Good afternoon, and thank you for joining us at the Tyler Technologies session at the Goldman Sachs Communacopia and Technology Conference. I'm Gabriela Borges. I cover emerging software here at Goldman, and I'm delighted to have Brian Miller, EVP and CFO of Tyler, on stage with me. Thank you for your time. Great to be here. So Brian, I want to start on the cloud transition, which we've seen pretty consistent metrics over the last year, and I know you've made a lot of progress with hitting milestones. So give us the power of your reflection. What do you think has gone well so far, and what do you think has been most challenging? Yeah, excuse me. Generally, we've been on track with our cloud transition. Our cloud transition has been a very, very long one. We started probably 20 years ago, moving towards a hybrid model with a mixture of license and subscription, in the new business market. And really going back to 2019, we accelerated that shift and we said we've moved from cloud neutral to cloud first, and took a number of steps starting in 2019, including partnering with AWS to move to the public cloud out of our proprietary data centers. Really eliminating, with most products, the new sales of license model and moving exclusively to SaaS and the new business model. Then doing a lot of the things that we needed to, to set up to move our existing on-premises customer base, which is very large, to the cloud as well. Generally, all of those things have been on track over the last three or four years. We've moved from, in 2019, 50% of our new business coming just in the cloud, to now, around 85% of our new business. We've made good progress with migrating customers, on-premises to the cloud, and we're really just at the inflection point of starting to accelerate that move. We've made really good progress in moving out of our proprietary data centers and into AWS. We've talked about our plans to close our first data center around the middle of next year and our second one by the end of 2025, and we're on track with those schedules. So that will help us from a margin perspective and eliminating a lot of duplicate costs that we've got while we keep our data centers open. I think the successes we're seeing around clients are pretty meaningful. We can do a better job of serving our clients when they're in the cloud, as opposed to in their own environments. We're able to proactively identify issues and problems and solve those before they get to the clients. So client satisfaction is generally better, and so that's an upside we've seen. We're able to integrate our own Tyler products better and provide better interoperability between multiple Tyler products when we're in the cloud. That's a big part of our story, the Connected Communities and the breadth of products we have, and the ability to communicate to connect those and make them work together. So that's proven to be better in the cloud. We've been able to, in the AWS environment, to take advantage of some of their services and technologies. I think on the plus side, we've seen better economics as we've scaled up that operation than we originally planned, and some of that was reflected in our Q2 results, where we had better margins than planned. So we're a little bit ahead of schedule there. On the challenge side, we've had, you know, we have, as part of migrating our customer base from on-prem to the cloud, we're dealing with a lot of version consolidation. So with a lot of our products, we have historically supported multiple versions of the software, and as we move to the cloud, our objective is each product has one version, and all the clients are on it, and all of them upgrade at the same time. But in order to get to that, we have to migrate those customers who aren't on the current version, we have to upgrade them to the current version. And so, we've been working through that. We've been sunsetting older versions of products. Each product has a different timeline and a different roadmap for that, but we're making good progress with that. Ultimately, that yields a pretty significant margin enhancement opportunity because it is expensive from a support standpoint and a development standpoint to support multiple versions of those products. I'd say the other challenge we have around the transition from the cloud is where clients in their own environment have adopted processes that aren't really consistent with best practices in the cloud. And so we have to work through some of those changes in processes as clients move to the cloud and work with clients so that their operations aren't disrupted, but help them through those changes that they need to make so that their processes work most efficiently with the products in the cloud. How much of the process management piece of this is a customer technology problem, meaning they need to also upgrade technology vendors that sit around you, versus education and process management? It's much more the latter as opposed to the technology itself. That makes sense. makes sense. Okay. In our observation, there are one or two critical pieces on pricing and incentives when you're working with customers through a cloud transition. Maybe let's take the two pieces separately. First, on pricing, do you feel like you've already gone through the process of optimizing the pricing on your cloud products to create more lifetime value versus your on-premises? I think we have. We've... As I said, we've been through this transition process for a number of years, and I think we've settled in at something that works well for us and works well for the clients. Generally, as a client moves from on-prem to the cloud, we see an average uplift of about 1.7x their maintenance. It's higher for a new customer, that spread between maintenance and subscription. For an existing customer, depending on how long they've been a customer, there's a recognition that they paid for a license at some point. There's at least in the early part of the transition, a credit or a discount given in recognition of that license fee that they paid, and then they over time move towards the standard SaaS rate. And I think that pricing algorithm has worked well for us. Customers generally don't view it as they're paying 1.7 times because there are