Okay, great! Well, hey, good afternoon, everyone. Welcome to day two of the Barclays Tech Conference. My name is Saket Kalia. I cover software here at Barclays. Honored to have the team here from Tyler Technologies. We've got Brian Miller, Chief Financial Officer. We've got about 30 minutes together. Let's maybe take the first 20 or 25 minutes to do some fireside chat here with Brian, which I know is gonna be fun. And then we'd love to make this an interactive. So if you've got a question, I think we've got a mic running out of the back. Just pop up your hand. We can ask the question for the benefit of the webcast. So maybe with all that, Brian, thanks so much for being with us here today. Yeah, glad to be here. It's been a great conference. Absolutely. Wouldn't be a conference without the team from Tyler. So, Brian, maybe just to start out, for those here, I think we're all familiar with Tyler, but can you just recap some of the points from last quarter that you and the team were particularly proud of, just so that we're all on the same page? Yeah, I think we continue to make good progress on a lot of the initiatives that we outlined at our Investor Day in June. So our cloud transition and some of the nuances around that, the migration of our on-prem customers, moving towards evacuating from our data centers into AWS, cross-sell opportunities, especially around payments, so selling payments back into our installed base, which is a newer initiative for us, but we were really happy with the progress we made in Q3. I think the biggest thing around Q3 was we had really strong SaaS growth, which is important to us. Accelerating growth. Accelerating. Now, we have said that we talked about a target of around 20% CAGR in SaaS revenues over the next couple of years. It was 20% in Q2, it was 26% in Q3. It'll still bounce around, around that 20% target. Sure. So we don't want people to get too excited about that. But it's exciting that—but the timing and the comps and when revenues come on board versus- Sure ... when they are booked, cause that to not move in a straight line. Okay. But it was well in support of the objectives we talked about. I think the biggest thing was just our cash flow was really strong. It was, I think, a record for a Q3. Just continue to see very good cash flow characteristics, and that's enabled us to de-lever faster. Mm-hmm. And so we've paid off more than $1 billion of term debt since we did the NIC acquisition, and we're ahead of schedule on that. So, given what interest rates are doing or have done, that's benefiting us. Absolutely. So we're really happy that, that we're making really good progress on the cash flow side. Yeah, no, that's good capital allocation, in my view. And also on top of all this, we've had a nice stable end customer- Yeah ... base as well, and maybe that's, maybe that's, you know, the natural next question. Just to talk a little bit about the underlying health of Tyler's end market. Yeah, so of course, Tyler sells to local and some state governments in the U.S., and I think what you've said is their spending is just quite a bit more defensive in this macro backdrop- Yeah ... than a lot of my other companies that are selling to enterprises, for example. Can you just talk about that a little bit and, and just also touch on the federal funding that your customers are- Mm-hmm ... may or may not be getting? Yeah. So government is different than the private sector. On one hand, it typically doesn't offer explosive growth opportunities, but it does offer very tends to be a pretty stable market and offers what Tyler has done, you know, compounding very consistent, high single, low double-digit growth for 20 years. Yep. The backdrop is really pretty strong. As you said, we're mostly local. We probably today, it's shifted some since the NIC acquisition, but we're probably 70-75% local, 20 or 25% state, and which is mostly transaction-based today, and at the state level, and then less than 5% federal. The backdrop is pretty strong. Budgets are really pretty good. Local government, typically, property taxes are the biggest single revenue source, and those are in pretty good shape. I mean, property values may not be growing explosively, but they're still at pretty elevated levels. So there's not a lot of pressure there. Sales taxes are high, people are building buildings, and yeah, there's just a lot going on. The backdrop is strong, and the indications we see going into 2024, the budgets are very comparable next year. With Tyler as a defensive position anyhow, you know, generally people are buying software from us because they have to, because they have a 20-year-old or 30-year-old, or sometimes 40-year-old system- Mm-hmm ... that has reached end of life, that is no longer supportable. They would just as soon not change even now, but that is not supported, they don't have COBOL programmers around anymore. It's from a vendor that, you know, hasn't, you know, has gone into legacy mode, and, and there's functionality that's kind of necessary now that they don't have. So generally, they're buying something because they have something that's end of life, and they're replacing it. Now we have more add-on opportunities around payments and data and analytics platforms that can layer