Apologies, we might be 30 seconds late. We got lost running up and down the stairwell, but I am sure we can all relate. My name is Steven Anderson, Managing Director on Citi's Software Investment Banking Team. Pleased to be here today with Brian Miller, CFO of Tyler Technologies. We are going to have a couple of questions here, fireside chat. If there is time at the end, happy to open up to Q&A from the audience as well. Brian, as we think about Tyler Technologies, we know you as a major player in the GovTech ecosystem. You have been a leader for decades in the space, and you have been helping governments modernize their business through technology. For folks who are not as familiar with Tyler Technologies, could you just maybe spend a quick intro on who you are, what you do, and the business strengths?
Yeah. So, sure, as you said, we are the leading provider of software solutions, mission critical software solutions for the public sector. Primarily focused, historically, on the local government markets, so cities, county, school districts. They make up 70%-75% of our business. Have gotten a bigger position with state governments, mostly through the acquisition of NIC five years ago, and that makes up about 20%-25% of our business. Pretty limited exposure to the federal government, less than 5%. We have the broadest product portfolio of anyone serving public sector software, and we have by far the largest customer base of anyone serving the market. Having said that, it is still a very fragmented market, and we still have an awful lot of runway domestically as well as internationally.
In addition to the software solutions we provide, we have a pretty significant transactions business, makes up about a third of our revenues. So providing payment processing as well as software that is provided under transaction-funded arrangements.
Very good. Thank you for that. One thing I would love to drill into, a lot of the companies who are here at this conference today serve into the enterprise horizontal markets. Those can be very different than focusing explicitly on government customers. What is unique about your end market? What is differentiated about serving your customers?
Yeah. The public sector, there's a lot of things that are very different about it than the private sector. At the core, one of the big things is our customers don't compete with each other. They talk to each other a lot. They take a lot of comfort in solutions that work at other places like them. References and reputation are a really big thing, and that's something that Tyler has an incredible amount of strength at. Not surprisingly, governments move slowly, so we have long sales cycles, long replacement cycles. Very often they keep systems until they die. Historically, it's changing a little bit, but historically, they don't really think about software from an ROI perspective. Again, they don't compete with each other. They're not profit motivated, and they don't like change, so they tend to use systems as long as they can.
Historically, it's been hard to create demand. But that replacement creates a very steady non-discretionary demand because when one of these systems does get to end of life, they're all mission critical applications, public safety, courts, property taxes, utility bills, those kinds of things. Not replacing it is not an option. So, it creates an opportunity for very steady compounding growth as Tyler's demonstrated over a very long time. I think it becomes if you're not in this market, there are a lot of those characteristics you might view as negative. If you're in the market, there's a lot of those things that are really positive. But at the end, Tyler's strength is really our deep domain expertise, the breadth of our products, and our very long history of focusing just on government.
I want to drill in just a little bit on one of the comments you made about they might use assets until end of life. They might sweat them all the way through. Maybe correctly or incorrectly, probably a lot of people have a view that public sector may not necessarily always be at the forefront of technology innovation. But what have you seen, obviously, the cloud transition is something we'll talk about a little bit more now with AI. Are governments becoming more front-footed? Are they becoming more technology-oriented? How have these cycles evolved as you've seen them play?
Yeah, they really are, and I think some of it is really related to an increased focus on government efficiency. DOGE was obviously a big topic a year and a half ago and in the news every day. But even before DOGE, there was starting to be more of a focus on government efficiency. A lot of state governments, even local governments, had efficiency initiatives. Governments, they never have enough resources, enough budget. They always have budget pressures. They always are trying to do more with less. But really the way governments get more efficient is a more effective use of technology. Not only with an old mainframe-based system is it just old technology that's hard to run, but it doesn't have citizen self-service or online access, and it's not a good platform to build AI on top of. Paper-based in a lot of cases and not digital.
