasonable amounts of debt, that you'll see more activity there.
Perfect. Well, we'll leave it there. Thanks, everyone, for attending, and let's give Brian a round of applause.
Thank you.