on top of that sort of core, just replacement cycle business, but that creates that really steady underflow. And then, I guess, lastly, on that topic, we're 85% recurring revenues today, so it's maintenance or subscriptions for mission-critical systems. All the things we automate are essential services of government, taxes, nine one one, licensing and permitting, things like that, or transactions that also are generally recurring, pretty essential, people paying their utility bills or their traffic courts. Sure. So given that, those are very, very stable. We have very, very low attrition, you know, 1% or so, across our software market, and, you know, so that, that makes it very defensive. The federal funding is a big stimulus from the ARPA Act, from a couple of years ago. $360 billion went to state and local governments, $160 billion to schools. Pretty broad in terms of what they can use it on. They have until the end of 2024 to, to commit it, until the end of 2026 to spend it. So it, it's hard to quantify exactly what the impact is, but it's part of that active market, and, it's something we think will be a tailwind, to some extent through 2026. Yeah. Yeah, absolutely. You know, I wanna talk a little bit about just, so to your point around recurring revenue, I wanna talk about, you know, just this transition to SaaS, which has just been such a steady sort of contributor here, and maybe just start higher level. Maybe the question for you is, Brian, where are your different customer segments on their journey to the cloud, right? Some are ahead of the others, right? Yep. What are some of the things that maybe Tyler can do to accelerate that journey for a customer? Does that make sense? Yeah, sure. Yeah, our, our cloud transition has been very long term. So like with a lot of things, government is slower to adapt new things like the cloud, which isn't new anymore, but they've been slower to adapt it- Sure ... or adopt it. They tend to kinda like things the way they are. And so there's a few things that are causing them to be much more open now to the cloud. But we, you know, for a long time, we were just a license and maintenance model. Then we had a hybrid model for a number of years, where we offered our products to new customers, either in the cloud, which is a private cloud for us in our data centers, on a subscription basis or with a traditional on-prem license model. And it took probably 15 years to get to where half of our customers in 2019 were choosing the cloud. Mm-hmm. At that point, we said we are cloud first, where we have a strong preference for the cloud, we're incenting salespeople to drive people to the cloud, and products, increasingly, we won't even sell on-prem anymore, and that's kinda where we are today. Now it's about 85% of our new business choosing the cloud. A couple of segments or product areas where there's been a slower adoption: public safety, which is less than 15% of our business, but 911 systems, police, fire, and ambulance systems, they've been more reluctant to move some of those to the cloud, especially if it's a jurisdiction that's rural and doesn't have great connectivity. Mm. It's coming along, though. We've gone... This year, I think 25%-30% of our new public safety business will be cloud. We've had our first flip this year of an on-prem customer. We've been in flips for 15 years of- In public safety? ERP, but we had our first- Yeah. We've had one in each quarter. So it's moving, but... And then the other product that still has a meaningful license business is our low-code application development platform, which is mostly in the federal and state markets, and we still have a significant amount of business in federal and state agencies that they choose licenses. It's maybe 50/50 today. So to encourage people to move... So we've got two things: We've got most of the new business coming in the cloud, but we still have a big base of on-prem customers that are paying us maintenance, that we've accumulated over decades, and we've only moved about a little north of 15% of those customers to the cloud so far, so this process of flipping those customers to the cloud. And we've said that by 2030, we expect to have 75%-85% of those customers migrated. We get a nice revenue uplift, typically a 1.7x uplift in revenue. So a lot of those customers want to move to the cloud, or an increasing number of those, because they're struggling with IT resources. They've had systems administrators and application administrators and security people that left during COVID or have retired, and they can't compete with the private sector to hire them, so they struggle with running those systems, and so moving to the cloud helps them with that. And concerns they have about cybersecurity and ransomware attacks, that moving those out of their network and into the cloud, provides better protection. But as we move through that process, which we see sort of as a bell curve over the next few years- Yep ... and we're still on the lower left side of moving up that curve, you know, increasingly, we're using carrots, like telling customers that as we move forward, their on-prem products will still be supported and we'll provide them the things they need to run them, but new features and functionality, they'll