Replacing those systems does have a really strong ROI. Governments are, I think as they look at how they become more efficient, at least at the state and local level, it is not that they can fire thousands of people, it is that they do not have enough people to get the basic work done to start with. Technology is the way they are going to address that. We are starting to see more customers looking at ROI cases, seeing that around AI applications, and talk about replacing systems that are not necessarily at end of life, that they could get another 5 or 10 years out of, but that they are starting to understand that there are real benefits from making that effort and investment.
Thank you. You mentioned DOGE. Lots of headline around DOGE, certainly more at the federal level. I know you are more state and local, but can you talk about any spillover impact? Did you notice it more than headline, or was it a real thing in your customer base?
Well, it did not really have much of an impact, but there was an impact on sales cycles in the first part of 2025.
Because there was a lot of conversation, a lot of noise, and again, we do not have much federal exposure, but at the local level, whether it was DOGE, tariffs, just a lot of noise around the new administration, it was enough that local governments and state governments had to sort of step back and say, "Hey, is this going to affect me? Am I going to lose revenues? Am I going to have a bunch of work that I did not used to do that I am going to have to do?" There was a slowdown in sales cycles in the first part of last year that impacted our bookings. It ultimately did not impact demand.
Ultimately, state and local government said, "No, this doesn't really change anything." There was a bit of a pause or a slowdown, and by the end of the year, it was pretty much back to normal. We've talked about, in recent quarters, a very active market, really strong RFP activity, sales demo activity. So really no ultimate impact other than what I talked about earlier in terms of a positive focus on efficiency that'll drive more technology purchase.
Perfect. Then you talked a little bit about your market continuing to be, despite your leadership position being very fragmented. Maybe can we just spend a minute on really just how has the competitive landscape evolved? Who do you see in RFP? Is there a new wave of more, call it AI native folks, showing up on your radar as well? What does that look like?
Yeah. There haven't really been a lot of fundamental changes around the competitive landscape. The market historically was served by a lot of niche players, point solutions, often companies that were focused on one product area and often even narrowly geographically focused. So a company that did court systems in California or property tax systems in New York and New Jersey. And those really were kind of the providers that served the market for a long time and still have a big market share. A lot of those companies have become sort of legacy companies, so they haven't kept up with new technology or invested, but they're still collecting maintenance or from large installed bases that over time will migrate off. We have different competition in each of our subverticals or our functional areas.
The companies we compete with in the court software space are completely different than the companies we compete with for property tech software, and those are different than the ERP competitors, and those are different than the public safety competitors. So there may be a few companies that have a couple of products, but no one has the breadth. And that provides us with the big advantage because in some cases, like public safety and courts, they're very tightly integrated because they're adjacent markets. But in other cases where we have foundational elements that are common across all of our products, like common security and ID or payment platforms or workflow engines, that creates more efficiencies around having more and more products from Tyler. In terms of new entrants, as cloud software became a thing, there were some cloud-native new entrants. Some of those became good acquisition for targets.
The difference really is that there's fundamental things that make it hard for new entrants. They don't have references. They don't have deep domain expertise. Their products are typically lighter in terms of functionality. It takes a really long time to build up all of that. Not everybody makes it all the way to the end. We've seen some good We've acquired a number of good cloud-native point solutions that have filled in gaps in our portfolio. We haven't really seen big, significant competition. Kind of the same thing around AI. We know that lots of AI-native companies are talking to public sector customers, but they're not really quite ready for anything. Our customers are really looking for Tyler to bring them AI that's integrated with their products rather than bolted on by someone they don't really trust.
Very good. Let's maybe pivot a little bit more just to the ongoing strategy and financial pivot. One of the most common things we hear about every quarter is the cloud transition. It's been going on very steadily, and will continue to ongo the concept of customer flips, moving them from an on-prem to the cloud. Just give us a little color on how is that transition moving for you from your perspective. You've given some targets for your 2030 model, what the business looks like. How do you feel you're on track to that as well?
