Tyler Technologies (TYL) Q2 2026 earnings call transcript

I would like to turn the call over to Hala El-Shirbeni, Tyler Senior Director of Investor Relations. Please go ahead.

And welcome to our call. With me today is Lynn Moore, Executive Chair, President and CEO, and Ryan Miller, our Chief Financial Officer. In an effort to streamline our earnest communications and provide timely context around our quarterly earnings release, we published our prepared remarks yesterday, shortly after hosting our full quarterly results release, to the new section of our Investor Relations website.

We've also posted on the Investor Relations section of our website under Financials tab, a schedule with supplemental information. Lastly, on the Events and Presentations tab, we posted an earning summary slide deck to supplement our prepared remarks. After I give the Safe Harbor Statement, Lynn will have some openings, remarks, and will directly go to Q&A.

During this conference call, management may make statements that provide information other than historical information, and may include projections concerning the company's future prospects, revenues, expenses, and profits. Such statements are considered forward-looking statements under the Safe Harbor provision of the Private Security for Invitation Reform Act of 1995, and are subject to certain risks and uncertainties, which could cause actual results to differ materially from these projections.

We refer you to our form 10K and other SEC filings for more information on those risks. Lynn?

Thanks, Holla. As you can see, it was a very busy and exceptionally productive quarter for Tyler. We accomplished a great deal strategically, including our Investor Day, where we detailed new, higher Tyler 2030 targets, our convertible debt offering, which enhance our financial flexibility, significant share repurchases, reflecting confidence in our long-term growth, and the acquisition of for the record, which strengthens our leadership position in the courts and justice market, all while continuing to deliver strong execution across the business.

Operationally, we delivered another strong quarter, highlighted by 21.7% SaaS revenue growth, record SaaS bookings, record total bookings, and record second quarter free cash flow. Public sector demand remains healthy, supported by ongoing modernization priorities across government, and continued investment in digital transformation, cybersecurity, operational efficiency, and constituent engagement.

We also continue to see momentum in our transactions business, made meaningful progress with our cloud operations, and advanced our AI strategy with growing client engagement and early customer adoption across the portfolio.

Overall, we're very pleased with our first half performance and remain well positioned for the second half of 2026 and beyond. Simply put, we got a lot done this quarter, and the progress we made reinforces our confidence in the opportunities ahead. We'll now take your questions.

Yeah, thanks, Kirk. I'd say it's business as usual. As we talked about it in yesterday, our market's going to move a little bit slower, but there is a lot of excitement and energy around the products that we're starting to bring to market around AI. We're not seeing any meaningful impact or any impact really on the remainder of our core business.

If I can just ask a quick off to Brian. Brian, just on the margin front going back after the year, anything we should be aware of in terms of hiring plans or any sort of shift in how are you guys just thinking about spending? Thanks.

No, there's no real change to our spending outlook. Margin expectation, obviously, is that margins will continue to expand through the year. I think the midpoint of our guidance has somewhere around 100 basis point margin expansion. There were a couple of one-time things in this quarter that pulled it down a bit that we still have about the same outlook on growth and our hiring is right on plan and fairly limited in the second half of the year.

Yes, you're Matt. Yeah, we're still just as excited about for the record as we were two months ago. And as we were, we made our initial investment 11 years ago. They won a really big opportunity in Australia this quarter, about a $1.6 million annual ARR. They also want to hand seven or eight other deals in the quarter.

So really out of the gate, it's about what we expected. Like a lot of our acquisitions, we expect that over time it's we're going to help accelerate its growth. And that's the plan. I'm sorry, I don't remember the second part of your question.

Just how is it so far? It's actually not M&A. It occurs in the AI strategy. I'm sorry, we talked over each other.

Yeah, just how is it in the AI strategy for both M&A and organic? Oh, I think it just reinforces one, our overall M&A strategy. And obviously, with changes that are going to market, that's one of the things we talk about is what is it that they can bring for AI? And on the flip side, we're probably scrutinizing acquisition candidates a little more closely in terms of whether or not AI is something that could displace those types of products versus others. But I would say it validates our approach. And again, we're as excited about FDR as we've really been for many years.

Yeah, we have the organic revenue growth on a total revenue base that is about two points lower than the overall growth.

