Awesome! Hi, everyone, my name is Rich Hilliker, and I'm a software analyst here at UBS. Thanks, everyone, for joining us. We're excited you're here, and thanks to everyone tuning in online. We've got Tyler Tech here today. Brian Miller, the Chief Financial Officer. Thanks for coming down, being with us, and looking forward to have a great discussion. Yeah, you bet. Happy to be here. Why don't we start at a high level, talk a little bit about macro, about budgets. Hmm. We've been seeing, you know, some mixed results from software companies, still continuing to hear some incremental signs of caution, macro pressure. Wondering if you could maybe characterize what you're hearing and seeing across your customer base. What do the conversations sound like? And then maybe, can you kind of remind us of the state and local budget type dynamic- Sure. especially to Tyler? Yeah, I mean, we are a little bit different there because we serve exclusively the public sector. Multiple levels of the public sector, maybe 70-75% state, local, 20-25% state, and about, you know, 5% or less federal, but all public sectors. So, some different dynamics there. We've actually have seen over the last few quarters and continue to see a really strong backdrop and not seeing slowdowns there. Generally, budget environments at all levels of government are pretty strong. The local level, property taxes remain not a lot of pressure on those. They remain a pretty strong revenue stream, but really, our customers are seeing really strong budget environments. It's being helped by the stimulus funds, so there's a large stimulus from the ARPA plan that they've got until the end of 2024 to commit, and the end of 2026 to spend. So that's providing some additional confidence and funding, which I think IT modernization is getting at least its fair share of. So we've talked about, in our recent calls that the sort of leading indicators we're seeing at the top end of the funnel are very, very strong. Number of RFPs, the number of demos we're doing are all definitely back to pre-COVID levels but, in many cases, kind of at almost an all-time high. So... And it's really stable at that elevated level. So, we're seeing a really good environment. Great. Okay, that's encouraging. Stable, steady. I guess maybe what would be helpful if could we, like, double-click into where customers are prioritizing within your portfolio right now? Maybe how has their strategic roadmap evolved as we've moved through this year, we have these stable budget levels. Seems like there's a lot of interest. Yeah, I think, definitely in government, digital transformation- Yep ... is in full swing. You know, in our space, sort of the core of what we do, where we sell mission-critical, essential back-end systems that power things that they have to do, court, 911, property taxes, financials, licensing and permitting, those sorts of things. So they're all essential functions and essential software that we provide. And governments tend to use systems much longer than the private sector, and they tend to- Right ... because they are not profit-motivated or ROI-driven, and they don't have competition that doesn't drive their software purchases. It's really, for the most part, replacing systems that are at end of life, that they've used maybe for 20 years, maybe for 30 or 40 years, and- Wow! and have gotten to the point where either they're no longer supported, where they're homegrown systems that are difficult to maintain, or they don't have COBOL programmers anymore. So those are the kinds of things that kind of drive the core demand, and that's very stable. It doesn't... You know, it becomes sort of a non-discretionary decision when it gets to that point. It creates a market that really never has explosive growth, but always has very consistent demand characteristics. So I think what we are seeing sort of layered on top of that are changes around government and their desire to, you know, accelerate some of those purchases, make purchases that may have a little bit more of an ROI kind of approach or that solve problems that they didn't previously had. One of the things is, and sort of kind of an outgrowth of the pandemic, but in general, governments are really challenged with staffing and with, Mm-hmm ... with people. Just like the public sector or the private sector, governments lost a lot of employees during the pandemic. They tend to have aging workforces that are retiring. A lot of those are in their technology and their IT side, but really kind of across the board, they're operating with thin staff. They're having trouble paying market rates to attract new people. Typically not very flexible about remote work and those sorts of things. You usually have to be there- Right ... to do what you're doing. So they're really struggling with people. And so to the extent they have to provide all these services, using technology to accomplish what they have to do, in the face of a, you know, tough hiring environment, really is driving, I think, some of their decisions. There's really a focus on data and having better data to make better decisions, having better analytics, you