Yeah. We are on track to achieve our targets, and actually we raised our target. We had an Investor Day in 2023, and at that point we said, with the starting point we were at then, that we expected that of our on-prem base at that time, that 75%-80% would migrate to the cloud by 2030. At our latest Investor Day this past June, we've changed that target to 85%, partially because of the progress we've made to date and also the way we see it playing out over the next few years. If you look at our entire customer base today on a kind of a revenue equivalent basis, if you converted all of our maintenance from on-prem customers to SaaS revenues, we're about 55% of our customer base is in the cloud today, and about 45% is on-prem.
Almost 100% of our new sales are in the cloud and have been for some time. We still have this base of on-prem customers that are migrating. We're well on track to hit that 85%. We've talked about incentives, disincentives, carrots and sticks, and we're working with all those things.
Very good. Then maybe a little bit on the carrots and sticks, but as you think about folks who are still yet to make the jump, is there something that prevents them? Is there something that they have to get comfortable with? What is it that stands in the way of getting to 85 and beyond?
Yeah. Part of it's just inertia, and governments move slowly, and there's always some early adopters. There's others that move along the way, and then there's some that just need a push or some sort of catalyst to get them to move. I'd say at this point, there's virtually none of our customers that are just saying, "I never want to move to the cloud. I don't see any reason why I should be in the cloud, don't understand it." I think they all understand that at some point, they'll be in the cloud, but there are different factors about when that happens. In some cases, it might be hardwired. They might know that in 2028, they're going to have to replace a lot of the servers in the data center, and so that's when they're planning to move.
They don't want to replace it, but they also want to run them off till they get to that point. Sometimes it's people-driven, especially in technical roles, governments really are struggling with competing with the private sector for filling those systems administrators and database administrators and cybersecurity people. They're facing a big wave of retirements over the next few years that's going to make those problems a lot worse. Moving to the cloud helps with that. Cybersecurity as well. Ransomware attacks are a big factor. In terms of other factors, we not only have a lot of products, we have historically supported multiple versions of a lot of our products, and so that's been really expensive from a development standpoint and a support standpoint for Tyler.
A lot of reasons why we've allowed that to happen, but our goal, obviously, is to have one cloud version, cloud-optimized version of each product, and to get all the customers on that as they move to the cloud. But if a customer is not on the current version of the software, they need to upgrade to that version before or when they migrate to the cloud. We've been making a lot of progress with that in terms of sunsetting older versions, getting more and more of our client base on the current version so they're in a position to move to the cloud. We still have some work to do around that, which will also show up in margin expansion. But that's been probably the biggest gating item on our side, and we continue to make progress around that.
I think the biggest development, I guess, if you will, is in this last quarter. A letter went out from our CEO to all of our on-prem customers, letting them know that over the next few months, that we'll be sitting down with every customer and starting to map out a more formal plan.
Yeah
for their migration to the cloud. The timeline, understanding what are the factors on their side that govern that decision, what some of the incentives and disincentives on the Tyler side. We've talked to clients about the new features, including a lot of AI features, will only be available to cloud customers. We also expect that along this journey, that there'll be more significant maintenance price increases for customers that are still on-prem, and ultimately, there'll be an end of life for on-prem products. Those will be part of those conversations. It's a little bit not quite so open-ended and indefinite, but there needs to be a plan around moving to the cloud.
Good. One of the things you mentioned on the revenue front, moving from a maintenance contract to SaaS, there's an uplift. I think you disclosed a 1.7 multiplier. Especially as we think about getting towards the end of a transition, that creates a great growth tailwind in the middle of it. What happens after the fact? What do the cross-sell, upsell opportunities need to drive?
Yeah. We've had above 20% SaaS growth for, I think last quarter was 23 straight quarters. Part of that is our core growth, and part of it is this additional uplift that's coming from the flips of moving from maintenance to SaaS. We've said we expect it won't be perfectly linear, especially because it can be lumpy with respect to large customers. A lot of our on-prem base still is made up of really large customers. As they move, it can make it a little lumpier. But we expect that the volume, the dollar value of flips will continue to increase over the next three or four years, and will peak somewhere out there as we get towards that 85% move, and then it'll start to tail off.