just get in the cloud. Yep. Longer term, we've got, you know, potential as we try to move the laggards along, then the possibility of, you know, raising maintenance at a higher rate to encourage customers to move to the cloud or ultimately just not supporting products that are on-prem. Those are much further down the road. Yep. Yep, absolutely. It's great to hear. You know, I guess if we zoom in on the SaaS revenue line a little bit, right, where we're talking about that 26% growth, I think, you know, in Q3, I'd love to talk a little bit more about new business. Mm. I mean, over the past year or so, I think that SaaS has made up sort of 80%-90% of that, of that new software contract- Yep ... value, you know, each quarter. As we maybe look into 2024 and beyond, should we think about sort of that mix kind of going to the upper end of that range? Should it be right within, or kinda how do you think about that mix of new business coming from SaaS over the next couple of years in general? Yeah, that mix has taken a big shift in the last four years. It'll continue to move, and ultimately, at some point, it'll be 100%. We won't offer any products on-prem, but, like I said, those two products that still have some licensed business, again, they're continuing to... That mix is moving. But, so we'll move up from this 80%-85% up to 90-ish, and ultimately to 100%. But if you talk about the next couple of years, I think we'll see some steps. We're now at the point where now licenses, you know, we've taken pretty big declines. I think at the peak, we had more than $100 million of annual licenses. This year is closer to 40, and it'll decline fairly rapidly over the next few years from that, but it's a smaller impact now that it's a smaller absolute number. So yeah, that mix should continue to move, and our objective is, in the not too distant future, to not sell any on-prem licenses anymore. Yeah. Yeah, sure. Maybe we can talk about flips for a little bit, right? I mean, you know, to your point, 75%-80%, 75%-85% of your on-premise installations kind of flip to SaaS, I think, by 2030. What are some of the puts and takes to that number, you know? You know, I know that coming out of Investor Day, some people are like- Yeah. Well, hey, why isn't that 100%? Yeah. There's some reasons behind that. Can you just walk us through them? Yeah, and some of them, some of those areas that are, like public safety, that are further behind, it will take longer to move those customers till that market is completely ready. There are a couple things that kinda govern or, or affect the pace at which we can flip those on-premise customers. And like I said, we've only moved 15, well, over 15% of our on-prem customer base at this point. We still have $470 million a year of annual maintenance. As that moves to the cloud, there's about a 1.7x uplift, so that will turn into $800 million in subscription revenue. So part of our what we've talked about is kind of a high teens growth CAGR for SaaS revenues over the next seven years. Part of that is from the uplift from the Flips. But there are a couple of items that help, that affect that rate, one of which is, I guess, both an opportunity and a challenge for us around that, and it's Version Sprawl or Version Consolidation, depending on which side you're looking at it from. Mm-hmm. We have a lot of products. That's one of the strengths of Tyler, that we have a lot of products. We have a lot of cross-sell opportunities. Each of our products is, has a stronger competitive position because it's part of a suite of integrated products. But with a number of our products, we have multiple versions of multiple products. So some cases, we have products that are cloud native, that only have 1 version and have only ever had 1 version. Sometimes we've got a couple, and some we have seven or eight. And so, in the cloud, we wanna have 1 version of each product. Mm-hmm. Everybody upgrades at the same time, everybody's on the same version. But in order to get there, and part of that being migrating all these on-prem customers to the cloud, they have to upgrade to the current version if they're not already on it. Mm-hmm. And so we've been laying that groundwork. We've been starting to sunset older versions and move people along, making progress on that. But you know, there's a path and a roadmap for each of our product groups to get there, and that supports that 75%-85% migration. But that's one of the things that each of the... If they're on one version behind, it's typically not a big effort. If they're on a seven-year-old version of the software, there's more technology to absorb. There's gonna be maybe process changes, things that- Sure ... it's more significantly different. So there's some effort on our part, there's more effort on the client's part. Some of it is just bigger clients, it's more complicated. So, you know, moving a school district's bus transportation system to the cloud is super easy. Moving a statewide court system that might literally be 60 different implementations in 60 different county courts, coordinating all that and figuring out how all that, even though it's one customer, how that moves to the cloud is a multi-year planning process. And even though they may... We're engaged with a lot of