know, basically the concept of business intelligence, which is not historically been something that governments have put a high priority on. But I think it's becoming increasingly important, both having internal data to make decisions and making data more available and transparent to the public. So, I think those are some of the themes around it that sort of layered on top of that sort of core demand driver, which is just a lot of old systems that are aging. Got it. Okay. Is there any way of kind of contextualizing how far along we are in the digital transformation journey? It feels like it's kind of ongoing, and I know that you talked about how it's these gradual shifts that we're seeing take place. Yeah. I think governments, in general, are really early. Yeah. I mean, if we think at a high level, if you look just at kind of the systems that they use today, that, you know, 60% to two-thirds of the systems that are being used by governments across the country today are either homegrown systems or systems from a vendor who's no longer competitive. Okay. Only, you know, a third or so of the systems out there came from a vendor who's competitive today. And so as those older systems age, I mean, we're still, you know, not halfway through that, and- Okay and as we get through that, then some of the ones that are competitive today Yeah - become non-competitive. In terms of moving to the cloud- Yeah We're definitely in the early days of that. Okay. Definitely lagging behind the public, the private sector in that, and that's certainly a big part of our story. Yeah. So, the whole cloud shift and that part of the transformation is in the very early days for government. Well, great, and we're gonna touch on cloud in just a minute here. But before we do, you know, you talked about ARPA funds, you talked about steady, stable environment. Any sense of how budgets might look next year or spending intentions? Do you think kind of similar to this year, better or worse next year? Any sort of gauge? Generally, they seem to be lining up with this year. Okay. We feel like the environment's very similar. A lot of governments have June year-end Okay ... maybe 60% or so of them. And so, you know, even still a little early for that, but- Sure ... you know, getting early indications. But generally, it feels like the environment going into next year's budget is very similar to this year. Okay, that's helpful. So maybe we can shift over to cloud now. Yeah. You're in the midst of a transition to cloud. Can you remind everyone where you are in this transition, and specifically, you know, the pace relative to expectations, and maybe what the shape of this would look like financially ultimately? Yeah. It's been a very long transition for Tyler. Historically, Tyler was a traditional license, perpetual license and maintenance model. Really going back almost 20 years ago, we started to introduce a hosted model with a subscription. So we hosted those customers in our data centers, proprietary data centers, and made the software available on a subscription basis, and really had a hybrid model for a long time- Okay ... and let customers choose the pace at which they wanted to move to the cloud, and that was a very slow pace. Like a lot of things in government, they're not the first adopters of it, of almost anything. And so we had a very gradual kind of a transition for a number of years, which was actually really good for our business model. It was not a disruptive transition. And then we got to 2019, it was kind of an inflection point. Okay. That, that was the first year that more than 50% of our new business chose the cloud- Wow And then sort of hybrid choice environment. And it was also the year that we made the decision that we were all in on the cloud, and that we weren't, we were no longer cloud neutral, but we were cloud first. We entered into a relationship with AWS to be our primary public cloud provider, and decided that we did not want to be in the data center business and to continue to try to scale that. And launched a bunch of initiatives around that, changing our sales processes to drive customers towards the cloud. Launching a number of product development initiatives to optimize our products, which had originally been designed to be deployed on-prem, to optimize those to be more efficient in the cloud. So all those things have been going on over the last three or four years, and now we're at the point where most of our products we don't offer on-prem anymore in the license model. There are a couple of exceptions, public safety being the one that's most notable, that hasn't quite embraced the cloud as much. Mm-hmm. We have made significant progress in moving customers out of our data centers into the public cloud. We've released cloud-efficient versions of most of our products this year, and those that haven't gotten there yet are there within a couple of quarters. And now we're at 85%+ of our new customers choosing the cloud. So we're very much there with new business. With existing customers, we still have a big customer base that's on-prem, $470 million a year of maintenance. And roughly only 