Tyler Technologies, Inc.

Hello, and welcome to today's Tyler Technologies 2021 Financial Guidance Conference call. Your host for the call this day is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. And as a reminder, this conference is being recorded today, June 7, 2021. I would now like to turn the call over to Mr. Moore. Please go ahead.

Thank you, Tom, and welcome to our 2021 Guidance Update Call. Joining me today is Brian Miller, our Chief Financial Officer. Also with us are Brett Dixon, President of our Justice Group, and Bruce Graham, Senior Strategy Advisor. Brett is the Tyler Executive leading the transition and integration of NIC as a part of Tyler. And Bruce is working closely with Brett and the NIC leadership team on strategic planning. First, I'd like for Brian to give a safe harbor statement and update our annual guidance. Then, we'll provide an update on the NIC acquisition and discuss some of the strategic opportunities around the combination. Note that we have posted a presentation on our website at tylertech.irpass.com backslash presentations that we will refer to in our discussion. After that, we'll take questions. Brian.

Thanks, Lynn. During the course of 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 Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from these projections. We would refer you to our Form 10-K and other SEC filings for more information on those risks. Lynn? I'm going to now move into the guidance section of the call. This morning, Tyler Technologies updated its guidance for the full year of 2021. This guidance includes the results of NIC from the date of its acquisition, April 21, 2021. We expect 2021 GAAP total revenues will be between $1.507 billion and $1.537 billion, and non-GAAP total revenues will be between $1.510 billion and $1.54 billion. NIC is expected to contribute non-GAAP revenues from the date of acquisition of $310 million to $315 million, which includes approximately $21 million of COVID-related revenues from Tour Health and pandemic unemployment services that are not expected to recur in future years. NIC's full-year pro forma non-GAAP revenues are expected to be approximately $475 million to $480 million, which includes approximately $57 million of revenues from COVID-related initiatives. We expect that 2021 GAAP diluted EPS will be between $3.58 and $3.74, and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate. We expect 2021 non-GAAP diluted EPS will be between $6.65 and $6.77. Interest expense for the year is expected to be approximately $24 million, And for the year pre-tax, non-cash share-based compensation expense is expected to be approximately $100 million. We expect R&D expense for the year will be between $98 million and $100 million. Fully diluted shares for the year are expected to be between $42.5 million and $43 million shares. GAAP earnings per share assumes an estimated annual effective tax rate of 3.5% after discrete tax items. includes approximately $39 million of estimated discrete tax benefits related to share-based compensation, which may vary significantly based on the timing and volume of stock option exercises. Our estimated non-GAAP annual effective tax rate for 2021 is 24%. We expect our total capital expenditures will be between $40 million and $42 million for the year, including approximately $6 million related to real estate and approximately $15 million of capitalized software development costs. Total depreciation and amortization is expected to be approximately $126 million, including approximately $88 million of amortization of acquired intangibles. Now I'd like to turn the call back over to Lynn.

Thanks, Brian. As we discussed on our first quarter earnings call, Both Tyler and NIC had first quarter results that exceeded our plans. Market activity, while not back to pre-pandemic levels, continues to improve from the levels we saw in the second half of 2020, and we're very pleased with our competitive position and win rates, which continue to benefit from the elevated investments in product development and acquisitions in recent years. The midpoint of our guidance implies total non-gap revenue growth of 36.5%. with implied organic revenue growth of approximately 8.5%. In addition to NIC and the two smaller acquisitions we completed in March, we announced last week that we have agreed to acquire VendEngine, a privately held cloud-based software provider focused on financial technology for the corrections market, for $84 million in cash. VendEngine provides essential tools and services for incarcerated individuals and their families, such as trust accounting and digital messaging and video visitation services, and their modular-based comprehensive suite of application plugs into most facility management systems. The transaction provides significant opportunities for continued innovation and expansion of offerings in Tyler's corrections suite. VendEngine has about $20 million of ARR and is growing approximately 30%. We expect the acquisition to close in the third quarter, subject to satisfaction of certain closing conditions. Now we'd like to take a deeper dive into the NIC acquisition. Since closing the acquisition on April 21st, leadership teams from Tyler and NIC have been working together closely on integration matters, as well as identifying and prioritizing a myriad of strategic opportunities. NIC already had an impressive team focused on strategic initiatives, and that team is working with counterparts at Tyler on joint growth and strategic initiatives. Our areas of focus include product alignment, sales channel activation, white space analysis, and vision and brand. I can wholeheartedly say that we continue to be more and more impressed with the strength and depth of NIC's leadership and staff, now led by Elizabeth Proudfit, a 21-year veteran of NIC who was appointed president of our NIC division last month. In addition, as we learn more about each business' products, services, and clients, we become even more enthusiastic about the opportunities ahead for the combined organization. In fact, one of our challenges is prioritizing which opportunities to focus on first. We've already identified a number of cross-sell opportunities that are actively being pursued. Bruce Graham, our senior strategy advisor, is working closely with Brett Dixon as the Tyler executives leading the NIC strategy, transition, and integration efforts. Bruce and Brett played similar roles in leading the very successful transition and integration of New World Systems into Tyler as our public safety division. and their experience with that effort is serving us well in the NIC acquisition. I've asked Bruce to review with you our vision for realizing the value of the combination of NIC and Tyler, and how NIC further positions Tyler to deliver on our vision. We'll refer to the deck posted on our investor relations website under presentations for this part of the call. Bruce?