And I don't have the organic bookings growth. But there was a pretty minimal contribution from the acquisitions this quarter, but about two points on the organic revenue growth.

About 11 million from acquisition. So the contribution for bookings was about $11 million from the acquired revenues.

Yeah, sure, Josh. I don't know that they're less price sensitive than they have been in the past, but I would agree with you about features and functionality and AI product roadmap. One of the things we've done on the ERP side is we've actually engaged our client base. We have an annual AI product focus group, not annual, they meet monthly, and we're working with our clients to make sure we're delivering the right value of AI into their products.

Features and functionality are always gonna be king. That's one of the things that's always differentiated Tyler's are 30 plus years of domain expertise, and that's gonna continue to be the case in the future.

Well, yeah, Alexi, it's Lynn. You're right. We've outlined a lot of what we call incentives for clients to flip to the cloud, and one of those will be AI functionality that will be solely available in our cloud release.

We recently sent out messages to our client base around their need to get a path to the cloud and working with us and our salespeople to do it. There'll be a lot of incentives to do that, not just AI features, but cloud-only features, cloud living release model that we talked about at Investor Day, the faster time the value they can get, starting to work with clients on transitional pricing. So you're gonna see us continue to ramp up what we traditionally called carrots, but I'd rather use called incentives to moving to the cloud.

Yeah, it's really all three. You're right, excluding Texas, our transaction revenues have grown, or about 10%, and it's really from all three of those things. It's from higher volumes, and we are continuing to see that. We've talked about how we work with our clients to drive greater adoption. It's from new names, and the sales continue to be very active in terms of bundling transaction services with both new sales and driving it back into our installed software base.

And then the third part is, as you noted, providing software under a transaction-based arrangement. And those not as much impact on the second half of the year. We've seen impact or ongoing impact from the California deal. We did some time back. I think it's interesting that both last quarter and this quarter, the biggest software deals of the quarter were transaction-based, and so they're not showing up in the SaaS bookings, but they will show up in transaction revenues.

But the largest actual software deal in terms of full ARR at full adoption rate was a statewide deal. Again, this quarter, as it was last quarter, for our digital motor vehicle titling and electronic lean solution.

Yeah, I think that deal, as with the one last quarter, in that digital motor vehicle titling deal, my understanding is that that was expected to be a transaction-funded deal throughout the process. That is one of those areas we've now, with our partner, Champ, have done those types of DMV deals in several states now. And that lends itself well to the transaction-funded model, because it has a revenue stream or a charge to the citizen that accompanies that transaction.

So those things, outdoor recreation is another one of those areas. It doesn't lend itself to every type of software deal, but there certainly are those where it does. We do use that to our advantage, being able to provide those transaction services, the payment capabilities, and fund it with that transaction model, that takes away the pressure of budgets, because it doesn't have to have appropriated funds to pay for it. And so we use that to our advantage when it fits the transaction type. I think if there are deals where the citizens are involved, interacting with the government or businesses, like digital titling outdoors, that lends it. But our traditional business, probably not so much.

Gosh, Terry, I'm not sure I would prioritize. I think the interest across all three are pretty high, and we're continuing to release new AI into the market as well. You're going to see an increase of that really starting next year, and revenues probably start picking up the latter part of next year.

The excitement around all three is high, but for different reasons. And we're getting a lot of traction right now out of document automation. We're getting a lot of traction out of the resident AI, and prior to base budgeting, we've had in the bag for a couple of years now, and it's out there and it's proven in the market. And I think as the other solutions continue to be proven in the market, again, as we talked about an investor day, trust and improveability is really important in this segment.

You're going to continue to see more traction and excitement.

I was wondering if you can go layer deeper and help us understand exactly what you're bringing in here and how that's changing the way that you all approach this end market today.

Yeah, I don't want to go too deep for competitive reasons, but we've been utilizing AI in sales for some period of time. There's obviously everything we do is in the public domain. Everything is out there. And so being able to use AI to understand client demand, understand what's going on at City Council meetings, understand their specific needs, the extent that we don't have that already through our relationships, to understand what competitive processes are out there, what competitors are doing. There's just a lot that we're doing and the results have been encouraging to see. One of those things is the AI enablement in our CRM system and taking advantage of that, but there's a wide variety of tools there.