15%-20% of our on-prem customers have migrated to the cloud yet. So that process is ongoing. We've got a number of initiatives around that. We've said that by 2030, we expect that 75%-80% of our customer base—of our on-prem customer base, will have migrated to the cloud. And so there are a bunch of timelines around how we get that, but we're on track with that. That's a big revenue uplift opportunity. Typically, as our customers move from on-prem to the cloud, it's an uplift of about 1.7 times the maintenance revenue, moving to a subscription. So, there's a nice growth component in there, and that kind of runs in parallel with our product moves. Okay, great. I think you've talked about, you know, kind of jumping in on that 2030 goal of the, really the vast majority of the base moving to cloud. You've talked about, I think, flips or migrations kind of accelerating in 2025. Could you, like, unpack what's gonna kind of govern the rate and pace of some of those flips and migrations? Yeah, there are a couple of governing items around- Yeah ... the flips. And just to sort of back up from it, to get to that- Sure ... 85, 75, 85% of our customer base in the cloud. We've We've got roadmaps for each product, and each product's a little bit different from where they're starting, how much of their customer base has already moved, how open they are to moving. But there are a couple of governing items. The biggest one being what's both an opportunity and a challenge for us around version consolidation- Okay ... or eliminating version sprawl. So we have a lot of product, that's a strength of Tyler. It provides us with a lot of cross-sell opportunities. It makes each of our products more competitive because of the breadth of products that we have and, and our ability to integrate those products and to create this connected community vision that we've talked to our customers about. But within those products, in many cases, we support multiple versions of those products. Okay. And that becomes very expensive from a support standpoint and from a product development standpoint. Our vision in the cloud is that we have one version of every product in the cloud. Yeah. The typical cloud model, and that our customers all upgrade at the same time, they're all on one version. But in order to migrate our existing customer base to the cloud, those customers that aren't on the current version need to upgrade, either before or when they make that flip to the cloud. And so we have an ongoing process, again, different for each product, but to sunset those older versions, move clients along to the new version, so they're in a position to be ready to flip to the cloud when on a pace that supports our schedule. So we've been working through that. We've made progress with that, but continue to make progress over the next 2 or 3 years as we eliminate those older versions and get clients on the current versions. What I talked about also around having cloud-efficient versions of our software is another item that was important to us around that transition. We obviously didn't wanna move a lot of customers into the cloud on a product that's not, that's expensive to host or that's not- Right ... not cloud optimized. So with that largely behind us, that sort of item is, the gating item, is mostly not as much a factor now. But we didn't really wanna crank up the pace until we had the cloud-optimized versions that lower our hosting costs. So I expect that pace of flips to increase next year, but I think we're probably still a year away from it being more rapidly increasing. I think it'll be some sort of a bell curve over the next few years, and we're still definitely on the lower left side of- Okay ... of working our way up that bell. So just to reconfirm, you talked about, like, a 1.7 or so uplift- Mm-hmm ... relative to on-prem or their maintenance. Then I think at the end here, you were just kind of highlighting how the applications are really gonna be more efficient, right? Yeah. To lower your hosting costs. So, have you ever, like, kind of quantified what—like, how much more efficient? So it, it sounds like revenue upside and potentially cost. Yeah. Yeah, both of those things. Will be lower? Yeah. Yes, so eliminating the version... And I guess the third thing around that, that's sort of a part of that transition that also affects margins, is what we kind of refer to as bubble costs. Okay. So moving from our data centers to AWS, as we work through that process, the costs are lower now hosting in AWS. But until, as we move those customers out, we start paying AWS to host, but we have a lot of fixed costs around our data centers that don't- Okay ... go away until we actually close the data center. Got it. So these bubble costs, which, you know, sort of get a little worse before they get better, but we talked about a hundred and thirty basis points operating margin impact for this year. And we are scheduled to close the first data center around the middle of next year- Okay ... and the second one around the end of 2025. So over the next couple of years- Okay ... three years really, we'll see that uplift from that. So we've talked