Okay, thank you, Lynn. Hopefully you've got the deck in front of you. I'm going to be referring to it as we kind of go throughout this presentation. And as Lynn said, we are truly excited about the combination of the two companies. I want to set it in context there on slide two, though this acquisition is really a part of a series of moves we've made over the last several years. You all know that we've been building the leader in off-the-shelf local government systems for 20 years, and we launched our Connected Communities vision with you in 2017 at the 2017 Investor Conference. From that time, we had an opportunity to move into data and analytics, which we believed was key, so we did that acquisition with Socrata in 2018. The next slide, then, is with Micropact, brought a presence with state and federal markets and a low-code platform that we'll speak about here in a moment. And then we feel like NIC is truly a key component of making this entire vision of connected communities a reality. They are a proven partner. with state agencies, a leader in public sector payments, and then have a unique contract structure with state agencies that we think is going to serve this entire approach very, very well. And that's what we're going to kind of focus on throughout our discussion today. The slide number four speaks to our first priorities that were given to us by Lynn and the leadership team. And the first thing was don't screw it up. This is not a broken business. There are very clear marching orders here that, you know, this is not something that we needed to come in and change the way that NIC does their business. Very successful team. As Lynn said, a proven management team that we've really enjoyed working with. We wanted them to make the plan that they had committed to when we made the acquisition, and I can say that they're doing that and, in fact, exceeding the numbers that we'd originally expected. And then finally, just very practically, getting our sales teams to work together. We believe we have the best sales team in local government by far in the industry, and working with the state general managers of NIC was kind of a job one, and you'll see the fruit of that as we kind of talk through the discussion today. On slide five, though, these are really, when we put it together and think about the combination of the two companies, and as Lynn said, the strategic advantage moves that this allows us to make and also begins to enable for our clients, we group them in these five areas. We will say with confidence that this creates the industry leader for public sector payment, and I'll show you why here in a moment. It allows us to begin to deliver Tyler's solutions through the NIC contracts. It combines the strengths of both Micropact and the acquisition that we made there with NIC in a very unique way that we believe solves some of the challenges NIC has and gives them some of the opportunities in the future. It extends what we wanted to do with Socrata and how we now have an end-to-end statewide enterprise and data and analytics platform. And then finally, what you'll see is it's going to give us an opportunity to work across all levels of government and let citizens have a single point of contact that can be resolved through our systems there. So starting with the first one on number six, talking through the industry leader for public sector payments. Some of you have asked us on seven, they said, you know, what is it exactly that they bring here? You all were already doing payments. We don't really understand the difference here. This can be a pretty complicated market to understand. And so we wanted to simplify this in a way that would be easy for everybody to get what we believe the strengths of the two companies were. 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 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 strengths 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 entering 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 Elevon, 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. So this particular combination, our very unique presence at payment portals, given the number of installations we have countrywide, with the strength and the robustness of a – I mean, NIC did over $20 billion in payments last year across their platform. So it works at state levels at the very large enterprise. We think we can say with confidence now this creates the market leader for public sector payments. Just to give you a sense on eight, how this actually begins to play out in what our projections will be, what you see there in the – on the far left, was what we expect to do this year with Tyler's payment revenue. This is pre-acquisition. This is what we would do, we expected to do. In 2025, we had made internal forecasts that we thought that business would grow well to 68 million pre-acquisition. Now, because of the combination of us with NIC, we actually believe that business will be 116 million. This is just Tyler's revenue, not including NIC's revenue. So we're trying to give you a sense of what it has been in the past. That comes through a combination of, one, we're able to accelerate the revenue. We're able to do more portal revenue sooner. We're able to get more of non-Tyler transactions. That's what we're calling enterprise in this case. And then, as it says there, the rev share with NIC, this is our ability to maintain and capture more of that revenue that we don't have to share now. with some of the third party providers. So that's just the Tyler side. And then when looking at that, if you go to slide nine, we wanted to take that down just to one real opportunity. So many of you know, NIC was awarded the state of Florida contract in late 2020. This is their ability to be the enterprise payment contract provider for the entire state. And part of that agreement had 94 localities and agencies that they could that were already using the credit card processing of the incumbent. NIC had the right then to be able to go in and one by one move those over to their new back end payment platform. What you see in the upside beyond that here is we went and did a poll of our implementations in the state, which is an additional 400 agencies and jurisdictions across the state. There was only a 5% overlap. between the 94 that were on the contract and the 400 that now make up the rest of Tyler's opportunity there. And what we'll do is our strength is working with our local governments to begin to move them to this payment platform. Now they'll be getting the benefits of everything that we showed earlier, and that'll be something that gives us the additional upside here in the state of Florida. This pattern should continue. This is exactly why we were so excited, and we've tried to give you a sense of why we think this is a unique platform and a unique opportunity, but this is a pretty good snapshot, I think. On slide 10, the next area that is also particularly compelling is around moving Tyler Solutions through the NIC contracts. On slide 11, many of you know or are familiar with the NIC approach to state enterprise master contracts. This is a very unique approach in state government. And really, I would say this is the crown jewel of NIC, this ability to have an enterprise master contract that allows in each one of these states, they have a general manager, they have a development team, they have a support organization that's there that's meeting the needs of the state agencies located there. There's a broad ability to move solutions through these agreements. This is not only custom solutions, but it can be off-the-shelf solutions. It's almost anything associated with digital government is allowed to be procured through these kinds of arrangements. What you see on 12 is actually from the investor deck of NIC pre-acquisition. This was the approach that they had. They said, look, we're going to