certainly costs, whether it's hardware or staff, that they don't have to have once they're in the cloud. And so generally, the case studies show that it's kind of cost neutral to them, but obviously more revenue to us. What was the, I'm sorry, the second part of the question? Yeah, the second part is on incentives. Incentives, yeah. Can you provide more carrots or sticks to incentivize customer behavior? And what about for your own sales team? Do you have an incentive program that encourages them to lean towards cloud? So there are both carrots and sticks. Kind of like with any of these transitions, there's some eager adopters early. There's a large group in the middle that are willing to move to the cloud, but have to kind of be led through the process, and then there'll be some more reluctant adopters at the end. Right now, we're still pretty much in the... Those clients that are moving are mostly the eager early adopters. There are a number of factors that are causing them to be eager, and the biggest one probably around just their general ability to deal with infrastructure. So as you can imagine, governments, like, like the private sector, are faced with a lot of challenges around hiring and retaining IT staff, and there's a lot of competition for that. Governments, in general, still aren't kind of fully back to pre-COVID staffing levels. They haven't filled all the jobs that were lost during COVID. So generally, they're seeing pressures around staffing and especially in IT, and so they're really struggling with running systems internally. And then cybersecurity concerns. So ransomware is, just like in the private sector, it's a very big issue in the public sector and around governments. And so many of our customers are not terribly confident about their abilities and their capabilities around cybersecurity. So their desire to move to the cloud, we certainly see upticks in that interest as there are ransomware events and that affect their internal systems. So right now, we're kind of in the early adopters. We're not really having to use a lot of carrots or sticks. We have talked to customers about the concept that as we move forward, that there will increasingly be new features and functionality that will only be available in the cloud. So while their on-prem systems will be supported for an extended period of time, and they'll get bug fixes and legislative changes, there'll be new features and functionality that they'll only get as they move to the cloud. Further down the road, we have more sticks available to us, mainly economics and raising maintenance prices more aggressively to make there more of an economic incentive to move to the cloud. Ultimately, we have the ability just to discontinue support on an on-premises solution as we get kinda into that stage where there are fewer reluctant movers at the end. But I think if we do our job right, we really won't have to use very many sticks, and it'll mostly be the carrots. There is a piece to this which is government willingness to move to the cloud, government customer w illingness to move to cloud. There's also a piece of this, which is broader government willingness to invest in technology. And many of the dynamics you talk about, like staffing shortages, I think speak to a broader advantage that Tyler has to be able to cross-sell and continue to continue to increase the value that you're providing to government customers at the time. What is the catalyst path? On paper, it makes so much sense to use Tyler's suite of products. In practice, when we do the due diligence, the ability for government to adopt technology seems quite painful. How do you work to bring the theory into the reality? Yeah, the government market is in a lot of ways very different than the private sector, and one of those is how they buy products, why they buy new technology, and how they approach that. On one hand, government is very risk-averse, and they don't like change for the most part. So, they are rarely early adopters of technology or looking for leading-edge technology. But on the other hand, once technology is sort of mainstream and widely adopted, they are generally eager to look at adopting new technologies to increase efficiency or provide better service to the public. Government's interesting because they're not ROI-driven, they're not profit-motivated, and they don't have competition effectively. So, wherever you live, you don't have a choice about where you pay your tax bill or where you pay a traffic ticket or your utilities. So, they're not really motivated. They would like to provide better service to the public, they'd like to be more efficient, and they sort of have this overriding mantra of having to do more with less, given often the budget pressures they have. And all the things that we automate are mission-critical functions. They're... None of the things we do are optional.... whether it's 911 systems or property tax systems or courts or financials and payroll. So they're all things they have to do, and generally, adopting new technology lets them do those things more efficiently. So they recognize that, but they still sort of battle with the sort of inertia and the slowness to change. So we're able to, in one sense, it's difficult for us to sort of drive demand or accelerate that happening, but we're in a really good position given the breadth of our products and certainly the breadth of our customer base, where we have 40,000 installations of software across 14,000 different government jurisdictions. So the average customer has 2-3 products from us and could have 8-10 products from us. So that creates a big cross-sell opportunity. We've done a lot of investing, and a lot of what we've done over recent years has been creating that value proposition, that next product and the next product, and the one after that should come from Tyler, and that there's more value from that coming from Tyler because our products work together. They share data. We have analytics tools on top of them. We have common foundational elements. So we've done a lot of investing, not just to have this broad portfolio of products, but to actually make them work together in a way that none of our competitors can, and to create additional value, and to drive that