broadly about, well, margins in general. We've talked about going from kind of the 23% operating margin place where we are now, to 30%+ by 2030. Mm-hmm. Most of that coming at the gross margin line, and most of that around our cloud operations. So we've said 400-500 basis points of margin improvement, sort of collectively from the things we just talked about. And then there's some more margin improvement from improving our professional services margins, from our OpEx, and around our payments business as we continue to grow that, which I'm sure we'll talk about. Absolutely. Being able to provide more higher margin, premium price for payment services. Okay, awesome. Thanks for kind of quantifying it. Yeah. That's helpful. Mm. One question I also wanted to touch on, you know, obviously AWS is a really big partner of yours. What happens when customers would prefer a different cloud provider, or if they're open, or if they have, you know, multiple clouds? Like, have you guys talked about that, expanding beyond just AWS? Are you happy just with AWS? How do you think about that? Yeah, it doesn't happen very often. We do have, we're not exclusive to AWS. Okay. They're clearly our primary partner. Our products are, for the most part, as we, as we've gone through these processes, we worked very closely with AWS. They're optimized to take advantage of services that AWS provides in their environment. Certainly, our pricing is based on, on volume, and so the- Yeah ... more capacity we have there, the better our pricing is. But our products will work, run in other clouds. Right. We have customers who have a Microsoft relationship that want to run in Azure, and we can accommodate that. It's not very frequent, and most of our... We may have some clients that want to have a multi-cloud environment, but it's not that common in government because, again, it's expensive. Right ... and it's more complicated. So, and obviously, AWS would like us to bring them more customers with Tyler software that they can expand those relationships around. We're in the fourth year of a five-year agreement with AWS. I would say that we found them to be a great partner over the course of that four years. And we talked about in the third quarter that part of the reason our earnings have been a little bit better than planned this year, we've raised guidance a couple of times and our margins are a little ahead of plan, is mostly around our cloud operations. And our hosting costs have been a bit lower than we had originally forecast. And we've talked about with AWS. I think internally, we were talking that we don't think we've. Nobody can think of an example where we've asked them for something, and they've said no. Okay. which probably means we haven't asked for enough. But, I would expect that will continue to be our focus there. Okay, great! That's helpful. So we talked about a big opportunity for transitioning to the cloud, and your portfolio is quite broad. So how do you kind of think about managing the transition amongst the entire portfolio? Like, how does that kind of all come together? Yeah. Yeah, because it's really a series of transitions. Right. We talk about it as a transition, but it's really multiple transitions because each product is in a different place, and each customer base has a different, different outlook, and we have different version sprawl issues. So, I think the big thing is we, we have standards and targets across Tyler, and then each product or operating unit has a plan to get there that all kind of converge on what those, those long-term targets are. And we have milestones and measurements along the way to make sure that everybody's moving towards achieving, those targets that we've set out. So all trying to get to the same state. Newer products are closer to it. Products that we've acquired in recent years or, or built in recent years are almost all cloud native, really kind of already there. And then we also have, you know, parallel processes with clients and working with those, and there's some differences between large clients and small clients, and that affect kind of the pace of how that works. Got it. Okay. And as we think about this portfolio, I think, you know, on average, customers typically adopt maybe two to three products. Mm-hmm. But it seems like there's... And I think you've discussed the potential for maybe adoption upwards of almost maybe 8-10 products. Yeah. So it seems like a considerable potential upsell, cross-sell opportunity. What kind of drives that motion? How do you capitalize on it? How are you incenting the team to kind of head in that direction, all while doing the, you know, the transition to the cloud? Yeah, that's always... You know, cross-sell has always been a part of our growth story, and that's one of the reasons why we have this unique product portfolio. No, no other company has the breadth of products that we have. Most of the companies we compete with, we compete in one of the subverticals. They have court systems, or they have public safety systems, they have tax systems, but they don't have all of those. Okay. We have a handful of competitors that might