Okay. Good morning, everyone. Good morning. I'm Hala Elsherbini, and I'm Senior Director of Investor Relations, and it's my pleasure to welcome you to Tyler's 2023 Investor Day. It's really great to see everybody here this morning in person, and I'd like to thank everybody for joining us on the live stream. We've got a full agenda. Let me get this. We've got a full agenda, and Lynn will kick us off in a moment, but I did want to just cover a few housekeeping items. Of course, our safe harbor statement, I'm not going to read the fine print, but as you may know, many of the comments made today are considered forward-looking under federal securities law and as described on our in our filings.
These statements are subject to numerous risks and uncertainties and could cause future results to differ from those expressed today. We're not obligated to publicly update or revise these forward-looking statements. This is our statement regarding the use of non-GAAP measures, and we have provided a reconciliation of GAAP to non-GAAP measures in our appendix. Looking at the agenda and the flow for today, we do have 5 presentations, and we have 3 Q&A sessions. We'll have a lot of time to get to questions. If you'll keep your questions primarily focused on the presentations and the topics just discussed, at the end of the day, we'll have a, you know, a Q&A session that will cover all the topics discussed during the day.
We will be also taking questions from the audience, and so during the live stream, please go ahead and submit your questions, and we'll gather those, and we'll take as many of those as we can during the day. We'll have a couple of breaks, and then we will plan to wrap up at 12:30 P.M., with lunch to follow next door. Lastly, I do want to mention that we'll have our presentations available on the website later this afternoon. With that, please join me in welcoming Lynn Moore, President and CEO.
Thanks, Hala, and good morning, everyone. As Hala mentioned, I'm Lynn Moore. I'm President and CEO of Tyler Technologies, and welcome to Tyler's Investor Day. A few of y'all have asked me out in the hallway, you know, how long has it been since our last Investor Day? It's been over four years, but this is actually the first time we've done something like this before. We've usually done it in conjunction with Connect. You know, when I think about it's been four years, there's a lot that's happened at Tyler in the last four to five years since our last Investor Day. We've had a few new strategic initiatives. We've had a lot of investments, and really, when you look today, we're quite a bit different company than we were five years ago.
Five years ago, we did about $840 million in revenues. Last year, we did $1.85 billion in revenues. We're a little bit more complex today. We've got a little more pieces of the puzzle going on. Really part of the goal for today is really to put all this into perspective. You know, I'm gonna start off by outlining a little bit about who we are and what we've been doing. I'm gonna talk about where we're going and how we're gonna get there. I'll close with talking a little about what we're gonna look like in the future. Throughout the rest of the day, you're gonna get a little more detail on each of these things. Let's start off with who we are, Tyler's unique story.
Tyler is the leader in providing software solutions to the public sector. We're the largest company whose sole focus is the public sector. Last year, we did $1.85 billion in revenues, this year we'll do about $1.95 billion in revenues. Last year, 80% of those revenues were recurring. This year, it'll be about 83%. Our gross client retention rate is about 98%, our free cash flow traditionally outpaces our non-GAAP net income by almost 15%. When I talk about us being a leader and being number one, what makes us number one in this highly fragmented market? Really, it's 5 core strengths that we've been leveraging for over 25 years. Let's take a look at each one of those. Our first strength is delivering the broadest, most integrated portfolio of public sector solutions.
No other company has the full suite of market-leading solutions across all the major functions of the public sector like Tyler has. Think about areas like public administration, ERP, HR, payroll, utility billing, permitting and licensing, appraisal and tax, in courts, criminal, civil case management, criminal case management, probation, supervision, e-filing, public safety, you know, corrections, CAD, 911, records management, things in schools, school ERP, school transportation, our Data & Insights solution, our payments platform, our HHS solutions. The thing about all of these solutions and all these applications is they provide essential functionality to the public sector. These are all non-discretionary items. These are solutions they need to do their job in today's world. The fact that our applications are integrated is one of the things that really differentiates us against our competitors.
Most of our competitors really only offer single-point solutions. Our second strength is our singular focus with deep domain expertise. The public sector is all we do. We've been doing it for over 25 years. We know this market. We understand this market. In fact, about 40% of our employees have worked in the public sector, which gives us key insights to how the public sector works and what the things that they need. What you see here on this slide really are the things that differentiate us from our competitors, whether they're local, regional niche players or they're large, multi-focused national players. You can see that singular focus is there. The other things that are on that list are things that I'm going to be talking about more of our strengths. Our third strength is our large installed base.
Today, we have over 13,000 client locations with over 40,000 applications. You know, I often say to people I talk to, "You know, our client base is our best asset." Why do I say that? The public sector is really a slow-moving market, and so when you think about 13,000 client locations, 40,000 applications, what I tell them is, "You don't just develop that over years, it takes decades to develop that." Our client base provides really significant cross-sell and upsell opportunities. In fact, our installed sales is our fastest-growing channel within Tyler.
If you step back for a minute and think about some of the things I just said, if you take our installed base, along with our broad suite of products, and then you couple that with our 98% gross retention rate, the combination of all those three things really creates an efficient moat against our competitors. Our fourth strength is our strategic innovation focused on long-term results. There's two parts to that, strategic innovation focused on long-term results. I just talked about how the public sector is a slow-moving market, really, to be successful in this market, you have to take a disciplined, patient, long-term approach, and that's what we do at Tyler. When we make investments, we're not really looking for what's it going to do for us next quarter, and sometimes not even next year.
We're making investments to say, "What's it going to do for us 3 years from now, 5 years from now, even 10 years from now?" One thing that's always been the case since I've been at Tyler is we never compromise long-term vision for short-term results. We're always playing the long game, and I think that's a real strength of ours. Our final strength is M&A. M&A has been part of our DNA since the beginning, and I hope M&A is part of our DNA, but M&A has been part of our DNA since the beginning of Tyler. It's how we were put together. When we look at M&A, we generally look for things like voids or gaps in our current product offerings, maybe something that's on our R&D roadmap, and it's a way to get to market quicker.
We also look for opportunities where we can take a product and really accelerate its growth faster than that company could, or certainly faster than what we're growing inside of Tyler. A great example of this is an acquisition we did in the fall of 2018, a company called CaseloadPRO . It's now our Enterprise Supervision product. That company, at the time, was doing a little less than $3 million in revenues. We paid about $9 million for it. The founders had built a great product, but they didn't have the resources and ability to grow and leverage it in a fast way. Since that acquisition, we've signed over $83 million in contracts with CaseloadPRO ... Sorry, Enterprise Supervision. We take a very disciplined approach to valuations. It's one of the reasons most of the companies we buy are not from auctions or broker-led processes.
Most of the companies we end up buying are companies that we know. We find ourselves in the field. We're familiar with them, we're familiar with their products, familiar with their culture. A lot of times what happens is you get a founder who wants to accelerate and wants to grow his business, doesn't have the resources. They're really focused on their clients and their employees. That's where we're a really good fit. We've got a good reputation in the market as being a good acquirer. I talked a little bit about our strengths. Let's talk a little bit about our track record and what we've been doing over the past five years. Tyler, as a software company, was put together in February of 1998.
I joined Tyler in September of 1998. When I think about these last 25 years and really think about the next 7 years, the rest of the decade, and even farther beyond, I really look at Tyler as 3 distinct phases. Let's talk a little about each one of those. The first phase was really the first 20 years of Tyler, and at that time, we were really focused on building our leadership position in core verticals, primarily at the local government level. We acquired 38 companies, including our cornerstone applications, Enterprise Justice, Enterprise ERP, Enterprise A&T, Enterprise Public Safety, ERP Pro. During this time, we were really hyper-focused on becoming a leader in each of those core verticals, and specifically, we were focused on capturing clients.
I talked earlier about how we really understand this market, and what we've always known is that the long-term value of clients in this particular market is very compelling. That actually led to our philosophy of going to market, which was for 20 years, our approach was what we call cloud agnostic. We had been offering solutions both on-prem and in a hosted version for over 20 years, and it was important to us to not necessarily focus on one or the other, because there were some competitors who only did one and some competitors who only did the other, and if you're only doing one, you were missing out on part of the market.
Our focus for 20 years was, "Let's get as many customers as we can." At the end of that 20-year period, as I mentioned earlier, our revenues were about $840 million, and about 64% of those recurring. The next phase is really what I've talked about the last 5 years, and. Did I skip one? I skipped one, didn't I? How do I go back? There we go. Sorry about that. Over the last 5 years, what have we been doing? Well, the first thing we've been doing is we continue to do the things that we did for the first 20 years that made us very successful. We call the blocking and tackling, expanding our leadership position in those core verticals at the local level.
That also included some elevated R&D that we started in 2017, 2018, really to help boost that leadership position. At the same time, over the last five years, we've had some new strategic initiatives and even more strategic investments. I'd say the two biggest ones of those initiatives have been, number one, changing our approach to the market from cloud agnostic to cloud first, and all that that entailed in becoming a cloud, a cloud company. The second was a series of investments where we really expanded our TAM into the state and federal, and really with a focus on payments. Tyler had been doing payments for many, many years, but it wasn't something that we really focused on.
We saw the unique opportunity that we had with payments, given our installed base, given our applications, and you'll hear a little bit more about that in a little bit. Why did we do that? Why did we make those shifts, those strategic shifts, and those additional investments? It was really to set the stage for a new period of sustained growth and free cash flow generation. On the cloud side, 2023 is a revenue inflection point in our cloud journey. It's the first time when our SaaS business is going to outpace our license and maintenance revenues. Over the last few years, we've been really diligent integrating NIC. We've created a unified payments team with a go-to-market strategy. We've also created the foundations for enhanced cross-sell opportunities through their state enterprise contracts.
Again, you're going to hear a little bit more about these throughout the morning. We talk about setting the stage for future growth. What's our strategy? First thing I think we need to always reset, what's our goal? What are we always trying to do? Our goals are simple: grow recurring revenues, expand margins, generate more and more free cash flow. Again, to do that, we're going to continue to do the things that we've done for the last 25 years. In addition, I think there are four areas where it really can drive elevated growth, elevated free cash flow as we look out to 2030, in some cases, actually beyond 2030.
These are the areas that we're going to do deeper dives in for the rest of the morning. I'd like to touch on each one of them briefly now. Our first growth pillar, probably not a surprise to many of you, is leverage that installed base. I mentioned earlier, it's our greatest asset, provides fertile ground for cross-sells and upsells. Right now, each client location averages about three applications, three products, and we think the opportunity is multiples of that. We're going to continue to make strategic acquisitions to get more products into that base, and one of the things I've been focusing on with the management team this year is an enhanced and renewed focus on client satisfaction.
If this is one of our major growth pillars, we got to have happy clients, 'cause if we don't have happy clients, they're not going to buy more products, they're not going to flip to the cloud, they're not going to buy our payment solutions. Again, leveraging our installed base is one of our first growth pillars. Our second growth pillar is to continue expanding our TAM into the state and federal markets. The recent acquisitions of Socrata, which is our Data & Insights platform, MicroPact, our low-code platform, and NIC, which is now our digital solutions division, and their state enterprise contracts. They actually fit together in a very unique way that can create a compelling offering for the state and federal markets. Bruce Graham is going to go into a little more detail of those as soon as I'm done on this stage.
Our third growth pillar, completing our transition to a cloud-first company and to a next-generation SaaS company. This is going to fuel both top and bottom-line growth. It involves things like optimizing our products for the cloud, consolidating product versions, closing our private data centers, migrating or flipping our on-premise clients to AWS. Jeff Puckett's going to go into detail of that a little bit later this morning as well. Finally, our fourth growth pillar, enhancing citizen engagement and growing our transaction business. How citizens interact with government has always been a key part of our Connected Communities vision, and as it relates to payments, we believe we have a very differentiated offering that allows us to command superior pricing in our markets. Bret Dixon is going to go into a little more detail about how we're going to accomplish that.
We've talked a little about Tyler's strengths. We've talked about our strategic shifts. We've talked about this period of investment, setting up the stage for next growth. Where are we going? What are we going to look like in 2030? Our core goals, grow recurring revenue, expand margins, expand free cash flow. As we look to 2030, we expect our recurring revenues will grow at a 10%-12% organic growth rate, and at the end of 2030, we'll be at $3.6 billion-$3.8 billion. This is on an organic basis. This is not taking into account any acquisitions between now and the end of the decade. We also expect to expand our blended operating margins to 30% or more by 2030.
I do not expect that margin expansion to necessarily be linear, however. We also expect that free cash flow margins will be in the high twenties, and that by 2030, we will deliver about $1 billion in free cash flow. What's important is a lot of you all have seen, I've seen notes that some of the analysts have put out, you've seen it in our proxy. This year also, we actually started aligning our long-term compensation of our executives to these targets. In summary, Tyler has a clear strategic direction to deliver long-term ARR and free cash flow growth.
The investments and strategic shift that we've made over the past five years have really set the stage for us to deliver on these 2030 goals. Now it's up to us to go out and execute, something we've got a pretty good track record of. We've got a great leadership team. They're aligned and focused on these objectives. You know, I talked earlier about me being here for 25 years, and it's funny because it's hard for me to believe sometimes I've been with Tyler for 25 years, and at times when I talk about it seems like it's just been a blip of an eye, and at times it feels like it's been every bit of 25 years. If there's any time I ever get confused, has it been a blip of an eye or 25, or true 25 years?
All I do is look in the mirror and say, "No, it's pretty much been 25 years." You know, one of the things that I said to the management team, and one of the things I've said to the board is, in my 25 years at Tyler, there's never been a point in time when I've been more excited to be part of Tyler. There's never been a point in time when I'm more excited about the future of Tyler than I am here today. It's because of these investments, it's because of this strategy, it's because of this executive team that's all aligned and pulling in one direction.
I've never seen the company so aligned at the executive level, which falls all the way throughout the organization it is today, and it actually makes it pretty fun to come to work every day, even after 25 years. We're gonna hear a little bit more about each of these things I talked about this morning, in more detail. There'll be plenty of Q&A sessions throughout the day, but right now I'd like to turn it over to Bruce Graham, our Senior Strategy Advisor, to talk about leveraging our installed base and the state and federal opportunity.
Okay, good morning. Great to have you all here. I'd say welcome to the surface of the sun here in Dallas, where it's only 96 today. This is a pleasant day. It's going to be in the hundreds next week, and you guys will go back home and say, "Why does anybody live there? I can't understand it," but we do. This is when all good Texans get out of here, though. We're all ready to leave. My goal to follow Lynn is to talk through executing our vision and really showing how this view that we have, this space that we're in, that we believe there's a tremendous opportunity, and then how over the last five years, we've gone about setting that stage and beginning to make that reality or that vision a reality.
I'm gonna talk through the opportunity, talk through the vision, go through the set of steps that we've taken, try to begin to give you more context on this. I know you guys are left brain. You like to talk about the numbers. I'm gonna try to talk strategy a little bit with you, and I'll try to help you with how that all fits, and then we'll show you some results and give you some numbers that you can begin to kind of take back home. Let's talk about the opportunity. For us, as Lynn said, really, the biggest single opportunity is 40,000 installations of our software, that are out there. This is... You know, we kind of throw this number around, and I would just put to you, there's not a close number two here.
I don't even know who that would be. That is in the ballpark here. When you look at our presence in every branch of local government, realize that 40,000 installations is one vote at a time, one city council, one set of county commissioners. Brick by brick, we've built this. It also is not just the last two decades. I mean, John Marr Sr. started Munis back in the 60s and began to serve local government. Dusty Womble in the 80s started INCODE. I mean, these are all businesses that have been working in this space for a long, long time, and it's taken us that to begin to build this kind of an install base. We looked at that and said: Well, you know, is that it? Is that all there really is?
In reality, when we looked at the install base, we said: "No, there's way more opportunity here still to go." Just looking at the customers we were serving today. We did some internal analysis. When we actually looked, this is not with cloud, this isn't with payments. This is just our internal customers that are already using our software, places we're installed. We have 10 times the recurring revenue we're currently getting. That was several years ago when we looked and said: "How much is available to us within our current customers, not new customers?" These are customers that we're already serving. Yet, for us, we had to begin to think differently about the company.
We had to begin to say: "Well, what else would we do in order to go after this opportunity?" We undertook a multi-step strategy, and I do want to just kind of put context on that. We had a great runway, but we said, "We're really not taking advantage of our position. We're not taking advantage of the presence that we have, and we're gonna have to think differently about this." You know, the stock at the time was around $200. You know, when I joined in 2008, I was the division president for Courts and Justice. Stock was about $11.
We'd had a great run, you know, to get to that point, to get to where we were in 2017, and yet we knew, hey, to be the company we want to be and what we think is possible, to unlock the power of this, we're gonna have to make some moves. We began to do that, and we called that strategy Connected Communities, and it was a way to talk with our clients. It was a way to talk to many of you about exactly how are we thinking differently about this market. What I want to try to do is kind of explain to you, Connected Communities, how that, how we've gone about making that vision a reality over the last several years, and then again, where we're beginning to see early results on that.
There are five steps. In hindsight, now we'd say that these five steps is what's allowed Connected Communities to happen and has positioned the company very differently than where we were in 2017. I'm gonna kind of walk you through each one of these. The first was we just launched the vision, and we actually, if you remember, many of you I know have been with us a long time. This was in 2017. We launched the Connected Communities vision.
we told our investors, we told our clients: "This is going to take about a decade for us because this is a huge shift for the company, and these are investments that we're going to have to make over that time." We began that process, and this was the initial vision, and I'm actually pretty proud of this because we've stayed within these frameworks, during that time, and they've kind of acted as guardrails for us as we've gone on this journey. We said there's going to be a family. We're going to think about a family of products, and I'll explain that more here in a moment. We want our products to have a common foundation because, at that point, they were all built off of different technology stacks.
We wanted to have shared data, be something that all of our customers began to take advantage of. Finally, we were focused on civic engagement and resident engagement. Personalized portals was the idea for us. We said those are all tenants of our Connected Communities vision. This family of products, I want to just take a moment on this and just walk through this just so you get it. I know we're not supposed to talk about how, you know, how a watch is made. You just want what the time is, but I do want to help you get this a little bit. You know, the biggest fundamental problem, and these are, you know, this is a market we know in government, is that government is siloed.