continue to grow same-state existing contracts. We're going to begin, though, to do development from our existing contracts, and then we're also going to do acquisitions. And so things like rx.gov and recreation.gov were solutions that they had procured or developed and began to move through their state contracts. This is what it was pre-acquisition. They really didn't have a lot that were off-the-shelf kinds of solutions that were configurable. On 12 is what you see – I'm sorry, on 13 is what you see – post-acquisition and this is a very simplified version of what's actually available. So now Tyler's Solutions, proven, off the shelf, our products that we've been building and developing for 20 plus years are able to be sold through this agreement to the CIOs and the agencies that make up the state. As we looked at this, I couldn't make the chart big enough, so we've got over 50 products that we believe now will be available to the state agencies, and many of those products are suites of products, so it's actually quite a bit more than that. And that's things from things like courts or e-citations to tax and appraisal systems or permitting and licensing, kind of a broad spectrum of of solutions that we built over the years that now we'll be able to move through these agreements. A big part of what we've been doing recently is beginning to connect up the state general managers who have these very long-standing relationships with the state agencies and our product teams. Just recently, we had our first showcase. This is turning into a weekly event now, the showcase where What we'll do is each week we showcase three of our solutions. In that, we give kind of a simple description of why do people buy it, what is the opportunity typically, deal sizes, who are our competitors, and then a demonstration and open that up for the general managers. And all we're trying to do here is shortcut the time so that, for example, this week we showed Tyler Supervision and The state general managers, well, lots of states are focused on bail bond reform or pretrial release, and they're doing that at a statewide level. Well, Tyler's supervision is already installed in two states doing exactly that, and now we're able to shorten the time, begin to build those connections, and begin to develop opportunities together. That's what you see on 14th. is these are just three snapshots, and we've got over 20 of these that are currently being developed between our sales teams and the state general managers. The one at the top, the western region state, was an area where we had already been calling on the Department of Education in this state. NIC had already provided services to that same Department of Education, and now what we're able to do is potentially shorten the entire time here, buy through the state contract, and begin to provide Traversa, which is our student transportation solution. In the second example, Intergov is on the path to a sole source, but what we're combining there is NIC's payment. So we can streamline that entire solution and make it run on NIC's payment. And then the third is actually a state where Odyssey is installed. It's the court case management system. And the state has recently, the CIO came to us and said, we'd like to move to a prosecutor system from from Tyler and also then an RMS system from New World Public Safety, Tyler's Public Safety Division. All of that purchased through NIC and through the state general managers. So we could go on and on here. We just wanted to give you a snapshot. These are deals in flight, so your mileage may vary, but we expect that these will be opportunities that we will begin to close. None of this, by the way, is in the projections that we've shared with you so far. Now, these are all upside to that. Lynn will tell you later, you know, don't believe everything you hear, but I can tell you these are things that we are building pipeline for the future. If not this year that they'll close, they're certainly beginning to build pipe as we look out into the future. The third area in slide 15 is around micropack and NIC. And this may have not been evident to you, but we were very excited about this combination and was one of the key reasons that we made the acquisition of NIC. And that's because on slide 16, what Micropack has is a very unique part of that acquisition for us was a product they have called IntelliTrack, which is a leading low-code, no-code kind of environment that is used by what you see some of the leading systems integrators on the right. And Micropack's path to market in state and federal is primarily through partners here. And what they've done is really they've All of these are providing solutions, many of them similar to what NIC's teams have built, but they do it on top of a low-code platform. That allows them to have reuse. That allows them to begin to build solutions that are repeatable and configurable. And for us, that made a ton of sense as we thought about the state general managers and the nature of the kinds of development that was being done by NIC with these state master contracts. And that's what you see on 17. So NIC has built over 19,000. They call them services, but they're basically applications that are meeting the needs of state agencies across the 28 states. These have been built off different platforms, maybe custom. And what you'll see us doing now is moving the NIC state GMs and that staff to IntelliTrack through the partner alliance program that exists today. This is something Micropact already has in place and they're very good at. educating and moving teams and training them and having them begin to use it. And then what we'll do, NIC has a low code environment called App Engine that's really more like form development. And so we think that combined with IntelliTrack provides a super environment for this kind of development. The other neat benefit here is over the last, since the acquisition of Microbac, is IntelliTrack has been built and some of you may have heard of this in the past with us, it's called Tyler Forge. What it is, is part of our connected community's vision was that applications from Tyler would look like they were part of a family. They would use common foundational components. They'd have a common look and feel. And so all of that is out of the box now within Teletrac. So as NIC are building applications, those will adhere to Tyler development standards. They'll take advantage of this foundation, and that'll make them use it and work very interoperably with the other solutions that are coming from Tyler through the Tyler solutions that I mentioned earlier. So we're excited about that in its own right, and one of the key things that excites us about MicroPAC with NIC. The other thing on 18 is MicroPAC has been building and selling solutions to states and built these. These are five key solutions that were proven in the market. Now, there's some overlap. Cannabis regulation and licensing are also solutions that NIC had. And we're working through whether we'll go to one platform or one solution there or leave it at multiple like we do in some other markets. But at this point, these are all proven solutions that are already being sold now through the state general managers. And that's what you see on 19th. is the set of opportunities that are beginning to be moved through those. And these are opportunities where the micropack team is working with the NIC state GMs, just as we described earlier, and beginning to jointly develop these opportunities. The western state there is one that most recently the two teams got together. They were both competing in that, and they went to one solution. And it's actually, in this case, being built on type of micropacks cannabis solution, but it'll depend on which market they go for. So you'll see this continue forward and we're excited about what that builds for us. The fourth area is