those customers, those things take longer. So, that upgrade is something we're working on and supports that transition. And that's probably the biggest driver. We've also, you know, many of our products were originally built to be deployed on-prem, so they're not optimized for the cloud, so they tend to be more expensive to host. They're not super efficient in the cloud. So we've had projects going on since we kind of made that cloud-first move to optimize our products. So re-architect them or make changes to them to take advantage of services that AWS provides or that the cloud provides to make them run more efficiently. And we've released a lot of those cloud-efficient versions during 2023. Those that are left are pretty close on the horizon. But we haven't wanted to really sort of open the spigot on moving a lot of clients until we had those cloud-efficient versions, so that we can lower the hosting costs. I think the good news is our experience through 2023 has been, our margins have been a little bit better than we talked about at the beginning of the year. Our, our earnings have been a little stronger, and most of that around our cloud operations have been more efficient. So as we've deployed those products, we've seen them operate at a little better than we thought they would, and so a little bit lower cost. That's great to hear. As we scale up in AWS, we've seen our unit costs be lower than we planned. Sure. Those are kind of two of the big drivers that kind of put guardrails around how fast we move everybody. Sure, sure. I think that's a great segue into profitability, just to your point. I mean, I think our goal from analyst day was to have 60% of your clients migrated off of Tyler data centers, I think, by the end of this year, right? I think we were gonna close the Texas data center, right, or kind of decommission it- Yeah ... right, in 2024 at some point. Yeah. I think there's also a data center in Maine or somewhere in New England, right? Yeah. That I think we would, we would sort of similarly decommission in 2025. Maybe the question is, you know, there's, that's a lot to do. Are you still on track to sort of reach those kind of three milestones? And can you just maybe walk us through the margin impacts- Yeah ... that we could see over the next couple of years as those happen? Yeah. So we've talked about that as one of the factors around, as part of this cloud transition, as our margins have declined over the last few years, and we've talked very clearly about 2023 being the trough year for margins. Mm-hmm. The combination of our licenses going away at very high margins and just building up that recurring revenue stream. But one of the factors around margins has been the, what we call bubble costs- Yep ... or the duplicate costs around data centers. So, as I said, we've had these two data centers where we hosted our clients. We said we can't scale those to run our whole business. We don't wanna run our business, run our own data centers. So that's all moving to AWS. But as we get out of our two data centers, we start moving customers to AWS, and we have to start paying AWS. But most of the costs around the data center are fixed. Depreciation and amortization of hardware, it's people, it's utilities, and it doesn't change a whole lot whether there's 5,000 customers or 500 customers in that data center. So we've said that the first data center will close around mid-2024, and we're on track with all of these. They're pretty specific plans on how we get there. Great. The second data center around the end of 2025. So we'll get some relief in 2024, more relief in 2025, and even more relief in 2026. We said that that impact, we estimated, was about 130 basis points of operating margin for Tyler as a whole- Mm-hmm ... in 2023. It actually gets a little worse before it gets better because we still move people, we're still moving more people out and incurring those AWS costs in the first part of the year until we get that relief. But which is part of the reason we've said, you know, our margin expansion over the next couple of years won't be linear- No. more it might be... There'll be some in 2024, more of it in 2025. Yep. and then- And then you'll see the full impact of that really in 2026, right? Yeah. We're on track with all that. That's great. There's a plan for each client, and those have been pretty closely adhered to. Great. Great. Maybe the other point to note around margin, or maybe I'll keep it broad. Can we just maybe walk through some of the other drivers here on margin expansion, whether that's payments, you know, whether that's the greater cloud efficiencies or whatnot? How do you kinda think about some of the, you know, drivers of margin expansion over the next couple of years that could- Yeah -be better? We've talked about, you know, kind of broadly, we laid out at Investor Day 25 targets and 2030 targets. Yep. Around revenue growth and margin expansion and free cash flow over those time periods. Around the margin expansion, so our non-GAAP operating margin this year is roughly 23%, a little below that, but in that ballpark. We talked about a 24.5%-25% target for 2025- Mm-hmm ... and a 30%+. We haven't kind of put a ceiling on it, but at least 30% by 2030. So easy math is 100 basis