That, you know, we all think every conspiracy theorist think that, "Hey, they know what you're doing." Let me assure you, they don't. You know, the left hand hardly ever knows what the right hand is doing in local government. You know, between here and when you leave at DFW Airport, you're gonna travel through probably four different counties. You may travel through eight to 10 cities. You're gonna go through. Every one of those cities has got multiples of departments and agencies that make them up, and then you're gonna go to a regional airport that's its own little island. Each one of those are little data silos. Each one of those operate independently, and we've made a fine living selling to each one of those independent agencies.
What we had to do was say, "Well, how do we begin to think differently about this problem?" We were the best street fighters selling and going after each one of those individual markets. To begin to unlock the power of our presence, we had to begin to say: How do we think about these in terms of suites? How do we think about these in terms of connected processes? What you see here are some of the major processes within government. Just to give you a sense of why this is important, this is... In the justice system, there's a process called pretrial assessment, and I just want to walk through this so you get the concept. I won't keep doing this. It's so important to our strategy. I think you have to kind of get the idea.
When you look at this, you have an arresting officer. You know, on a Friday night in Dallas, they arrest somebody. They book them in. That's a city PD going to a county jail, where they're going to book them in. When they do that, they've got to confer with the DA, who's a district DA, maybe a state's attorney, maybe local, maybe elected. They're also going to have to work with a judge who may be by the state, might be county, might be district. What you're seeing here with the colors, those are three different systems purchased independently. Overall, those are three vendors that we would compete with for each one of those different markets. What we began to do was say, "We have to have the best product in court, in public safety," which is law enforcement.
We had to have the best product in courts. We had to have the best product in corrections and supervision. Each one of those, what our products are gonna do, is work in a pre-integrated way. Even though these solutions are purchased independently out of the box, they work across the suite. They work across these upstream and downstream processes. To make that super practical for you, what that ultimately means is that we win the demo. When I'm demoing, when our team is demoing the court solution or the jail solution, or pick any one of those, if we already have a presence in there, we've got a nice strategic advantage because out of the box, it does things that we're the only ones that can do because it's already in there. Realize, again, we have 55% of the courts market.
That's who uses our software. In 55% of the markets, we're already there, and as we built these out, and when we go compete for these opportunities, now we can go in and do things that we've never been able to do before. That agency not only solves their individual problem, they're actually starting to work within an enterprise process. That's what we mean when we say a family of products, a set of connected processes. What we group that into is these suites that you see. Underneath each one of those are individual product teams. These products, and we've been investing for the last 6 years, we have teams working on this.
These development dollars we talked about have been focused on these kinds of initiatives in order for our products to win the demo and over time, increase our percentages because it begins to be a network effect. The more products that we have in there, the more we're able to do things out of the box that only we can do, and our products then win the demo, and over time, that's how we build this sustainable advantage that we've talked about. That was the first piece. The second piece was begin migrating all of our clients to the cloud. Jeff is going to speak here in a moment about the operational benefits, and they are legion, in going to the cloud for a company like us.
I want to just talk about the strategic benefits because this, for us, turned out to be a real godsend. I mean, to be able to take local government clients and move them to the cloud makes everything about Connected Communities easier. Think about the challenges that local government has with locally implemented systems. These systems to, you know, so these are on-premise for us, and we know this again very well. These are various vintages, whether or not they-- You know, it's not uncommon, they're locked in some broom closet someplace, aging gracefully there, and multiple versions of our technology deployed. For us to go after a big vision like Connected Communities is pretty tough if everybody's gonna just do that in their own individual on-premise system. The cloud solves a ton of that for us.
Now, the ability to keep them on the latest version, to unlock new features, to do things like data sharing, that I don't have to do a poll from that local system, I just have to get permission to get that put into the cloud because we've already got that. That's why, for us, not only are there a ton of operational benefits that Jeff will tell you about, there's a load of strategic benefits that we get as clients move to the cloud. The third piece was adding Socrata, and they were the leading data and public sector platform. Really the best in their market. Many of you had covered them, I think, in before that.
When we started with them, the journey that we've been on with Socrata was to, you know, first, take them, and second, to really begin to say, "All right, well, what are the insights and the solutions that would be within each domain that are unique to that area?" Like courts, like planning, like economic insights. Begin to build that in each area. The biggest move that we've made here, I spoke about a common foundation, and the biggest move here is that we've made Socrata the data platform for every Tyler product. It's the platform for Connected Communities overall. I know this year's big idea is AI, and we're big fans of AI and excited about it. Last year's big idea was data. Everybody remember that? You know, oh, man, we just gotta unlock the data.
There's $billions in the data. That's what we've been doing here. Let me explain to you kind of how. The big challenge with data is not making data pretty. There's a load of companies that can make data pretty. What's tough is getting the data out of the transaction systems, getting it out of the systems of record. One of the investments that we've made is that all of the Tyler solutions now, all of our systems of record, out of the box, have a data that have Socrata as the data platform. I am a fifth-generation Texan, and when I think about this term, and our Socrata team doesn't like it, I say that each one of these has a data pump in them. You know what a pump jack is? You got to know what a pump jack is, right?
Oil coming out of the ground, right? We have data pumps in every one of these products that is pumping data into the cloud that now, through our tool, through normalizing that data and visualizing it, and doing all the things that Socrata is able to do, makes it actionable for the key people on top of that system, that want to use that system. Now they're working off of real-time transaction data that is from the systems of record at local government. That hasn't happened before. This all happens out of the box, by the way. Again, the heavy lift was the integration. That's eliminated now for Tyler Systems. Given our market size, given our presence, that gives us a real advantage as we compete in this space. Fourth piece was acquiring MicroPact.
This company, there was clearly a presence that they had in State and Federal. We were excited about that. They gave us a move into a TAM that enlarged our TAM in a way that we didn't have before. The piece that we're particularly excited about was the low-code platform that came with them. We knew that as we moved into the state market, I mean, I'm sure we always express this well, COTS in government, commercial off-the-shelf software in government, is a fundamentally disruptive technology. We've been living off that since 2000. Meaning instead of custom code, we come in with a repeatable solution that's able to have higher reliability and be able to deliver the results. In state government, in federal government, there's just fewer customers, so the ability to have a highly reusable solution was tougher.
Low code is better than custom. It's way better than custom. That begins to give us a low-code platform for that market. Gartner said that. They said, "Look, by 2030, 35% of the solutions in state and federal are gonna be replaced by low code." What they loved about this, what we loved about this, is we knew as we moved into state market now, and federal markets, we had the best of both. We're gonna be selling our COTS products to state and federal. Now we've also got a low-code platform that we can begin to use that allows us to build repeatability. We're not a systems integrator in the sense of a classic custom developer, but we really get the platform that we need to compete in that space.
That brings me to NIC, which is our fifth piece, and I would say the final piece. I don't think there's a sixth move here of this. This was what we needed. This is the acquisition that really is such a cornerstone for us of where we wanted to be as a company, and so excited about what they brought. They brought this expertise in state government, they brought an expertise in payments, they brought an expertise in civic engagement. First, just they have 18,000 applications that they have developed. If you're in one of 29 states that I'll show here in a moment, odds are high you're using the software that they've built. They're the experts in civic engagement.
Again, I don't think there's a close number 2 in terms of who's built at this level. By the way, realize as these get modernized, we're using our low-code platform to do that I just spoke to you about. When we do that, we're uncovering opportunities for repeatability, reusability, new solutions that we can sell that are unique in this space. The other thing that was so exciting about them is they have an expertise in trying to simplify government, you know, across multiple levels. This is what these applications have done. They had a product called Gov2Go that we loved and still do. It has several million users using that application.
Kind of proved its mettle during COVID in terms of the volume that it can bring, and allowed us to begin to have a platform that we could use, coupled with other solutions that we've acquired, like MyCivic, that begin to allow us to meet this particular need. Those two things aside, and Bret's gonna talk to you about payments, I'm not gonna go into that at this point. The thing that NIC brought for us that we just did not have is this expertise in state partners, this deep set of expertise and experts and relationships. You know, for most of us, that world of state... Like courts, we had a little bit of relationships there. You know, the rest of Tyler, not much.
It was kind of a necessary evil when we had to deal with state government because the legislature would pass new changes, new laws, we'd have to change all of our systems. We didn't kinda know what they were doing. Well, they were exactly the same. NIC was that way about local government. That looked to them like a really messy environment. This is the perfect marriage in that way because they bring this expertise in state government. These are 30-year relationships in some cases. What they also brought is this culture of innovation, of integration. You know, our people are product people, and that's in the best sense of that word. We know how to go build and deliver excellent products that meet specific needs. What NIC brought was this process of, or this culture of integration.
When you think about as we zoom out on these problems, as we go multiproduct, we needed more and more integration and innovation, and that's what they brought to us with dedicated state teams that had been doing this for their whole career. They'd been doing it with custom and low code. Now they have off-the-shelf solutions. They have our products, coupled with their culture that has been so powerful. When you put all that together, and I know everybody's got a bake-off slide like this, I really want you to absorb this for just a moment. I've been in this space a long time. I've been in computing longer than I'd like to care, and I say this with no hyperbole, there has never existed a company at scale that serving government, that has this breadth of capabilities.
Never been before in the history of computing. Full stop, and I'll debate that with anybody. We've never had a company that had local presence like we have. 40,000 installations. We've got relationships with 29 states. We've got all the pieces in between. We've got this data platform built into the product. This hasn't existed, folks. You're watching it come to life, and now we're here. As Lynn said, the stage is set for that, and that's what's been so fun for us, and I appreciate your patience and your investment as we have built this, because this is now. We believe we can go against anybody. We compete against Deloitte on the high end. They don't have a local presence. They can't do what we do there. We compete against Salesforce. They don't have what we have in terms of partnership and years of expertise.
They don't have the local presence that we have. We compete with small SIs or regional SIs, national SIs. They don't have relationships that we do at the state. They don't have our presence. It just hasn't existed, that's the part that begins to set us up, and that's the results that we're beginning to see. That's the part to kind of move to the next, 'cause these are early days in this. Early innings, as Lynn likes to say. The first thing that it's done is expand our TAM. You know, this is dramatic. It's more than doubled our TAM since 2017. You know, TAM is something analysts get pretty excited about. I'm a sales guy. I can tell you what we get excited about is I get to compete for deals that I didn't get to use to compete for.
All of a sudden, our deals got bigger. Our sales teams, by the way, we've told them, "Dream bigger," and they like that because they're making some money on that. All of a sudden, their commission checks are a lot bigger because they're competing for bigger deals on that. We're doing multiple complex deals that now begin to allow us to put it all together overall. The other thing that happens is our acquisitions. When we take an acquisition that fits within a suite, we move it through this channel, it is like putting it on steroids. And Lynn mentioned CaseloadPRO . Just to frame that out for a moment, I mentioned before, like, we had a really good courts product. We had a pretty good county jail product, you know, solid law enforcement and all that.
What we didn't have was a parole, probation. In most of the country, courts have jurisdiction over parole, probation on that. CaseloadPRO was three former probation officers in Modesto, California, that loved our story, loved and wanted to be a part. As Lynn said, they wanted to be a part of making a bigger difference. These folks had a passion to make a difference in this market and reduce recidivism. That was what they were about. We purchased them, renamed them. The growth on this has been crazy. This is just the ARR, by the way. This isn't total revenue. 80% CAGR since 2018. I could have put five others up here. They wouldn't let me because we just limited the time that I had on this.
This is normal for us when we build out these suites, and it guides our acquisition strategy. We don't have to do this through brokers often. We find the right company. In this case, they were already in Amazon Cloud, so it worked in that way, and this product is going crazy. Just as an example, L.A. Criminal Courts, they were running our court software. They selected CaseloadPRO to be the pro-parole, probation, their supervision solution for all of L.A. Arizona, State of Arizona, same thing. Looked up and made it the statewide solution. That's the power of this kind of approach in acquisitions. This is what we've seen now. Lynn spoke about upsells and cross-sells. This is an attempt to try to show you what we're actually seeing overall. Two things that are going on here.
These are new multi-product sales. Not just sales that are the classic, "Hey, we sold to a specific agency," but this is where, we had multiple agencies buying multiple products at the same time with one contract. Sales back into the base, back into our install base, so our expansion sales. What we're seeing is that's growing 15% CAGR a year. This is not slowing down. As our teams get comfortable figuring out how to do this and deliver this, and as our customers figure out this is our strategy, this has become the norm for us. Just to give you another example here, and this one I love because it's just so real. This is a top 20 county customer, current customer of ours that's in the justice side. Our existing ARR, $2.25 million.
We do the courts there, we do the county jail, do jury. That's our ARR. Pretty solid for one court, for one county in the U.S. When you look at what we have from products we've developed, still available to us, it's another almost $5 million in ARR available for upsell. When you look at what we've acquired, it's another $10 million. Within that one client that we're serving well and helping them do some very difficult work to implement our software, we can grow that another, what, five times? It's six, seven times on that. Pretty incredible that we're able to do within that one. The next thing for us that we wanted to begin to truly say, "How do we put all this together?" was working with NIC and these 29 state master contracts.
These are broad contracts that are focused on digital solutions for government. Again, you had, in each one of these, we have a state capital team. It was an NIC team. They average in size between 10 and 30 in terms of the size of those teams. Deep expertise in these markets, and yet we weren't getting all the traction here that we wanted. We began a process of working team by team, state by state, where we would work with the state GM, we'd identify the key priorities of the governor. We would look at the install base that Tyler had again. Think about that. We're unlocking this because it's different. We're unlocking the install base for each state that we work with, prioritize those, and then begin to identify and develop some of these opportunities.
The best example I could give you, I can give you a load here, the one, again, that we're a little limited on is a deal that we've already announced with the Kansas Department of Revenue. It's a great example of what we've seen. Tyler, before NIC, had 105 independent county assessors. These are the people that tell you, "Here's your new property tax bill." You guys love them. They always sign it. They say, "Here's where to send the check." Not usually the most popular people on the block, right? County assessors, they all happen to be running our assessment, Tyler Assessment and Tax Pro product. They had a problem, though, where if you're an independent county assessor, those systems didn't share data.
Those independent county assessors would say, "Okay, I've only got one Amazon warehouse in my county," and somebody would protest it. They wouldn't have a way to justify their valuation, which is kind of fundamental in that market. They may have one McDonald's. What we said, we approached the Kansas Department of Revenue, said, "What if, since all those systems already have these data pumps in them, what if we pulled all that into a Socrata cloud? It would allow each of them to share data to where now they could do a proper valuation, they could justify and have a defendable valuation. Oh, by the way, for you, KDOR, you can now begin to do forecasting. You can begin to do analytics real time that you've never been able to do before." They love that idea.
$650,000 ARR, a huge deal for our Socrata business. By the way, this is a small, relatively small state. Realize that, you know, guess what? This is highly rep, repeatable. You know, There's a lot of these places. We have a 52% share in property and tax across the U.S. We'll leverage our presence and do these kinds of deals bigger and better than we've ever done before. I'm not kidding when I had about six examples. I said, "You don't have that much time," all I can share with you is this. We have identified in this process 221 of these multiyear opportunities. We have $90 million in qualified ARR that's currently in our pipeline.
You will see us announce and deliver some of the biggest deals that we've ever done, and they're going to be deals like KDOR, others, where we're able to now put all these layers together, the state partners, Socrata, MicroPact, the solutions that were brought there, and then what we have with the NIC relationships and the power, leveraging the power of our base. Okay, to wrap it up. Our installed base, as we said, created this unprecedented opportunity. We wanted to take advantage of that. We've made a series of moves since 2017. You've seen those moves. We envision largely that those are done now and that we have completed that. The stage is set, as Lynn said.
As I said, I put up that one bake-off chart, there isn't another company that's positioned like we are to go deliver on this, and that's why we are so excited. As Lynn said, you know, we're just getting started on this. I've been here since 2008. These are the things, working on these problems, it's frustrating for all of us in our form of government to see how difficult it is for them to do the basic things, and we're now positioned to actually help make that happen. When we do that, guess what? We make a lot of money along the way on there, we're solving the problems that matter, we're doing really some good for our shareholders. With that, I'm going to turn it over now to Jeff Puckett.
I would tell you that Jeff is a long-term friend. He's been in the company longer than Lynn because he actually was with one of the companies that was acquired. He is now our COO, and the beautiful thing about Jeff is that he's done every job. He's been head of development, he's been head of sales, he's ran one of our divisions. When he comes in as the COO and begins to encourage, and not just encourage, but force people to adhere, they know that, guess what? He's got the chops. He understands the trade-offs that have to be made. I think you're in for a treat. Here's Jeff. Thank you.
Thank you, Bruce. Bruce is right. I've been with Tyler for 31 years, and for the last 15 or so of those years, one of my aspirations has been not to follow Bruce on stage at any kind of speaking event, but that always seems to happen. I'm often known as that guy who talked after Bruce Graham. You know, Lynn mentioned that Tyler is not the same company that it was several years ago, and really, to understand Tyler today, you have to understand the software side of our business and in particular, the cloud transformation that we're undergoing. You also have to understand the transaction side of our business. The rest of this investor meeting, the agenda is structured such that I'm going to spend some time talking about cloud.
We're going to stop. We're going to do a Q&A. My friend Bret Dixon is going to come up and talk about the transaction side of our business. We're going to stop and do a Q&A. Brian Miller is going to get up and put all of that together for you so you can see how all of those combine and how our financials will transform over the next few years. Let's get started with the cloud transformation. The three things I'm going to talk about here is give you an update on that cloud-first roadmap. I'm going to talk about the things that we're doing that are drivers to margin improvement, and how those things combine to impact this Tyler 2030 vision. I think it's helpful...
