Well, hey, good morning, everyone. Welcome to day two of the Barclays Tech Conference. My name is Saket Kalia. I cover software here. Very happy to have with us Brian Miller, Chief Financial Officer of Tyler Technologies. We've got about 30 minutes together. Let's take maybe the first 20 or 25 minutes to do some fireside chat with Brian here, which I know is gonna be fun. And then we'd love to make it interactive. So if anyone's got any questions, just pop up your hand. We'll have a mic runner in the back. So maybe with all of that said, Brian, thanks so much for being with us here today. Yeah, thanks for being here. It's a great conference. We've had you for years, and it wouldn't be a tech, you know, a Barclays Conference without you. So thanks again. Maybe just to start out, Brian, I think we're all familiar with Tyler's business, but could you just maybe recap some of the points from last quarter that you were particularly proud of just so that we're all on the same page? Yeah. Well, this was unusual for us in that this was our third straight quarter of exceeding expectations and raising guidance. Usually we're, especially on the revenue side, we try to be pretty realistic about our guidance. I think a couple of analysts pointed out on both our first quarter call and the last one that it's not our normal practice to raise guidance after the first quarter. I don't think anybody's ever seen us do three quarters in a row. This has been a really strong year for us around on a lot of fronts. On the revenue side, most of our performance has been around the transaction business. Which is a growing part of our business. And so we've had some successes there. And a lot of that has worked its way through to free cash flow. So I think that's certainly been a high point. We had our best quarter in our history in terms of free cash flow growth or free cash flow and growth in Q3, and are actually kind of ahead of the targets we set for 2025 around free cash flow margins. So you know, executing at a high level. There's a lot going on at Tyler. I'm sure we'll talk about some of those. Absolutely. We've got a lot of big initiatives going on. Sure. Around our cloud transition. But generally, you know, we had a big I nvestor Day in a year and a half ago and set out some targets for 2025 and for 2030, and all those things underlying those. And generally, we're, you know, through this year, executing really well against those and, at least on track for all those longer-term targets. I couldn't agree more. I'd love to dig into the SaaS transition a little bit more, Brian, to your point. I mean, we've seen real great progress this year with SaaS making up, I think, over 90% of new software contract value, so since most of the new business is coming from SaaS, it feels like the next leg of this transition is gonna come from maintenance customers that are flipping to SaaS, so maybe you could just walk us through your expectations for sort of the pace and, I think importantly also, the size of the flips over the next few years as we think about that Tyler 2030 goal, if you will. Yeah, there has been a lot of focus on the number of flips. And as you said, the size of the flips is at least equally important, probably more important. I agree. Yeah. If we and just to set, you know, a little bit of the background, we historically a license and model or license and maintenance model had sort of a gradual transition where we had a hybrid model kind of cloud agnostic. And then starting in 2019, we really shifted to a cloud-first focus, especially around the new business. So from 2019 when 50% of our new business was cloud to this last quarter when it was 97% cloud, really selling very little new licenses and really only around a couple of products. And those have also accelerated really rapidly in the last year towards more of a preference for the cloud. So new business, as you said, almost all there. But we've got decades of on-prem customers that are still using our systems on-prem and paying maintenance. At the time of our investor day last year, we said at that point about 15% of our on-prem customers had converted to the cloud, and that by 2030 we expected 80% to 85% of them to have converted. We continue to make good progress with that. The number of flips each quarter is accelerating, but more importantly, the average ARR from those flips is accelerating. When a client flips from on-prem to the cloud, our typical experience is it's about 1.7 to 1.8 times uplift in ARR from a revenue perspective. That's from that revenue then gets passed through to AWS and hosting fees. So there's a meaningful revenue uplift, but also a margin uplift as well, and a cross-sell opportunity or an upsell opportunity. So, this last quarter, the number of flips was a little higher than a year ago, but the average ARR was up 37% over a year ago. So we're starting to see more of our larger customers start to flip, but more complex transactions for them. There are a couple of sort of gating items that we've talked about around the flips that governs the pace of those, and how we get to that 2030 target. It's different for every product. They're all starting out at different places. So there's really a whole bunch of different workflows around that. But the biggest governing item is version consolidation or upgrade. So we've historically supported with many of our products multiple versions of the software, in the on-prem world, in the cloud. Our goal is to have one version of every product. Everybody stays on it. Everybody upgrades at the same time. It's a much better client experience, but today we devote a significant amount of our resources from both development and