Anything one time to call out about that performance that you saw here? There's not anything necessarily one time, but I think probably the biggest impact on the increase over last year was cash taxes. So there was about a 30 million dollars less cash taxes this quarter than there was in the second quarter of last year. And that's primarily related to some of the impacts of the one big beautiful bill.

Yeah, I think it's a couple things on what garners the interest. You know, I think when you talk about AI solutions, we're talking about ALT. This is one of those that's really an outcome-based solution. And you're really trying to ease the burden, the sort of the day-to-day routine that in this incident state agencies, but with all our jurisdictions, the burden they have in serving their citizens.

And what they see is, like I mentioned earlier on the response to the other question, you know, everything we do is out in the public. And our client base tends to be a little conservative, and they tend to watch what happens in other states. And when things start working for other jurisdictions, it shouldn't say states. But when things start working and they see that measurable ROI outcome, then it drives that demand. And that's what we've seen with our resident AI assistant.

And the ARR varies from state to state, but I would say typically it's in the multiple millions of dollars.

Yeah, and we've gotten away from commenting on that quarter to quarter. We have said that we expect the activity to continue to grow in general over the next three to four years, and that we're certainly on track to achieve that 85% of our 2023 maintenance converted to the cloud by 2030. So, and it can be lumpy from quarter to quarter, especially based on the larger customers. And there's probably a little less. I wouldn't say visibility, but a little less certainty around some of the timing tends to move around a bit around those larger flip opportunities. So, I'd say we're on track to certainly achieve the long term objectives, and we're continuing to see those pick up.

And Lynn talked about some of the things we're doing with particularly round incentives now that we expect will help solidify that activity over the next couple of years.

I don't know that sitting here today, Rob, it's been a meaningful contributor. I do expect it to become more meaningful and more significant. Over the next, I'd say, probably 12 to 18 months as we continue to put more AI agentic cases in our flagship products as we tend to do more commercialization of the AI. I think you're going to see that ramp up.

As I mentioned on the other question, we've got a whole program in place to try to start incentivizing the move a little faster, particularly now as our products and as we move towards cloud living that we talked about it, investor day, and as we become better prepared, our clients become better prepared, I think you're going to see that continue to increase, we consist on what we outlined at investor day.

No, that third-party payment headwind was really pretty much isolated to last year where we saw sort of outside increases from some of our third-party payment processing partners. That seems to be played out after the first part of last year. So that headwind really isn't a big factor going forward, but last year in Q2 with sort of the peak of that.

I guess Brian, maybe the first one for you, can you help understand, investor understand a little bit of the faster revenue in the quarter? Were there some timing impacts that led to there being a bit less recognized in the quarter? And then is there confidence given that it looks like first-half SaaS bookings is a meaningful acceleration out of this versus last year? But kind of when does that start to show up? Is that the conference behind the reiterated SaaS revenue guidance? Yeah, I think you, as we've talked about for a long time, there is a lag from the time we sign something to the time SaaS revenues start to show up in the income statement.

And that's true both with respect to new deals, which is probably a little longer, often one or two quarters, but could be longer.

And flipped. There's also a lag there as well. So I think the accelerated bookings in both of the last two quarters don't have as much of an impact certainly on the current quarter, but even on the next quarter or two as they do beyond that. And so that lag, I think, is something you have to keep in mind. I don't think there's anything particular around timing we always have deals that move around. So we typically aren't calling out deals, slippage is a major factor because it's there all the time. There's nothing unusual about this quarter. And I just say that our outlook for the full year hasn't changed. And we don't give quarterly guidance. But there's not any meaningful change to our outlook for the year.

Yeah, I'd say, as Lynn mentioned, it's beyond this year where we expect it to be meaningful. The direct sort of AI stuff that we've talked about is still a real small percentage of the total ACV. As we've said in the past, we expect that revenue contribution really is probably 12 to 18 months down the road when it starts to become more meaningful. It's certainly growing, but it's still a very small percentage of the new ACV.

Do you have a sense of the ramp on that $10 million annually number? And how does that compare maybe to other similarly situated size deals? Yeah, I think the biggest difference between from state to state is whether adoption is mandated initially or whether it starts out as optional or voluntary. In the case of the state that we signed this quarter, it is not yet mandated. So we expect it will start out at somewhere around a $2 million ARR run rate, and that probably starts at some point in early 2027, and then would ramp up to $10 million plus as it becomes mandated. In the case of the state we signed last quarter, it has been mandated.

