Good afternoon, everyone. Welcome to the tail end of Day Three at the Oppenheimer Virtual Tech Conference. I'm Ken Wong, Software Analyst here at Oppenheimer. Extremely happy to have with us Brian Miller, Executive Vice President and Chief Financial Officer at Tyler. Brian, welcome. Thank you. Thanks for having me. I think just about everyone in the audience knows Tyler at this stage, so I won't kind of dive into who you guys are. One thing we did want to jump into is just since this is topical, everyone has been asking, just kind of macro federal spending uncertainty. You know, you guys were seen as potentially being impacted there. Would love to get your most current takes, most current views on what we've seen and maybe how things are shaping up as we approach the back half of the year. Yeah, I think obviously in Q1 there was a lot of noise, not just around Tyler, but in general in the market around federal spending uncertainty, federal spending, and potential trickle down of federal spending impacts at other levels of government, tariffs, all the things that were causing a lot of commotion in the first quarter. Certainly, we saw some impact of that in the quarter, not so much in terms of a real impact on demand or even a real impact on our clients. We did see it manifested in some delays, slowing of processes, pauses, as our customers and prospects tried to figure out if there was an impact on them, if there was something they needed to be worried about. We saw some processes slowed down and delayed, and some of that reflected in some slowness in bookings in Q1. We said at the time on our Q1 call that we believed it was mostly just timing and temporary in our view, and that what we heard from discussions with clients was that, in fact, most of this really had very little impact on our customers. Only, as a reminder, only about 5%, less than 5% of our business is directly with the federal government. State and local governments were still analyzing what that meant to them. I think as we moved into Q2, it became pretty clear that it was a temporary, for the most part, a temporary impact. I think discussions we've had with clients, a lot of discussions we had at our user conference in May, and in fact, the analysts and investors who were there at our user conference had the same kind of feedback, pretty unanimously in the conversations with our clients. Our clients said none of this really affects them, doesn't affect their spending with Tyler, what they might spend in the future with Tyler, their overall IT spending. What we do think is that this sort of out, sort of a reflection of federal spending uncertainty, I guess, whether it's at the federal or state or local level, an increased focus on government efficiency is, in the long run, a very good thing for us because ultimately technology is the way that governments become more efficient in replacing aging systems and inefficient processes that are governed by inefficient older software. That becomes a higher and higher priority, and over the long run, these systems will get replaced sooner than they otherwise would as governments think more and more about replacing systems from an efficiency or a cost-benefit standpoint rather than just waiting until old systems die. We saw really good sequential growth in bookings in Q2. I think a lot of the deals that we saw that were paused in Q1 moved forward and signed in Q2. We have talked a lot about that 2024 was an exceptional booking year, especially with a lot of large contracts that just are inherently lumpy. We faced throughout this year a really tough bookings comp on the new, sort of the new logo SaaS sales, but do expect to see sequential improvement as we move through the year, just as we did in Q2. Got it. I was planning on saving some of the audience follow-up for later, but I do have one that somewhat ties to this, and you answered most of it. On the efficiency side, any benefit from government downsizing headcount that potentially benefits you, or should we view that as a net negative as maybe a lot of, you know, not necessarily you guys, but a lot of software vendors or maybe some more seat base? Is that a headwind? How are you guys thinking about it? How should we think about that? For starters, we don't really do much, very, very little seat-based licensing. Almost all of our licenses reflect some measure of the size of the application that we serve. If it's a tax system, it's the number of parcels of property. If it's a public safety system, it's the number of calls for service that they handle. For systems, the number of cases that they typically handle. For the most part, it doesn't directly affect our pricing or our ongoing revenues from existing customers or future customers. In most cases, especially at the local level, which is 75% or more of our business, it's not so much that they really expect to downsize the number of employees they have. It's really that they don't have enough employees already. Local governments, governments at all levels, but local governments particularly, lost a lot of employees during COVID when people either left the workforce or went to work in the private sector. They have not, for the most part, fully rebuilt those workforces. They've always been short-staffed, so there's always a difficulty just maintaining the staffing, whether it's because of budgets or just because of difficulty attracting employees. There's sort of this concept of this silver tsunami that is hitting government as aging workforces retire, and they have a lot of trouble, especially in technical roles like IT, contracting, retaining, paying market rates for competing with the private sector for employees. It's not so much that they're going to get rid of a lot of people. It's that they don't have enough people to do the essential tasks that they need to do. There aren't enough clerks to enter data in the court system, or there aren't enough clerks at the county clerk's office to answer citizen calls when they call in with a question about how to