Tyler Technologies Inc at Needham Growth Conference Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Joshua Reilly - Needham & Company - Analyst : <_ALACRA_META_ABSTRACT>The budgetary environment has been a tailwind now for several years. One of the key questions I get is how or will this change with the Trump administration taking over? And when will the bleed off of COVID stimulus dollars impact demand trends in 2025 or 2026, particularly down to the state and local level where you are the most relevant for your business? Brian Miller - Tyler Technologies Inc - Chief Financial Officer, Executive Vice President, Treasurer I guess the short answer is, for us, we don't -- really don't anticipate any significant changes to the demand environment from the administration change and particularly not at the state and local level. And that would be consistent with what we've seen in prior administration changes. As you said, we're mostly focused on state and local, about 5% of our revenue comes from federal, but the vast majority comes more at the local level and at the state level, mostly from transactions. We're really seeing a market or activity in the market that remains very stable at these elevated levels that we've seen for the last several quarters. We've talked about the early indicators or indicators of market activity, like the number of RFPs we're responding to, the number of sales demos we're doing, how the pipeline is moving. And all of that is pretty stable at these elevated levels, and we really don't see a change to that from the administration. And with respect to the ARPA funds, significant amount of direct funding to state and local governments. Going back to post-COVID, everybody got something. They had until the end of '24 to commit those funds. It doesn't mean that they had to sign a contract to REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:30PM, TYL.N - Tyler Technologies Inc at Needham Growth Conference spend them, but they had to sort of allocate those. So that's been done. They got until the end of 2026 to spend them. So we expect that we'll continue to see a tailwind of some sort through '26 as those funds are spent. I would say that we don't think it's been the biggest driver of that active market. It's been a factor. It's really hard to quantify the impact of the ARPA funds accurately. We certainly know of some incremental deals that have been in the market because they had extra money from ARPA. But even in cases where they're spending ARPA funds, they're specifying that they're paying for something with ARPA funds. It doesn't mean that, that wouldn't have happened without those funds. They do tend to be used more for onetime things. So for example, in our school transportation solution that automates all the aspects of school buses, there's a significant hardware component with those. And we've seen ARPA funds used to pay for a lot of the hardware. And of course, there's an ongoing SaaS subscription that goes with that. And we saw a lot of that in 2024, so we do expect, as a result, to see hardware revenues, which are a pretty small line for us, show a decline in 2025. But again, not really significant. It's been certainly a plus and expect it to continue to be, but not really the biggest driver.

Question: Joshua Reilly - Needham & Company - Analyst : Got it. That's helpful. If you look at your largest product segment, ERP, it's basically in line now with -- in terms of the size of the payments business in terms of revenue. But last year entering the year, I know you had a very strong pipeline of RFPs for the ERP division. Maybe a couple of items. How was the execution of those deals in 2024 relative to your expectations? And then how should we think about the pipeline entering 2025?

Question: Joshua Reilly - Needham & Company - Analyst : Got it. All right so you just mentioned that you've had some success moving upmarket in both ERP and Public Safety. If you look at the pipeline for these two divisions, what do you think is driving some of these larger wins? Do you think it's the reference wins that you've already had? I know like with Orlando and Naperville, in some of these areas? Or is there some other factor at play with the way you've restructured the platform, or something from a product perspective?

Question: Joshua Reilly - Needham & Company - Analyst : Awesome. That's interesting. All right. So Courts & Justice, which is about 14% of revenue, is in the midst of probably the most significant cloud transition of any of your business segments, just given the magnitude of what's about to happen there and the timing potentially. You recently had a little bit of a mini conference where you met with these customers. Curious what's the feedback in terms of the expected pace of these migrations? And what type of multiplier effect on the maintenance revenue should investors expect from these deals?

Question: Joshua Reilly - Needham & Company - Analyst : And can you just remind us how does the revenue recognition work in this scenario where they may be still paying maintenance? Is it when the new system goes live, when they flip from maintenance to subscription, or is there something we should be aware of in terms of the timeline? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:30PM, TYL.N - Tyler Technologies Inc at Needham Growth Conference

Question: Joshua Reilly - Needham & Company - Analyst : And do you think that two-year timeframe that they went through in terms of planning the Idaho did that some of these other states can have a shorter planning --

Question: Joshua Reilly - Needham & Company - Analyst : That was unusual.