around establishing the data and analytics platform for connected communities. And I wanted to take a second here and just kind of do a briefing, a little bit of what we've done with Socrata since the acquisition in 2018. The initial work that we had done, Socrato was the leading and really the pioneer in open government and the idea of transparent government. And what we wanted to do, though, we thought we have these systems of record that are rich with data, and we saw a market opportunity to note both with the data and with the insights that came from that data. And so what we've been focused on the last three years is building turnkey, vertical-specific, what we call insight solutions. in things like tax and appraisal, in courts, in public safety, key areas that tend to be areas we have deep domain expertise that our clients wanted off-the-shelf dashboards and a platform that would be there. What we see now is with NIC is the ability to extend that idea all the way to the state and begin to do that across all the major agencies that make up a governor's cabinet, make up the state agencies that are being served today. I know this is a big idea, but I want to show you how real it is and even the opportunities we're beginning to realize today. If you go to 22, just to give you a snapshot of how this works. This is working in a justice example. Every state that we sell to is a combination of district and county and appellate courts and sheriff's offices and city police, you name it. There's all kinds of data that is basically in a series of silos. And millions of cases go through these systems every year. They flow through them and they're disjointed. There's no standard norm for data. And so consequently, making any kinds of decisions here can be very difficult. What Socrata does first on 23 is is actually begin to automate the pull from those systems of record. Most of the reporting that's done today in most states is done through manual reporting still, where they report up even the most basic kinds of data. Well, now what you do is we actually pull that data automatically because we own the back-end transaction data in so many of the cases. Or Socrata, because it is an open platform, can tie into other systems of record that are non-Tiler. We pull that together, it aggregates the data, it begins to move it towards some kind of a uniform data standard so that we've got a, the client begins to have one source of truth that everybody can rely on both at the local level and at the state level. They call this liquid data within Socrata. And if you go to 24, what we're able to do then, because we have so much domain expertise in each one of these areas, is we build turnkey solutions, turnkey dashboards. The clients don't have to figure this all out. We're able to do it because we've, like in the courts example, we have over 30 years of experience with courts. So they get the standard reporting that has traditionally been a part of any of these kinds of agencies that, you name it, in anything that we serve, there's some state agency that's demanding localities to pull up reports. And what we get is this dashboards and insights. So this saves literally tens of thousands of hours of manual reporting that's done by local jurisdictions. Our clients, I mean the local clients, are the most excited about this. The state agencies are excited because now instead of working off stale data that's very difficult for them to correlate, they can begin to do it in near real time. So just to show you how this actually plays out then, in a recent opportunity and one that's now being worked, this is a Midwestern state. This does exactly what I just described to you, where it pulls from the local jurisdictions. It's pulling from 100 different circuit courts, 63 probation offices and sheriff's offices. It's an insight solution for courts. And there's been so much focus across the country on things like criminal justice reform, and this tool begins to make that kind of – the people that need to make decisions, they're able to do that using real data – and actually having it be something that can give them real insight. And then finally, what you see at the bottom line is we can begin to deliver these kinds of contracts or these kinds of solutions through the NIC contracts and the state GMs. So this is a first of what you'll see. We have built these insights. We're extending them now to the state agencies. This is one of the areas the state general managers at NIC are the most excited about. Because this is truly value add at every level across the state. The last area that we wanted to talk about was engaging citizens across all government agencies. And I would tell you this is one that I'm going to keep it pretty light here, but you're going to see more to come in the coming years. If you go to 27, all of you on the call have this experience. If you're interacting with government, which I'm sure you don't look forward to, you've got to do that across multiple locations. You've got a portal or a handle for your local government, maybe something like that for state and federal. And that's pretty frustrating because you don't know where to go. You don't know how to make it all work or how to work through all that. What you see on 28 is we've got a platform called Gov2Go now as part of NIC that was very powerful at the state level. We purchased MyCivic a couple of years ago within Tyler. It's a very strong, sexy application for localities. We're going to move this to one platform. And with that, we'll be able to cross across all three of those lines, the local jurisdiction, the state, and the federal. What you see on 29 are some of the features that will be available through this single platform. We had over three pages of this. This is a short version. The product team wanted to give us more, but the slide got overwhelming. But what you can see, we can do stuff as simple as local information, or if you're a citizen and you want to report incidents or repairs that need to be made, it can be public safety. And then as you go into the state level, now we'll be able to do things like driver's license renewals and property tax, and even at the federal level, outdoor recreation, you name it, through that solution. And then the last piece of this that we're excited about, is our ability to resolve those transactions, both Tyler and non-Tyler transactions, through a single payment platform. So this will be the first time that really all of that can begin to be monetized in a way that up to this point has not existed. And when you look at the presence that both Gov2Go and MyCivic has, we try to be exact on this, but I think you can be safe saying it's 100% of the US population is touched by one of our systems, connects into one of our systems, has a reason to use our application here in the handheld. And you'll see us roll this out and begin to roll out this common payment platform and service platform in the coming years. So on 31, just to wrap it up, we believe this creates the leading payment provider in the public sector. We now have a unique opportunity to provide our solutions through these state contracts. The NIC taking advantage of the IntelliTrack platform begins to help them improve their margins and begin to help speed their solutions that they serve their state agencies with. The extension of connected communities now beginning to go all the way to the state to connect the entire community in each one of these areas. And then finally providing citizens a one-stop shop to be able to have all of their relationships managed through a common payment platform. That's why we're so excited about it. There'll be a lot more to come in the coming months and years. We're building out each one of these lanes. As Lynn said, there's more that we could share, but we were limited on time. So with that, I'll turn it back over to Mr. Moore.