get a business license. Using new technology more efficiently, things like automating data entry through the use of AI, which is a feature that we have in our court system, or using agents to answer citizen questions, which is something that we've deployed now in three or four states with our resident assistant AI application, enables them to continue to do the essential things they need to do, but address the staffing shortages that they already have. Understood. Maybe circling back to the booking side of things, since that seems to be where we probably encounter the most kind of investor debate questions at the moment. You touched on the tough comp dynamic. One other concern we hear is, look, as software investors, we're so used to bookings leads billings leads revenue. Should we see potential risks to kind of forward revenue growth on the SaaS subscription side? With the weaker bookings this year, how would you kind of best walk us through what the potential impact could be downstream? Yeah, our bookings are sort of a mixed value in terms of analyzing our business going forward. When you look at the SaaS side of the bookings, we give a few different metrics there. We get bookings from new SaaS customers, kind of new logos for a new application. Also driving SaaS bookings are the flips that we also give a breakdown of. Our customers are migrating from on-prem to the cloud, and that uplift is 1.7 or 1.8x in revenue that we get. We have bookings from renewals, so multi-year contracts that we've signed in prior years that reach the end of their term and then renew for a new term. Those can be kind of staggered and lumpy. They're not consistent from quarter to quarter. We have expansion, so add-on sales to existing customers, new modules, new applications, and pricing. All those things combine to drive our revenue growth. A lot of those can be very lumpy in terms of how the bookings hit. You really need to look at these things not over a quarter or two, but over a year or two. There are also timing impacts. If we sign a contract this quarter, we might not start recognizing revenues for a quarter or two quarters or three quarters, or they may be phased in revenues. They don't follow sequentially as neatly as you might like for modeling purposes. Broadly, I'd say we think the last year was an exceptional year for bookings, especially new SaaS deals, large deals, some of which are still working their way into revenue. This year is shaping up to be a really good year. It's just not as good as last year in terms of the new deals. Last quarter we did have bookings over total SaaS bookings growth because we had really strong expansion sales and really strong renewals. The top line is that we believe that the level of new business that we're signing this year, whether it's new names, flips, expansion, is right in line with the level that we need to support the growth targets that we talked about in Investor Day a couple of years ago, which were kind of around 20% SaaS growth through 2025 and kind of high-teens SaaS growth through the period through 2030. We've been running a little bit ahead of that, kind of in the low 20s. It may accelerate as flips accelerate, and then it'll decelerate as we get on the downhill side of the flip trajectory. We're really comfortable with the bookings that we have right now and the level of sales support those growth targets that we've been talking about for a couple of years. As you touch on accelerate as the flips accelerate, I think the public commentary has been that we should see flips kind of approach a peak in 2027-2028, suggesting an acceleration. I guess what gives you confidence in that trajectory? How much of this is just based on what you see in the install base, renewal timing, customer commentary? We'd love some feedback to understand the visibility that you guys have in that flips trajectory. Yeah, I mean, we still have a significant portion of our customer base that is on-prem, and that cohort of customers is more heavily weighted towards large customers. We have been having customers flip for now, I guess, about 20 years, but it really accelerated in the last four or five years. The larger customers are slower to move, with more complex roadmaps, and how they fit that into their long-range plans around their data centers and other priorities they have. I'd say in general, with our large customers, but really all of our customers, it's not a matter of whether they'll flip to the cloud, but a matter of when. I think almost all of them, and again, this is borne out through conversations at Connect, all of them understand that they're going to move to the cloud, expect they're going to move to the cloud, understand why and why that's a good thing for them. It's more around when. As we have conversations with all of our customers, particularly our large customers, and we start to have a clear idea of how it fits with their longer-range IT plans, we have sort of slotted people in, not precisely, but into broader timeframes. We really see over the next two or three years, both the number of flips, but more particularly the average size of flips trending upward. We really believe the peak, which will be driven by the larger customers in terms of both number of customers and dollar value of customers flipping, is in the 2027-2028 timeframe as we start to see, especially, some of our larger courts customers expected to move in those timeframes. There will be a kind of a downhill side to the bell curve. We still expect that kind of 80%- 85% of the customer base of the on-prem base will have migrated to the cloud by 2030. We've talked about some of the gating items around that, the biggest one being the need to upgrade to the current version of the software before you move to the cloud version or when you move to the cloud. We've made a lot of progress around that version consolidation, sunsetting older versions of the product and moving customers to that current version, which then gets them in a position to be able to move to the