I know a lot of you know this story, I think it's helpful to just take a step back and talk about how we got to where we are today. Tyler's first cloud customer was actually in 2000, so we've been doing cloud software for over 20 years. In 2011, we opened our second data center. The first one was in May, the second one we opened is in Dallas. By 2016, about 30% of our new total contract value that we sold was software as a service. That's not that long ago. We were just at 30%. About 2019, we kind of hit a tipping point, and you'll see that in the graph here in just a minute. We crossed that 50% boundary.
That was when we launched this cloud first initiative, and we also signed a strategic collaboration agreement with AWS. In 2020 and 2021, we really started significant investments in accelerating this cloud transition. We'll, I'll talk a little bit more about this in a minute. Those of you who have followed us closely for several years, we talked about the fact that we were making significant cloud investments during this time frame. We started deploying our first clients in AWS, in 2022, last year, we settled on a strategy and approach to close our private cloud data centers and to begin accelerating migration of our on-premise customers and our private cloud customers into AWS.
That brings us up to current, to current state, to today. Our priorities now are around evacuating and closing those private cloud data centers, on, launching our cloud-optimized releases, and on, accelerating our on-premise maintenance to SaaS conversions. Let's talk about the way that you can, you can evaluate where we are in that journey. There's lots of different ways we can talk about this. I'd like you to keep in mind, as I go through this, that we have dozens of major products that are widely deployed and hundreds of SKUs, right? This is a very complex story, but my job and Bret's job, when he gets up and talks about transactions, is to try to simplify that for you. I want you to think about this in 3 different dimensions.
The first dimension is new clients. Our goal here is to get 100% of new client contracts as software-as-a-service contracts that are deployed in the public cloud. That's our goal. The second dimension is addressing all of those customers that for the last 20 years we have put into our private cloud. Our goal there is to evacuate all of those customers from our private cloud, move them into AWS, and basically get out of the data center business. The third goal is to take that large inventory of local installations, on-premises installations that we have been doing for, you know, 25 years. Take all of those customers, flip them into away from a maintenance agreement into a software-as-a-service agreement, and move their implementations into the cloud.
I want to talk about each one of these different lanes independently. In the first lane, the first driver, has to do with new customers. This chart, I think, tells a really interesting story. Kind of echoes what I said a moment ago, that, late 2018, early 2019 was when we kind of crossed this 50% boundary. That was when that cloud-first initiative, really kicked into gear, and we have now grown that to about 87% of our total contract value is coming in as Software as a Service. We're, in this first dimension, we're getting pretty close to the finish line on that first dimension. Just an example of what happens when we sell a customer as a Software as a Service arrangement versus a license arrangement.
In this example you're looking at here, you'll see a customer that paid us $1 million up front in a license fee, a one-time license fee. They pay us 21%, so $200 thousand or so a year in annual maintenance. That maintenance, usually we see just start recognizing that maintenance the first year. It's a significant revenue bump that first year when you sign that contract. If instead we sell them a software as a service arrangement, we are effectively doubling their recurring revenue stream, but at the cost of not having that benefit of that one-time bump. That creates both a headwind short term and a tailwind, and that. You've been seeing that flow through our financial statements over the past few years as we've been accelerating this. The second dimension.
We have these 2 private cloud data centers. When we made this cloud first decision, those 2 data centers were pretty close to being full. We were about at a point where we're going to have to add a third. By signing this agreement with AWS, by changing our strategy, by starting to encourage customers in this direction, what we're able to do is to avoid adding that third data center and start to draw down the presence and the capacity that's in our existing private cloud data centers. We're on track right now. By the end of this year, we'll be at about 60% up towards our goal of having reduced our presence in those private cloud data centers to be able to shut those both down over the next 2 years.
In the third dimension, this is the dimension that is we're going to be living with for the next several years. Our goal is to migrate or flip our on-premises installations, about 75%-85% of them by the end of the decade. The two questions everyone always asks about this slide is: Why can't you go faster? Why only 75%-85%? Let's just take a minute and talk about the why can't you go faster question. You know, one of the things Lynn said that I want to pick up on is that we always take the long view here. These are customers that we have, you know, multi-year, in some cases, multi-decade relationships with.
Our promise to those customers is that when we go through this transition, we're not going to leave anybody behind, right? Moving them before they're ready to move, before there's a clear, safe path for them to move, is not in their interest, we don't think it's in our interest, even if there's some short-term financial tailwind by doing that. We're trying to calibrate the pace of this to have the most positive outcomes for our customers. Why only 75%-85%? Well, a couple of things are happening. One is we're not at 100% new contract value as software as a service. We're still signing some license agreements. I mentioned at the beginning, there's a lot of diversity of products here. We've got many SKUs. Some of them are at 100%, some of them are at 30%.
We're still signing contracts, so we're still adding to that maintenance stream. By the time we get to the end of the decade, there will still be some products that have not gotten to that to that state yet. We can migrate all their customers. This will have a big impact on our financials, and we'll talk about that in a moment. We're at about 15% of that goal at this point in time. Again, what happens when we do a cloud flip? This slide's a little different than the one I showed you a minute ago, so I want to make sure I speak to this.
The last slide that I showed you showed that when we sign a new contract with a customer, that we are effectively doubling their maintenance if we sign it as SaaS, right? They pay about 2x for software as a service, as they would for a maintenance fee in terms of recurring revenue. When we flip a customer from maintenance to SaaS, that number is a little different. It can be as low as 1.5 and as high as 2.2. The average comes out to about 1.7. Why isn't it 2.0? A couple of reasons. One is, if they've recently signed a license fee, then we're going to give them some credits for that license fee they just paid to get them to move to SaaS.
If they've been a long-time customer and they've had multiple price increases, rate increases over time, they may be actually closer to our SaaS price than a customer who's relatively new. We basically tailor a migration plan and a pricing strategy for each customer, taking into account their particular situation, and that results in that 1.7 factor for flips. Again, taking a step back, if you look at all 3 of these dimensions, we're getting pretty close to the finish line in the first dimension. We're on track to finish the second dimension within the next 2 years. The story that we're going to be talking about over the next 7 years is the migration of those on-premises customers. Let's talk about how these different initiatives impact margins. There's really 3 areas that I'm going to talk about.
The first one is this private cloud evacuation. The second one is the optimization of Tyler Solutions, those investments that I talked about that we began in 2019 and 2020. The third one is version consolidation. I'm saving the most impactful one for last. This version consolidation thing is a big deal, but hold that thought. I'll get to that in a minute. Let's start with the one that's easiest for everyone to understand, and that's the private cloud evacuation. I think it's, it's understandable to say that operating data centers is not Tyler's core business. Our core business is building software. We've gotten really good at operating data centers, but we're not as good as AWS or Microsoft or any of those other providers where that's their focus.
We can't match the ongoing investments that AWS has in security and microservices and other infrastructure. We also have an ongoing need to make capital investments just to maintain our existing capacity. I think, when we shut down these 2 data centers, we're avoiding about a little north of $20 million in capital expenditures that we were just about to have to start making just to keep that current capacity intact. The second driver that's going to impact margins is the optimization of our solutions, and everyone always thinks about this as kind of a binary. You start it, and then you finish it, when are you going to be done? Well, it's a little more complex than that. When we started these investments, there were really three different sets of goals.
The very first goal across all of our major products was to make sure that taking all of those products that had been running very successfully in our private cloud for 20 years, that when we moved them into the public cloud, that they operated at least as, if not more, cost effectively as they did before, right? That was the first goal. We've already achieved that. What we're into now are the second two goals, which are about optimizing, taking advantage of microservices, doing additional automations to accelerate onboarding and migrations, and ultimately getting into things like multi-tenancy. What you'll see over the next seven years is us introducing the last two dimensions, but our first goal we have already achieved. The third margin driver is version consolidation.
Again, it's important to understand that when you have a large on-prem set of installations, the diversity of environments, the diversity of software versions, all of that equates to additional cost, right? A typical on-premises customer lags behind the current production version of the software by anywhere from 2 to 5 years, and there's sometimes outliers where they get into the 7, 8, 9-year range. Why does that happen? Well, there's lots of reasons for it, but a lot of it has to do with a customer does an installation, they're happy, everything is stable, and kind of they take the attitude of, "Don't touch anything," right? A new release comes out, when we provide a new release of software, we can break things when we do that, right?
When you have thousands of customers operating in multiple different kinds of environments, and you send out a release, the more customers you have and the more diversity, the likelihood that you're actually going to break something goes up to almost 100%. The more that we can simplify that operating model, the more that it can be consistent, the better it is for our customers, the better job we can do in not breaking things, and the side benefit is it's a lot less expensive for us to do that. This is the biggest payoff for us that we'll start to experience as we move customers to the cloud and consolidate customers onto single versions.
This impacts our support teams, our development teams, it impacts our security teams, it impacts professional services, the level of effort to do implementations. Everything about the software side of our business is impacted by the negative of this version diversity that we have out there. This is a big deal for us. Collectively, over the next 7 years, as we approach 2030, we expect these improvements that are currently underway to contribute 400-500 basis points to Tyler's overall gross margin. Now, we've talked to enough of you to know that what you'd really like us to be able to do is to talk about our software gross margin, our transaction gross margin separately. Our financial statements today make that difficult to do, and that is something we are working on.
Today, I'm characterizing this just in terms of Tyler's overall blended gross margin. Finally, the impact of this transition on Tyler 2030. Again, just a reminder that this shift from a license model to a SaaS model has created both headwinds and tailwinds. You've been seeing that flow through our financial statements, you know, for the past several years. Good news, right now, we are at the inflection point, where the tailwind from the SaaS growth is exceeding the headwind from the declining license fees. That happens this year. It's one of the reasons why we started talking about margin improvements starting to come in 2024. By 2030, our revenues, our revenues will grow, our software revenues, so SaaS plus maintenance, that blended software recurring revenue will grow to be $2 billion.
In the early years, 22-25, the SaaS CAGR will be about 20%, declining to the high teens in the bottom half of the decade. The maintenance stream is going to decline by 1%-2%, and that will start to accelerate to the low double digits to low teens in the bottom half of the decade. Again, why is that not going to zero? Again, we're still adding customers that are still going on maintenance. Those customers that are on maintenance are getting price increases. There are some products that we've got, some legacy products, that will never, ever go to the cloud. They'll stay as on-prem software until they're retired. That's what the model looks like. Again, later on, when Brian talks, he's going to put this together for you in a bigger picture of Tyler.
You'll see another version of this slide later in Brian's presentation. In summary, we are accelerating this transition and will continue to accelerate it. There's 3 dimensions to the transition. All of them are progressing well. We're happy with progress in all 3 dimensions. We expect these improvements to contribute 400-500 basis points of gross margin improvement by 2030. The revenue mix will shift from about 27% software as a service this year to 48% software as a service by 2030. When you see Brian's comprehensive model, you're gonna see why the additional leverage we get from that transition really creates a big tailwind for us. That's what I've got for you for the story for software as a service and for the cloud transition.
We're gonna take a break now for about 10 minutes. We've given you lots of content. Collect your thoughts, organize your questions. We're gonna come back up here after the break, and we're gonna do a Q&A. After that, Bret Dixon is gonna come up and talk about the transaction business, and we'll do the same thing again. Thank you.
Hey, everybody! We're going to get everybody to come back into the room and settle in for a minute so we can start our Q&A session. All right, make sure everybody's here. Everybody's coming back in. Great. We'll go to our first Q&A session, and I would like to ask Lynn back up to the stage, and I'd also like to introduce Brian Miller, CFO, to come join, as well as Jeff and Bruce. Also joining us for this Q&A is Russell Gainford, our Senior Vice President, Cloud Strategy and Operations. All right. This session, we're going to have 40 minutes, and for the audience here, we do have two mics, one on each side. If you'll just raise your hand and I will ask if you also just please state your name and your company. Just real quick, we'll also be taking some questions from the live stream. Anybody on the live stream, please go ahead and submit your questions in the box. Let's go to Saket first over here.
I would ask if you could really speak clearly and loudly in the mic, because there's an echo sometimes up here, and it's hard to hear.
Yeah, sure. Happy to.
Okay.
Hello? There we go.
There we go.
Excellent. Can you hear me okay? Excellent. Hey, folks, Saket Kalia at Barclays. Thanks so much for the presentation. Really helpful content so far. Looking forward to the second half as well. Jeff, maybe I'll focus this question for you. As you think about those three dimensions of the transition, I think number two and three were really interesting, the flipping of maintenance customers and the transitioning of customers from private cloud to into AWS. Clearly, there are some things that you can't control. These are government customers, right? I'm curious what you can control to maybe accelerate that if you were able to. Does that make sense?
Sure. Yeah, the question is, essentially: what can we do to make it go faster, right? What is within our control? If you... Let me talk for just a minute about what kind of work is involved in flipping a customer. It's not necessarily what you might think. The technical task of moving a customer from on-prem into the cloud is actually not that difficult, and the more of that that we can automate, the easier that process becomes. The real problem goes back to this version consolidation problem, right?
If you've got an on-premise customer, and they have allowed themselves, or we, and we have allowed them to get two, three, five, seven years behind the times in terms of the distance from the current production version, before we can move them to the cloud, we have got to get them caught up, right? We've got to get those versions, get them up to the current production version. That's a pretty disruptive experience for a customer to take multiple years of software at one time. There could even be a training impact that has to occur.
What we have to do is go to each customer, kind of assess what their current state is, figure out what work needs to be done to get them moved along, and then execute that in the least disruptive way possible and in a way that's acceptable to them. From our standpoint, in terms of the things that we can do to accelerate this overall process, independent, long before a customer has ever agreed to flip into a cloud arrangement, we have a parallel project going on across multiple divisions who are focusing on getting them caught up to the current production version, right? That's really the long tent pole in that effort. Does that help?
Yeah, very helpful. Thank you.
Okay, we'll go to Alex right here.
Hey, guys. Alex Zukin, Wolfe Research. First, thank you for a very efficient and impactful analyst day presentation. At a high level, you're basically guiding to a higher growth rate over the next, you know, call it eight years, 10%-11% organically than you've guided to before for the total company, which I believe was somewhere in the 8%-10% range. I think what you've said is part of it is going to come from the flips, part of it is going to come from the upsells, and part of it's going to come from the payment attach. Can you stack rank? Like, where do you feel more... You know, in those three buckets, where is more of that going to come from? If we think about the margin opportunities exiting, that you talked a little bit about gross margins and the efficiencies, presumably there's going to be efficiencies, you know, you're selling more product. What's kind of the barrier? Like, what's the aspirational margin target for this? You're going to love Brian's presentation.
One thing I would point out when you talk about the growth rates we talked about, those growth rates we've talked about so far were for the recurring revenues, so maintenance, and subscriptions, so basically the software recurring revenues. You'll see in a little bit different growth rates on transaction revenues. Of course, professional services is not a fast-growing business, and we don't want it to be. I'll wrap this all up with those growth rates, but I will say in terms of margins, the whole, when we talk about our overall margin improvement between now and 2030, the biggest drivers are those things related to the cloud that Jeff talked about. The other, those are the biggest p ayments is a smaller impact, but it's still a positive impact on margins. OpEx is a much smaller impact, but there's some impact from that as well.
Yeah.
We'll get to-
Not to jump ahead into Brian's presentation. We're going to wait, hold that slide. Yeah, you will see gross margin aspirations for those, each of those two pieces of the business based on the way our financials are currently constructed today.
We'll go to Terry over here.
I'll Terry Tillman, Truist Securities. I'll echo the other analysts' commentary on all the great content. Thank you for all of that. At Connect, I mean, cloud, cloud was a big deal, and a lot of different reasons why they're very motivated now. What I'm curious about is, as we get into 2024 and 2025, and the propensity is increasing for them to, the on-prem customers and the other ones in private cloud to move to public cloud, is there a change or an evolution on their actual interest to look at the other products at the time of that? Because I see that three modules, and the 8-10, that is such low-hanging fruit. I know it's easier said than done. Is there a greater interest, "Hey, we'll look at those other tools now," or, no, it's very much heads down, though, and it's, "We just got to get to public cloud first"? Thank you.
I'll start, and then maybe Jeff Puckett and Russell Gainford, you can jump in. Absolutely, we view the opportunity when we flip someone to cloud as a perfect upsell opportunity. We talk about cross-sells, this is really what we believe is a huge fertile ground for upsells as we move into the cloud. Jeff Puckett, Russell Gainford, and Dane Womble.
I would just add to that somebody asked a question during the break along these lines. I used to run a sales team at Tyler before my current job. The guidance that I would give to a sales rep who was asking what they should focus on right now would be, "Hey, focus on getting that flip transaction done. If there's low-hanging fruit that we can capture, great, let's go get it. If not, we'll go back to them next year for that next piece, right? I think that's probably consistent with the way most of the heads of sales look at it, is let's not try to boil the ocean in one transaction. We'll do transactions with these customers every single year. Focus on getting the flip. Our real two priorities right now on our sales teams are these cloud flips and payments. You'll see in Bret's presentation after this one why payments is a priority for us.
Okay.
I think the only thing I would add to that is, when we do go back, because I totally agree, getting the flip is that first priority, right? That's a project in itself. We have been investing heavily in common design frameworks and patterns. Our Tyler Forge recently was open-sourced, and it's a public sector kind of design system. When we go back to the customer, and we show them some of our other solutions, it looks very similar and has the same user experience as the products they have today, which really helps when we want to do that additional cross-selling.
One other comment, it works the other way, too. We have had some instances where customers came to us wanting a new product, but really, to get that new product, they needed to move their old stuff into the cloud.
Yeah.
You know, all of these things do interact, but we look at this customer relationship with a very long horizon.
Real quick here, because there's a couple of questions related to this, more from a financial perspective, but, what would be the average SaaS ARR per customer of the $2 billion target? Is that about $150,000 per customer, and does that include additional product upsells? Is that something?
Well, the $2 billion target for our SaaS revenues in 2030 would include upsells along the way, so that's part of the growth getting there. I actually don't know what we would have for an average customer number. There's a wide range of customers. I mean, we have customers that pay us $10,000 a year, and we have customers that pay us multiple millions of dollars a year. The example Bruce gave with a large county and its justice system is paying us a couple million dollars a year. I'm not sure the average would be too meaningful, but.