Thanks, Bruce. And clearly, we're excited to have given you guys a deeper look into our vision for this combination. I think as Bruce mentioned earlier, part of my job is there's a lot of excitement across the teams. And you saw from some of the slides we already have some early client interest. From the deck, we believe this transaction is going to create a lot of opportunities and really opportunities that we think are really unique to Tyler. As Bruce mentioned, we've already hit the ground running. We're doing things like showcasing our products. As exciting as all this is, I do want to remind everybody that this stuff takes time. It's not going to happen overnight. Realizing the full benefits of this acquisition is is going to be a function of some near term, but it's going to be years. And part of that's a function of our market, but part of it's a function of our experience with this stuff. And I think what makes me really excited about this combination and gives me the confidence to share with you this vision today is that at Tyler, we've got a pretty good track record. We've got a pretty good track record of executing on these types of strategic acquisitions and initiatives, even as we know they take time. And And with that, I'm going to go back to the first two of our priorities, which was, one, we're not going to mess up the business, and two, we need to make the 2021 plan. So even as we've got all these other things going on in the background, we're going to continue to stay disciplined and focused and just start to execute on these strategic initiatives. And we certainly look forward to reporting our progress and successes on those in the coming quarters. So with that, I'd like to open up the line for Q&A.

We will now begin the question and answer session. To enter a question into the question queue, please press star 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your request, press the star key, then the number 2. Please limit yourself to one question and one follow-up, and then place yourself back into the queue for additional questions. We will pause momentarily to assemble our roster. And the first question comes from Peter Heckman with DA Davidson. Please go ahead.