We would expect that incremental revenue growth from flips to be a little bit higher each year for the next 2 or 3 years. Then over time, it will revert back to whatever our core growth rate is, if it is low teen, something like that. But we are seeing, when we talk about this 1.7 uplift, that is really on a like for like basis. We are seeing increased opportunities to upsell more things when a client moves to the cloud. So they may be moving their court system with Tyler to the cloud, but they have a probation system that is an in-house system or a jury system that is from a vendor who does not have a cloud offering. Rather than leaving those things behind, it creates an opportunity to bring more of those together in an integrated solution from Tyler, and we are having those conversations.
I think we are a little more intentional about that around how we approach those opportunities. We are seeing, in some cases, uplifts that are 3 or 4 times the existing maintenance revenues from additional products and services.
I did not expect to hear the 3 and 4x.
I would not say that is the average.
But-
But there are opportunities.
Which is great.
Yeah.
Those are out there as well.
Yeah.
Then one other big product that's become a notable part of your revenue mix. A couple of years ago, you bought a company called NIC to bring payments online. What is the remaining opportunity for payment as you think about your customer base? Are there more areas of payments to capture? Is it just more customers? What does that look like as well?
Yeah. Just maybe a little bit more broadly, when we think about our transaction revenue streams, it is a lot more than just payments.
Payments is a significant part of it. We are probably approaching $100 billion of payment processing volume for governments. We have 28 state enterprise relationships where we are doing all or a significant part of the payment processing for those states. Beyond that, it is not just payment processing, it is providing the integration to back-end systems and the portals and the interfaces to conduct those transactions to renew your license plates or get a business license. They are all funded through this sort of a self-funded, generally convenience fee model, so the states do not have to budget or appropriate funds for that. That makes it really attractive, and so we can provide the payment processing capabilities along with software or applications that facilitate those transactions.
But in terms of just payments, part of the benefit of the NIC acquisition was it gave us this really robust payments platform that we are now able to integrate with a lot of Tyler products that are installed mostly at the local level that facilitate payments. We did not have those capabilities before. So utility billings, traffic tickets, licensing and permitting, property taxes, our systems produce the bills and process those transactions, but we had third-party payment providers that actually did the payment processing. So now we have integrated the payments platform with our software solutions, and that gives us a much more attractive payments offering than a commoditized payment processor because we can automate reconciliations.
The system of record that produces the transaction is fully integrated with the processing system. We have better security, better reporting. So it is something that they are willing to pay premium pricing for.
We have moved away a bit from the commoditized payment processing. We had a large contract where we did all the payment processing for the state of Texas, and we did not have the additional services around that. So it was just payment processing, very low margin, an 8% margin contract. When that contract came up for rebid, we were not aggressive about it, and so that moved off at the end of last year. It is really being replaced by this integrated payment solution that we are now selling. When we sell a new utility billing system, we give them a payment processing proposal, and then we are rolling it back into our installed base. Today, I would say it is about 30% of our current customer base that has a payments opportunity is using Tyler payments.
We expect that to expand by 2% or 3% every year as we move towards 40%, 50% and greater. It is at better than historic payment margins as we continue to move towards that model. Lastly, we are also increasingly selling software under a transaction-funded model, which provides software-like margins, but in payments revenue, transactions revenue.
Understood. Thank you for that. Maybe we can just spend a couple of questions on the topic of AI. It seems to be the hot-
I think we go for 20 minutes.
I know. It is impressive, actually. It seems to be the hot theme of the day. But maybe we talk just a little bit about what is Tyler's AI strategy. Again, going back to your customer base. I think we all see big headlines with federal three-letter agencies and AI and what it can be. What is it mean at the state and local level, especially when you get to maybe areas away from the Silicon Valley?
From where AI is everywhere. What does on-the-ground state and local government view AI as, and how are they going about it?
Yeah. I think we've described it as cautiously curious.