Yeah.
There's a wide range.
Okay. Jonathan?
Let me, excuse me. This is Jonathan Ho from William Blair. Let me echo my thanks as well. Just in terms of the NIC acquisition, you've had this business for a little bit of time now, yet the presentation today seems to suggest that we're still in the early innings of seeing some of that synergy materialize. Can you help us understand a little bit better what your expectations are for the time frame and also how you measure the success of the NIC acquisition? Thank you.
Yeah, I'll start, Jonathan. Bruce, you've been working hard with the state opportunities. You got to remember, Jonathan, when we first bought NIC, we talked about sort of our goals, and our first goal was, "Don't break it." You know, everything we do, I talked earlier about our long-term approach to everything, and we do that even with any acquisition we do, particularly one as accomplished and as successful as NIC is, we weren't gonna rush, you know, we weren't gonna rush things. You talk about barriers going forward and where we are or slow, you know, how fast are we? I go back to my comment is the stage is set right now.
You know, getting alignment across Tyler on a unified payments team with a go-to-market strategy is not something that's very easy. You've got different divisions doing different things. You've got what I call P&L territorialism. Who gets credit for this? Who gets credit for that? Because it all impacts their bonus. That's stuff you've got to work for beyond the strategy of how are we gonna go to market going forward? What's the product roadmap going to be? Who's going to control that? How are we gonna do sales? That's stuff, while we're trying to do our day in and day out stuff, takes time to work through. Then on the state enterprise side, Bruce, why don't you talk a little bit more about these SAM meetings that you've been doing?
Well, the SAM, the structured assessment meetings that I kind of laid out the diagram for, I would just say to you, I mean, one, NIC is a very successful business. We paid $2 billion for them, and then we had obviously great sales teams, as Lynn said before. Getting those two organizations to understand how together they could do more and, you know, one, very local government focused. All of a sudden, they have access to state agencies, and then we've worked with Elizabeth and with that whole team, just deal by deal, working through examples.
And for example, South Carolina, their governor, we were in there with student transportation, which is a local product that we had. Well, now South Carolina said: "We're going to make that a statewide solution. We're going to have the whole state go to our student transportation solution." That, well, that's something turns out we have a pretty good presence in other states like that, and now we start to replicate that going forward. We say we're in early days because we're still crafting one by one. Here's what works in your market, and then others see it and begin to replicate it going forward.
We'll triple the number of deals this year that we did last year through that combination, and we would expect to triple that again next year. The deals, the numbers that I shared there, meant to say this in the state, those are all accretive, by the way. Those are not built into plans. That $90 million of ARR, that is not because we already had a plan. Our NIC team had a plan, all of the divisions already had plans, and yet we've identified and starting to develop these deals. Some of them will close this year, some will take next year and the year beyond. These are complex deals that you'll see begin to be cumulative going forward.
Yeah, I think it speaks to what we always talk about. It's, it's a slow-moving market. We think we're at the point where we've done all the work internally. We're starting to see the results. Even when Bruce talks about qualified leads, these are things that we think will close in, like, the next two years. The other thing is, you got to remember, when we acquired them, there was a huge education process that had to go on, and we started off by trying to educate all the state GMs and all of their salespeople about all the Tyler products and all that portfolio. By the way, everybody's got their own... everybody had their own plans that year. Everybody had their own goals to go achieve. You know, it's the sort of diligent approach that we take to most things.
We'll go to Josh, and then, Alex, I know you have a follow-up after.
Hi there, Joshua Reilly from Needham. Thanks for taking my question, and nice presentation today. As you're moving to the public cloud here, how do we think about the mix going to single tenant versus multi-tenant today? Is there a goal as you get to 2030 to get that higher mix of multi-tenant, and will you have a preference to get customers on multi-tenant? Thanks.
I'll start, Russell, you can fill in the details. I think what you're going to see is a little bit of a bell curve. There are going to be, in our portfolio over the next few years, a mix of single-tenant and multi-tenant environments, products. You'll also see a lot of hybrid products where one portion of the application, like the user interface and application tier, is multi-tenant, but the database is still single tenant. All of these products are on a journey that had a different starting point. They have different technical considerations. We're trying not to force a particular template on every single product line, but that's kind of the answer I would give. Russell, can you add to that?
Yeah. I would just add, even when we started this and along with some of the acquisitions along the way, we do have many multi-tenant products inside Tyler's portfolio today. The investments we made in 2019 for many of our flagships, is beginning to release this year, which will include a set of multi-tenancy options for each of those major products. Whether it's our Enterprise ERP product lines, appraisal and tax product lines, our permitting and licensing, all those products that are coming out this year, all those investments we've made along the way, are being released, and they are releasing into a multi-tenant environment.
We do expect and we will move towards over time, going back to version consolidation, we will move customers over time when they're ready, and we're ready, into those environments to operate at scale inside those multi-tenant environments. Not every product will be there on the same timeline as Jeff mentioned, but a big chunk are moving this year, and we'll continue to invest to move the rest.
Alex?
It's in Brian's slide.
Alex Zukin, guys, from Wolfe Research. I guess maybe since we're not going to be talking about Brian's slide, let's talk about the carrots and sticks associated with the cloud migrations. Maybe start with carrots, like, you know, security and maybe, you know, what percentage of customers are you finding? That's a really important driver for a flip. Maybe GenAI, I know the topic du jour, how customers are perceiving that. Maybe, Bruce, you could talk to that. Is that starting to even become a conversation starter for a reason to move? Then maybe Brian or Lynn, you can talk about do you ever plan to end support for certain products, or introduce, you know, discounting strategies more aggressively to incentivize and drive flips and what you're doing there from a sales perspective as well?
There were several questions in your question. Let me just start with kind of generically, the way you framed it as a carrot-and-stick approach. I've been through several product retirements in my career, and I think they always follow a pattern. It's a bell curve pattern, right? At the beginning, you have early adopters, then you start to get into the vast majority of your installed base, who will move if you give them the right incentives, right? That's where we are today. We're in that, if we can give them the right incentives, they'll move. A lot of the early adopters are, I think, are already there. To your point about what drove that, I would say probably over the last few years, as we've been going down this path.
Security is absolutely the number 1 motivator for customers to move into the cloud. We've heard that from our customers over, and over, and over again. I think some of y'all who went to Connect conference and talked to customers heard the same kind of thing. That probably is the biggest driver. COVID also accelerated that push. People figured out, "Hey, having to have personnel to have hands-on physical equipment isn't so fun, when there's some kind of disruption," right? Going forward, as we get to the very end of that bell curve, again, looking backwards on my career, when you are down to a small number of customers that just won't move and, they're not part of a big community of users anymore, yeah, maintaining them on an older version of the software on-premise is gonna start to get more and more expensive, and eventually, the unit economics of that it will make sense to them of, "Okay, I need to move.
I think one of the other big drivers that's high on the list of people choosing to move, and it's not getting better, is just their ability to deal with the infrastructure, and particularly with the people. The same thing we have, the competition for talent. As the workforce ages, particularly in the government space, and as people retire, being able to attract people to fill those jobs, being able to pay market rates, all of those things are big challenges for them. To the extent they can eliminate replacing applications administrator or security person by moving those solutions to the cloud, that solves a problem that a lot of governments face, and it's not getting easier for them.
To supplement what Jeff said, I think we talked about this on the break. We had a client last quarter out in Arizona, and we had, you know, tried the carrot approach. We'd been pushing them to move to the cloud and flip, and for whatever reason, they were not doing so. You know, fast-forward to not too long ago, they had a ransomware attack, and shortly thereafter, they were signing up to flip into the cloud.
I think we're a long way away from getting to that, what you characterized as the stick approach, for the foreseeable future. Again, it goes back to what I said earlier. We want customers to move, but we want them to move because they're ready to move. Part of this on our part is education. Part of it is sitting down with them and, you know, and looking at their infrastructure spend and figuring out when a good time would be. Some customers are ready. They wanna move, but they want to get the full value out of the equipment they've already purchased first. There's lots of dynamics when you're sitting down and talking to a customer about timing.
Yeah. We also have a long history in our DNA. Tyler and I talked about the early years and capturing market share and being a leader in verticals and the long-term value of clients. You know, one of our mantras is always, "Don't put your client into a buying opportunity or making a new buying decision." You know, we want to cooperate with our clients. At some point, you know, down the road, will there be a more of a stick approach? I mean, you can imagine things. You're not gonna get new upgrades. You're not gonna get, you know, same kind of support. I think to Jeff's point, we're not there yet.
Okay, I think, Clarke, you've got a... Then we'll go to Terry for a follow-up.
Clarke Jeffries, Piper Sandler. You know, I think we've spent a good amount of time on the macro view of how the subscription transition gets there, and maybe a follow-up to the previous question about maybe on the micro level. Just as we think about the capacity, you're doing a few hundred flips currently, you know, tens of thousands of on-premise customers. You know, maybe walk through what are the ways you can get leverage in the migrations? Is it new versions being closer to the cloud version, and it can be automated? Is it going to be going to those customers off cycle? Could you just help us think through the micro level, that capacity?
I would say, again, what it really does boil down to for most customers is making sure that if you were to go to every customer, and you were to have a cloud readiness checklist, right? You know, the first, second, and third item on that checklist would be: Are they running the current production version of the software? If all of those are yes, then there really are no there's very little in the way of logistical hurdles to making them migrate. The conversation is different. It's about timing and all that kind of stuff.
In parallel to this flip program, where we're actually going out, we're contracting with customers, we're flipping them, and you're right, we're doing, I think, in 2023, about 500 or so flips is what is expected for the year. That will need to ramp up, that to, you know, north of probably 750 a year. When we look at customers, we're giving you lots of numbers, 40,000 installations, 15,000 customers, 13,000. There's about 5,000 customers of those that are already in our private cloud, so those don't count. We're not gonna have to flip those. They're already paying us SaaS fees.
The balance of them, typically, those customers have multiple products, and we're gonna typically sit down with them and come up with an arrangement to flip all of them at once, not do them 1 at a time. You'll get some multipliers in there in terms of the rate. I really do think that what's going to... As if we hope for acceleration in this effort in the out years, what's gonna do it is our divisions out there working with their installed bases today, getting them caught up to the current production version of the software, so that when we approach them to do a flip, there's not a roadblock.
Yeah, just to be clear, that 500, say, flips that we might do this year would be a much higher number in terms of the applications. Each of those customers might have 3 or 4 applications, it might be 1,500 or 2,000 of the 20-some thousand on-prem applications.
Terry, follow-up?
Terry, Tillman again at Truist. The I was hoping to talk about data pumps.
Thank you. Yeah, they really, the technical really hated that. We were hoping to talk about it, too.
Feels like that's gonna be in a title maybe for somebody. With Socrata, y'all, you all have had that for a while, though.
Mm-hmm.
It does seem like it's more and more resonating, and I think you all gave the example in Kansas. It seems like it's strategically, it's hitting more often now. What, what changed, or what was the inflection point in that? Then going forward, it sounds like it's like a data pump in all the apps, you said. Is it a real direct monetization play, or does it end up creating an opportunity to just sell the other products and go bigger? I'm just trying to understand the best monetization approach. Thanks.
You want to cover it? Get the 2 questions in there. I would say, 1, I think the inflection point was, I think Jeff, at the time, the product line was reporting to Jeff. We made the decision to make Socrata the common data foundation. That was 2019, 2020?
About, yeah.
Right? That was the inflection point, because... Then again, we have to build that into each product when you think about it. We've got to get that rolled out, and each product has to have a, you know, this pre-integration into the cloud. I would say you'll see both. It does enhance every product, because now our traditional Enterprise ERP products, our every product we have has got advanced analytics that allow them to win the demo just for that particular area. At the same time, we will directly monetize this by doing solutions that have never been done before, like that Kansas Department of Revenue. That, nobody knew you could do that. They didn't ask them.
We approached them and said: "Hey, what if?" We're working on problems that are at a scale because of all these dynamics. Things like economic development. We, in New Jersey, do, they signed up for an economic insight. We have data coming from all of our transaction systems now into an economic insights for the New Jersey Economic Development Authority. That model, when you couple that with our property, our tax data, all the other data that we have, becomes a first of its kind of a solution. In certain states, they're very focused on economic development. This begins to give the governor and that, the Department of Revenue and those, a chance to do things they've never done.
Another example, we have, it turns out that we have some states where we have, with our school ERP solution, we have 85% of the school districts in several states run our school ERP solution. Now through NIC, we've connected with the Department of Education, and we said: "Wouldn't you like just to eliminate all of the reporting that comes to you quarterly from these districts? What if we could turn that into an Education Insights solution?" Because they have very long-term relationships, and because we have this presence, and those systems are pre-integrated, we're able to offer that and monetize that for that department. There's real value in that way. For the DOE, they've never had this before.
It eliminates, in our case, some reporting that's kind of onerous, that we didn't enjoy, and yet it makes the state a much wiser. It becomes a smarter agency in that way. I can do this all day long, by the way. I'll quit. I'm just saying, there is a lot available in those areas, and that's why it was so exciting. When all that began to hit, and now we had relationships with key decision makers that could work off this transaction data that existed in our systems, it's opened up a lot of interesting doors. I would say, too, that when we acquired Socrata, their business model was to really treat this as kind of a generic platform. The problem with that is there's lots of generic platforms out there.
Mm-hmm.
Selling someone a generic platform requires them to know what they want, and it requires them to have some internal expertise. That's not always the case in state and local government, and so we took a little bit different approach. In addition to building all these data connectors, the data pumps, that none of our technical people like that term, but in addition to building those, what we also did is for each of our major products, we built really compelling out-of-the-box turnkey data solutions that were applicable to that customer. Whether it's a finance department, or public safety, and like, for example, in when we acquired NIC, they had a couple of contracts, big contracts, big state contracts that were up for renewals.
One of the things that Socrata was able to do is come in and offer them a solution that provided a way to do fraud detection, for example, right? Now they've got a differentiating capability in their portfolio. These are not snowflakes. These are not one-off solutions. These are things that can be repeated from customer to customer to customer. That approach of giving customers an out-of-the-box solution for data, that doesn't require them to have an on board data scientist to make sense of it, that's the value that we can bring to that equation.
You also asked a question about about AI, I know probably that lots of investor days, there's lots of companies that, you know, are kind of tripping all over themselves to get out in front of the AI train. I know it's gonna be no surprise to anyone in the room. I don't think that state and local government is gonna lead the way in the AI transformation. But i t does have a place, and, we can talk a little bit about where we're going with that. Lynn, you wanna?
I mean, for sure. I mean, AI, we've got a team that's looking at AI right now. We've got a task force that's being put together. We do think there's a lot of applicability in our business, both on the OpEx side and operational savings, as well as some potential revenue-generating sides. When you think about just some of our day-to-day things that are more mundane, routine tasks that AI could do, even in perhaps the support world or a lot of implementation tasks, even in the dev world, we do think there's a significant opportunity. We're probably not gonna be on the forefront. There's also other companies out there that are gonna be doing things that we'll be able to leverage over time.
We're looking at it hard, and we're looking at it seriously because the potential is there. You know, our task force is really gonna come back with recommendations, and I think part of the thing is, like a lot of things we have at Tyler, we got a lot of stuff going on, and it's how do we prioritize and look at resources going forward to sort of pinpoint where we think our best uses of AI is today. Russell, you got.
Yeah, I would just say, everything Bruce talked to as well, we all know that generative AI and large language models, they're based on the data that you provide them. All of our strategy with our Data & Insights really takes us a long way there. We're already talking with our task force and customers, Lynn mentioned, like, support use cases. One of the areas that we think long term, though, with generative AI that we're excited about is really what Brian talked about earlier, which is the workforce issues that we see in public sector, and using generative AI to help supplement and the productivity for our customers and the work that they do daily.
It was just a couple of months ago, I think, they published a study saying that, you know, since the pandemic, that if you looked at March of this year, that all private sector jobs that had been lost had been filled, and some had actually gained, but the public sector, in totality, was down 650,000 from February of 2020. That's 450,000 in state and municipal. There's a shortage there. You've probably seen the articles and teaching shortages, and you've seen the information, you know, as the generations head to retirement. We say generative AI, just like in all industries, but specifically with the silos in public sector, helping customers move and be more productive in those areas and really the future for it. As our task force comes back and we continue to work with customers, we're excited to continue to look at it.
Okay, we have a question right there.
Hey, guys, it's Darren Baker from PRIMECAP. Thank you for the presentation so far today. It's been a very useful discussion. You know, I think, I think you did a great job describing how Tyler has changed in very significant ways over the last 5 or 6 years, and the ways, you know, and where you want to go over the next 5 or 6 or more. I would love to just hear a little bit more about how you feel that your customer base, maybe has changed, right?
With respect to their motivations, you know, their desire or their goals around digital transformation or the factors that are influencing their buying decisions, either if they're, you know, coming new to your products, from that very fragmented landscape you described, or if they're already a customer, but, you know, you're hoping to upsell them into many more solutions or to your cloud products or things like that.
I would guess most people in the audience here, you know, we follow a lot of software companies, and have maybe at least a little sense of what the business buyer is looking for, but when you're talking about a state and local government, you know, official or decision maker, you know, how is their viewpoint evolving in a world of digital transformation and big data and all the factors that might affect them differently than it affects sort of the private sector? Thank you.
Well, I'll start. I mean, the move to digital transformation, you know, it was slowly coming. COVID jumpstarted it, some of the things coming out of COVID have really lit a fire. You know, Russell Gainford just mentioned the workforce issues that are going on. They've increasingly got to do more with less. As more and more people retire out of that public sector, you know, one of the things I used to talk about with the management team is, you know, you look at your kids, look at how they use technology, look how they view technology. Those are our clients of the future, we have to be there. They're starting to embrace it in ways, you know, look at security and what we just talked earlier about movement to the cloud.
I would say that our clients are embracing transformative technologies. They need to do more with less. They're embracing data, being able to make more actionable decisions on key data and insights, the things that we offer to automate their systems, automate their processes. I think we're in a time right now where that's only accelerating and is gonna continue for some period of time. Bruce, Jeff, anything to add?