So we expect that ramp up. I believe that one was closer to $20 million. They are that that ramp up will start faster, and it just depends on state policies from state to state how they decide to govern that.

Yeah, it's not too dissimilar from our courts and e-filing business that we remember 10, 15, 10 years ago, 12 years ago as we were rolling out e-filing, and a lot of counties were sort of voluntary. And then as jurisdictions went mandatory, which will happen over time as they've seen the value of the solution, then you'll start to see those revenues pick up.

Yeah, sure, Trevor. I'd say right now, yes, communication's gone out since investor day to our clients. And it's really about, look, we want to be there and hold your hand and work with you on the plan that's going to get you to the cloud. We'd like for you to have a plan in place within a certain time period. We're still focusing mostly on the incentives. We're not necessarily communicating right now what those disincentives will be. But, and I'll tell you, the feedback we've got from a lot of clients as well, both the connect that we had this past quarter, our client advisory board, our focus groups, and just our generally, our general day to day working relationships with our clients is some of them also need our help in sort of selling the move to the cloud internally.

And so we're working with them on the talking points that they need to go internally to sell those. The disincentives, I think you'll start to see come out more over the next 12 to 24 months, as opposed to something that we're really focusing on right now today.

When I think about how we price AI, and I think we covered this in investor day, there's really sort of three three different models that we're talking about. The first is really what I call it, it's all essentials or table stakes. This is stuff that's going to be in our product. It's going to improve our competitive position. It's going to improve our win rates. It's going to improve clients at. But I also think it's stuff that as we continue to bake stuff in the product that may also allow us to increase annual rates.

The second is obviously the subscriptions uplift, where we're bundling AI capabilities and then outcome based type of pricing. On the subscriptions uplift, yet we're seeing that in the market right now that's being well received. We we're still testing and talking with our clients about the amount that we can charge for that and the viability of those going forward, similar with outcome based. It's still early, but we're we're it is valid being validated in the market. And again, you're going to start seeing more meaningful revenues coming from AI really probably the second half of 27. We'll ramp up between now, but second half of 27 and going into 28, I think you'll start seeing more meaningful revenue.

Yeah, I think right now, some of it's still anecdotal. We're we're really trying to tease everything out and make sure there's clear our ROI before we go invest too much internally on the developer side. You know, we're seeing as much as into anything other than our our developers are going to be 30% more productive. And the way I view productivity is we want more productivity, not less. In areas of support and implementation, we have some we have some guidelines that we're we're we're shooting towards. I'm not ready to publish those, but we are looking at different ways to both shorten implementations, which shortens time to value, which increases clients at, which helps us with cross sales and upsells.

And same thing on the support side. How can we how can our clients get their answers faster? And we've got a lot of things in motion there. But again, it's it's still a little too early to say, Hey, this is going to meet mean extra turn or why return. All I can say is we're extremely diligent to make sure that whatever investments we're making in AI are going to have a meaningful ROI attached with them.

In fact, one of our clients made the comment as we were going through the sales process that they were going to be able to tap the labor budget to go ahead and procure this product. I think we outlined an investor day, Tarrant County, which is a document automation product. And we went from I think a $900,000 S. arrangement to about a $1.3 million total ARR. So pretty significant increase. We've seen it with resident assistant being able to document the fewer amount of calls and Q&A that jurisdictions employees had to take. Because we all know, and we've talked about it for years, is that one of the things the public sector workforce is facing over the coming years as a shrinking labor force, both through retirement and also a lack of hiring and technology.

So tapping that labor budget is becoming more meaningful. It's part of our playbook and discussion. We're still in the early innings, like we talked about everything else, but it is an interaction in the market.

AP automation is one we called out. On an individual basis, as we add that to our ERP clients, it's a relatively small uplift in the SASVs, but it is a SASV uplift. But it does open up additional opportunities to leverage payments in association with that automation of invoice processing. So it creates a new conversation and a new opportunity to bring in more transaction-based revenues tied to that automation.