support to old products, to products that aren't the current version of a product, and so to get those customers into the cloud, if they're not on the current version, they need to upgrade to that cloud current version, and as part of that process, we're sunsetting older versions of individual products, moving more of those clients along to the current version, which then puts them in a position to be able to, to flip to the cloud when they're ready, and we've made a lot of progress with that. That's been one of the things in this past year that we've over the last couple of years had a lot of success with our Enterprise ERP, which is our biggest single group of customers, with Enterprise Justice, which are some of our largest individual customers, where by the end of this year we expect to have about 95% of both of those customer bases on one of the two most current versions of the software. That not only then helps facilitate accelerating the pace of flips, but also has a margin impact as we're able to be more efficient around support and development. So. Oh, that's interesting. So, I think at the peak, where, whenever that peak is, if it's three or four years down the road, that we'll be doing more than twice the number of flips or volume of flips that we're seeing today. But we feel real confident around, our ability to get there over this multiple years. Won't be a straight line, but I think generally you'll, the trend will be you'll see more flips and the average size of flips growing, over the next, you know, three or four years. Oh, that's great. I think that's the right thing for the business and probably the right thing for your customers as well, right? Because there's so much more innovation on your SaaS products. You know, it's funny as we move further along in the transition, I find that companies typically have a variety of carrots, right? Sticks that they can use to really incentivize those existing customers to move to SaaS. Maybe you could just talk a little bit about maybe what some of those levers are. Yeah. Right? That Tyler can pull to drive more flips, right? To your point over the coming years. And at one point, do you move to maybe more of a, you know, move from maybe more of a carrot approach. Which I would argue it's been so far. Yeah. To maybe more of a stick approach. Yeah. That's all part of the roadmap for the, you know, government across almost anything you look at in government. They're not the first to adopt new technologies, new things, and the cloud's not new, but for a lot of governments, it is. So they have generally been slower, but that has accelerated just in terms of market acceptance and the market understanding why it's better for them to be in the cloud, not just better for Tyler for them to be in the cloud, but better for them in terms of their user experience, the ability to stay current and use our best product. But a lot of that, from the client's perspective, the increased desire to move to the cloud is around their struggles with running their own IT infrastructure in-house. So even if they want to keep systems in place because they always have, in their own networks, they struggle with that because they face aging workforces, especially in IT, as they try to replace those people or hire new people, people that left during COVID. They struggle with paying market rates for those IT administrators, applications administrators, security specialists. They struggle with just attracting them to go to work for the county government. So as a result, they really have a lot of issues around managing their own infrastructure, especially in small to mid-sized places where you might have a handful of IT people. Sure. Three of the five jobs are vacant. Right. They have the budget, but they don't have the jobs. Managing their own hardware and managing security is, has become a bigger and bigger factor there. Ransomware attacks are very, very prevalent in public sector just as they are in private sector. But I think often there may be easier targets around their own networks. And so we've seen a lot of that in our client base and, and in the, the space in general. And that has, their, their lack of confidence or concerns around their own, whether they've already had an attack or they've seen their, their neighbors have one, that they're much more comfortable with the security or the added level of security in the cloud versus at AWS versus on their own internal network. So that kind of is driving the, the market being more open. From our perspective, we've done internal things like, along the way of changing compensation, you know, sales commission structures and those sorts of things to drive more business to the cloud. But in terms of the flips, we have, you know, done a lot of work around educating customers. But sort of the carrot right now is that new features, even though we'll support your on-prem system for an extended period of time, new features and functionality will only be available in the cloud, which could include, you know, AI capabilities and things that they're gonna want, that those won't be pushed back into on-prem versions. And then longer term, the sticks, I guess, would be changing maintenance. So rather than a typical kind of 5% annual increase in maintenance, you might get a higher increase. Sure. To make an economic incentive. And ultimately we have the ability, I think much, much further down the road, but to stop support for on-prem versions of systems and say, "You have to move to the cloud or if you want your system supported. Yeah. Certainly a multi-year opportunity. Yeah. Maybe to put a bow on this line, I mean, you mentioned a 1.7 times multiplier. Maybe