I... So I... Maybe Bruce can pick up on this. You guys saw Bruce's presentation that talked about systems interoperating with each other, and I know, you know, from a person who doesn't live in this world every day, you kinda look at that and say, "Well, of course, that's the way it should work." I've seen Bruce give a different version of that presentation to customers on multiple occasions, talking to state and local CIOs, elected officials, and the uniform response is head nodding of, "Oh, thank God. Yes, this is what we need." I think there's a couple of things going on here. One is the workforce in state and local government is getting younger. When I started in this business, you could not pry the big yellow tablet out of the judge's hand, right?
Now, you have new judges in their forties coming on the bench, and they have an expectation. They're like, "What is all this?" Right? That's definitely a factor. I also think in some cases, Where technology has progressed organically in their organizations, it's kind of reached a point where, okay, they need it to do more, and they're gonna need to do big things. They're gonna need systems to interoperate. They're gonna need to make data-driven decisions, you know, seeing that pitch that Bruce did, and them going, "Yes, this is what we need!" Just because those are real problems.
That's the only thing I just think that's very much what we're seeing. There's a generation coming up. You know, I mean, we don't have to be a rocket scientist to say the federal government is kind of a mess right now, right? I mean, not too encouraging. I've been doing these state reviews. There's a generation of governors coming up, both red and blue, that have different expectations, and then that trickles all the way through there. I think analytics, data is not going away. They expect to be able to get to that, where... That's one reason we've invested and doubled down on that, and I think the expectations are gonna be different going forward. We also, that one chart shows it, we're seeing more and more, I'd say, maybe enlightened purchasing, saying: "Hey, let's solve a bigger problem here." When you begin to solve some bigger problems, this idea of a suite and Connected Communities really, really makes a lot of sense.
Yeah, you know, going back to my comments earlier, and I was talking with Bruce on the break about the excitement of the management team at Tyler and seeing the opportunities ahead. Part of it goes back to my presentation and Bruce's presentation, is that we're the only company out there who can do all this for them.
Mm-hmm.
That's pretty exciting.
Okay, I think we have time for one more follow-up from Jonathan.
Thank you for squeezing me in. Jonathan Ho from William Blair. So one thing that I wanted to think a little bit more broadly about was Tyler as a broader platform or suite of solutions. You know, how often is your ability to tie into a broader set of systems the winning factor for some of these competitions? Does that maybe lead to a broader, you know, sort of visionary sale to more CIOs or, you know, sort of higher-level executives versus more traditional project managers? Thanks.
I'll take a stab at that.
Yeah.
I do think. That's what we are seeing when we're able to tell that bigger story of how all these pieces. How we're thinking about this, I think we're seeing CIOs and senior decision-makers begin to opt towards that. The challenge is every agency is purchasing independently often. When they re-realize that we've been creating an enterprise architecture underneath this, that over time, as they put more into it, they're able to do more, that is exciting because otherwise it's a very difficult problem. I, you know, I've worked with CIOs, you know, who was in a top consulting firm, working with some of the largest companies in the world, in their problems. The problems facing city and county and state CIOs are the most complex that there are.
There's no boss, there's no CEO. We've tried to create this underlying enterprise architecture that they can tap into, and over time, has a network effect, that begins to have more value the more pieces that are put in place. I think for CIOs that embrace that, kind of understand it, we've seen that be a real difference maker.
Yeah, Jonathan, if you remember in Bruce's presentation, he had a slide on that, multi-suite deals as well as, you know, It wasn't all 100% multi-suite deals.
Yeah.
It was also cross-sells, but, you know, that's been growing at about a 15% CAGR over the last three or four years.
Okay. Well, this concludes our first Q&A session. Thank you all to our panelists. Giving you time to get off stage, and I'll introduce our next session. Okay, now I'd like to introduce Bret Dixon, president of our State & Federal Group. Yeah, we need the music here.
All right. Am I on? Great. Okay. Nice to see you this morning. Thank you for taking the time to learn more about Tyler. I'll tell you, if Bruce was a self-professed sales guy, he said that, right? Jeff is a superior operator. I don't know that he said that, he is. Unfortunately, I am a teacher. You're gonna wind up perhaps learning more about payments than you ever bargained for. Just hang in there. I think there'll be some nuggets in here that'll help you understand why we are so excited about payments being a growth driver for us. As any good teacher would do, I'm going to give you the answers to the test right up front. Our clients, they value our payments solution. Key word is value. Payments is going to enhance Tyler's cash flow.
It will put pressure on our margins, but maybe not for the reason that you think. We'll talk about that. Finally, payments is a part of transaction revenue. Transaction revenue is a P&L line item that's made up of multiple revenue-generating products. Payments is the biggest component of transactions, and it will grow faster than the projected 10%-13%, but it is a part of that. All right? Let's get into payments. First thing we're going to do is talk a little bit of history, how we got here. Won't spend long there. We will talk about the product and what makes it unique, and then we'll end with how we're driving growth in the marketplace, and it'll correlate with a lot of things that you've heard, and we think it's very, very practical.
Okay, why in the world would Tyler want to get into the payments business? Why do we think we can become a dominant player in the government space? First, a little context. We all know the government funds itself by bringing $ in: taxes, fines, fees, permits, so on and so forth. We also know that government spends a lot of money. They disperse a lot of money to citizens, to other businesses, to other agencies. These bringing money in and sending money out is measured in the trillions of $ over billions of transactions. Here's the hook: Many of Tyler's products that we sell and have already sold facilitate those payments. They initiate those payments coming in or out. It's a natural extension of our product set, and it's a natural extension of our service to our clients.
We were interested in payments early on, but we were early in our payments journey, and then we purchased NIC. Immediately, our payments install base grew by 600%. What was even more important is we acquired a product that was deep in features. Government features, by the way, because all NIC did was government work. They understood government, and their payments product was built for government. The other thing that we got with the NIC acquisition is executives and team members that had a deep expertise in payments. It has accelerated Tyler's journey into the payments marketplace. That's one of the reasons... Their expertise, NIC's expertise, is one of the reasons that we have consolidated payments into one payments organization.
We took the Tyler payments team, merged it with the NIC payments team, and then our Rapid Financial Solutions acquisition that we made in the fourth quarter of 2022, we've taken all three of those companies, and we've put them into one payment organization. Just a side note, this is not whining. This is just true. That's not easy to do. Three companies, three product roadmaps, three cultures, three set of processes, three management structures, we've got to put into one cohesive organization geared towards growth. We've done that heavy lifting, and I'm making it sound like my job is so hard. It was actually not that hard because these people are excited about the opportunity that is in front of us. This payments organization now interfaces every day with all the Tyler verticals, with all the Tyler divisions.
We work with them on their install base, with their customers. We work with their sales teams. We also work with their support teams and their implementation teams. That is happening right now. That is working right now. By the way, over the last two years, we've doubled our dollars processed, and we're just getting started. We're just now getting started. That's a little bit of how we got here. All right? Let's move into the product, and this is where I'm going to ask you to really bear with me here. This is the teaching part. I'm just warning you, okay? Here we go. It is a unique offering. If I do a good job of explaining this, then the rest of this presentation is going to make a lot of sense.
Just bear with me on this slide right here. This is meant to represent a payments life cycle, okay? Starting at the core application all the way through resolution. The light blue part is the Tyler part. This is what we do to facilitate a payment. The dark blue part are two institutions, a processor, that, in layman's terms, is a special network that gives you access to all the card and banks, okay, in a payment life cycle. Put a pin in that. We're going to come back to that blue part in a little bit. Right now, I just want to talk about this, the light blue part. I want you to focus all the way to the software solutions icon. That's where our payment mindset begins.
Not at the payment engine, where a lot of people begin, not at the payment engine in a generic portal, but all the way to the core systems that initiate payment. There's two things I want you to understand about that. Here's the first. We own a lot of those products. That's utility billing, that's permitting, that's business registration, that's veterans benefits, that's e-filing. Those are the products, and many more, that we built, we implement, we support on behalf of our clients, 40,000 of them, and plus another 18,000 at NIC. What owning those products allows us to do is, see that portal? That's how the citizens and the end users interface with the payment engine.
The fact that we own those software products allows us to build very purpose-driven portals into the payments engine and into those software solutions that gives citizens and end users a very unique experience, a very rich experience. It also eliminates an integration point. Now your software provider is also your payments provider, so you don't have to deal with two companies on that connection there. Our customers really like that. That's the first point of starting at the software solutions. Follow me on the second one. We build, as a company, we build those solutions, that means we are heavily invested in understanding workflow, we understand government culture, we understand government compliance needs, we understand government reporting, we understand how departments work between one another. We understand how they like to deal with their constituents.
All of those attributes get reflected in our payment engine. For instance, our payment engine is configurable, just like any good software company would make a product. It's configurable. Maybe a bank? I don't know. Pure play? I don't know, but a software company certainly has a configurable payment engine. What that allows us to do is to configure into a customer's business process, their preferences, as opposed to having their preferences and their business process defined by the payment engine. We can adapt. Speaking of adapt, we're not afraid of integration. I may have state agencies that need to integrate to a state accounting system. Not a problem for us. We're a software company. That doesn't scare us. You may want us to integrate with an interactive voice response unit or a mobile device or a cash register. Can do. Not a problem.
We're a software company. Those attributes are reflected in our payment engine. Reconciliation, a pretty common process. Reconciliation just means when the card carrier or the bank says, "Yep, that's good on that charge." It's got to reconcile all the way back to the software solution. We do that very elegantly, but we also manage, just like government people need to have this managed for them, we manage refunds, disputes, returns, those type of things. We do that very elegantly for government, okay? For government. I could go on and on. You can tell I'm geeking out a little bit here. I'll stop with those. There are other features that we could talk about that are specific for government. Here's the last one I'll call your attention to.
With the acquisition of Rapid Financial Solutions, we are now a government provider of payment services for payments coming in, but we can also manage your payments going out. Again, one hand to shake. There are more, but you get the idea, built for government. What this does when we go head-to-head with our competitors, admittedly, a lot of times it talks about: Okay, how much does it cost? What's the price? We can quickly change that discussion to a value-based discussion, not a price-based discussion, because of the uniqueness of our system. Again, we're dealing with government, all right? I'll give you an example of what that looks like.
You, I'm sure you know this, but the way you fund, the way you fund payments or payment contracts is one of 2 ways, really 3, but the first way is a $1 or a cents per transaction. The second is we're gonna charge you a percentage of the transaction amount, or a third is a combination of both of those. I've picked 2, admittedly extreme, examples that speaks to value. That first competitor, we were up against a competitor that was willing to charge less than 10% or $0.10 per transaction. Our price was $3. We won. We won. Another one that was transaction amount-based, they were charging a point and a half. We charged over 80% more.
We won, it wasn't apples to apples because nobody would do that. It was value-driven. It was value-driven. If our price is a premium price for a premium solution, that's a good thing to know. Another thing is you got to know when you understand the payments business is what type of contract you're signing with your clients. You've heard Lynn and Brian talk a lot about, well, it's a gross contract or a net contract. We're gonna explain the difference between the two. I will say before we get there, the majority of our contracts or majority of our revenue is generated by gross payment contracts. Gross payment contracts are really good for free cash flow. They do put pressure on our margins. To the...
We are projecting about a 200 basis point effect, negative effect on Tyler overall margins, given the, our gross re-revenue contribution of payments. Let's talk about the difference between the 2. Okay, this is part of the teaching part again, but you remember the life cycle piece that we talked about? That dark blue part, where you had the processor, that was the specialized network that gets you into the card institutions. Those 2 things are necessary to complete a payment process. Those 2 institutions also would like to get paid, and well, they should. They provide a valuable service. There are, out of every transaction, those 2 institutions take a piece of that transaction. Also, you need to understand that the interchange or the bank card piece, those fees are volatile. They move up and down because of various circumstances. Okay?
Understand that. Now we're back to talking to a customer. A lot of times, our customers value, I say a lot of times, the majority of the times, they value two things: simplicity and predictability. When it comes to the payment life cycle, they come to Tyler, and they say, "You know, we really value simplicity. We don't want the administration burden of paying the processor or the interchange. We don't want that, and we for sure don't want to bear that risk of fluctuating fees. Tyler, would you pay those people and bear that risk on our behalf?" We say, "Yes, we'll do that. We'll do that." Now, on a gross contract, we're charging for the Tyler value add, the payments value add. We're charging for the processor and the interchange fee, and we're pricing in risk. Okay?
Revenue gets accelerated on that, so do our expenses, because when that payment comes through, we've got to turn right around and pass that expense through to the processor. Our expenses are up. That's what puts pressure on our margins. However, if we're on the right side of risk, our cash flow works out really well. Okay? That's gross. That's a gross contract. Net contract's a lot simpler. Net contract says the customer's willing to pay the processor and the interchange fees. Alls they want to do is pay Tyler for its value add, for its payment services, and we're happy to do that. That's less revenue. It's also less expense, our margins are higher. That is the difference between gross and net, and it matters to our PNL, which ones our clients pick.
We don't have a whole lot of influence over which one they choose. I'll be just candid with you. We don't really care that much, because they're both really good contracts. The service we provide our client is very, very good. It deepens our relationship with that client. Whether it's a gross contract or whether it's a net contract, in true Tyler fashion, we are still looking for efficiencies. There are some efficiencies that we can drive in our payments business. Just quickly, the combination of contracts that we have, the higher value contract, the more they value the added services that we can put in place, the better our margins will be. For instance, disbursements. Disbursement, the Rapid Financials, those margins tend to be a little bit higher.
the higher mix of disbursement transactions we can put into our business, the better our margin's gonna be. Economies of scale, I already touched on this, but we're gonna grow our payments business substantially. We're not gonna go hire a sales force. We already got one. We're not gonna go hire a huge support infrastructure. We'll make a change here and there, but we already got one. We're not gonna go hire a new implementation team. We already got something. We're able to scale better this payment business, because we're gonna exploit some of the investments that already exist. Finally, interchange optimization. There are some tools that we can acquire, there are some processes that we can build, there's some certifications that we can achieve, such that we can get deeper discounts with the processor and the interchange for ourselves.
Those are things that we're also working on. Over the next seven years, you can see we have some room for margin improvement to Tyler as a whole. That's not just the payments business, that's on Tyler as a whole. Okay? All right, that's the product. Now, you guys, if you get tired of doing what you're doing, you can come sell for us. Multiple growth drivers. There's four of them. They're pretty practical. The first two are leveraging our install base, like you've heard all morning long. The third one is working outside our install base. We'll talk to that. The fourth is scaling our recent acquisition, which is Rapid Financial Solutions. Let's just spend a minute on each one of them. Okay, here's another slide.
This is a scary one for me to put up in front of you guys, because we believe the state and local acquiring TAM, that's payments coming in to state and local governments, is $30 billion. Yes, we actually believe that. We actually believe it's more than that's as much as we could allow ourselves to put on a slide here, because it's such a huge TAM. I tell you what, I'm not asking you to believe that just because I believe it. What I am asking you to consider is that in our local install base, that's our cities, our K-12 schools, our local install base, for the products that we have already in place, we believe there's over $1 billion of addressable market. At the end of 2022, we owned less than 10% of that market.
If our product is as good as I advertised earlier, we should own a lot more of that. We should go get after a lot more than that's what we're focused on. Here's a great example. The city bought our tax system in 2016. Six years later. Oh, by the way, they had an incumbent payment provider that they hooked to our product. Six years later, we go in, we start showing them, guess what? Our purpose-built portal and how we automated many of their reconciliation processes. It was so compelling to them that they were willing to make a switch to Tyler Payment, relieve the bank of their responsibilities. That was a great win. It's a great example. With payments now, the ARR that we're earning from that particular account has tripled.
We see opportunities like that. That's an example of that $1.3 billion of TAM. Growth driver number 2, same play, this is in the state market. We think there's over $2 billion in the 29 states that we have contracts with, that we have teams on the ground. We think there's over $2 billion of TAM in those places, payments TAM. We, NIC has been at this game a little longer than traditional Tyler, their market share is a little bigger, there is still plenty of room to grow. Let me give you an example of how this works. They call this the land and expand, this is a great story. In 2021, prior to acquisition, quite frankly, I wish Tyler could claim this is all NIC.
A coalition of 19 state agencies signed a contract with NIC to do payments in the state of Florida. Since that time, over 20 incremental agencies have signed up on that contract. They've also, after they've experienced NIC, now they've experienced Tyler, they have added on premium services to their payment to their payment contract. For instance, you heard Jeff talk about fraud detection powered by data, Data & Insights, or formerly Socrata. Very, very powerful add-on. The implications there are the results of the premium adds and the new agencies. If I took from the first quarter of 2022, which is the first year of implementation, to the first quarter of 2023, 82% increase in transactions processed just in this state alone.
That's earned us over $1 million incremental revenue from the original contract, or really just, I mean, I'm sorry. What we did from first quarter of 2022 to first quarter of 2023, we've added an incremental $1 million from 2021, the original contract. Land and expand. Obviously, our focus is gonna be on our install base right now, but we are opportunistic, looking for opportunities in agencies that do not have a Tyler presence or Tyler software, and opportunistic is the word right now. Over time, we will begin to become more aggressive in marketing, more aggressive in sales, in non-install base environments. These would be new name cities, new name state agencies, where this would be the first Tyler experience that they would have.
We will grow in that space, but right now we are focused on our install base. Lastly, scaling Rapid Financial Solutions. Rapid, when we acquired them, A large percentage of their business was government business, and they were focused primarily on the justice space. They served courts, jury payments, and they were big into the corrections world. We think there is an incremental half a billion dollars of opportunity in Tyler install, in Tyler's install base for Rapid, just in the justice space. We think there's over $4 billion of opportunity in other areas, again, our install base, in the state and in the local. I just can't let this pass. I told you the acquiring or the incoming payments TAM was $30 billion.