compete in two of those areas, but no one across the board. And we've done a lot to, in recent years, to create more value around that. We've got common foundational elements, like across all of our products, we would have the same security and sign-on. We'd have the common payment engine- Mm-hmm ... service bus, workflow, document management, components. And then we have actually integrated products that make sense, like public safety and courts and justice, so those create one sort of integrated suite of products, as opposed to where we compete with separate point solutions in those areas. So that's always sort of been the foundation of our cross-sell opportunity. But to some extent, it's been governed a little bit by what I talked about earlier, in that customers just don't—we have to wait until they're ready to replace that next system. Okay. Yeah. I think that's shifting a little bit. We have more products that we can sort of proactively sell to people. Especially around the cloud, we can create a story that, okay, you're moving your on-prem court case management system that you have from Tyler to the cloud, but you've got an on-prem probation system and an on-prem jury system from other vendors. You can move those all at the same time and integrate them in one Tyler solution. It's sort of a good inflection point for them to make that decision. So that's part of it. Got it. We talked a lot at our Investor Day in June about cross-sell- Mm-hmm ... and upsell opportunities. Through recent acquisitions and, and builds, we've got a lot more products now to cross-sell, most notably with the NIC acquisition- Mm-hmm ... 2.5 years ago. We have a big payments platform. Right. That opportunity to sell NIC payments or payments using the NIC platform into our local government customer base is a big focus going forward, and we're really, we've sort of laid the groundwork for that over the last couple of years, and now we're really just now starting to go to market in a big way with that. There's also an opportunity going the other way to sell Tyler software into state governments through the NIC relationships. So to do all those things, we've been kind of doing structurally the things we need to do in the background, creating compensation plans so that everybody gets- Mm-hmm ... gets paid and has the right incentives to do that. You know, just really developing the go-to-sales plan, go-to-market plans, and how, you know... Who approaches the customers- Yeah ... and how we work together across divisions to do that, while still continuing to, you know, pursue no new logos in our normal business. So there's just a much bigger focus. And we've got things like our data and analytics platform that sits across products. That is another thing that we don't have to wait for an RFP to come out. That's something we can go sell to people. Payments, we don't have to wait for that. Right. So there's sort of a number of different pillars to that, but it's a much bigger focus for us right now. Okay. Just, just to realize the base of this customer base we have of, you know, 14,000 different jurisdictions, 40,000, almost 40,000 systems installed across them. But as you mentioned, the average customer has 2-3 systems from us and could have 8-10. So, just... And that, that customer base took decades to acquire, in a market that moves slowly. I mean, it's, it's sort of an asset we have, that no one else has anything close to it. And you can't just go out and get it. So, it's, it's a big focus for us and something that, that I think you'll, you'll increasingly hear us talk about, progress there. Yeah, absolutely. Well, why don't we... I think we touched a little bit on payments there. We have. There's so much we could talk about here, but I want to get to some financial questions as well. So, maybe I think what could be helpful for everyone is just to kind of touch on your SaaS revenue growth. It could be a little bit lumpy here and there, so I was wondering if you can just kind of remind us as to why some of the puts and takes here, and what the path towards, you know, linearity looks like towards your near and long-term goals- Yeah ... that you set? ... Yeah, on the SaaS revenue growth, we've really talked about, kind of low double digit- Okay. I think 9%-12% kind of growth in that over the next, over the next 7 years. It can be a little bit lumpy. There's both timing issues, there's big deals and, and how they affect it, and then there's the flip. So as we move those on-prem customers, that $460 million-$470 million of maintenance to the cloud and get that 1.7x uplift, you know, that creates, you know, additional growth from existing customers. But, that also isn't a linear process, and, and so the pace of that will help govern where we are within that range. The new business, yeah, again, the timing of big deals, the timing of, of, when those revenues hit. So there's also typically a lag from the time we sign a new SaaS contract or a flip, to when those revenues start to hit the income statement. It may be a quarter- Okay. It may be three or four quarters, depending on if they have to upgrade along the way, if