points a year, but it won't be- Linear to your point, right. Of that expansion, 400-500 basis points comes out of cloud operations. So the stuff we just talked about, the data center evacuations, the product optimization for the cloud, the uplift from the flips, and the impact of version consolidation and getting rid of the support and development costs associated with supporting those multiple versions of software. So that's 400-500 basis points. Payments margins. So payments margins are inherently lower than software margins. Absolutely. But they generate nice cash flow. Sure ... and it's all incremental to our software business, so we kind of layer it on top of it. We do believe that payments margins can increase over that time period as well. Mm ... because as we sell. So we've talked about a target of gross margins of high 40s, low 50s for payments, which is roughly 20 points below our SaaS margins, but still above where they are today. That comes from as we drive payments down into our local government customer base, and as we embed payments with our software, we can get premium pricing around that. Mm. Better pricing than just doing a, like, we do the payment processing for the state of Texas, so it has... The margins are thinner on that than if we're doing payment processing for a utility billing system, and it's integrated with the UB system. It automates the reconciliation process. It creates advantages for the customer that they're willing to pay a little bit more for. That's interesting. And then on the disbursement side, so growing the disbursement side, which we're just barely started in, but we did an acquisition a little over a year ago. Rapid. Rapid. Yep, mm-hmm. It gave us some capabilities around that. Those are higher margin revenues than the acquiring payment side. Mm. So we said that we'll get some margin expansion over the next several years from payments, and then there's a lesser amount that comes from sales and marketing and G&A. Yeah. You know, a point or two out of that. Yeah. Yeah, sure. Where do I want to go? Maybe, maybe payments, maybe payments- Okay ... is the most natural one, right? I mean, just really, I don't want to call it a strategic shift, but a much, much more strategic focus- Mm-hmm ... right, on payments over the last couple of years. You know, you mentioned Rapid. Of course, there was NIC, which was very- Yeah ... which is really the biggest foray into this market. Can we just talk about how Tyler thinks about the payments opportunity? And of course, we're talking about the collections- Yeah ... and sort of disbursement side. And very importantly, how fast is that business growing? Yeah. So we're not the first software company to decide that- Absolutely ... there's payments floating around our software, and that- Sure ... we could get a piece of that. I think we do have a lot of software products today that facilitate payments, that present bills. So things like utility billing, licensing and permitting, property taxes, traffic court, parks and recreations, and lots of that money that's coming into governments, especially at the local level, is coming through a Tyler system. Of course, NIC, that was their business at the state level. They provide, or we now provide, these portals into state government and the interfaces to these back-end systems to facilitate transactions like adding fishing licenses or renewing your motor vehicle registration or your driver's license. And NIC processes those, or we process those. We get a convenience fee typically, as well as the, the fees around the processing the payment. So we've got this-... really robust engine with a lot of capabilities that we would have looked to built out over time that came from that acquisition. And now driving that down to leverage the software, the new software we're selling, the existing software systems we have, and those relationships we have at the local level. So we're kind of in the early stages. In the past, you know, over the last few years before the NIC acquisition, we were kind of dipping our toes into payments, and most of that through third-party relationships. So we would bring Chase or Elavon to a customer and not integrate it the way it is today with our, our own platform, and we would get a revenue share- Mm-hmm From their payment processing. So here we get to keep more of it, we get bigger revenues. We've just started to go to market with all this. We've spent a year or two getting our payments organizations together, figuring out go-to-market, integrating the software, the payments into the software. So we think we have a really compelling story for customers, that we provide a better solution than a generic payment processor, and especially around those systems that they have from Tyler or will buy from Tyler. So we're selling into new deals. When we sell a new utility billing system, we give them a proposal for payments. We're selling it back to our installed base, and then ultimately, we'd like to do enterprise-wide payments at the local level, like we do at the state level, where, you know, a city might have multiple payment processors: one for the courts, a different one for the parks and recreation, a different one for utilities. Taxes, you can only send a check in, you