The TAM for disbursements is $30 billion. It's a different $30 billion. It's a different $30 billion. This is incremental to the other. This is just what we can do in the install base as we develop new case types. Here's a great example: Within weeks of the acquisition of Rapid, the GM, the NIC GM in Indiana, had a relationship with an agency called Indiana Child Care and Development Fund. What this agency did is it pushed supplemental revenue to over 3,000 childcare providers that served underprivileged families. These childcare providers get funds every month from this agency. They can take it any way they want it, meaning you want a check, we'll cut you a check.
You want an ACH, you want a wire transfer, you want a Venmo, you want a PayPal, you want a debit card, we'll fund you however you want. That is one of our clients. Speaking of purpose-built portals, you want Venmo this week, but you want this month, but you want a debit card the next month, no problem. Just go into your portal and switch it. Configuration, purpose-built portal, built for government. Perfect illustration of what we can do with Rapid. By the way, this solution we think is repeatable. We think we can take this to 28 other states, maybe 50 other states. That's how we're going to market.
The impact of this, as I've already said, from 20, from now to FY 2030, transaction revenue, 20%-13%, payments are part of that. Transaction revenue aspirations is in the low 50s from a margin standpoint. Brian, you're gonna talk more about that in your presentation. Now you're ready for the test. All right. Our clients really are liking our product because of the value that it brings as a government player. Our cash flow, it would be substantial contribution. Brian will show that to you. We've got a good plan on going to market and exploiting our install base. I appreciate your attention this morning. I think we're going to do Q&A now. Hala, are you coming back up? Thank you.
Okay, well, we're gonna go right into Q&A. Just remind you that we've got our mics here, we're going to take questions from the audience. I would like to invite Lynn back, Brian, Jeff, to come on back, Bret, back to the stage, please. This will be 20 minutes, we'll invite Elizabeth, Liz Thomas. Where's Elizabeth? Is she here?
She's coming.
Okay. Liz Thomas is coming to the stage. She's our Chief Operating Officer of Digital Solutions Division. Elizabeth Proudfit, our President, is coming right in right now.
Right on time.
Right on time.
Just made another sale.
There you go. Okay. Liz.
This is part of the, acquisition and integration is the lack of, bathroom breaks for me.
Liz and Elizabeth are our payments experts. We've got a bunch of them, but on stage, you got technical questions. Not that Bret can't handle them. They did a fabulous job, but they're our experts.
Okay, we'll get started. All right, Saket, we'll start with you, and then we'll go to Terry Tillman.
Thanks. Can you hear me? Great. Saket Kalia from Barclays. Bret, really enjoyed your session. I wish my college professors were like you, by the way. I've got a couple of blocking and tackling questions on payments, if that's okay, it's going to be a couple of parts, right? The first one, 10%-13% growth, CAGR growth in payments. What do you think the market grows at? You know, of that 10%-13%, what do you think you have to go out and get in terms of market share gains?
I got a feel for that.
Even, you know, qualitative.
Yeah.
Go ahead.
I'm not sure I have a great perspective on the market because it is such a differentiated market. I mean, there's the pure play payments processors. Ours is a lot different, but I think you saw it in Bret's presentation. I mean, what we're really looking to do is increase that local market base from the 10% roughly that we have. If we can, you know, double that, and move that's a big part of the growth driver. We see tremendous expansion with disbursements, and that's a big part of what's driving our growth. You can see there, we have such a small part of that market. It really can be the easy button in our state enterprise relationships. You saw how quickly we were able to add the Rapid add-on, just through that GM relationship. No RFP, no new contract. It was an SOW. I think if we can rapidly capture some of that market potential, I think that that's going to drive, you know, that 10%-13% CAGR.
I would also add from the market perspective, what we saw during the pandemic for both payments and transactions is so many folks migrated online, right?
Yeah.
Governments provided it online, and we're seeing that sustained. We're just going to see that number grow and grow in terms of capturing the IVR, the mobile, the online payments, because today, people still have the opportunity to put a check in an envelope and send it into government. Many people came online, and we believe they're going to stay online.
I have a perspective, but I'm going to do it as a question and let them correct me. Payments is not new.
Yeah.
It's not new, doing payments well.
Mm-hmm
And doing it at scale in government, that's what's changing. We're winning market share, not just from first time, but we're stealing market share from others. Is that? Would you agree with that?
Yeah. I mean, I would certainly agree with that. We've seen that in the market. You really hit on the whole citizen experience and value-added payments.
Right.
We're seeing more of a focus of our government partners away from the back-end processing and how to extend that platform...
There you go.
Make it as secure and seamless and easy as possible for citizens and businesses to stay in compliance and offer payments, online and through different channels. We are definitely seeing that.
One thing I would add, sorry, not to belabor the answer, but, Bruce even referenced our Gov2Go platform. Some of those, you think about it, I mean, government is at the point where they're expecting citizens to have the same or residents to have the same experience that you have when you're buying something on Amazon, right? They want that ease of being able to renew your driver's license. They want the wallet functionality. They want all the bells and whistles, and we're able to provide that to them, and we're able to combine that with a resident or citizen experience that's kind of unparalleled for government.
Got it. Sorry, just a quick follow-up. I thought it was interesting how the TAM for acquiring, like, collections and disbursements are pretty similar. The follow-up question is: what is what is the what are we calling it? The Tyler Payment Solutions business or-
Sure.
What does the Tyler Payment Solutions business sort of look like in terms of that mix, disbursements versus payments? Is there a difference in sort of margins between those two?
Yeah, I can take that one. Right now, obviously, Rapid is really our first foray into disbursements. It's a very small percentage of our overall transaction revenue base. You kind of saw it in the 2022 perspective. We obviously expect that to increase, and we do see higher margins in the disbursement business. There's lower interchange that you have to account for. You know, I wouldn't say materially it's not double, but it's definitely a higher margin.
Yeah, I'd say, you know, for Rapid, their low-hanging fruit, as Bret outlined, is in the justice space, and that's where we've got all our relationships. In the near term, that's what we're going to go after. In the long term, he put up on his slide all the different things in government that involve disbursements that we still touch, but we'd have to still build that out a little bit. In the near term, you know, we're really going to concentrate on the justice space as it relates to disbursements.
Terry?
It's me again, Terry Tillman from Truist Securities. I just have a two-part question, so it's a lot easier this time. The 300 people sales team, I don't know what that means. I don't know if that's up a lot. I don't know if it's down some, but it does seem like a bit of an army or a brigade. like, how are we doing in terms of those 300 folks? Maybe they're not all just quota-carrying reps, but how is productivity with that sales team and, like, how enabled they are to sell all this stuff right now versus going to taking some time? The second part is on premium services, like the fraud detection. I'm curious, like, what's the attach rate on that at this point, and is that kind of early days, or have you been doing it for a while?
I'll take the first one, and I'll let them answer about the premium one. The 300 salespeople are the salespeople that already exist in what I'll call legacy Tyler pre-NIC. And then it adds their sales team to that number. I think it's 318 was the number I got for quota-carrying sales rep. That's not managers, that's not sales ops. Those are people that are already on our payroll, that are used to selling Tyler products, and those are the people that already have relationships in the field that now are going to go back into the install base, places they've already been, products they've already sold, and say, "Here's an upsell opportunity for payments." That's the 300 people.
Yeah, let me add to that. For example, our ERP space, every new deal, our salespeople are quoting payments and our inside sales, they're pushing inside sales payments all across. It is. It's leveraging our current sales channel across, you know, the local opportunities that Bret outlined.
In terms of their. We're pretty early. Of the 300, we might have had, you know, a few that really were passionate about payments and really understood it, and so we're in the process of now educating our team on payments. We've probably been doing it for 2 years now, educating the team on payments. Dane Womble, who runs the local side of our business, he's been after payments for years, so he has certain people that understand it and have sold. We had a payments business before we bought NIC, but getting the entire sales force passionate about payments, we're, I would say, you know, we're 60% into that. That, and that's a guess, but we'll get them all payments enabled in short order.
Is that the whole Sales force, or is that-
Mm-hmm.
No.
No, that's the whole Sales force.
Okay, that's good to know, because I was thinking that was just payments, and then maybe you have 1,000 more.
No, no. No. We like it that way. We could have gone and done that. These people already know how things work in the space. They've already sold things in the space.
Already have relationships.
Yeah.
I would say from our division standpoint, Bret mentioned the 18, which is our quota-carrying sales folks, but we're also getting our general managers who run those 29 enterprise states that Bruce showed, getting them really energized. I think from our standpoint, from a payments standpoint, we have so many new tools available to them. You mentioned fraud detection as well. We're using that D&I platform. We used it to help secure one of our payments contracts and preserve our pricing to be able to show the power of analytics for payment processing. We talked about some of those other use cases, but it's such a powerful use case at the state government level with all of that transaction data coming through.
I was in the room when we showed it to Department of Financial Services in Florida, and their eyes just lit up. It's the first time they'd ever seen all of that information. The next turn of that, of course, is fraud detection, and so we're working with some of our power agencies across our state enterprise to be the design partner on that type of solution and using that D&I platform to uncover some of that fraud, especially within the DMV space. Your question, I'd say we're really early in that attachment rate. Yes. There's a lot of space to room, or room to grow.
In, to the question of the sales engagement, though, I would add one additional thing. I know some of y'all went to Connect. We had sessions at Connect on payments. Every single one of them were standing room only.
Yeah.
Right? There's a lot of enthusiasm for this in our install base.
Okay, Alex?
Hey, guys. I guess... Sorry, Alex Zukin, Wolfe Research. The growth rates, if you break them down by gross versus net-
Why not just go all net in with regards to this? I know this is a Brian question. Then if I think about from a strategic point of view, given every salesperson right now is really focused on it, is upselling it, is cross-selling it, at the end of the line, like, is this a way that you're winning market share on the overall software business by selling payments? How much at the end of it, like, if you think about a tail, like, what's the aspirational goal for every customer that's an ERP customer or an application customer? What % of the ARR is going to come from payments?
In terms of the % of ARR, Brian is gonna cover that.
Yeah
in his presentation. I think to the point of why don't we just make all the contracts net, I'll be honest with you, when we acquired, I asked exactly the same question, right?
Yeah.
Our history has been optimizing around margins, right? They educated us pretty quickly that it goes back to, you know, Bret's presentation. The free cash flow generation off the gross contracts is so compelling that even though it does put pressure, downward pressure on margins, which one do you want to play for? Do you want to play for the margin number, or what is free cash flow more important? I think the conclusion that we all came to pretty quickly was it's the cash.
You'll see what we predict our free cash flow from payments or transactions through by, in 2030. You know, there's some competitive reasons why we don't want to break everything down minutely. In the long run, since one of our goals is to maximize free cash flow generation, we think that's a better play.
Other than a negative impact on margins, we make more money, we keep more cash in the gross model.
Yeah. Okay. We'll take Clark, and then we'll take one from the audience on the live stream.
Clarke Jeffries, Piper Sandler. You know, when we think about NIC, historically a high single-digit growth business, thinking about that 10%-13%, I just wanted to maybe be granular there. You know, what's the contribution from Rapid and disbursement versus what's incremental in the NIC business from cross-sell or other opportunities?
Well, I'll let Liz answer or try to answer the Rapid piece. At a high level, NIC didn't have access to the local client base that we've got. They didn't have access to all the systems that Bret outlined as the differentiator, so it's really that bringing that combination together, and then they didn't have access to our 300 salespeople. That's the thing that drives that growth a lot higher than what NIC could do on its own, unless I missed something.
I think that's exactly right. I think from a Rapid perspective or disbursements in general, right, I would say that, you know, we see that as this small fraction right now. We would see that growing to, you know, maybe a quarter to a third of our overall transaction base, potentially, disbursements in general, at the end of 2030. Obviously, that's growing at a pretty rapid clip.
It's from a small base.
No pun intended on the Rapid.
It's a very small base.
From a very small base. Yeah, we definitely see that, but we see growth in the acquiring market, too. The Tyler local install base is big, and I think that's. You know, when you think about the easy button, that's obviously what we want to attack first, both on acquiring and disbursements.
I would add one more thing, just to go back to Bruce's slide. Those, 200+ deals, the $90 million, that's all new to NIC, right? Those are all those new tools. That's the local market within our state enterprise market. That's what gets me excited.
Yeah.
Just some clarification on the, on the monetization. You know, what portion of the state or the local entity is paying the transaction fee versus passing it on to the customer? Then maybe just when we think about premium services, are they in the pricing of transaction fees, or are they maybe like flat contract rates that just apply to any kind of volume?
I can take that one. All of the above.
Mm-hmm.
When you think about it, I would say the majority of our contracts are citizen or resident-paid or user-paid business. You know, we do have some absorbed model contracts, and we would use that term when the government entity is absorbing those fees on behalf of the user. That's kind of the mix. Majority, I would say, are passed on. Second part of your question. Okay, remind me of the second part.
Premium service.
Oh, yeah, the premium. Sorry. I mean, that it is a mix. That actually is why we use the term transaction revenue versus specific payments revenue. Especially in the historical NIC base, there are a lot of our services that we actually price in, you could call it an embedded model, where that transaction fee, that value-add fee, is combined with your payment processing. It's not separately identified. It might be a flat rate for the customer and say, "This is your fee to process this. This is gonna cover the payment portion on a gross basis.
It's also gonna cover that interactive, you know, the portal that has been built to interact with the citizen, whether it's renewing their license, whatever they need to do that ultimately generates that payment." There are quite a few of our services that are priced on that embedded model.
To Liz's point, our favorite contracts are all of the above,
Yeah.
gross and net-
Mm-hmm
combined. Florida is a perfect example. We have $3 a transaction for some of the previous premium services. We have the 2.75% for one of the absorb services. We like all of the above and diversity in the portfolio.
Okay, one question from the live stream here. I think we've kind of covered a lot of this around gross margins. One is, how do you ensure still driving towards the gross margin improvement in payments if you're agnostic, really, to the mix? That just really comes down to the terms of the contract, or is there any other factors?
The question is about how are we driving.
Overall gross margin improvement in payments, how are you driving that if you're really agnostic?
Well, we're improving margins in both models. Bret talked about, I think, 3 things that drive that.
Yeah, I mean, 2 of them focused on expense. 1 of them is focused on higher revenue volume.
Right.
I'm sorry, different contract mix.
Yeah.
Our revenue will grow. We're not going to have to add, you know, start from scratch on support. We're going to have to start from scratch on implementation. As our revenue grows, we're not going to be matching $1 of revenue and $1 of expense.
In your gross versus net mix today?
Yeah.
I think what they're basically asking is, if we're agnostic, if we don't care whether it's gross or net. The answer to that question really is we're not depending upon more net contracts to drive that margin up.
Yeah.
Right?
Yeah, exactly. I think when you think about it, we're already starting with 93% of our revenue being the gross model. If we do happen to increase that mix on net contracts, that yes, that will contribute to higher margin. Outside of that, even with the large gross base, we definitely believe there's things that we can do operationally.
Right
to start to improve that overall contribution.
You know, they broke down the gross versus net at 93, 7 today, and as you look out in the future, I mean, step back and also think about our client base. Our client base is generally risk-averse. We talked earlier about workforce and labor issues. When you say to a client, "Well, you're going to take on the administrative burden," well, that's more people they need. When you're going to take on the risk of interchange fees and merchant fees, that's risk, and they tend to be risk-averse, and so I think that's why that mix stays. Right now, I don't anticipate that mix changing substantially over time.
Yeah.
Right. Just, again, keep in mind that for, like, for state and local government, for them to be able to fund those fluctuations, they have to go get an appropriation for that. It's a big deal.
Yeah.
It's very difficult for them to do that.
Liz and Elizabeth , speak to, as we add premium services...
Mm-hmm.
-to a contract, we see agencies go out and adjust their payment fees to us.
Mm-hmm.
Specifically, if it's passed on...
Yeah
To Jeff's point, it's not a budget item. We can go back. I think we can go back in. We can add $0.10 per transaction for a fraud feature.
Yeah.
That gets passed on to the end user many times or to the citizen many times. Is that?
Yes.
Is that accurate?
Yeah.
That's a way, selling premium services, we can, we can increase our margins there.
Well, I think we've actually run out of time for this session. This concludes the second session. Thank you again to our panelists.
Yeah.
We're going to take a 10-minute break before our final presentation. Okay. All right. I know everybody's having some individual conversations, but if we can take our seats, we will go to our final presentation. I know everybody is waiting for this one. All right. Well please, join me in welcoming Brian Miller, Chief Financial Officer, to the stage to talk about our financial numbers.
Everyone, I think it's still morning. I am neither a teacher nor a sales guy, so I'm a finance guy. You may be disappointed in my presenting skills, but I think you'll like our numbers as I move through them. You've heard from our previous presenters about our strategies around things like cloud transition, leveraging our customer base with upsells and cross-sells, payments certainly, and other revenue drivers, and you've seen some of the growth rates we've talked about around those. Now I really want to focus on our growth algorithm in both midterm and longer term. We're really talking about a three and seven-year models, and how that plays out as we move into this sort of new era of growth for Tyler. Our long-term financial algorithm is really pretty simple.
We couple organic revenue growth that is expanding at a higher rate, margin expansion over a long period of time, that creates really strong free cash flow. We use that cash flow wisely to create additional growth opportunities and ultimately drive more cash flow and build more shareholder value over time. As you guys all know, we have historically provided a lot of financial measures, a lot of different metrics around our financial performance, one of our goals has been to simplify that over time. Now we're really focusing on what we think are the 2 key metrics to be the best measures of our progress going forward.
The first one of those is recurring revenue, and there are two flavors of that: software, which is made up of SaaS and maintenance, and transactions, which is made up of the payments and the portal revenues and the things that you heard about in the last presentation. Those two have different growth rates, and they have different margin profiles. You've heard some of that, and I'm going to try to tie that all together and how that leads into Tyler's long-term consolidated metrics. With the second metric is free cash flow, and that ultimately is what fuels our growth and fuels our innovation. We're going to talk a little bit more about that, and that's going to be one of the metrics that we'll be much more focused on going forward.