cloud. Courts, where we have a lot of our large customers, is one of those areas where we've particularly made a lot of progress. I think very close to 100% of our customer base there is on either the current version or one version back, which has been a significant lift over the last few years. That gives us more confidence around the ability of those customers to move. For example, this year we also told our courts customers that this year's release was the last time we'll have a full release with new features that goes to on-premises customers. We'll continue to support them on-premises, but going forward, new features will only be available in the cloud version. Whether you consider that a stick or a carrot, that's something we're clearly implementing in more and more products as customers. We'll still get legislative changes, bug fixes, those kinds of things that need to keep running in the on-premises. New features, including a lot of AI-driven features, will only be available in the cloud version. We think that incentive continues to make it more attractive for customers to move. Another factor that continues to be a meaningful factor around the migrations to the cloud is the increasing incidence of ransomware and cybersecurity attacks and the additional security that they get when they're in the cloud. That continues to be a motivator for customers to move, and especially customers who do suffer an attack. Often that significantly accelerates their timeline for moving to the cloud. Understood. Yeah, definitely sounds like maybe at worst a carrot-shaped stick, so a little bit of both there. A follow-up on the cloud opportunity, someone asking in the audience, how much of this SaaS opportunity is left beyond the migration, which apparently, you know, that obviously makes sense. You have very, very resilient customers. Is there, you know, on the new side, is there a lot left to try to capture? You mean just the new business in general or around moving the makeshift from on-prem to the cloud? I guess the question just specifically, greenfield SaaS opportunity. I'm assuming that greenfield opportunity probably looks very much like whatever you thought the original kind of adoption curve for governments to Tyler looks like. I guess to the extent you have any nuance to that question, that'd be great. Yeah, I mean today, high 90% of our new business is cloud. That, you know, the SaaS opportunity is the new business opportunity. Virtually, there's very, very little new licenses we're selling back. Even products like public safety, which was a little bit slower to move to the cloud, now is very close to 100% SaaS in the new business market. That opportunity is kind of our overall opportunity, which continues to be a lot of replacements. We still think that well over half, probably north of 60% of the systems that governments use today are legacy systems. Systems either homegrown systems or systems from a vendor who is no longer competitive. Someone that had an on-premises system that they sold 15, 20 years ago may still be supporting that system, but doesn't have a current technology product that anyone would buy today. As those products reach their end of life, it's not a replacement for a replacement cycle and upgrade for the existing vendor, but it creates an opportunity for someone like Tyler Technologies to replace that system. Those continue to produce a really steady kind of a replacement market. Historically, it's been kind of hard for us to accelerate that pace of those changes. Even today, I think the average system we replace is probably more than 20 years old. In some cases, as old as 30 or 45 years in some of the homegrown systems. We do think that, kind of tying back to that, the federal spending uncertainty and the government efficiency push, that as customers or prospects increasingly look at the opportunity to gain efficiencies by replacing these systems, we'll see some acceleration of pull forward of the replacement systems that might have otherwise lasted another decade, another 15 years until they actually died. People are saying, okay, if I actually make that investment, go to the effort today, there's a real ROI to that. There's real efficiency gains that I can get. Maybe I won't wait another 10 years. Maybe I'll do it now or two years from now or three years from now. We do feel like there's somewhat of a pull forward, sort of a change in the way they look at acquiring systems, and there will be some pull forward. A lot of opportunity there in terms of new business. We've talked a lot about the importance of cross-sell and upsell. Our average customer has two or three products from Tyler. We could, in most cases, have eight or ten. Really, that's what gives us a competitive edge. As these systems turn over, buying that next system from Tyler and the next one from Tyler provides them with more value because of common technology elements, common reporting dashboards, and the way the systems interface with each other. That provides an advantage from Tyler that they can't get from another vendor. That huge customer base of installed systems that we have today creates that foundation to sell more and more products. As we add more products through either M&A or through internal R&D, that gives us more and more cross-sell opportunities. Makes a lot of sense. On the cross-sell, payments has been kind of a nice source of incremental growth the last five years and especially the last couple of years. Maybe help us understand what's been kind of the core driving force there. Is this outsized growth in transactions? Is this something that's sustainable? How should we think about what, you know, kind of that overall payments piece of the business? Yeah, transactions is really growing kind of above what the targets that we set. Again, going back to 2023, we talked about kind of a low double digits, low teens growth expectation. Last quarter we grew, I think, north of 21% in transactions. There's a couple of things there, some of which are more short-term and