Update 2025.2 - Tyler Technologies (TYL)
Cloud First + Payments Drive Recurring Revenues
Since this is only the second update post, I just want to reiterate that the goal of these updates will be to summarize the key events in the business since the initial write-ups and to analyze whether the quality of the business has changed, measured by returns on incremental capital and reinvestment opportunity.
With this update, the initial write-up on Tyler Technologies is posted under the No Paywall tab for everyone to review. Also just as a reminder, the financial model is attached in the last section of this update. There are some data points in the Segments tab that could be useful to many.
The next post will be a full initial write-up on Airbnb, and will be published sometime in mid May. We’ll get back to more updates shortly after.
Tyler Technologies
Here is a quick recap of what Tyler does. You can also read the initial write-up for additional background analysis.
Tyler is the leading provider of software and payments solutions for local, state and federal government entities in the U.S. The company’s core products are in ERP/Financial software (32% of revenues), platform technologies like payments and data insights (29%), case management systems for courts & justice (15%), public safety reporting (7%), K-12 education solutions (7%), appraisal & tax (5%) and civic services (2%). Most of Tyler’s customers are local government entities (85%), then state (10%) and lastly federal (5%). Tyler has over 45k installations at over 13k customer locations across its product suite. In fiscal year 2024, the company reported $2.1B in revenues, of which $1.8B were recurring (subscriptions + maintenance).
What happened since the initial write-up?
Tyler was the 7th write-up in 2020, so it’s been over 4 and a half years since we’ve discussed the company. There have been two big changes at Tyler - (1) the step-up in migrating customers from on-premise license software to SaaS and (2) the $2.3B acquisition of NIC and the company’s push into unified payments for government customers.
Tyler actually started to offer cloud solutions to its customers starting in the early 2000s hosted at the company’s owned datacenters. But because Tyler’s customer base is comprised of various local government entities, the shift from on-premise software to SaaS has taken much longer than other software providers (think Microsoft, Adobe, etc.). Government entities have been slower to adopt SaaS because they are not driven by profit and have virtually no competition. So as long as existing systems work well enough, there usually isn’t a motive for change. Many of Tyler’s new customer wins are still replacing 20 year-old systems and a few are even up to 50 years old running on mainframes. Government entities are also run on annual budgets, and shifting funding allocation from capex to opex can be a challenge.
Prior to 2019, Tyler was cloud-agnostic, meaning that it did offer SaaS solutions for its products, but also offered the traditional on-premise software solutions that were structured as one-time license fees + annual maintenance contracts. So many customers chose to go with on-premise solutions that even with the push for SaaS since 2019, 55% of total customers are still on-premise today. From the customer’s perspective, the main advantages of adopting SaaS vs. an on-premise solution are (1) always having the latest version of the software, allowing for fewer issues and better interoperability if needed, (2) less required spending on internal IT support, and (3) allowing for easier additions of complementary software.
In 2019, Tyler signed an agreement with AWS to host the company’s software on the public cloud. At the same time, the company transitioned from a cloud-agnostic to cloud-first strategy, pushing for new customers to adopt their SaaS offering and for existing on-premise customers to “flip” to SaaS. Almost all of Tyler’s new customers are now SaaS at 96% of new contract value in 2024 (up from 71% in 2021). And flips are trending well at 36% of all new SaaS customers in 2024 (up from 12% in 2019).
Flips are interesting because the subscription contract values are higher than annual maintenance contracts by an average of 1.7x-1.8x. So while the company is forgoing the upfront license fee for new SaaS customers but are making it back and more with higher subscription values in later years, with flips there is no initial license fee that the company is “giving up”. The subscription contract values for new SaaS customers are roughly 2x that of the annual maintenance contracts. But for flips, it’s less than that at 1.7x-1.8x because (1) for recent on-premise customers that are flipping, they get some credit for the license they recently purchased, and (2) for older customers that are flipping, they’ve likely had many price increases on their maintenance already which moved them closer to the subscription price.
From Tyler’s perspective, the main advantage of going from private cloud to AWS are (1) less capex spending than managing the company’s own data centers, (2) better security and compliance, (3) and much easier scalability and planning. By 2023, the company migrated most of the workloads in its Texas datacenter to AWS. In 2024, the Texas datacenter was closed and the company is on track to close its Maine datacenter in 2025.