We've always been internally focused on that, but externally focused, you'll hear a lot more around that. For example, in the past, we haven't actually guided to free cash flow, and that'll be something we'll be doing going forward. Let me tell you where we are with respect to each of these measures and how we see them growing in the future. Recurring revenue growth has been very strong over the last 5 years, a 22% CAGR. That is not organic, but that's overall. It's been really driven by our cloud transition and the growth in our SaaS revenues and by the expansion of our transactional business when we acquired NIC in 2021. You can see the CAGR for transactions has been 56%, with a good chunk of that being inorganic.
Our SaaS growth, which is organic, has been about 27% CAGR over 5 years and a 4% growth in maintenance. We have a very powerful free cash flow generating engine, given the highly recurring nature of our revenues. Our average conversion of free cash flow relative to non-GAAP net income has been about 114% over the last 5 years. Over the next few years, we really expect that our free cash flow margins will expand significantly from our current year levels. In the near term, as we've talked about on our last couple of earnings calls, our free cash flow will be pressured by additional cash taxes because of the change in taxes around 174, Section 174.
The biggest part of that impact will be recognized this year. Then it'll be declining impact over the next five years. By the time we get to the latter part of the Tyler 2030 model, there's no additional impact from that. Now let's talk about how we view using the cash flow and what our priorities are for capital allocation. We have three very clear priorities for capital allocation. Those are, in order of importance: paying down debt, strategic acquisitions, and being opportunistic around share repurchases. Talking about the first priority, deleveraging, paying down our debt remains our very first priority for use of capital, especially in today's interest rate environment.
We really view paying down debt as a form of investing in our business because it frees up capacity on our balance sheet to make other investments, things like M&A, as well as internal investments. We've made tremendous progress towards paying down our debt since we acquired NIC in 2021. We've paid down $900 million of term debt over that time period, and we've delevered down to about 1.5x net leverage ratio today, and expect that to be about 1.3 times by the end of this year. Most of our debt now is our $600 million convert. It's due in 2026, and it has an interest rate of a quarter of a point and a conversion price of 493. Now let's look at the second priority, and that's the M&A.
You've heard about some of these things. Bruce Graham talked a little bit about it. Lynn Moore talked some about it. As Lynn Moore said, M&A is really a part of Tyler's DNA. We've completed 55 acquisitions over the last 25 years, and 17 of those in the last 5 years. We've used about a little over 75% of our free cash flow during the last 5 years on acquisitions. These acquisitions fill in gaps in our product offerings, expand our TAM, drive higher growth, because we can leverage our sales organizations, leverage our customer base. Generally, the things that we're acquiring, we expect to grow faster than Tyler's core growth rate and to be accretive to earnings relatively quickly. We have a disciplined approach to valuations as well that we've maintained across the years.
At times, that's made us a somewhat frustrated acquirer, but we have a very strong history of executing really well on acquisitions, and we expect that with the cash we generate over the next seven years, to continue to be an active acquirer. The last thing, in our priorities is share repurchases. There have been times when we've been very active and had great opportunities for share repurchases. We bought back 28 million shares of our stock, really in the last 20 years. You can see in the last two to three years, we've been less active or not active in the last two years with respect to buybacks, as we've had other priorities, especially around paying down debt.
I would note that because we choose to issue net shares in, under our equity plans, as employees receive shares, under our RSUs and PSUs, we withhold shares and then pay the taxes in cash, rather than issuing the shares, letting the employee sell them and pay taxes. In effect, that's a sort of a ineffective repurchase of some of our stock that we'd otherwise be issuing and experiencing dilution from, and that's accounted for about $91 million in the last three years. Now let me tell you about how we see our financial model evolving over the next three to seven years. This is a little bit of the charts that you've seen before, a couple of charts you've seen before, but layered on top of each other.
We're modeling a high teens CAGR for SaaS and a 10%-13% CAGR for transactions over this 7-year period. As you can see, SaaS revenue and transactional revenues will be the major drivers of our growth. In addition, this is all organic, but in addition, M&A could add significantly to that, given the cash flow that we'll generate over that time period. By 2030, we aspire to software gross margins in the 70% range and transaction gross margins in the high 40s to low 50s. Let me tell you a little bit about our pathway to double-digit revenue growth. I want to show you the major drivers of that, all of which you've already heard about in previous presentations.
You heard from Jeff about the opportunity that we have from flipping on-prem clients to SaaS, the first two boxes there. Bruce talked about some of the factors like cross-sell, upsell, that should accelerate both net expansion and net new software SaaS revenues. Bret talked about the opportunity to drive additional growth through higher growth rates in our transactional business. On top of that, M&A should drive additional growth, potentially 200-300 basis points of annual growth over that period on average. The result is an estimated CAGR for total recurring revenues of 10%-12% before M&A. What you see here is a depiction of the relative contribution of different drivers of margin expansion as we go forward. We've got the growth side and now the margin side.
Jeff detailed really some of the biggest drivers of the margin improvements, which are related to the cloud transition, things like consolidating versions, exiting our proprietary data centers, optimizing our products for the cloud. While transaction margins will remain below our software margins, it's important to note that there is a significant opportunity for us to improve those margins over time, the things we just heard about around our ability to have premium margins compared to commodity processors in the payment space. We also expect to improve our professional services margins over the next few years, and to get some leverage from SG&A and sales and marketing as we continue to scale the business. As you can see, the path to 30%-plus operating margins by 2030 really mostly comes at the gross margin level.
There's things at the side: cloud ops, payments, services, and then more limited opportunity from the operating expense side, but still a couple of points coming out of that. This is kind of how we see the margins playing out from the roughly 23% non-GAAP operating margin. It would be the midpoint of our guidance for this year to 30%+ in 2030. With higher revenue growth and margin improvement, we also expect our free cash flow margin to expand. We expect it to grow from today, including the impact of the Section 174 changes, in the 10%-11% range, into the high 20s by 2030, with free cash flow reaching $1 billion. Two-thirds of that free cash flow will come from our software business and about one-third coming from the transaction business.
To the question of why do we want to be in the payments business? That's really the answer. Our blended free cash flow margin will be in the high 20s, with software in the mid-30s and transactions in the mid-20s. What you see here is our target models. We put this all together. What does our target model look like in 2025, and what does it look like in 2030? A bunch of stuff here. We've talked about the revenue growth side. We would expect to be in the low $2 billion range in 2025 and in the mid-$3 billion range in 2030, with growing our recurring part of that revenue to 90% or more. We expect to see low double-digit organic growth in the recurring revenues.
I just showed you that. We expect total revenue growth to be in the 9%-10% range. Services, which is a much smaller piece of our business, will grow at a slower rate. Of course, maintenance is embedded in that. The decline in maintenance is embedded in that recurring revenue growth rate. OP margin, you can see, going from expanding to 47%-48% in 2025, in the mid-50s by 2030. Roughly 100 basis points a year on average over that 7 years. I would point out, we do not expect that to happen in a linear fashion, as we talk about that full period, that's our expectation. I'd also point out that M&A has the potential to drive both growth higher as well as margins higher.
Our free cash flow, you can see what I talked about, going to 17%-19% in 2025 as the impact of Section 174 goes away, and in the high 20s by 2030. Now I want to go back to what we talked about in terms of being our primary metrics to measure our performance and show you where those targets are. Again, recurring revenues, we're expecting a 10%-12% long-term CAGR for that segment of our revenues. In the software business, the SaaS business growing 9%-12% and transactions growing 10%-13%. Free cash flow, again, $1 billion in free cash flow by 2030 and high 20s free cash flow margin by that time.
To conclude, we're really building on a 25-year track record that Tyler's had in this of success in the software space and building on that very valuable client base that we talked about to really move into a new growth model for Tyler. We've detailed a clear set of growth and margin expansion drivers that are driven primarily by our accelerated shift to the cloud and by the expansion of our transaction business. Recurring revenues and cash flow will be the primary factors we look at to measure our success. Now we're going to move into our final Q&A session, and I'm going to ask Lynn and Jeff to come back up. We're also going to have our three group presidents join us.
You've already met Bret Dixon, also Rusty Smith, who's President of our Justice group, and Dane Womble, who's President of our Public Administration group. This will be an opportunity to ask questions really about anything, but certainly about the financial numbers, but also if you have questions about specific products, business units at a more detailed level, we've got our product teams here.
We'll have 40 minutes, this session here, we'll go ahead and get started. Alex, go to you.
Thanks. Alex Zukin, Wolfe Research. I guess my two questions are, It's a great framework for operating margin leverage. I'll stick there for the first question. Are you so efficient? It's unusual to see over a seven-year time frame not that much incremental margins from the OpEx side. Is that because you're super efficient, you're reserving the right to, you know, dry powder and make more investments? Then can you just maybe walk through some of those commentaries around where you said it's nonlinear? Like, where is it mostly nonlinear, just so we have a better handle for the model?
I'll start out on the efficiency side. In general, I'd say our sales and marketing organization is very efficient already because of the nature of our sales and the way a lot of our sales are coming into our installed base. We do think there are additional efficiencies, particularly as we focus on new, leveraging our current customer base. Those are more efficient sales processes. We think as we scale to, you know, roughly 2x the size, that there'll be opportunities to leverage G&A, but we haven't built a lot of those into the plan right now. The second part about the linearity?
Just mechanically. I'll save that question for later. The other question actually is maybe for Lynn, right? This is a long-term plan. I don't think you guys have had such a long-term plan before that you're signing up for. The last few years, relative to the macroeconomy, your end market has seen some meaningful tailwinds. What are you assuming from a macro backdrop perspective specific to your market? Where is this, like, not that risky, aspirational? Where are kind of the grooves, if you will, of your assumptions predicated on?
Yeah, I think it's a lot of, it's a couple things. We talked a lot about our strategy. We talked about our unique position in the market. We talked about the needs of the public sector. Yes, there have been some tailwinds. Yes, there's been some money. The budgets have not been impacted. We generally assume that's going to stay you know, somewhat constant. Obviously, there could be any major macro disruption that changes everything. We're talking about seven years out. The real, the near term one is the one at 2025. My guess is we'll be back here in 2025, and we'll be reassessing. When you look out to 2030, you know, I view these right now as, are they achievable? Yes. Are they slam dunks? No. Is there opportunity to beat it?
I do think there is opportunity to beat it. You mentioned some OpEx savings. You know, we're not modeling a lot of OpEx savings in there, but in the back of my mind, I see some areas where I think we should have some OpEx savings. You know, there's a lot of moving pieces. I wouldn't say these are aspirational goals. Again, I think they are achievable goals. Particularly, you know, one of the things I talked about in my opening session was the alignment we have now within Tyler. I've never seen a time at Tyler when the executive team was so aligned in such a unified manner. We talk a lot internally. I mentioned it at Connect, this whole concept of One Tyler. That's not to say that we did things wrong in the past.
It's just we used to operate almost in the silos that our government clients did. We were very distinct divisions with very distinct sales and marketing plans and very distinct, you know, opportunities. The opportunities going forward are really joint opportunities and what we can do together. I think that's the thing that's got me excited, and I think I'm not going to speak for everybody up here, but since they work for me, they'll probably say the same thing.
Okay, Saket Kalia, we'll go to Jonathan Ho.
Excellent. Thanks. Saket Kalia from Barclays. Brian, really appreciate your presentation. Thanks a lot for all the detail. Appreciate the two North Stars that you're setting up here. I'd love to just talk a little bit about how you think about free cash flow margin expansion through 2025 versus operating margin expansion. Section 174 throws a huge wrench into sort of your base here, but is there any reason why free cash flow margin expansion normalized should be any different than operating margin expansion? Does that make sense?
Obviously, operating margin is, drives a lot of the free cash flow growth. But I think one of the things over time, as more of our business evolves to recurring in nature, and it's certainly the case with the payments, but even on the SaaS side, it has better cash flow characteristics. We get paid sooner. Generally, subscriptions, like maintenance, are paid in advance. We typically don't carry as much receivables around those. Payments were generally paid pretty close to the time of the transaction. Over time, as our model evolves to more of, more and more recurring, it has a positive impact on the cash flow characteristics just because we've got more deferred revenue. We're getting paid in advance of doing the work or at least in advance of recognizing the revenues. I would expect that that margin over time would expand faster than our operating margin.
Thank you.
In terms of your, I guess, overall macro or budget health assumptions, can you talk about what underpins sort of these medium and long-term assumptions around, you know, the spending environment? Thank you.
Yeah, I don't, I don't think we're modeling in a higher elevated spending environment from today, nor are we modeling in something that's significantly worse from today. Obviously, we can't predict that. You're talking, you know, 7 years out. I think we're modeling a generally healthy market, maybe not one that's particularly robust or one that's particularly latent.
We've talked about the current market is really pretty strong. We've talked about activity, RFPs, being in a lot of our product groups that at or near all-time highs. In most cases, the budget environment is still pretty strong for our customers, and the stimulus money is still flowing through that. I think with the shorter-term model, we're expecting generally similar kinds of conditions, maybe not continuing to become a stronger market, but a similar kind of activity.
I also think when you think about, you know, there was a question earlier about the digital transformation and the changing workforce. That's not going to reverse do an about face and go. It's probably going to continue on that trend, which is going to require our clients to go out and spend more money on things that will automate and digitize things.
There's a question there, and then we'll come up here. Yep.
Hi, guys. This is actually Peter Burkly with Evercore. I'm filling in for Kirk Materne here. Just curious, at the state level, is there any real change you see in the competitive dynamics once you sort of get past payments? Meaning, do you see any of the other, you know, large enterprise apps companies showing up more?
You want to take that, Bruce?
Sure. I haven't seen a change in it. We're competing against SIs. We are seeing a surge in the platform players, the ServiceNow, the Salesforces. We're seeing that. I don't think there's any new entrants in there. We hold our own.
Okay. Yep, Terry?
Terry Tillman from Truist Securities. This is my last question, I promise. Great job, Brian, on the presentation, the last presentation, and everybody else as well. The one thing I was going to ask about M&A, it is part of your DNA, so I'm curious, though. Rapid seems like you deserve a pat on the back, and it's really interesting on the disbursement side now, what that can do. What is the appetite near term? How actionable could M&A be, whether it's big, medium, or small? Just kind of when you look out over the maybe next 3-6 months. Not trying to tip your hand, but, like, holes or, you know, kind of the waterfront, where are maybe some areas that we could see?
Could it surprise us, or could it just be deeper in some of the product areas now? Thank you.
Yeah, sure. You know, Brian outlined sort of our capital allocation priorities and debt paydown being the top one, but that's been our top priority since we did the NIC acquisition, when we had $1.75 billion in debt. Since then, we've done several hundred million dollars in deals. Our appetite is we're still looking at deals, and the bar may be a little bit higher right now, but we're still looking at them, and it is part of our DNA. You know, one of the reasons why we don't model out exactly what we think M&A did, we can look in the past and say, "Well, we've taken X% of free cash flow. We've generally bought companies at X multiple." We don't do that because we don't pursue deals to pursue deals.
We do it for strategic reasons. If something were to come along in the next six months, nine months, that was a really large deal, say, a $1 billion-dollar deal, but we really saw the long-term vision and value in it, remember, going back to my comments earlier, we always think about the long term, we'd find a way to make that deal happen. you know, I've had I don't know how many deals across my desk in the last few weeks, but the bar is probably a little bit higher right now.
Okay. Callie, did you have a question? Oops, sorry. Get Callie, then we'll come back to you, Josh.
Hi, this is Callie from Goldman Sachs. Just a question on when you look at those targets for 2030, what are the key things you're thinking about in terms of what could drive upside and what could drive downside?
Well, I think upside is really some things around the cloud transition. I think that potential upside. I do think we have some OpEx upside. I think our growth rates could actually be higher, particularly when you add in M&A. Obviously, if our growth rates go up, our margins are going to go up, our free cash flow is going to go up. You know, to Alex Zukin's question, you know, do I think these targets are achievable? Yeah. Do I think they're slam dunks? No. It's not part of Tyler's DNA to really put out big numbers that we're not certain of.
Generally, the way I look at things is we spent 25 years, I think, building a pretty strong credibility with the market. Part of that is we tell you what we're going to do, then we go do it. If we tell you, it's because we think we're going to do it. There might be once or twice, we're not going to quite get there, but we're going to tell you because we believe it. I can tell you that if I say something, then we're going to do everything we can to make it happen. That's just part of our DNA. We don't like to get ahead of our skis. I do think, you know, even when you look at those ranges, if you took the high end of each of those ranges, you're north of 30%. If you take the low end of those ranges, you're kind of around 30%. I don't know if I answered your question, but, I tried.
I'd, I'm going to say, if you don't mind, Lynn Moore, just when you think about the upside is the cross-sell. The slides that Bruce Graham showed and all of the opportunity that's not even in our plan, and I'll also refer back to the example that he had about Assessment Connect. Just to kind of give you a perspective there, so we had all of the state of Kansas that were using Assessment & Tax Pro, so we had all the data, but we didn't have the data platform until Socrata. Now we have the data and the data platform, but we didn't have the relationship that NIC brought.
That was a unique opportunity, those $650K ARR, that we would have never sold without the combination, the culmination of these three teams working together. I think those are the things that the synergies and the excitement that we have around cross-sell, that's going to be potentially upset, that we just don't really even have visibility into yet.
If you go back to my presentation, to Dane's point, you know, I outlined four sort of elevated growth drivers between now and 2030. We're modeling kind of what we think we can do, but I think there's upside in those.
There's a lot of things that can happen between now and then. Macro environment can change, all kinds of things, but.
On the downside, probably macro environment would be, you know, maybe a risk there. But we have talked about our ability to perform well during a recession or a tougher macro environment. While we're not recession-proof, I think we're probably about as recession-resistant a company as you can find, given very high recurring nature of our business, and it's all around providing essential applications to government or providing payments that are around things like your utility bill or renewing your driver's license, that are very predictable as well. We generally feel that while there could be some macro risk that every company would encounter, I think our ability to deal with that, we feel very confident about.