know, those... So bringing that all together- Yeah under one umbrella. So all those are initiatives. We said that, historically, NIC's payment business has grown, or the transaction business, has grown 8% a year- Yeah - kind of same state. And it grows from adding new services, or potentially from more utilization, more volume, and that's certainly been the case since COVID, where more people want to do things online or have to do things online. Sure. So, nobody wants to go to the DMV to renew your driver's license. Much rather do that online. In a lot of places, that wasn't an option before COVID- Mm-hmm ... now it is, and nobody's going back. So, they were kind of a high single-digit grower. We've talked about in our 2030 targets, about between now and then, figures of 10%-13% around our transaction business. Yeah. So, elevating that quite a bit, most of that coming from cross-sell, and- Yeah, really successful cross-sell- Building that between those businesses before. Yeah. You know. We've just started. So that's... You know, on one hand, some people say, well, that given the size of the opportunity we've talked about, we think that if we were just doing payments for our existing customer base, that that's potentially a, you know, a $2.5 billion-$4 billion revenue stream. Wow! Now, that's kind of the whole- Sure But the 10%-13% sounds pretty achievable, given we're early stages, but given the opportunity, we feel pretty good about that opportunity. Yeah, absolutely. Then just going back to sort of the tie-in with software and maybe being able to, you know, deliver more value to the customer and, of course, charge more value for it as well. Yeah. So, that's interesting. Like, you know, if with the state of Texas, we do all the payment processing for the state of Texas, and it's a payments-only contract. So we get 2% plus $0.10 a transaction. So I renewed my CPA license in the state of Texas a couple of months ago. Mm-hmm. $100. Tyler got $2.10 for that. Paying a utility bill, often we're able to, because it's embedded with our software, we get 2%, but we're also able to charge a $2 convenience fee that the citizen pays. Mm. The city lets us do that because they get more value. They're not having to write the check to us; it's funded by the users. They believe it's a higher value proposition for them, but they're able to pass that fee on in a convenience fee, and you might not be thrilled about paying a fee to pay your bill online, but you also don't want to write a check and put it in the- Not anymore. Absolutely. I know, even I don't want to do that, but my kids wouldn't do it if you helped them to do it. Sure. So, and- Yeah ... so it's, you know, it's that ability to capture that, but not necessarily all of that to come out of our customers' pocket. It's coming out of their customers' pocket. Yep, absolutely. They've got a captive customer market, so you don't get a choice about where you pay your water bill or where you pay your traffic ticket, so it's not like you can go to somewhere else. Yep, absolutely. Maybe the last question here, in the last 30 seconds we've got, just on M&A. I mean, I think Tyler's just done a great job consolidating this market historically. How do you think about sort of the pipeline of M&A opportunities, just- Yeah. I mean, we've done some... You know, obviously, NIC was a $2.3 billion acquisition. Yeah, big one. In 2021, we've done a number of, we've done, I've been with the company for almost 26 years. We've done about 60 acquisitions over that time period, so it's a lot, but it's a couple a year. We've done some more tuck-in type acquisitions this year. We did two in October, total purchase price, like $38 million, that fit into existing products, fill in little gaps. Mm-hmm ... things that we can sell through our existing sales force, more products in their bags, things that we can sell to our existing customer base. And I think we'll continue to do those. That's always been a part of our DNA. Sure. We've said the bar is kind of high for big acquisitions in the near term- Mm-hmm ... you call it, next year or two? Mm-hmm. I've just talked about a lot of stuff that's on our plate: cloud transition- Yeah ... data centers, payment- Delevering, that you've been doing as well, right? We have been delevering. Sure. We paid off almost all the term debt- Yeah ... more than $1 billion of debt since we acquired NIC. Ahead of schedule on that. I think it'll be completely paid off at least early next year. All we have left then is a convert that Barclays helped us place last- Yeah ... in 2021. Yeah. That is at 0.25 of a point of interest, so that's just fine. Yep. But given the higher cost of debt now, our cost of capital, as well as all those things on our plate, I think the bar is really high for kind of big acquisitions, and we'll continue to do those, the smaller things that fit our strategic needs, and we find at reasonable prices, and pay for out of cash flow. And long term, I think there'll be more bigger acquisitions, but I wouldn't look for those, anytime in the next near term. That, that makes a lot of sense. I think that's about all the time that we have. Yeah. Brian, thanks so much for taking the time. Always enjoyed- You bet ... chatting here. Very much. Yeah, absolutely.