it's a two-part question. First, has that 1.7 multiplier evolved at all? Right? I mean, you've given out that multiplier years ago. So I'm just curious how close is that to what you're actually seeing? And then secondly, from an accounting perspective, you know, when a customer flips from maintenance to SaaS, you know, obviously the geography and the income statement will change. But is that instantaneous? Is there any sort of lag? That we should think about like as that happens? Just to get into the mechanics of it. There's a lag, you know, typically From the time we sign the flip, which are what we announced every quarter, you know, how many and what the ARR and what the dollar value of those are to when we actually see that uplift, is the time it takes for the, you know, to actually move the customer. And there's. Some of it's governed by their resources and their ability. Typically it's a quarter or two, so for example, we just did our first last year, our first, or well, earlier this year, the first flip of a state court system, and we have 15 of those that are on-prem. The State of Idaho flipped. It took a couple of years of planning to get from discussions to signing a contract. But we started the project at the end of January and completed it in May. So I guess five, five-ish months from the time we signed the contract to when we saw the revenue uplift. The first part of the question was. the 1.7. The 1.7. I mean, yeah. Yeah. That's right. Yeah. That's been pretty consistent. You know, for a new customer, the difference between what their maintenance would have been and what their SaaS is is pretty much around 2X. But an existing customer, because by definition they paid for a license, they bought a perpetual license at some point, they get an initial discount based on effectively how long ago they bought that license. If it was two or three years ago, they might be at 1.5X. If it was 20 years ago, they're not gonna get a discount. It's gonna be 2X. But it's been averaging right around that 1.7, 1.X pretty consistently, I think. But that's not a permanent discount. So t hey will, as maybe it's a three-year discount and at some point then they'll get a higher increase to get them up to kind of that. Market price. What the normal market 2X. So, and that's on a like-for-like basis. So that doesn't include the impact of any upsell or add-on sales, which are something that we are seeing more of. Got it. Got it. I wanna move to the payment side of the business, which has been, you know, I think you mentioned earlier has been one of the bigger drivers of upside to revenue through the year. Can you just maybe walk us through some of those? I would call it both mechanical and fundamental factors, right, that have kind of driven some of that upside. Maybe you could just remind us of some of those. Yeah, so we have a, you know, a significant payments business or transaction-based business. There are a variety of transactions that fall in that category. I think at a high level, they're complementary to our software business. And I think going forward, the cross-sell and the additional payments that we're looking to leverage with our existing customer base are very complementary and provide added value to our customers. Margins are different. So payments margins aren't as good as software margins, but it's very good cash flow It's again a complementary offering that makes a lot of sense to our customers. So historically, we had some transaction-based business that were things like electronic filing for the courts where we provide a solution that's integrated with our court system or someone else's for lawyers to file documents electronically. We get a fee for every filing. We had a number of relationships in our software base that were really reseller relationships. So we would bring a third-party payment processor to our customers and get a revenue share. And we still have a number of those in place. And then with the NIC acquisition in 2021, that brought us a whole new set of payments capabilities and transactional capabilities that they're providing mostly at the state level. And that's a business that has historically had kind of high single-digit same-state growth, from either higher volumes or adding new services within a state. You know, they also, NIC had more sort of commoditized payments business at the state level. So a couple of Contracts that were really not the kind of value-add, sort of arrangements that we have with our software customers, but more highly competitive, lower margin, less sticky sort of payments, so that's a little bit different than what we really go after today. So what we've done is taken that NIC payments platform and the expertise that we have, around this long history of providing payments at the state level, and are integrating it with our software products, so we have a lot of software products mostly deployed at the local level, that are used that have that present bills that have payments, running through them. Utility billing is a big one, municipal courts, traffic tickets and fines and fees, licensing and permitting, anything the government licenses you for, parks and recreation, property taxes, so all these are core systems from Tyler. And so what we've done is integrate the payments platform with those products so that the statement of record that provides the transaction is fully integrated with the payment platform, so it provides a benefit to the customers primarily around the automation of reconciliation so those transactions are matched up, it provides better reporting, better data and analytics, than they would get from a horizontal payment processor, so it creates more value, and