cross-sell. As we talked about at our Investor Day recently, there is an increased focus within Tyler on cross-sell opportunities and taking advantage of that. So not necessarily just waiting for those deals to come along, but to be much more proactive about driving those cross-sells. Well, I think you've also been proactive on building the next pieces of the portfolio. Speak a little bit to your market analysis and your customer conversations that allow you to identify where the gaps are. Then, if you're willing to share with us, the one or two things in the product portfolio that you're most excited about, either from an organic or a potential M&A perspective? Sure. And we have been an acquisitive company over the years, primarily driven by organic growth, but certainly supplemented by regular acquisitions. I'm in my 26th year with the company, and we've done about 60 acquisitions over that time, so a couple a year. Those acquisitions tend to be... Well, we have an ongoing active white space analysis, so we're always looking at our view of government and where our products currently fit and where we have gaps, whether that's within an existing suite of products or whether it's sort of whole new subverticals that we don't serve or that we have a limited presence in, and that includes levels of government. So, for a number of years, Tyler was primarily focused on the local government market, cities and counties and school districts. And through the NIC acquisition, we established a couple of years ago, a much bigger presence in the state space, and through a smaller acquisition, we have a limited presence in the federal space. But so we have expanded into other levels of government as well. Different needs lend themselves differently to whether it's organic development or whether it's acquisitions. Often, if it's something, whether it's more feature driven, then that's generally gonna be organic, internal R&D, where we already have a base of a product, we understand the needs of the customer. If it's more sort of expansion of our TAM, getting into a new-- again, whether it's within a suite of products or a new, a whole new area, often that's best served by M&A, where we can acquire significant domain expertise, maybe an existing customer base. We look to leverage those acquisitions by using our sales organization and our customer base to drive higher growth with those. We've had a lot of success with those kinds of, sort of, tuck-ins, but some of them are bigger than tuck-ins, but those kinds of acquisitions. That provides us with more cross-sell opportunities and more customers to sell more things to. We look at M&A initially as adding something, but ultimately driving higher organic growth by having more products to sell. I'd say, you know, without kind of giving you the list of the white space, there's not big gaps in our portfolio right now, especially at the local level. We've filled in those major areas like public safety, where we formerly didn't have a presence. We've got a lot of opportunities for state. I would say, given the relationships we have through the NIC acquisition, we have done a couple of acquisitions that have added more state-focused products, like, in the outdoor recreation space. So, there could be opportunities to continue to expand that and potentially to expand more in the federal space, where we have most of our presence is through a low-code platform that we acquired. Technology, AI, certainly. This is a hot topic, and we actually made an acquisition. Right. Last month of a company that is really sort of AI-based that focuses mostly in the court space today, but around redaction and extraction of data and automating those processes, which were fairly manual. We do believe that that technology we can more broadly apply across the Tyler product portfolio as well. So I'd say some of those kinds of technologies and certainly looking at citizen interactions with government and technologies that can help drive that those capabilities could be things that we would look to expand through M&A. I guess the other area is around payments, which has been a big topic for us, and I'm sure we'll talk about a little bit more. We've done a couple of acquisitions since the NIC acquisition to strengthen our capabilities around payments. Most notably, Rapid Financial Solutions, which added a lot of capabilities around disbursements and outbound payments. So there could be areas around the payments and transaction world that would be attractive from an M&A standpoint. I want to approach the M&A question from a competitive angle as well, which is, if you think about the characteristics of your business, which are incredibly sticky, and you apply a private equity lens. What is the risk that private equity successfully takes some of the point products that you compete against and puts it together in a platform that perhaps on paper, can emulate some of the breadth that you have? Yeah. We've certainly seen more private equity interest and involvement in the public sector space over the, you know, recent years. They've discovered it, and we've seen competition both for M&A opportunities from private equity firms. We've seen... And of course, they all will turn over at some point, and so we've seen a lot of those companies then running processes again to be sold. We have acquired maybe one, maybe two acquisitions that we've done from PE firms, but it's been pretty limited. I'd say just in a general, whether it's PE or startups in our space, not that we're certainly aware of, you know, hyper-focused on competition and if not, not paranoid about it, but very aware of competition and, you know, and where that's coming from. I would say that in the government space, the market generally moves fairly slowly. Not that it's impossible, but it's very hard for something to sort of sneak up on you because sales cycles are long, adoption of new, new technologies are long, and their risk-averse nature means that references, reputation, looking at installed customer bases are super important to them. While-- And we've seen some, some PE firms consolidate different products, but actually making them work together as a sort of a suite of products that's actually integrated is very, very difficult, and