Hey, good morning. Thanks for taking my questions. Just curious, in terms of how we think about this 2021 guidance, what level of corporate overhead removal and cost synergies are included? The combined company R&D came in a little bit lower than expected. But how would we size that? Is that maybe... $15, $20 million here in the first three quarters?

No, Pete. Actually, the cost that we've eliminated were mostly just duplicate direct public company costs, and it's on the order of $3 to $4 million. We believe there are additional opportunities from a margin expansion and a cost elimination standpoint, but we've been, I believe, very conservative in terms of what's in this first-year number.

Okay, okay, that's great. And then just thinking about, I mean, some of the examples that Bruce had given, things that we hadn't really contemplated in that much detail just yet, and probably more cross-selling opportunities than we had originally thought. I guess, I know you're not giving guidance further out, but kind of aspirationally, I mean, do you think that the combined Tyler once NIC falls in the organic category calculation can grow low teens organically?

Well, Pete, I mean, that's a good question. You know, we think the opportunities are significant. At the same time, you know, we still have a fairly large significant part of our business that's recurring that's only growing at certain rates. So when you look at the new business opportunities, and we're also still dealing with a little bit slower market right now. I mean, we mentioned earlier in our remarks that, you know, I don't think we're back to pre-pandemic levels. The excitement's there. The demos are there. The RFPs are coming back. So I don't know that I would necessarily expect, you know, mid-teens growth for an organization the size of a billion six, but the opportunities are there. And as I mentioned earlier, those opportunities are unique to Tyler from what we've done the last 20 years and all the various acquisitions. So, You know, a lot of excitement there.

All right. That's great. I'll get back in the queue.

The next question comes from Matt VanVa with BTIG. Please go ahead.

Thanks, guys. Very helpful and appreciate all the information this morning. I guess looking at it from the sales opportunity perspective and getting the teams aligned, I guess over the next couple months versus maybe the last couple months of the year, how much of the activity that you're having is sort of building on what was already in the pipeline for each organization and just kind of bringing in the cross-sell opportunities versus really highlighting and pushing forward on those joint sales efforts near-term and using those as sort of top priorities. So just curious more broadly kind of how much you're pushing those joint sales immediately versus that being a longer-term trend.

Well, I think it's a little bit of both, Matt. I mean, we're currently identifying these joint opportunities. Some of the opportunities that Bruce mentioned, were things that we would have liked to have pursued, but not having the relationship at the higher level with the state agency and being able to leverage those. So we talked after the Q1 call about how we'd taken a fairly conservative approach since we announced the acquisition in February through closing, and we weren't really able to do some of the stuff that we've been doing the last six weeks. And as I said, we've hit the ground running. The sales teams are meeting. We're showcasing. One of the priorities is identifying these joint opportunities and just like we're identifying white space opportunities. So a lot of that's going on, but I'd say it's a mix of both.

And then sort of touching on the previous question about synergies, have you been able to sort of eliminate or reduce the number of potential hires that you maybe had in the plan for both sides of the organization by bringing in, combining the teams here? Is that an area that It's sort of an implied synergy, even if it's not removing the cost today, it's just eliminating the need to add that cost over the course of the year.

I don't know that we've necessarily done any of that just yet. I mean, we each have our plans. We're still in the early strategic formulation. Part of our goal really is to, if we talk about prioritizing these initiatives, looking at what we're going to do in sales, is we're trying to get ourselves set up for as we get into the fall budget cycle so that we're really able to then think about how we're going to fund those initiatives, including new hires. But I think right now, as it relates to each company or one company now, their pre-acquisition plans and ours, I don't think those have really changed at this point.

All right, great. Thank you.

The next question comes from Joshua Riley with Needham. Please go ahead.

Hey, guys. Thanks for taking my questions today. So, the assumptions for NIC in 2021, excluding the pandemic-related revenues, imply 11% growth. Is that primarily from transaction growth returning to the model? or large new deals like the Florida deal coming online later in the year?

Go ahead, Brian.

You're correct that it's 11% is the implied core growth, excluding the COVID initiatives. And it is a combination of primarily increased volumes and adoption. So as you can imagine, as we've gone through the pandemic, more citizens are interacting digitally with governments and their traditional expansion of applications within their existing state contracts. In terms of new large contracts, there's not really much in there. The Florida payments business is expected to start to ramp up really late in the year towards the fourth quarter. So there's some contribution there, but Most of that is around the existing business growth in volumes and activity.

Okay, great. And then how should we think about the breakdown of the $310 to $315 million in FY21 gap revenues for NIC between license, maintenance, subscription, and professional services?

Don't have that breakdown to provide at this time, but it would be similar to their historic breakdown. Breakdowns, most of it is in the recurring revenue side. It will fall in our subscription line. Their revenues are about 90% to 95% or 90-ish percent subscription or recurring. Licenses and services make up a much smaller piece of their business. They don't have that complete breakdown at this point, but it would be similar to their past historical numbers. Okay, great, guys. Thank you.

The next question comes from Jonathan Ho with William Blair and Company. Please go ahead.

Hi, good morning. Thank you for the additional color. Just maybe looking at the NIC blanket purchase contracts, are you able to bypass sort of the traditional RFP processes for all of your Tyler products using the BPAs? And then maybe secondly, with a broader product portfolio, do you also have the opportunity to expand the size of those contracts over time as well?

The answer on the first one is it kind of depends. Most of the time they can work – this is Bruce, by the way – they can sell those solutions through those existing contracts. In some cases, though, they'll directly take it outside of that. But the value, honestly, is as much from the partnerships that they've had over time with these state agencies that we simply just didn't have in those markets. And then they do have the ability – to expand those contracts over time, very much like what you see with the Florida agreement. That's very common. They'll have a payments processing solution and then the ability to go after localities. What they haven't had is the strength that we have. I mean, their ability to go after the local market and sign up jurisdictions and agencies on a statewide agreement is very difficult. Well, for us, that's the market that we've been serving for all these years. So does that answer your question?