some of which do support maybe longer-term growth that might be above those targets that we previously talked about. More recently, we have seen a lot of growth that really reflects higher volumes from both new and existing customers. It's people doing more things online, which is something that we expect will continue. That's always been sort of built into our growth assumptions that we continue to work with our clients who want to drive more transactions online. We're having success there. We're seeing higher volumes. We're also seeing the growth from new transaction or payments customers that we've added. We've talked about in the last few quarters as we've really gone to market with this integrated payments offering, tightly integrating our payments platform with software solutions that present bills, facilitate payments, things like utility billing systems, traffic port systems, licensing and permitting systems, property tax systems. As we've integrated our payments platforms with those, we've been able to sell payments both with new software deals bundled with that and going back to our installed base of customers who use those utility systems or port systems and adding payments to those. Each of the last few quarters, we've talked about adding 100, 200, 300 customers, adding anywhere from $3 million, $3.5 million- $8 million or $9 million of new ARR each quarter. There's a lag of a quarter or two typically from when we sign those deals to when we start to see the payments revenues. We're starting to see the impact of that new business hit on the revenue line. There's still a lot of runway ahead in terms of both the installed base and new deals. We also have seen some of that elevated growth coming from revenue sharing arrangements we have with third-party payment processors, which is kind of the old Tyler payments before the NIC acquisition, where we really were kind of a reseller of third-party payment processing and we get a revenue share. Some of those partners have had pricing increases in the last year that have flowed through to our rev share. I think we're probably about capped out on those. I wouldn't expect that to be a big factor going forward. The last thing really is around what I've sort of referred to as SaaS as a transaction type revenues. We've seen a number of instances where we've sold software solutions and are getting paid for those through transaction revenues. Probably the biggest example is the California State Parks deal, which is the largest contract Tyler Technologies has ever signed to provide a complete outdoor recreation solution for the California State Parks. We're also processing all of the payments associated with all of the revenues that collect through the state parks and doing some other services there. We're not getting a SaaS fee for that. We're getting paid by getting convenience fees that are added on to charges that users pay when they make a campground reservation or rent a kayak or any of the revenue streams that go through the state parks. We might get a $2 convenience fee on the campground reservation. The state gets the benefit of the new software, but they don't have to appropriate a line item in their budget to pay for it. It gets paid for by these user fees. It shows up in transaction revenues. In effect, it impacts SaaS bookings and SaaS revenue growth, I guess in a negative way because it's showing up in transactions. We still get the same revenues or even potentially better revenues, but it shows up on a different revenue line. That's part of the reason for the higher growth above our targets on the transaction side. SaaS revenue growth actually would even be a little bit higher if they were in the traditional model. We've done that in a number of outdoor recreation type situations. We're doing some digital motor vehicle titling solutions for the state level that also are paid for with transaction fees. I certainly wouldn't say it's the primary way we're selling software these days, but there are instances where it makes sense to provide a solution that's attractive to the customer. We're comfortable with that kind of a revenue stream, even though it sort of falls in a hybrid of SaaS and transactions. I expect that'll continue to be a factor going forward. As we look at potentially another Investor Day early next year, to the extent we reset some of those targets, we'll take into account that that's really something that wasn't contemplated when we kind of laid out this model a couple of years ago. Got it. Super interesting dynamic there. How much of that shift to subscription as a transaction is facilitated by Tyler versus maybe at the request of a customer? Then maybe secondarily, I don't know if there's a way for you to size or quantify, but do you find that this maybe elevates the size of a transaction or gives customers more theoretical budget to work with, or is it still roughly net neutral in terms of what the contract would have looked like? Yeah, it's kind of hard to put them side by side, but generally, because we are taking a little bit more risk, generally, like the California Parks arrangement, for example, we replaced, they had previously several vendors, they had a payments provider, they had multiple software providers, and someone managing call centers. They had multiple providers. We were able to provide all of those services under a transaction-based arrangement because we do have the payment processing capabilities. We're comfortable. We have the software, industry-leading outdoor recreation software, and we were comfortable with all of that being paid for through transaction fees. The transactions are generally pretty predictable or reliable. I mean, there's generally a lot of history about how many people visit the California State Parks and how many people go to the Hearst Castle and all these different revenue types. There is some risk because those transactions have to take place and the volumes can fluctuate. We expect to get sort of compensated by a little bit higher level of