it's taken us decades to get there. Not that you can't move faster, and the cloud helps some of those things move faster, but amassing a customer base our size has also taken decades. And building those referenceable accounts and that reputation in the marketplace has given us, you know, a very defensible place to start from. But I would say that putting these products together and really making different technologies, different platforms, not just kind of have the same look and feel on the screen, but actually making them work together is really difficult. And I think we've done a good job of it over time and have a pretty good lead there, but we're certainly very aware of competitive threats and take them seriously. Absolutely. I want to switch gears and talk a little bit about your comment from the earnings call on pipeline metrics and specifically RFPs and demos tracking above pre-COVID highs. So walk us through the implications for that. How do we think about COVID being a tailwind versus a headwind t o your business over the last three years? Do you think it's a headwind or a tailwind today? Are Are there lingering impacts? And can we construct a scenario where returning to record high levels in RFP and some demos means that you may see an acceleration in revenue over time? Yeah, I think most of the lingering impacts from COVID, at least from the negative standpoint, are largely behind us. To the extent that... And COVID didn't really change the underlying demand. I mean, people still are replacing, you know, old legacy systems that are at end of life, and again, they're mission-critical systems, and they're kind of non-discretionary decisions. But we certainly saw sales cycles lengthen. Things shut down for a while, so we weren't doing demos on site. Customers weren't doing site visits. They had certainly a lot of other priorities during COVID, and so a lot of sales processes just took a pause, as well as implementation processes, as we figured out how to do those things remotely. So there was kind of a pause for a while. You know, 2020, we still had growth, but like 2% growth. Those sales processes, I think whatever pent-up processes there, those have all kind of worked their way through the pipeline. And what we've said now, to your comment, we've pretty consistently for the last few quarters, but, but again, this quarter, said demand is now, or activity in the market is now at or above pre-COVID levels or pre-COVID highs. So it's, it's all the way back. The pent-up stuff, I think, has worked its way out, and now it's just a very high level of activity. So when we look at those, those are very early leading indicators, RFPs, new deals we're seeing, and then are we moving to the next stage and, and being downselected and doing demos? Things are moving through the pipelines at pretty normal rates, but there's a lot of activity at the top end of the pipeline. Now, our typical sales cycles are a year for just sort of an average deal. Sometimes 18 months, two years, sometimes five years for a big, you know, big complex deal. So, those things turn into contracts and turn into revenues, you know, maybe several quarters down the road. What I do think maybe has some of the impacts of COVID, from a demand perspective is, you know, in general, our customers are waiting until their old system is just about nearly dead before they replace it, because they're not profit-motivated, they don't have competition, so they're generally not buying because of an ROI decision. So they, they use those systems as long as they can. But I think some of the complications that emerged around COVID, namely the move to remote work and the need to be able to, to operate in different environments, has shown them with a lot of systems that they had, that they might have known were not state-of-the-art systems, systems that, didn't provide a lot of things they'd like, but that they might have thought had 5 years, 10 years left of life in them. But they don't support remote work. They don't, support citizen self-service. So for example, you might have a mainframe, court system that, you know, is a COBOL-based, 1970 era, and, and a lot of large cities and counties have those kinds of systems. That they might have thought, "I can get by for another five or six years with that, or 10 years, maybe." But it only worked if the users were at their desks in the courthouse on a terminal that was tied to the mainframe. They couldn't operate remotely, they couldn't select a jury remotely, they couldn't hold a trial remotely, maybe they don't take online payments or didn't have electronic filing. So all of those things, their operations were just shut down while the buildings were physically shut down. So they're saying, "You know, maybe I need to replace that system sooner than that." Now, that might mean now they're starting a process. That s o it may still be part of that accelerated demand, but that still may be things that they're just starting to think about that, or they've come to that realization. So we do think there's gonna be some pull forward. There is and will continue to be some pull-forwarded demand that might not have materialized until further down the road. The other thing I think is that they've... Really, there's an intensified focus on the need to have better data and better analytics or better- business intelligence. That's not been a big focus of a lot of governments in the past, and they have siloed systems with siloed data, and have had difficulty in actually, you know, pulling data together and being able to make good data-driven decisions. I think COVID heightened their awareness around that and intensified a focus on the need to have better data. Certainly a key to our systems, and a lot of that came through an acquisition we made as a company called Socrata a few years ago, that brought us a advanced data and analytics platform that we have integrated into all of our major products. So, we have real capabilities there, and so the need for those kinds of capabilities, I think, also is driving how they look at systems and potentially replacing some systems sooner. One of the hypotheses that we're stress testing is: Does the move to the cloud actually accelerate some of that process with bake-off