Obviously, they hear a lot about it like everyone else. They're interested in how AI can solve real problems that they have day to day, the basic, boring toil that they do every day, that is a lot of their challenge is not enough people. Not necessarily they don't have budget for people, but they can't attract and retain, and they're facing the retirement wave and all those things. They don't have the people to do the work they need to get done every day. As a result, there are things like multi-month backlog to get a building permit approved or backlog of court cases that aren't in the system yet, and so trials are delayed.
Those are the kinds of things where our initial approach has been to develop AI tools that are embedded in, not bolted on, but embedded in our software products that solve those problems. We've prioritized those and developed those with a lot of input from our clients around what their needs are and what they see value in and what they're willing to pay for. In a lot of cases, what they're willing to pay is related to the kinds of savings and efficiencies that they can get. Things like an application review assistant, an agent that will review a building permit application and make a determination about it, or agents that do document automation, that do the data entry into the court system. So taking complex court documents and extracting the right data and creating the case file.
Those are the kinds of things that we are investing in. I would say as we talked through this year, some of those products have been out for a little while and are generating meaningful revenues and really significant uplifts from the core software revenues. We talked about at Investor Day that there are about 25 agents, agentic solutions that we will be releasing during this year that will be at least into, we call Private Preview, which is basically early pilot adopters. There is a process, especially in government, because most people will not adopt something that there is not a lot of references for.
There are a bunch of other people like them that they can say, "Yeah, they are using it and it is working, and it is providing the kinds of returns." We are in that kind of process through this year of releasing these agents, getting early pilot roll-outs and client references, evidence of the ROI, and validation of the economics that then as we move into next year, we can have broader releases. We talked about the second half of next year before we would really expect to see more meaningful revenues. The interest is there. But again, like most technology shifts in the public sector, the adoption curve is much, much longer
Yeah
than you see in the private sector.
It sounds like you have been pretty quick to market with some of these new products to have that many agents going into private preview in a short amount of time. Have you had to make changes to your overall R&D strategy? Do the same engineering groups that move a business from on-prem to SaaS, they also become your AI engineers? Are there differences you operate?
There are some differences. We have hired some different people. We have retrained and repurposed people. Interestingly, we have not added a lot. Our true R&D spend is going up 10%-12% this year. There are also some geography changes, but the true spend. We are using AI in our development efforts, all of our development-
we are using AI and getting pretty significant efficiency gains, as much as maybe 30% gains in efficiency. Rather than cutting 30% of our staff, we are just producing 30% more output, and a lot of that output is for AI development.
We are kind of using our AI efficiencies to be able to direct towards the development. I think the pace at which our clients are looking for stuff kind of matches up with, we do not have to add hundreds of millions of USD of spend in a short period of time. We can kind of balance that because the pace at which government wants to move. It just works with a really good balance.
Yeah. Helpful. Your AI offerings, you are talking about a couple of different pricing tiers, sort of a basic essentials, more subscription pricing, and also outcome-based. I guess, how do you orient around those three? Are you seeing clients migrate to one over the other, have a preference to one over the other? How are they digesting it?
Yeah. Well, our early, I guess what I would call our more mature AI products, those that have been out for two or three years, things like document automation in the court space, priority-based budgeting, which is a solution that we acquired a couple of years ago that uses AI at its core to dig deep into the spending of city or a county or state, and really get into the details of where they are spending money and help them align their spending with priorities. They have new things they want to spend money on, but they need to find some money somewhere else. Really high value, solving a problem. But those two products that are our more mature products are really very much outcome-based pricing.
Document automation, Fort Worth, Texas, Tarrant County, can save $2 million a year that they are comfortable with in labor costs, and they are paying us $1 million a year for the product, which happens to be about the same amount that they are paying us for the core product, for the core software system. They are actually taking that out of the labor budget, too. They are not taking it out of their IT budget. They have budget, they just do not have people to spend it on.