Well, I'd say this, when we talk about sort of our cornerstone products, our view is that we want to be number one in the market with each of those cornerstones. I wouldn't rank one over the other. You can look at it in terms of, I wouldn't rank one over the other in terms of our competitiveness, our functionality, but you can look at some things where we sit in the market and our market share, clearly a place like courts. We have a lot higher market share. There's fewer competitors, and we really dominate that market. ERP and public safety, more competitive markets, but our competitive position is really strong and continues to get stronger. We've made significant investments, for example, in our ERP products over the last 12 months, and we're always doing that.

Public safety, some really nice wins this quarter against some really key competitors, which I always like to see. So I would say, generally, when I look at my art portfolio, again, our flagship products, we want them to be number one, and I believe they're very competitive in each of the markets to serve.

And on the growth level, I mean, we've talked about Crossel as being one of the key pillars of our growth. You're correct that, especially in larger customers, very few have all of our flagship products, and there are a lot of underpinnings that we're doing to create those opportunities to make a more compelling story for why that next product and the next product when it comes time to replace those should come from Tyler. So we've talked a lot about going from that two or three products, the customer to eight to 10 products, the customer, and all of the things that we're doing to encourage that. But that customer base that we have that doesn't have all those flagship products is a huge opportunity for us.

Yeah, I think one of our biggest department of health, our enterprise permit and licensing enterprise health, it was a $700,000 ARR deal, and that was leveraged by our DSD or former NIC relationships. We've made great inroads with the state of Mississippi, and we're looking to turn that into what we call a quote, total Tyler state. But that doesn't happen without those relationships across our different divisions.

That's great.

Yeah, I think the public safety market is pretty healthy, and budgets seem to seem to be stable as generally across all of our business lines. Our competitiveness is really strong. I'm happy with where we are in public safety. As you pointed out, we want some nice deals. As I mentioned, I don't like to call out competitors, but we had some really nice competitive wins against some very competitive companies in Q2, and the momentum and engagement and my general excitement about what we're doing at public safety remains high. I don't have the Riverside deal off the top of my, at the tip of my tongue.

I'm not sure we want a nice deal in Santa Cruz, California. Maybe that was, I don't have Riverside. That was about a $660,000 ARR deal for our RMS and enforcement mobile solutions.

Is there anything we should be just mindful of in terms of comparison seasonality there or just the right way to think about those good growth numbers and regardless of what the comp was, those were our SaaS bookings and our total bookings were all-time quarterly records. It was the highest quarter ever for those bookings, again, regardless of the comp from last year. Clearly, as we talked about a lot last year, the first two quarters of last year were weaker booking quarters. So those are, again, somewhat easier comps although the second quarter improved sequentially from the first and then the second half of last year was stronger. I think one thing to point out is that both last quarter and this quarter, the good booking number weren't really on the back of mega contracts are really big deals.

The biggest deals were transaction based and they're not showing up in those SaaS numbers. So it was just a lot of volume of good sort of traditional mid-sized deals and a handful of a little bit larger deals but no mega deals. Those things are still in the pipeline. It's hard to tell what quarter those could fall in. So the comps are a little harder in the second and RFPs, the strength and the activity in sales demos, all those points to continue good bookings throughout the rest of the year.

Yeah, Michael. Over the years, I'd say our priorities have sort of evolved based on what's going on in the market, what's going on in the business at a particular time. If you go back 10 years ago, our priority focus was internal investment in 2017-2018. Coming out of NIC, our priorities were debt repayment. I see right now that share repurchases are taking a higher priority for me and that's based on the confidence I have in our 2030 outlook and what I see the valuation in the stock market, I think. It's a great time to buy right now. There have been three times in Tyler's history where we've really sort of gone hard at it. I'd say in the early 2000s, post-recession 2010-2012, and now we've sprinkled buybacks in between those times.

But I just think where things sit today in the valuation that Tyler has in the market, our free cash flow or outlook, the confidence in our future, it's a compelling value and I think you'll see us continue to execute on that as we try to continue to reduce our share count and then really maintain that reduce count going forward.

Yeah, I think at a high level, Jonathan, we're talking about automating just some more routine work, reducing those manual responses, helping our clients be able to make better decisions through data assistance and generative AI predictive analysis. Basically, just generally freeing our clients up to do other things. Again, we talked earlier about labor savings. It's not just it's making their day-to-day work go faster and making them more efficient in addition to being able to compensate for lost labor actually in the market. You see that stuff with things like we talked about our document automation, our party based budgeting, AP automation, report writing assistance, GL reconciliation, policy assistance, permit review assistance, just things like that are getting inside of our products inside of our workflows and making them our clients be more efficient with their daily tasks.