Yeah, even acquisitions. I mean, our profile is we want to find something that's going to grow at a rate faster than Tyler. We want to do something that's going to help elevate Tyler's margins. If there was a significant investment, either an acquisition or an internal R&D project, something around AI, and we decided it was worth making that investment today, and that's going to pull down some margins during that time period, we'll probably do it.
Okay, Josh?
All right, Joshua Reilly from Needham. Thanks for the great presentation today. As you move migrations up from kind of this 500 run rate to maybe 750 or higher in the next couple of years, do you have the customer service personnel in place to manage these ramping migrations, or are you going to have to do some additional hiring there? How is this kind of all factored into the model expectations for the next couple of years?
You want to take that, Jeff, or?
Sure. There may be some marginal headcount that we need to execute some of this, but it's not, I don't think it's a material piece of what we've modeled going forward. Rusty, Dane, do you guys...
Part of that, going back to the slide that Jeff showed with the evacuation of our current data center, we've been running two data centers, so there's personnel that we have a chance to reassign, and so part of our modeling takes that into account. Just to support the notion that incremental staff will really be based on the demand. If the demand, and our ability to move those faster, then it would be incrementally more, but there's quite a bit of reassignment. As we're able to collapse versions, move clients to those, then it gives us the room on the OpEx side to be prepared for those migrations.
We talk about linearity. The pace of that 1.7 times uplift from the flips, you know, how that plays out will be one of the things that drives the linearity of that growth.
A lever that we have, is we have some flex on limited period. In fact, are we going to have to hire additional support to get us through this window? We have some flexibility with implementation resources if we needed to flex those into a support environment for a limited period of time. We have the ability to do that. If you're asking, do we have to add a significant long-term cost component to get through a period, I agree with Jeff. I think it's immaterial.
Okay, we'll take a question real quick from live stream here. There's been a lot of discussion on payments with states and locals. Can you discuss potential opportunities at the federal level?
I'll take that. We don't have payments ongoing right now in the federal space, but we do have opportunistic focus there. We do have some applications in the formerly MicroPact world, now known as our platform division, that would generate payments. I'd say we are opportunistic in the federal space, and then with an eye towards getting more focused, more methodical in that space.
The same factors that cause us to be competitive in the state and local space also apply in the federal space.
Absolutely.
Okay.
We also have an outstanding bid with the IRS that we're still.
We do. We do.
Yeah.
Yeah, we've won it once, so we'll have to win it again.
Okay. Let's take one more question from the live stream here. Oops, I missed it. Sorry about that. Part of the growth algorithm at NIC included higher growth from the new portal states in the first 4-5 years. Do you think Tyler is likely to win any new U.S. states on the traditional NIC self-funded enterprise model?
I think there's not a 0% chance. We are focused on making new relationships and sustaining new re-relationships in the 30th, the 31st, the 32nd state. We do push that way. What we're finding now is, there may be a state that wants to bundle a bunch of services under a contract. What we're finding now is we can go agency by agency in different states, take services or applications that we have built in the 29 states that we have, and now offer those to states that aren't under our contract. There are purchasing vehicles available to us that we can use. They're good vehicles. We don't have to have a statewide contract.
We think there's growth in non-NIC states without having to have a state contract.
All right, I think.
We'll take that.
We'll take that, sure. Go ahead.
Hi, David Unger, Wells Fargo, one for Michael Turner here today. Just one for me. What would it take to bring buyback up higher in the capital prioritization list? I know it's hard. You mentioned private market valuations are high. You know, seeing other software companies are initiating buybacks, just curious how we should be thinking about that. Thanks.
Yeah, I mean, I think, you know, I look at it a couple of different ways. You know, right now, you know, our capital structure is pretty good. Our annual dilution is really pretty small. When Brian Miller showed that slide and showed sort of what I call an effective buyback through our long-term incentive compensation, you know, on a net share basis, we're experiencing about 0.5% dilution a year. You know, I think right now, with the cost of capital, and where our valuation is, look, I believe that Tyler 2030 model. I used to be saying, "Well, why don't you go and spend $1 billion on your stock right now?" If I didn't have $800 million in debt, I probably would.
I've made that comment a few times that, particularly in the last year, when we saw, you know, equities, particularly in the tech space, drop considerably, and we dropped, considerably and maybe a little bit more than others. My comment was, if we didn't have over $1 billion in debt, I'd be wanting to go out and buy some right now. At the same time, part of the reason why we have $1 billion in debt is why we're so excited about the future. It's kind of a catch-twenty-two.
Okay. Clark?
Clarke Jeffries, Piper Sandler. Maybe you can help me think through this in terms of what are your OpEx growth expectations between the SaaS business and the payments business? You know, if we start from the point of gross margin and the benefit there between the two businesses, that specifically, what seemed to be, like, a third of free cash flow from payments, would seem to me like OpEx growth is lower in the payments business. Maybe you can help me think through, you know, how drastically versus SaaS OpEx growth will be.
I don't know the number, how to quantify that in numbers, but qualitatively, yes, the OpEx should be lower around the payments business. We talked about that a lot of those sales, at least in the near term, are coming through our current existing sales channels into our installed customer base. The 300 sales reps that are already selling other Tyler products have payments in their bags now. And generally, the.
Their expense is sitting in software.
The expense is in the software side right now. It, at least it's already in Tyler. I think also the sales marketing side is one, the GNA side as well, because it's a lot of transaction processing, we have the systems and the solutions in place for that. There's not a lot of incremental GNA around those, more volume from those. R&D, there's not as much R&D on that side as well.
Fair to say that the free cash flow margin in the payments business is going to improve at a higher rate than the SaaS business? You know, the SaaS business will have the cloud ops, but then from that point, payments will get a higher and higher free cash flow.
I think that's fair. I don't know that it's, how dramatic that is, but I think over that seven-year period, you would expect that to be the case, but that both improve.
Alex, we've got one over here, maybe.
Hey, guys, Alex Zukin, Wolfe Research.
What's your name?
We're going to need it.
We know. On the... I want to do two separate questions, one on the payments business. If the math looks like about, I think, about $1 billion, a little bit over $1 billion in kind of transactional revenues by 2030, on a $60 billion TAM, are you under-punching or, you know, is that? You talk about it not being aspirational, which I appreciate. What is the, where should you go as a, you know, we're not going to use the M word, but the market leader, let's call it, in this space, if you do the things that you're talking about, why wouldn't? I also don't fully understand why the payments revenue growth is more linear, given the consumptive element there.
Just help us understand, like, where is the aspirational benefit of, on that payment side? Completely separate topic, federal. I think you talked about Socrata and payments there. Is that as far as you want to go? It does feel like there's a lot of opportunity on the federal side of the business that could be done through M&A, presumably. Just, you know, two different topics.
If I rephrase your question, you're asking me: Is our payments growth conservative? If that's what you're asking. You know, I think part of it, I'm going to let Bret Dixon step in because he's been more involved with the modeling with our Digital Solutions Division. You know, I go back to what I talked about in my opening remarks, which is we've really just now starting to hit our stride there. We only just now unified the payments team with a go-to-market strategy. We've got a little bit of experience of the growth in payments, but I don't have 2 years of experience in growth in payments. You know, at this point, for me to say, "Yeah, we should be at $3 billion," I don't know what that exactly takes right now.
I know we're the market leader. I know we're differentiated. I know we can command premium pricing. I think it's a big growth factor for us, not only just to 2030, but, you know, when we talk about our cloud transition, a lot of that sort of runs through at 2030. I talked earlier about, you know, some of these are growth drivers that go to 2030 and some that go beyond 2030, payments and transactions to me, is one that has legs and keeps going. Bret, tell me what I messed up.
You didn't mess up. I'm going to give you a little inside baseball answer there. I made a comment a minute ago that 60% of our sales force is trained, which was probably not a good comment. All our sales force knows about payments. It's really more of how confident are they to go drive a payment sales and getting our sales force, NIC excluded, getting our overall sales force comfortable going and driving it, that sale is important. Part of their confidence level has to be, can we sell that payment, and our support organization be able to handle that, our implementation organization handle that? We've got a 98% retention rate, and we don't want to screw that up.
Convincing sales guys that, "No, no, you can trust us on this, we'll get the..." it's more of that, so that it's kind of an evolution, if you will, as opposed to just go to the sales class for payments and go sick them, okay? There, there's that thing. I also made a comment earlier that payments is not new. There's a lot of payments companies that are embedded in our install base, and, and so unseating an incumbent is hard, you know? I think tempering our excitement is probably appropriate at this point in time. I'll speak, you know, for myself, I do think there is upside. There, there is upside there.
An anecdote to support just not having enough experiences, one of the acquisitions that we did about 18 months ago is called VendEngine. They provide the payment services to jails and corrections, and we see it's got a great-looking TAM. It's new to us. That product line, combined with the NIC team, there's five states that we are at some point in a sales process with. We will be really interested to see over the next six to 12 months how those play out, and those are the types of experiences then that will then better inform what we think the opportunity is.
we would-.
That's just one example. There are lots.
We would not have been able to predict our success rate in those states you're referring to if we went back in time 18 months.
That's right.
Right.
We're looking to see how those play out to inform our future expectations, too.
Let me dovetail just another thing around payments growth. The comment earlier about margins and how confident are you in margins going forward. We showed that disbursements is a very big TAM, and what we're doing right now is a tiny little piece and very little. For us to go and expand significantly in disbursements, one, we're gonna get more legs under ourselves on the acquiring side, but that's gonna take investment. To my comment about, well, if there's investment out there, that's gonna produce some margin headwinds in the short run, but we see that long run, we're gonna go do that. If that disrupts, you know, something that we're saying might happen in 7 years from now, that's what we're going to do.
What about on the federal side?
payments on the federal side?
Just federal, federal in general.
Federal business at large.
Mark, I thought you were asking an M&A question.
No, no. His question was, do we expect to expand more into federal besides Data & Insights, and payments, I think was his question?
We're going to be opportunistic on the payments side. Lynn mentioned opportunistically, we've been on an IRS bid that is tax refunds. We would be one of what, 2 providers, Elizabeth? That's what we're bidding for. That is an opportunistic play. We will begin to take some of our federal applications, like vet benefits, I mentioned a minute ago, and that's a perfect disbursement case type. We will selectively choose our applications that will then we'll begin to hook either acquiring or disbursements to those. I think in the federal side, it is going to be a lot of disbursement type thing of disaster relief, things like that would be another case type that we can develop.
It'll start out, opportunistic payments, then we will begin to hook payments and disbursements to some of the applications that are federal.
Yeah, I mean, the interesting thing for us to do on the, on the federal side is the same thing that we've done on the state and local side. If we can find a lane where we can build software or, or technology services that are repeatable, where we can essentially turn it into a COTS-type play, then we could get excited about that. A lot of the spending in the federal government is not that. It's one-off, snowflake, custom-built. That's not as attractive to us.
With our low-code platform that came from the MicroPact application acquisition, we do have a really significant opportunity to expand even just within their customer base. They have a presence in every major federal agency with some applications, they've got many more opportunities across that. For example, in the federal government, one of the applications that our platform is used for is background checks and security clearances. We do that for the.
Yeah
-Department of-
DoD.
-uh-
State.
Department of State. Every agency has background checks and security clearances, you might think that the federal government has a system for that, each agency goes out and procures its own system. We've got the opportunity to replicate that across multiple agencies over time, it's the same thing with managing things like EOC claims or veterans' benefits or licensing things. We do believe there's a significant opportunity with that platform to continue to grow it.
The short answer, Alex, we've got a federal division, we've got a federal sales force, and they're out there selling things other than payments and Data & Insights.
There's some cool things, just to expand on that a little bit, MicroPact, when we acquired them, was a lot like Socrata when we acquired them. They had a local development platform, and that's what they sold, and then they had partners that developed applications, which is a good business. What we've started doing, similar to what Jeff did with DNI, is now we're taking that platform, and we're building assets underneath that platform that are applications that we can sell in a repeated fashion. Beyond just the platform, we continue to sell that platform, but now those assets that that platform is building, we're packaging as a product and moving into the federal space very, again, opportunistically right now.
That federal space is the one area where we do significantly partner with SIs and both on the sales side and on the implementation side. That's a little bit different than our other business, but that gives us the ability to push more software out quicker.
We are seeing growth in there and expect to see good growth in there.
Okay, we'll take one more from live audience and then one more here real quick. Why is the gap between free cash flow margin and operating margin in 2025 significantly wider than the gap that exists in 2030? It implies more of a hockey stick ramp in free cash flow. Why might that be the case?
Part of that is the impact of. The starting point was Section 174. It's a $130 million impact to free cash flow. You're starting. It's probably better if you looked at it, sort of an adjusted free cash flow that you're starting with. Free cash flow does grow faster than operating margin, it's not as dramatic maybe as that slide would indicate, given that we're starting at sort of a, artificially.
Yeah
depressed free cash flow margin because of $130 million of incremental cash taxes. That then will become something like $50 million next year, $40 million the year after. That's probably the biggest factor there, besides what we talked about earlier around the ability to expand the free cash flow model.
Yeah. Remember Bret's slide, the government's taking money, and they disperse.
They're taking in a lot more from us, next year.
Okay, one more question here. Terry, you want to follow up?
Yeah, I lied. I have a question, and it's not what's for lunch, but Terry Tillman from Truist Securities. Brian, one question in terms of when folks look at the bookings and backlog PDF you have and then the schedule of supplemental information, there's a lot on both of those. You know, there was consternation with some investors I was talking to about backlog a couple of quarters ago, and, like, there's so many kind of moving parts. Have you all thought about maybe condensing? I mean, I know a lot of effort goes into this, but sometimes it's kind of death by a 1,000 kind of metrics. Going forward, is there a thought on...
Of both of those PDFs and looking at each one of them, like, what should we really focus on that can kind of better capture 2 distinct kind of financial streams?
Yeah, they're really the things around ARR and recurring revenues are what we think are most important. As we've talked about in the past, some of the reporting and the disclosures we do are sort of a product of, as our models evolved from years ago, being a license and maintenance business, when bookings and backlog, a lot more played out of backlog was a much more important metric. Now it's much less relevant. We've layered on lots of new disclosures and metrics, and we recognize that it's in some cases, it's kind of hard to figure out which ones are more important and what some of the nuances between those are. To your example, bookings and backlog, we think, are much less relevant now.
There's always a lot of explanation around those, which means they're not that relevant to us. I think you will see us eliminate some things that we've talked about in the past and really focus on a fewer number of relevant indicators.
Somebody does notice every time we take a.
We get a question about it. Someone will ask about, whatever goes away, there'll be some things that we just won't disclose because they're not really relevant. We used to have a disclosure around new license deals, more than $100,000 in a quarter, and that's totally meaningless now. We did take that one away at some point, or maybe it's still on that sheet. Yes, we're really looking to simplify and focus on those things that we look at that are the most important metrics.
Potentially, we could see SaaS, like, SaaS ARR every quarter that includes everything, flips existing, just adding on additional modules and all of that.
Yeah, I'd say we want to provide more transparency around breaking out those. Some things are in the supplemental information. Some things, ultimately our goal is to have more in the face of the financial statements, but to have better disclosure around those components of what currently is subscriptions on our income statement, so the transactions and SaaS, and what's driving those. We want to show you gross margins for each revenue line. Some of those are combined. We have some back-end things to do to get to that point, but you'll see our disclosure become a little bit more detailed, and especially around the gross margin side.
Okay, well, I think that's all the time we have for questions. Thank you so much. Great questions. I'll hand it over to Lynn to wrap it up.
Okay, thanks, everybody, for taking the time to join us today. We're certainly very appreciative of the efforts. We hope you found today informative. There's a survey that's out there. We really appreciate your feedback, appreciate the comments you've made throughout the day. The comments are anonymous, so if you didn't like anything about the day, you didn't like what I did, I won't know it. I'll still talk to you.
We'd really appreciate it if you would take the time to fill out the survey, so we can learn a little bit about the things that you liked, the things that you didn't like, so that we can improve going forward. You know, I started off my presentation this morning sort of talking about how it had been more than four years since our last investor presentation and said, "You know, a lot's changed, a lot's happened over the last five years." We've had some new strategic initiatives. We've had a lot of investments, and really, we're a little bit of different company than we were five years ago. I hope that today really sheds some light on, you know, what we've done over the last five years and, more importantly, why we've done it over the past five years.
You know, in closing, I just kind of revisit a little bit what we heard today. You know, Tyler, it's a one-of-a-kind company. We've got a strong track record of delivering free cash flow and growth. As I mentioned, the last five years have been marked by a period of investment and some new strategic initiatives. We believe those investments have really set the stage for a new period of growth and free cash flow, delivering on our goals in Tyler 2030. To recap those goals, in 2030, we expect our revenues to be between $3.6 billion and $3.8 billion, more than 90% of those recurring. Again, that's organic, excluding acquisitions. We expect free cash flow to be in the high twenties and delivering about $1 billion in free cash flow.
Before I close, I want to emphasize that. That's a big deal. When I started at Tyler in 1998, our total revenues from the software business were about $25 million, and I'm standing up on stage talking about delivering $1 billion in free cash flow. To me, if I'm taking a headline away from today, that's it. We've got a clear path to do it. We've made a lot of investments. You know, margins have been compressed. We know that. We've talked to you all about that. We tried to show you the path forward, why we did those things. Again, I remember talking to the management team.
We started planning this last year. I started talking to the management team, "You know, how do we get to $1 billion in operating profit, in OP?" It sort of evolved into, "Well, how do we get to $1 billion in free cash flow?" Again, to me, that's a big headline. It gets me excited. I talked earlier, I think it gets the whole management team excited. I told you it's a great time to be a part of Tyler. The management team is great. You know, we're aligned and focused on trying to deliver on those goals. Again, thanks again for your time today. Thanks again for your interest in Tyler Technologies. For those, I know a lot of people have travel schedules. We do have lunch next door, for those who can make it.
I think most of the executive team will spend some time over there. We've got travel schedules. We've got some other schedules. I think they'll be there probably for at least 30 minutes or so if you have some more questions. We've got some of our operators here, which I know you guys grilled them at during Connect, but you can also talk to them today, too. They're happy to chat with you. Again, thanks again.