What’s somewhat unappreciated about Tyler’s SaaS transition is that it’s going to through multiple transitions at the same time because of its various software products and end customers are all in different stages of SaaS adoption. Here is CEO Lynn Moore, on the Q2 2023 earnings call describing this phenomenon:
“One of the, I guess, hurdles to getting people into the cloud and getting them upgraded and migrated is some of them are on older versions, and that's something that we're consciously attacking across all our product lines, trying to get to version collapse. Some divisions are a little more ahead than others. But I think it also sort of highlights what I've said a lot of times is, Tyler's not really going through a single cloud transition. It's going through multiple cloud transitions because we have multiple core applications who are in different stages with different versions out there, different technology, different beginning points, different endpoints. And so, it's a lot of moving parts.”
And a lot of the work that Tyler has put in is version consolidation. Because some of their on-premise customers have been using the same version of Tyler software for many years, there are newer features and interfaces that customers need to be trained on. This version consolidation effort will require more resources initially, but will cost less going forward in support. On the Q4 2024 earnings call, Tyler stated that 95%-97% of ERP customers and 75% of courts and justice customers are on the latest version, which puts them ahead of schedule. This is important for convincing some of the larger customers to flip to SaaS given the complexity of their operations. Historically, the larger customers have been slower to flip.
Tyler expects that the migration of its customer base will largely last through 2030, when it expects to have 80%-85% of the customer base flipped to SaaS. This should be a beneficial tailwind for Tyler’s subscription revenues, even as maintenance revenues continue to decline.
As for payments, the company acquired NIC for $2.3B in 2021. At the time, NIC had over 7.1k customers in federal, state and local government agencies and 31 state enterprise partners. The company processed $24B in payments in 2020 or 8x the volume of Tyler.
Prior to acquiring NIC, Tyler had limited capabilities in payments, mainly facilitating bill processing for local utilities. The company had to partner with payment processors, which would eat into their share of the payment revenue. With NIC, that wasn’t necessary anymore and Tyler could capture more of the value internally. Here is Senior Strategy Advisor, Bruce Graham, describing what capabilities that NIC brought to Tyler on the Q4 2021 earnings call:
“Tyler's strength has historically been the payment portals, and that's because these are the systems that tie directly to the transaction systems of state or local government, so your utility billing system or a court payment that you have. That allows us to have deep integration into those systems and do things like account management. You can turn on and off your services. You can do all those kinds of things at the payment portal level. And that's been very much what our strength is in this market. Both NIC and Tyler were strong in payment capture, and that's simply the part of the transaction where you're interning in your credit card and those kinds of things. Now, what NIC had that we didn't have were things like Apple Pay and Google Pay, and they've already built that out. The real power though of NIC here is the back-end processing, so the payment platform and the disbursements side of the business. This allows Tyler now to eliminate the need for Chase, for Elavon, for OpenEdge, for a whole series of third-party providers on the back-end, those that would set up merchant accounts and the disbursement providers. And this allows us then to retain more of the transaction fees that are being charged here or the credit card fees.”
In our initial write-up from 2020, we mentioned that payments was an opportunity for Tyler but the company needed a more complete payment offering to scale up the business. After the NIC acquisition, the company’s offerings were much more complete, allowing Tyler to capture more value in each transaction. As an example of this, the company had internal projections to do $68M in payment revenue in 2021. After the acquisition of NIC, Tyler’s payment revenues for those same projected transactions (so not including NIC’s) was expected to almost double to $116M.
Tyler also acquired Rapid Financial Solutions in 2022, which provided the company expertise necessary to handle disbursements. Rapid was a small tuck-in acquisition $15M in annual revenues servicing courts and corrections customers. The company leveraged its existing 300+ member sales force to grow the combined payments business to $88B+ processed payment volume in 2024, more than 3x the combined Tyler + NIC just after the acquisition in 2021.
With these strategic changes, expanding TAM and new growth drivers, the company is expecting to reach $3.6B-$3.8B in revenues by 2030. This is a 9%-10% CAGR over the next 6 years. This also implies 10%-12% CAGR in recurring revenues (subscriptions + maintenance + transactions), of which a large portion is expected to come from new subscription software sales (+low teens%) and incremental transactions (+10%-13%). The company is projecting gross margins to reach 53%-55% (from 47% in 2024) as the contribution of SaaS revenues moves higher, more customers move to public cloud and as payments benefit from scale. It is worth noting that payments margins are lower than software and that due to a portion of payments revenues being record as gross vs. net (discussed more later) there is a further margin impact.