Question: Joshua Reilly - Needham & Company - Analyst : Awesome. All right. So you've been on this journey to migrate products to be fully optimized for the public cloud. I think investors are generally familiar with that. Maybe just an update on where you stand today in terms of the eight product segments or more importantly, the subsegments. I know that, obviously, within the eight product segments, there's many subsegments. And are there still a few within those subsegments that need to be public cloud optimized? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:30PM, TYL.N - Tyler Technologies Inc at Needham Growth Conference

Question: Joshua Reilly - Needham & Company - Analyst : Got it. Is it essential -- is there some sort of milestone you need to hit with preparing these products for the public cloud before you shut down the second data center at the end of the year or is that not --?

Question: Joshua Reilly - Needham & Company - Analyst : Got it. That's very interesting. Okay. All right. So maybe moving on to everybody's favorite topic, which is AI. You made three smaller acquisitions a little bit over a year ago, if I remember correctly. And from my work, I'm speaking to some of your customers, it seems like there's been some nice cross-sell of these products. You just mentioned a little bit earlier, one example there. As you look across the product portfolio, how do you manage maybe the broader integration of AI and GenAI technologies and kind of the full suite of products? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:30PM, TYL.N - Tyler Technologies Inc at Needham Growth Conference

Question: Joshua Reilly - Needham & Company - Analyst : Awesome. All right. So along with the cloud transition have come these kind of bubble costs or managing customer deployments of software in both the public cloud and your data centers for some period of time. You shut down the first data center already and manage this process for some customers. Maybe could you just explain how have these -- when did the first round of bubble costs peak and then come off. And now we're kind of at the final stage of these -- the second round of bubble costs and when would these potentially come off? Can you maybe just give us a little bit of background.

Question: Joshua Reilly - Needham & Company - Analyst : Got it. And then just in terms of the magnitude of the sequential increase that we should expect quarterly in 2025, how do we think about that? Are we talking about 5 basis points, 10 basis points impact to gross margin?

Question: Joshua Reilly - Needham & Company - Analyst : So then the peak might be 25 basis points to 30 basis points headwind by the time we get to the third quarter. Is that kind of the right way to think about it?

Question: Joshua Reilly - Needham & Company - Analyst : So it's not a huge overall factor there?

Question: Joshua Reilly - Needham & Company - Analyst : Got it. All right. So in terms of the Public Safety market, it's about 6% of revenue and I do a lot of work in this space. It's probably the most competitive product segment that you operate in today. There's been a lot of innovation in this space. How do you kind of maintain an edge when your large on-premise installed base in this segment goes to RFP in the next several years? And it seems like the pace of cloud migrations may be actually a little bit quicker than what we would have thought a couple of years ago. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:30PM, TYL.N - Tyler Technologies Inc at Needham Growth Conference

Question: Joshua Reilly - Needham & Company - Analyst : Got it. So maybe moving on here a bit. So when I talk to customers, they highlight the Tyler kind of ecosystem play is a really easy way to kind of add on incremental products and drive cross-sell. Obviously, NIC, a big part of the thesis there, was cross-sell opportunity. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 2:30PM, TYL.N - Tyler Technologies Inc at Needham Growth Conference I know early on, you were successful with a couple of products in cross-selling like MicroPact, which now you've renamed to something, I can't remember --

Question: Joshua Reilly - Needham & Company - Analyst : Tyler Application Platform. But the question is with now another full year of NIC ownership, have you expanded the cross-sell even more into the broader kind of ecosystem?

Question: Joshua Reilly - Needham & Company - Analyst : Awesome. All right. Well, we only have one minute left, so we'll do one rapid fire financial question. Maybe can you just go through some of the puts and takes in terms of thinking about revenue and actually more interested in operating margin in 2025 relative to the $2.35 billion Analyst Day target you gave and 25% non-GAAP operating margin. Maybe just focus on operating margin in particular.

Question: Joshua Reilly - Needham & Company - Analyst : Awesome. All right. Well, with that, we are out of time and I want to thank Brian very much for the chat today.