And in terms of that being embedded in the workflows as opposed to bolted on, that's really key to our clients. We're hearing from them that that's what they're looking for. They want those from Tyler. They want them integrated and embedded in the system of record that's doing the work. And it's really a matter of trust and their comfort with how that data is being handled, how those models are working, and they want that from the same provider as the system. It makes a ton of sense.

Yeah, Jenna, we're not seeing any real change. I would say the market dynamic. Budgets are generally healthy and stable. It's been pretty consistent now for the last, I don't know, years. So I think that's pretty stable. A year ago, for example, we were talking about some decisions taking a little bit longer. The market didn't go away, but some decisions were actually starting to see. It's still anecdotal, particularly like in our ERP area that uptake and the decision is actually being made. But generally speaking, the overall demand environment, the overall health is pretty consistent with where it's been. And I think we're customers, and it certainly varies from place to place, but we're customers are seeing pressure.

That's where the ROI analysis comes in and becomes more important. As they work drive towards more efficiencies and doing more with less, the understanding of how technology can make that happen. So looking at that ROI, and that's also, as we talked about earlier, where the in certain instances where the transaction funded model is attractive. So the systems that we've talked about states acquiring under that model, they don't have to appropriate budget funds for that. It operates outside of the budget through self-funded revenues. And the budget pressure does not enter into the equation.

So, you know, at Investor Day, we talked about our whole cloud-living initiative, which is to get everybody on that single stream that's got continuous improvement, continuous delivery. Before, we can even achieve that. We've got to get people down to a single version. We're going to get them in the cloud. You will see us start to unroll cloud-living. We're launching pilots throughout 2027, and we're going to start to have clients referenceable on 28. When you look generally at version control, what we've done, for example, you mentioned in courts, over the last three years, we've gone from 89% of our clients being on a legacy system to only 7% today. And look at our enterprise ERP. We've got about 80, 85, 90% are on the current version.

Now, that's not necessarily our cloud-living version, but getting them current, then moving them cloud and getting them into our cloud-living roadmap is a goal that's going to drive higher clients at higher retention, increase upsell and cross-sell opportunities. It's pretty exciting. It's pretty bold vision. We've been working on it for many years, but you're going to continue to see gains year over year over the coming years.

Yeah, I think the answer to the second question is, I don't envision that those are, it's a smaller client base. Our relationships are strong and deep within our courts and justice division, so they'll continue to work those. And they're just like other places, you know, we talk about how the clients, they like to watch what their neighbors do and they like to see it successful. We did that Idaho state flip a few years ago. That was the first one. Everybody watched it and that spurred more interest. Generally speaking, yes, Orlando was a really nice SaaS flip for our public safety division. It involved our CAD product, our RMS, and our newer product, emergency networking that came through acquisition last year.

I don't think there's really a segment of the market that has sort of the reluctance that we used to talk about a few years ago with public safety. Public safety is moving to SaaS. That's all we're selling. We're actually one of the, you know, a pure SaaS provider. Many of our competitors are still more in the lift and shift mode. But I think just generally across the board, I don't think there's any sort of structural or individual vertical market resistance.

It's just the same factors that we've been talking about for the last couple of years. And as more clients go, as more seat of value, as we continue to roll out incentives and eventually disincentivives, we'll reach our goals that we outlined in investor day.

Thank you. So, you know, FTR is based in Australia, so not surprising. They had a presence. They used to own a manual transcription business there, which was actually sold off while we owned a piece of FTR so several years ago. I don't know that FTR, they'll continue to do things in Australia. They'll continue to have sales international. They had a couple of international sales, small deals this past quarter. I don't think it changes our overall strategy, which is we've still got a lot of runway ahead in front of us. We've had a lot of strategic initiatives. We're, you know, we're rolling out, you know, moving our U. S. clients in the cloud, we're rolling out AI here.

So, I think it would be a bit of a distraction to think that we're going to start taking other products more international when we've got still such great runway in front of us here.

Thanks, Maria. And thanks everybody for joining our call today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks again and have a great day.