It does. It does. And then maybe as a follow-up, I know this is a little bit more of a high-level view, but if you were able to cross-sell sort of your entire portfolio into NIC's base and vice versa, is there a way to maybe size how large that opportunity could be, just recognizing that it would take time to reach that goal? Thank you.

There's certainly not a way to do that right now. Over time, we will be able to build up the TAM in a more detailed manner, but as you said, that would be over a very long period of time. We certainly believe the opportunity is significant in the near term, but as far as aggregating everyone, we'll save that for a little bit later, Dave.

Thank you. The next question comes from Keith Howsam with North Coast Research. Please go ahead.

Good morning, guys, and I appreciate you guys putting this together. I think it provides a lot of clarity to a lot of us. In terms of, like, the five different areas that, Bruce, that you highlighted in terms of your slide deck and the opportunities, I guess is there one or two that you think will be easier and quicker for Tyler to recognize versus the others?

Yeah, I would say that the payments team is fantastic. off and running. And that's actually, the solutions are easy to actually, relatively easy to integrate. They're very complimentary, as I tried to show in the slides there. And so that team is off and running. Lynn, I think that's fair in breadth. And I think the second would be what we mentioned with the delivering of the solutions, of Tyler's solutions. It's been a combination of state CIOs, state agency heads, the actual clients of NIC contacting them and saying, I've been on Tyler's website. They have a solution that does the following that we need. Hey, we'd like to look at X, Y, Z. And so I think you'll see that pick up quite a bit more quickly as well. But the first one is without question the payments. That's the area that's going to be the fastest.

Okay. And then if I just kind of think about, I guess, the question that Peter asked earlier, and I'm going to try to pin you down to an exact percentage point of organic growth, but is there a feeling within Tyler that the acquisition of NIC can add, you know, one, two, three percent of organic growth to Tyler's original organic growth, you know, for the next several years? Is that a good context or a good scope to be looking at, or is it less or more of that?

No, I mean, I think that's fair generally. You know, as we look at, you know, we... So we looked through this slide we just talked about, all these new, these are all incremental opportunities. And so I think that's fair to think of it that way. I don't think we certainly haven't sat down and mapped out multi-year plans for the two companies. We're still getting our arms around each other and getting to know each other and trying to just, as I said earlier, you know, get off the ground running. But I think you'll see over time and probably as we go into next year's budget season, next year's guidance, you'll start to see some of that and we'll have a little bit better sense for

multi-year growth between the two companies all right thanks guys appreciate it the next question comes from brent bracelet with piper sandler please go ahead thank you questions for me if i could one on the tyler payment side certainly clear the opportunity looking out to 2025 to expand that meaningfully to north of 110 million. My question for you is really, as you migrate off your current payment processing partners, what's the impact to gross margin? Is there also a material lift to gross margins as well on the tighter payment side? And then one quick follow-up on the NIC micropack opportunity.

As Bruce said, moving to the NIC platform, We do expect to have a positive impact on our payments margins because we'll be able to keep more of the revenues. There's a difference sometimes in how those contracts are structured, where we fall in the payment chain, whether we report net revenues, which is typically what Tyler does, which is we just report his revenues to the part we keep, which is almost all margins. and many of the NIC contracts because of where they sit in the payment process are gross. So the margin is lower, but the actual amount that we keep is higher. So it should have a positive impact. We don't really have the ability to quantify that right now, but over time we do expect it will drive the Tyler payment margin higher.

And I think the follow-up to that too, Brian, is the fact that getting the experience and the rich and the robust platform that NIC has, you know, that's an area that Tyler, had we not done the NIC acquisition, would have had to be doing some investment in over the next couple of years to realize the full potential in payments. And so the R&D savings going forward is actually significant and allows us to focus more on shorter-term, near-term growth strategies that drive revenue as opposed to simply doing a lot of R&D, building out the back-end payment part.

Great. And I'm just less familiar on the Micropack kind of low-code app services opportunity. Could you remind us, what was Micropack's state exposure? And as you think about the 19,000 low-code app services they've created so far, what's the opportunity? Are we talking 100,000? kind of app services opportunity to go after? Is it a million app services opportunity that on a combined basis you can go after? Any color there on what was the micropack state exposure before? And then I'll just frame the opportunity there would be helpful. Thanks.

I want to be careful with this because I think we may have, maybe the slide was confusing to you, but the 19,000 services or applications that are built was done by NIC. So that's over the last 20 years they've been building these. And many of those are transaction-based. Some of those are done for free because it's part of their master agreements that they have. Micropact has been working with those systems integrators that are on that one slide, and they build and deliver solutions separate and apart from that. What we're saying is we expect some of those existing NICs, some of the 19,000 will start to move over to IntelliTrack. Others will be just the net new applications that they build. They'll be doing that. NIC's teams will be doing that on top of the IntelliTrack platform. Is that clarified?