revenues than if it were a straight fixed fee SaaS transaction business. I think it only really applies to some applications. There's got to be an underlying transaction associated with it. We really couldn't sell a payroll system that way. You know, there's nobody to pack a fee onto or an accounts payable system. In something like outdoor recreation or motor vehicle registrations where there's already a transaction where there's a fee going to the government, it's easy to put a convenience fee on top of that. In the case of California, where they do have pretty significant budget pressures, this was a great solution that we could provide that whole package of solutions under a model that wouldn't require them to appropriate funds out of the state budget. We do similar systems other places where they do pay a SaaS fee. It kind of depends on their philosophy in different states or different jurisdictions. We think it gives us a competitive advantage because not every vendor, every software vendor has that kind of a model. Got it. Okay. Maybe shifting gears away from some of the top line dynamics, how should we think about the operating leverage in the business? You guys have given a fair amount of margins over the last few years, but we're also in a bit of an investment cycle. We're waiting on some flips. What's the right way to think about the pacing of profitability? Yeah, you know, as we talked about those margin targets of, you know, 30%+ operating margin by 2030, which implied about 100 basis points a year of operating margin improvement starting in 2023, with most of that coming at the gross margin line. I think here, as we sit halfway through 2025, we're sort of maybe a bit ahead of pace in terms of achieving those targets. I think more of that has come at the OpEx line than the gross margin line. Most of what's left to come is on the gross margin line. A lot of that coming from cloud operations, version consolidation from scale with AWS as we continue to grow our hosting operation there, from ultimately getting customers on one version of every product. All those things contribute, have made some contribution to date, but most of that yet to come. I'd say when we look at the impact of AI, both on potential revenue growth, but also on internal efficiencies around things like professional services and implementation efficiencies or other support organization efficiencies in our development operations, we're seeing some impact today, but most of that is yet to come. Actually, most of that wasn't contemplated back in the targets we set in 2023. AI wasn't really being discussed much then. I would say that we, so I'd say our gross margin objectives, still a lot of that ahead of us, but certainly well on target for those. On the OpEx side, I think we've achieved a lot there already, but still expect that as we move forward, we'll continue to see some pretty good leverage, especially around both sales and marketing and around G&A. We've been able to hold headcount in both of those areas, certainly at a growth level that's well below our overall revenue growth level. We expect that to continue to be the case going forward. AI is a factor there, but a lot of areas of focus around standardizing platforms, whether it's backend systems, processes that may have been different across different areas of Tyler as we start to make progress on standardizing those. Those are giving us additional efficiencies around the OpEx line. I think that as we move forward, we'll continue to see leverage around those areas as well. Feel really good about where we are at this point towards those longer-term targets. I believe there's upside from those, but we'll continue to hold. Understood. With all this talk about incremental leverage, better profitability, you're going to free up some cash as you close up these data centers. You'll probably get a little more cash back with all the tax dynamics with the OBBB. How should we think about prioritizing where you guys are going to funnel that cash? What's the capital allocation priorities? Do they maybe shift now that you have a little more capacity to work with from a cash flow perspective? I don't know that there's a big shift. For the last couple of years, paying down our term debt from the NIC acquisition was a big focus, and that's behind us. We have enough cash, way more than enough cash to pay the convert off next spring when that matures if that's the best move for us. With the cash flow, we've got a lot of capital dry powder. I think M&A still is the biggest potential use of our cash. We've said that for the last couple of years, the bar's been really high, especially as we've not only just focused on paying down debt, but also been focused on a lot of really important initiatives in the company around the cloud transition, payments growth, integrating NIC that we've wanted to focus on rather than putting a lot of M&A on top of management's plate. When I say management, I really mean the people who are running our business units and running those businesses day to day. I think we've made a lot of progress there, and we're kind of more open to M&A right now. I would expect that you'll start to see us potentially become more active over the next couple of years. There are a lot of opportunities for both tuck-in acquisitions around existing products or technologies, as well as potential acquisitions that expand to sub-verticals where we really don't have a big presence today. I think a greater focus on M&A. I also expect that opportunistic buybacks probably rise in priority now, now that the term debt's been paid off. I think that probably would be a bigger factor going forward as well. Got it. I think with that, we are right up on time, just as I planned. Brian, thank you for taking time out of your day to interact with us and investors, and to the audience, thank you guys for participating. I really appreciate everyone for being involved in the virtual tech conference. Thanks, thanks Ken for hosting and thanks everyone for participating.