as a result, we're able to get premium pricing above sort of commodity-level payment processing, and often they can pay a premium price because they're passing some of that on to the payers. So they add a $2 convenience fee to your utility bill or to your traffic ticket, and so it's not really, it's sort of self-funding some of the additional to pay for that additional capability. So we're in the kind of early days of selling that, but we're seeing that, you know, we've seen that through this year grow nicely. Some of the upside has been around both the number of new sales of our payments to our Tyler software customers has been a little bit above plan. We've gotten them onboarded faster. And so like last quarter, I think we did 260-some payments deals with Tyler software customers that will add about 8.5 million of ARR. But we're again in the very early stages. We've got thousands of customers who use all of these products. We are selling it with new, you know, bundling it with new software sales around anything that has payments, but we're going back to our existing customer base. And that'll be, you know, a multi-year opportunity, but something that we expect that, you know, in our long-term targets, transaction revenues will grow slightly ahead of the overall revenue growth. But you know, at least right now we're seeing that grow more rapidly, kind of in the high teens in the second part of this year. Yeah. Absolutely. You know, I wanna move over to just sort of the health of your underlying market and maybe zoom in 'cause I've got a lot of questions just on, you know, the upcoming change in administration. Some questions just around federal funding. Maybe the question is, can you just talk about how impactful a new administration could be on state and local government funding, particularly with sort of renewed focus around government spending, right, with things like DOGE, for example? Yeah. We've gone more than 15 minutes. Yeah. I know. I know. I know. I know. Yeah. We don't have very many investor meetings to go that long on that. Yeah. I think at a very high level. Well, a couple of things. Typically elections and changes in administration have not had a major impact on our market. I've said, I've said it other times. I've been at Tyler for 27 years and we have never during that time on an earnings call or in an MD&A ever mentioned elections as a factor, either positive or negative. So the core business, you know, generally we provide essential mission-critical systems. We're generally replacing an aging system, like really aging, that's at end of life, often 20-plus-year-old systems. And so that's a very, very steady kind of a business. It's not subject to a lot of outside factors, whether it's broader macroeconomic factors or geopolitical events or elections. Right. And I don't really see that differently here. And only with respect to the DOGE and the federal drive for efficiency that's being talked about specifically, only about less than 5% of our revenues are at the federal level. And again, we address that market with a low-code platform that's used primarily at the state and federal levels to automate various processes, which again would generally be mission essential processes, things like background checks and security clearances or EEOC claims or veterans benefits. Those are the sorts of things that our platform manages. More broadly, so we don't really see those, you know, subject to cuts. And more broadly across all of our customer base or all of our products, we don't really have seat-based licensing. So to the extent there are fewer people, that doesn't really affect our pricing. Yeah. Most of our systems are priced on some measure of the size of government, whether it's the budget for an ERP system or, you know, it's where what tier they fall in or the number of parcels of property for a property tax system. So not really seat-based licensing. But more broadly, I think to the extent that there's any focus on government efficiency or greater focus on government efficiency, that's exactly what Tyler does. Right. Although there are all kinds of anecdotal things about wasted costs and spending that doesn't make sense, in general, if government's gonna become more efficient, they're gonna use technology to do it. Now, we certainly don't think that at the local level, we don't see it in our customer base that there are thousands of employees standing around doing nothing. It's more that because they have processes often that are governed by antiquated systems that they have highly manual processes. They don't provide for citizen self-service, be able to do things online. So it takes a lot of people to do a lot of routine things. That's a great point. So, yeah, and that's nothing new for us. I mean, we're replacing a 20-year-old, a 40-year-old court system. We've talked about an example like Cook County, Illinois, Chicago, the second largest county in the country where we replaced the court system. It was a 40-plus-year-old mainframe system. But, you know, they had, I think, 10 people whose only job was to push shopping carts of case files, of manila folders to the courtrooms every day and stack them on the judge's benches. And they replaced that with a system that was totally paperless. So those kinds of things would only be good for us. I mean. If there's more focus, more acceleration of those kinds of things that we're already helping governments do, then that's a good thing for us. And that could accelerate the replacement of systems to the extent that's pushed down more to the state and local level where we have more business. Absolutely. That's a great perspective. You know, in the last few