Tyler Technologies FY2024 Results
Healthy Gov't Budgets, Cloud Transition On Schedule, Free Cash Flow at All Time Highs
Tyler Technologies reported their results last week. Here are the highlights for the full year 2024:
Total revenues were $2.138 billion, up 9.5%;
Recurring revenues were $1.81 billion, up 11.1%, and comprised 84.5% of 2024 revenues, up from 83.3% in 2023;
Subscription revenues up 15.8% and SaaS revenues grew 22.1% to $645 million;
Free cash flow was $574.7 million, up 75.5%, and hitting a new all time high.
Reviewing Long Term Goals
I feel like a broken record in saying that this company continues to execute on their long-term vision for 2030, which they described in their 2023 Investor Day presentation. The two most important financial metrics for them are recurring revenues and free cash flow.
More specifically, Tyler has the goal of having at least 90% of total revenues be recurring in nature. Next, Tyler has guided to improving margins which will then hopefully produce at least $1 billion in free cash flow by 2030.
Revenue and Margin Drivers
Tyler management, and myself as well, believes the company can achieve its long term financial goals. The following are just some of the more recent and notable factors contributing to their likely success.
Healthy State and Local Budgets and Spending
95% of Tyler’s revenues come from state and local governments while the remainder comes from the federal government. Although this is a highly dependable source of revenue, the strength of the budgets of thousands of government entities can wax and wane in the near term. Tyler continues to see their public sector customers as having very healthy budgets and an increased willingness to spend the money to upgrade outdated software and to add on new capabilities and functions. The two charts below show the evolution of state and local expenditures and state tax revenues over time.
DOGE and Government Efficiency
With DOGE making recent waves in the news cycle, Tyler management had this to say:
“While the new Federal Department of Government Efficiency … is still in its early days, we don’t envision its effort having a significant impact on funding or demand for our software and services, which power what are generally essential functions. In fact, we view an increased focus on government efficiency at any level as an opportunity rather than a risk for Tyler, and we believe that technology is ultimately the greatest driver of improved efficiency.”
Additionally, there is not much to worry about if federal grants or funding dries up as a result of DOGE efforts. Brian Miller, CFO of Tyler, had this to say on last week’s conference call:
“[A]t the local level, there’s very, very little federal funding. There can be some grants around specific things. And generally, on a national average at the local level, about 14% of their revenues come from state funding, which can include some trickle down from federal.
But almost half of their revenues are from local taxes and another 17% from general charges like licensing and those sorts of things. So very, very little funding at the local level from federal revenues. And at the county level, there’s roughly 1/4 of their budgets tend to come from state funding, which, again, can include some trickle down from federal. But again, at the county level, mostly 40% or more from local taxes. So not a whole lot that gets down to the local level, which is the vast majority of our revenues.”
A few months ago I was on the Preferred Shares podcast breaking down Tyler. One of the most extreme examples of Tyler helping government become more efficient is when replaced the 40-year-old court software system of Cook County, IL. The court system literally had ten full-time employees pushing around shopping carts full of files. With Tyler’s software, the Cook County court system no longer needed these shopping cart pushers.
Tyler’s entire value proposition is that its software helps local governments become more efficient and this will remain an evergreen opportunity. Just look at the table below of some of the oldest systems Tyler was selected to replace. And there are likely much more than these examples which Tyler has chosen not to share given their immateriality.
The Kentucky court system win is a significant one as Kentucky is Tyler’s 22nd statewide Enterprise Justice client implementation and 17th statewide trial court client. The Kentucky Bar Association put out a nice two-page summary detailing the history of the state record systems since the 1970s and its a fairly typical story. Typewriters and mainframes were in place at first. Then in the mid-1990s, the Kentucky Court of Justice invested in a new front end system to put on top of the legacy system. In 2010, the system’s very first chief information officer deemed the system “functionally and technically obsolete.” Finally, in 2024, Tyler was selected to help fully modernize Kentucky courts with a completely new system. You can read more about it via the link below.
Continuing Cloud Transition
With subscription revenues having surpassed maintenance revenues in 2023, the benefit of the faster growing subscription revenues—paired against a slowly declining maintenance revenue stream—will continue to have a positive impact on overall revenue growth.
The chart below shows the trend in how much subscription-based contracts make up all new contracts for the period. For the past four quarters, as a % of total contract value, subscriptions have made up 93% and higher of all new contracts.
Flipping current on-prem customers to the cloud continues with great progress. Tyler envisions flips peaking in 2027 and 2028 and hope to have migrated at least 80% of their on-prem clients to the cloud by 2030.
Version Consolidation
One of the big benefits of moving to the cloud is the opportunity for Tyler to consolidate multiple versions of multiple on-prem products. It was refreshing to hear an update with firm numbers on this subject. Here’s what Lynne Moore, Tyler’s CEO, said on the most recent call (emphasis mine):
I’m really pleased with where we are on version consolidation…. [F]or example, our enterprise ERP application, over 95%-97% of our clients are on a single version.
Enterprise Justice, I think we’re north of 75% on a single version. These are things that were big moves, and I wasn’t quite sure when we would get there. And to me, we’re ahead of schedule. And all of that starts to feed into each other. We’re going to continue to make optimizations in the cloud, but we’re also going to continue our efficiencies in how we how we deliver the software as we continue to evolve into a more continuous improvement, continuous delivery. That’s going to take time, but that is part of our goals.
And I think as you look out to later part of this decade, those are big milestones is when we really start moving down into synchronized cadence of releases across our client base, across our major products, and we’re making progress towards those goals.
When Tyler gets to the point where nearly 100% of clients are on a single version of a specific cloud product is when Tyler will really show outstanding margins. Further, Tyler clients will benefit from better support, faster updates, and higher quality software in the vastly more secure environment of Amazon Web Services.
Summary
Free cash flows are inflecting. Adjusted operating margins are inflecting. Tyler shut down one of its two data centers last year and it will shut down its remaining data center by the end of 2025. Version consolidation will continue. Flipping on-prem customers to the cloud will continue. One Wall Street analyst essentially asked in the recent call whether Tyler should update its long term goals with higher figures given the amount of progress the company has made.
The future remains bright for this Texas-based software company as it continues to help state and local governments do more with less and to provide the essential services all of us citizens require on a daily basis.
Additional Reading
“In 2024, SLED IT Spending Takes a Whole-of-State Focus”, Government Technology, February 2, 2024.
“State and Local Expenditures”, Urban Institute.
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Disclaimers for this Substack
The content of this publication is for entertainment and educational purposes only and should not be considered a recommendation to buy or sell any particular security. The opinions expressed herein are those of Douglas Ott in his personal capacity and are subject to change without notice. Consider the investment objectives, risks, and expenses before investing.
Investment strategies managed by Andvari Associates LLC, Doug’s employer, may have a position in the securities or assets discussed in any of its writings. Doug himself may have a position in the securities or assets discussed in any of his writings. Securities mentioned may not be representative of Andvari's or Doug’s current or future investments. Andvari or Doug may re-evaluate their holdings in any mentioned securities and may buy, sell or cover certain positions without notice.
Data sources for all charts come from SEC filings, Koyfin, and other publicly available information.