they have the resources internally or their IT resources are ready to support them. Sometimes it happens in phases. You know, a statewide court system might have groups of counties that come on in different times, so it takes. It might take a couple of years to ramp up to the full run rate. So that doesn't line up exactly with bookings. So sometimes- Right. new ARR added is higher, but SaaS revenue growth isn't as high, and- Okay. - sometimes it's the other way around. So this last quarter, we had 26% SaaS revenue growth, but some of that was revenue that was where the contract was signed, you know, last year's third quarter. Right. So, you know, there's a bunch of variables around it, but, but we're very comfortable with the sort of those long-term targets we've talked about, and that those will drive margin expansion. Got it. Okay, and we did that on margin expansion and the 30% target. Yeah. So maybe I'll shift over to free cash flow here. You reported results last month, and one of the highlights was free cash flow exceeding expectations. So I'm wondering if you could remind us again and unpack some of the dynamics you're seeing and in that cash flow generative power? Yeah. As we move more and more to a, you know, recurring revenue, we're close to 85% recurring revenues, whether it's SaaS or maintenance or transactions, and the transactions tend to be pretty predictable and recurring, that the cash flow characteristics have improved. I mean- Right. Maintenance and SaaS, we get paid in advance, and we have deferred revenue on the balance sheet. In transactions, we get paid at the time of the transaction, so there's not a receivable that's carried. So the cash flow characteristics in general have improved. Our collections and the pace of those, I think, have also improved. So most of that is just coming from operations, from better earnings and revenue growth. We've talked - we have talked about this year, the impact of higher cash taxes. Okay. So we've had the Section 174 IRS changes, have caused us to have to capitalize some R&D costs that we formerly deducted in the current year. And so it's creating a... And we've had a two-year, we had to make cash tax payments this year for both 2022 and 2023, so it's about a $130 million dollar cash tax impact to us this year. Okay. That'll be closer to $40 million next year and then narrow over the next 4 or 5 years. But what we said is by 2025, we expect our free cash flow margin to be kind of in the high teens, 17%-19%. Okay. Ultimately, by 2030, to be in the high 20s, maybe approaching 30% free cash flow margin. So, pretty significant opportunities to continue to grow that. But, cash flow is, you know, does grow at a pace ahead of our earnings growth. Okay, great. And thanks for reminding us of kind of that trajectory as we- Yeah work towards the long-term goals. Okay, maybe could you give us an update on your capital allocation strategy, how you're thinking about M&A in this environment, and kind of how that evolves as we kind of move further through the cloud transition? Sure. We've historically used about 75% of our free cash flow for M&A. At times, we've used debt. We did a big, you know, $2.3 billion acquisition of NIC two and a half years ago and incurred a pretty meaningful amount of debt. We have paid off a significant part of that, over $1 billion of debt since then. Our term debt, which is floating rate, is down to a pretty small number. I think we'll have that completely repaid by, you know, at least by the middle of next year, if not sooner. So that's been the focus on us more recently. We've done some tuck-in acquisitions. Okay. And I think we'll continue to do those. They tend to be on the smaller side, things we think can grow faster than Tyler's core growth rate, where we can leverage our customer base and our sales teams to sell more of it. I think in terms of big M&A, you know, again, we've got a lot of initiatives that we've just talked about on our site. Yeah. Even as we pay down the debt, I'd say in the very near term, that's probably less of... Not a big priority. The bar is really high for acquisitions right now, but that'll evolve over the next couple of years. But I think M- you know, M&A is still kind of, will be, as you look out over 2, 3, 4, 5 years, will be the biggest priority. We have, the rest of our debt is a convert that's due in 2026- Okay - and is at a quarter of a point of interest. So, that doesn't have to be dealt with for a while. And then, you know, we've we've been opportunistic about buybacks over the years. And, you know, as again, as the debt is paid off, and, and again, depending on, you know, valuations and where our stock trades, there could be opportunities there. We've tended to buy on big dips that we didn't think were, you know, reflective of, of long-term potential of the company. And so I think we'll be more open to that as, again, as we get the debt paid and, and, you know, just balance that with M&A. Very helpful, and, unfortunately, we're out of time. Yeah. It kind of flew by. So Brian, thank you so much. Great discussion, and thanks everyone for joining us. You bet. Thank you.