minutes here, I just wanna wrap up with just some talk about profitability and free cash flow, 'cause I think those have been great parts of the story as well. Maybe just on profitability first, Brian. You know, there are some moving parts here, particularly around the closing, the timing of closing around two Tyler data centers. Can you just talk a little bit about the margin impact? I think we've called them bubble costs in the past. Can you talk about the margin impact of those bubble costs kind of going away, with other areas of the business where Tyler can maybe drive more leverage, as we think about that 30% margin target in 2030? Yeah. And again, for those that aren't familiar with it, when we set those 2025 and 2030 margin targets, that we talked about going from a 23% operating margin in 2023 to a 30% plus operating margin in 2030. So an average of 100 basis points a year. But that it wouldn't be linear. We talked about a lot of those underlying drivers of that margin improvement, most of those being from the cloud transition. What I talked about earlier, the version consolidation is probably the biggest one. Data centers is another one. So we've historically hosted our clients at two Tyler data centers. And several years ago, we'd said that was not the business we wanted to be in, that we couldn't scale it to have all of our customers. We have a primary relationship with AWS as our hosting partner that's been an incredibly successful relationship. We have been migrating customers out of our data centers into AWS. We closed the first data center on schedule mid-year this year. And at the end of 2025, we'll close the second one. But until we get those data centers that we have till we got the first one closed, until we get the second one closed, there are a lot of fixed costs that don't go away until we close it or after we close it. And they're, and we continue to incur new costs at AWS. So there's some duplicate costs in there. Sure. And so we're seeing the impact of the first data center now, but it's being offset by the growing build costs around the second data center until it closes at the end of next year. So there'll be more impact from that in 2026. The version consolidation continues to be a factor along the way. We've also talked about. We have developed cloud-efficient or cloud-optimized versions of our products [and] have released most of those now. So we're seeing better unit hosting costs as a result of that. And just in general, the AWS costs and our hosting costs, there's a lot of leverage there. So the more volume we do, the lower the unit costs get. So that's part of that long-term margin expansion. There's also other factors like improving our professional services margins and improving payments margins over time. And, you know, we're, you know, I think the midpoint of our guidance for this year implies around 150-ish basis points of margin expansion this year. So more than that 100 average, I'd expect less than that next year. But as we said, it wouldn't all be on a straight line. I think we're at least a year and a half into it. We're very comfortable with where we are in terms of achieving those, that long-term improvement. And it's showing up. That improvement in margins is the biggest driver of the improvement in cash flow, along with sort of improved collections, more efficiency around our working capital. As we get more and more revenues that are coming, the recurring revenues, the SaaS revenues are paid generally annually in advance. So it creates deferred revenue. We're getting paid before we're recognizing the revenue. And then the payments and transaction revenues, we get paid at the time of the transaction so we don't have to fund a receivable for some period of time. So all those make a more cash-efficient business. Which maybe is a good dovetail into the last line of questioning I wanted to touch on, which is, just the improvement in Tyler's free cash flow margin has really stood out this year. I think we walked the 2024 guide up from, you know, 17% to 19% up to 21% to 23% through the year, right? So very well done. Maybe you could just talk about some of the factors that drove that outperformance? Yeah. I think. If that makes sense. Yeah. The higher earnings and better collections that go with those earnings, especially around the transaction business, because again, we get that right away. That's right. We don't have to wait 60, 30, or 60 or 90 days to get that. That's been the biggest thing. I think there's been a little bit through the first nine months of some things around tax payments. We were able to defer some tax payments until later in the year, but that'll, it'll work out by the end of the year. But yeah, the better collections and more efficiency around working capital management, I think, has been part of it. On the negative side, that changed last year in taxes around Section 174, which required us to capitalize for tax purposes and amortize costs that we used to be able to deduct currently. It had a big impact on cash flow last year, something like $130 million of incremental cash payments. This year, it's about $50 to 55 million. Yep. Of incremental cash payments, and then it narrows over the next 4 years until it kind of reaches an equilibrium, but so the improvement in cash flow is, you know, part of it is that, although it was built into our plan, is that lessening impact of Section 174, but yeah, we're ahead of where the targets that we set for 2025. I wouldn't expect from a margin perspective a massive improvement from this level in 2025, but in terms of the cash flow margin, I think we'll, again, continue to drive towards that 30% plus cash flow margin target.