winning vendor selection and ultimately brownfield replacement? Are you seeing any of that in practice? I think so. I mean, I mean, it, maybe on the margin, I think we are. I think we're seeing it... You know, the implementation process is easier. Yeah. The ability to integrate multiple products is easier. So for someone to acquire multiple Tyler products and have them work together, it's easier in the cloud. They don't have to deal with the same, you know, hardware issues and configuration issues. So I think at the margin, it's helping that. The other thing we believe is that it creates more cross-sell and up-sell opportunities as customers move to the cloud. So, you know, a little bit contrary to what I was just talking about, but if someone is moving part of their solution, part of a suite of products... Say they have a court case management system from Tyler, and we're kind of the pretty clear leader in providing those systems that run about 55% of the courts in the US. And so they have that system on-premises. Most of those customers are on-premises today. And so as they decide to move that system to the cloud, they may have a whole lot of ancillary systems that are not from Tyler, a probation system, a prosecutor system, a jury system, a jail system, that are generally also on-prem. So those systems may not necessarily need to be replaced today, but it gives us an opportunity to have that conversation with them and say, "If you're moving your court system to the cloud, you either don't want to leave those other ones behind, and maybe there's not a cloud option for those." But this gives us a chance to say, "You know, we can provide you with that whole suite of products, completely integrated. It's a cloud solution, so there's not a you know capital outlay upfront, there's not a license fee, and we can work with you on how you price these." But it gives you a chance, while you're making a change, to bring all this stuff together in a solution, one solution, one vendor, all in the cloud. So we believe it's gonna give us a chance to increasingly drive more of those cross-sells and have those conversations. How much higher is NRR on the early cloud cohorts relative to you? Yeah, I'd say the sample size is still pretty small. Fair enough. So, I'd say our focus is definitely heightened on those opportunities. I don't know what the, you know, what percentage I'd put on how much that uplift has been, but we believe as we move down the road, it'll certainly provide more of an opportunity there. All right, let's pause there and go to the audience for questions, please. Then you talked about cross-selling a bit, on both the product side and the sales side. What have been the lessons you learned from comparing the times where the cross-sell resonated versus when it didn't resonate the way you expected it to? I'd say that the lessons we've learned, a lot of those have been around how we operate internally to drive those cross-sells. So everyone in Tyler understands that cross-selling is a good thing for the company, but we still have product groups, sales reps, people who have customer relationships that are focused on their individual products. And so we've had to adapt our processes and put in place processes around compensation. So if we've got sometimes two or three different Tyler groups working on an opportunity, how do they all get paid? And how does that compensation, commissions all work? And then even within the company, each of our business units have their own business plans and objectives. They have their own bonus plans based on those results, so who gets credit for those revenues? And so we've had to work out all those things to make sure we don't have internal roadblocks that are unintentionally hindering our ability to do those cross-sells. And we've done a lot of that in the last year in particular, particularly around the cross-sells between NIC, which we acquired in 2021, and other Tyler business units. So, that's probably been the thing where we've seen slower adoption in some cases than we expected, and we've said, "What are the roadblocks that we've got internally?" Externally, you know, creating our go-to-market, our pricing, those sorts of things, I'd say we haven't seen a lot of issues around that. And customers understand. I think we've done a really good job of conveying to customers they understand and get it around why it makes sense for these products. You know, buy that next product from Tyler because of the, you know, technology works well together, the data flows seamlessly between the products, one throat to choke. All of those things resonate with our customers, who tend to like things as simple as possible. Please. Just a question on cloud. When you're having these conversations with the customer, are you generally the only vendor who makes that push? What about the others? And maybe does that differ depending on the area that you're in? Yeah. Yeah, we're certainly not the... When we're talking to our existing customers about moving to the cloud, obviously there are other cloud options for them. But generally, customers, as Gabriela said, we have very sticky customers. We have about 1% gross attrition, so our customers don't generally want to move. So the fact that we have a very well-defined cloud strategy around each product, we have a pathway for them. We're not, in most cases today, forcing them to move to the cloud today, but we provide that opportunity in a pretty flexible manner, I think resonates really well with our customer base. We do have competitors who, especially some of our niche competitors in specific product areas like, you know, a more regional company and, like, a property tax solution or something, that are becoming increasingly less competitive because they don't have a cloud strategy. They're an on-prem vendor. They either haven't invested in or don't want to invest in a cloud strategy, so they've sort of become a much less competitive offering. You know, I think the fact that we're flexible about it, that we're giving customers a long runway, but that we've made it very clear that the direction is the cloud, has made those conversations with customers very positive. Excellent. We'll leave it there. Brian, thank you. Thank you very much.