And Micropack's business today is about half federal and about half state and something less than $100 million in revenues.

And as you think about the benefit of migrating off of some of those 19,000 NIC app services to Micropack, is there like a cost benefit or Is there a margin opportunity? Is there a revenue opportunity? What are you really highlighting there? Is it additional revenue opportunities or really some cost-saving opportunities that you plan to extract out of that relationship?

It's on that one slide. It's on 17. It's down there at the bottom. We really do think it's a margin opportunity for the NIC teams because they can begin to – they have, as part of their agreements, they have to provide these applications for all agencies that are there and The second, though, is their ability to get reuse on that. So across the 28 teams, if they built an application, this is what they did with licensing, I believe, where they built an application for licensing, and then now they cross-sell it to other states. So we expect the same thing to happen here. There'll be niche solutions they build for the agencies, but now it's much more, it'll be something that all of them are using a library of components across these 28 different agency, or 28 different master contracts. and ultimately that will let them go faster on the time to market. So it's a major shift in a positive way, solves a big problem that NIC or a big challenge that NIC had, and this was something that they are particularly excited about.

Makes sense. Thank you so much.

As a reminder, if you have a question, press star then 1 to be joined into the queue. The next question comes from Rob Oliver with Baird. Please go ahead.

Great. Thanks for taking my question, you guys. There have been a lot of good questions already, but Bruce, one for you, and then I had another just quick follow-up high-level question for Lynn. So, Bruce, appreciate all the detail. When you look at the micropact NIC partnership opportunity, obviously a lot of opportunity to get products up to the state level, Tyler products up to the state level. Verticals are a key part of Micropact, and vertical markets in general are pretty hot right now. I'm just wondering about Micropact's architecture. You guys have really good presence in veterans and some of the things you laid out in the slide deck. Are you able to be nimble there, or do you have to acquire to get into other verticals that might pop up? For example, five years ago, cannabis wouldn't have been on there. How do you think about that? Because obviously there may be a payments opportunity that would come with that. Just how is the architecture and how nimble can you be or will you need to acquire?

I think one of the things we are doing, while we've got, as I said, over 50 solutions that are able to be sold through those contracts, there's still white space that we would expect. There will be agencies that we don't serve. One of the things, as you all know, we're pretty good at acquiring and we're able to do that What we wanted to do was actually begin to do that same kind of a method that we've applied to our markets and do that now at the state market. So NIC working with the same teams that built that method for us are underway with doing that. So I think we'll either build in the way that we just described through harvesting a particular state and the team that built that will either develop that fully or I think you'll see us be active as it makes sense and we find the right kind of partners to acquire in that space. Does that answer your question?

It does. Yep. Thanks, Bruce. I appreciate that. And then, Lynn, just one for you, a bit higher level. Obviously, NIC has some revenue that's rolling off from the impact of COVID, but I'm less interested in that and more interested in you know, this acquisition comes at a really interesting time for budgets for state and local and just, you know, stepping back when you look at, you know, I think there's been sort of steady kind of improvement here, but did you guys just avail yourself of a much larger swath of, say, American Rescue Plan dollars or stimulus and recovery dollars in aggregate as we look at how those dollars, I think they need to be spent over the next four or five years? Did you guys just get yourself exposed to just a bigger chunk of change there? Thanks.

Yeah, I mean, I think that's a fair comment. We've had a lot of questions around the stimulus money, and you're right. I mean, there's been a lot that's been earmarked. The latest one, there's $350 billion that's direct for state and local, I think almost $200 billion for states. So I think that's there. There's been some specific things around K-12, and you're right. State and local governments, they're on the timeline to spend some of that stuff. I think what's important Two, about the stimulus funding is it's really providing our clients a lot of confidence. Last year when, you know, when the pandemic hit, you've got to think about the timing as well. I mean, a year ago nobody knew what was coming on, and then everybody was going into their budget, their fiscal seasons. And as it turns out, you know, the state budgets were not as hit as hard as everybody expected. And same thing locally. I think state budgets in all were only off about 2%. And so now you're going into a new budget season. We're starting to see the confidence of, one, the impact of the pandemic was not as bad on budgets, and then, two, the Fed's coming in and providing all this money. Yeah, the money's there. We know where it's earmarked, and now it's a question of agencies and figuring out how to use it and how to fight for it against other agencies. But, yeah, it should open up more funding generally for our services.

Great. Thanks again, guys, for all the detail. Appreciate it.

At this time, there appear to be no more questions. Mr. Moore, I'll turn the call back over to you for any closing remarks.

Great. Thanks, Tom. And thanks, everybody, for joining us today. Also, we really appreciate Bruce and Brett and the teams going through the presentation and all the work that's gone into that. Clearly, we're excited about this opportunity. Again, there'll be more to come. I'm sure there'll be plenty of discussions over the next several quarters and years to come. But again, appreciate everybody's time and hope everybody stays safe and healthy and If you have any further questions, please feel free to contact Brian Miller and myself. Thanks, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.