So, that kind of outcome-based pricing is primarily what we have today. I would say more of the stuff we are about to release over the next year or so will be the SaaS uplift. It might be a 20% uplift for SaaS for the automation of the application reviews, or at the core it provides an ROI, but it is more of a standard SaaS uplift.
Somewhere down the road, there will be more things that are just table stakes or embedded in products that will not necessarily be priced separately but should increase the value of the product overall. All that will evolve over the next couple of years. But today, it is mostly outcome-based with more SaaS uplift coming.
If you are seeing sort of a direct move from labor budget into tech budget, it just must be a very large TAM uplift opportunity.
Well, we highlighted that at our investor day, that we really view it as not only just a revenue uplift opportunity, but accessing a whole new TAM beyond the IT and the software spend. It really solves a core problem that they have around staffing shortages. We are seeing that in places 20% to north of 100% uplift from their core SaaS revenue.
Awesome. I want to spend a minute on M&A and maybe a little bit of capital allocation as well. I think you have steadily done acquisitions over the history of the company. How do you think about buy versus build and maybe particularly in this environment, there is a whole world of folks who were built pre-AI, who become potential targets for a leader in the space. There will be folks who are going to be more AI forward. Where do you think about M&A dollars potentially being allocated?
Historically, a lot of our M&A has been around, I guess what I would sort of call tuck-in acquisitions. So things that fill in a gap in our product portfolio, maybe an adjacent product to something where we have a flagship product, but there are things on the fringe that we do not have. Some things that go across products like payments or data and analytics. Some of those things have come from acquisitions. I think that will continue to be the focus where we have opportunities. Whether now beyond the sort of basic, does it expand our product offering? Is it something we can sell to existing customers? Is it something we can leverage our same sales force with? Increasingly, we also ask, is there a payments opportunity? So can we also monetize payments? Now we say, is there an AI opportunity?
Either do they bring us AI capabilities that we don't have, or is there an opportunity to expand the growth of that product through integrating AI into their product? It's another factor. I don't think we're out looking for a lot of just pure AI kind of startup companies, but there may be a point at which there are some of those that are interesting. But I think our focus still is on expanding the portfolio through more of these kind of tuck-in, although some of the tuck-ins have gotten bigger.
They have. Well, maybe that is an interesting question to think about larger scale M&A. I think at the time, NIC was more of a transformational type of a deal, or at least a very large tuck-in. How should folks think about your sweet spot on size? Or will you move? When is the right time we might think about another NIC transformational type of?
Yeah. We've done two acquisitions over our life that were each 20% of our size. New World Systems, which is a public safety company in 2015, and then NIC, which was a $2.3 billion acquisition in 2021. I think there's still those opportunities out there. But I'd say in the near term, they're less likely, just because of the overall shift in multiples and valuations, that I think on the seller side of those, many of those are companies that are owned by PE firms that were acquired at multiples well in excess of what current software multiples are, at least in the public sector or in the public market. And I think there's still kind of some struggle around valuations around those.
Yep.
What you do so
Yes.
I think that makes it difficult right now. I don't claim to be an expert on the PE side of the business, but I think it seems like in the near term that those are less likely and the kinds of traditional founder-owned businesses, those kinds of things are a little bit more active right now.
Makes sense. I know we're wrapping up, so maybe just one final one, but maybe you just share again, summarizing it all, what are you most excited about here for Tyler in the next coming, call it 18 months?
Yeah. We just in June laid out our new 2030 targets, and those were generally increased from where we previously had set those. We talked about AI as being an opportunity on top of those organic growth numbers and M&A on top of that. We're generating really strong cash flow. We've got $6 billion of firepower over the next five years from cash flow from operations and our available credit. I think we're really excited to see how all that plays out. We think we've got such a really strong base in this. The amazing client base that we've accumulated over the last three decades that provide us with this great platform, and so we're just excited to see all that play out and kind of dispel the narrative around AI being a threat as opposed to an opportunity.
Sure.
That's what we're excited about.
Super. Well, thank you very much for being here today.
Thank you.
Really enjoyed it.