Executive Summary / Key Takeaways

• Dominant Public Sector SaaS Leader: Tyler Technologies is the undisputed leader in government software, leveraging its deep domain expertise and extensive client base to drive a robust cloud-first strategy, with SaaS revenues growing 22% in Q2 2025 and expected 21-23% for the full year.
• Accelerating Cloud Transition & Margin Expansion: The company's strategic focus on "flips" (on-premise to cloud migrations) is gaining momentum, with larger clients converting and contributing to significant gross and operating margin expansion (200 bps in Q2 2025), driven by higher-margin SaaS and operational efficiencies.
• Strong Financial Performance & Cash Flow: Tyler delivered double-digit revenue growth in Q2 2025 (10.2%) and exceptional free cash flow ($88 million, up 80.9%), further bolstered by favorable tax legislation (OBBBA) expected to reduce 2025 cash tax payments by $55 million.
• Strategic AI & Payments Initiatives: Tyler is embedding AI across its flagship products by year-end 2025, focusing on productivity and service delivery, while strategically shifting its payments business towards high-value, integrated solutions for enhanced profitability.
• Resilient Market & Clear Outlook: Despite minor macroeconomic noise, the public sector market remains stable with healthy budgets and strong demand for digital modernization, positioning Tyler to meet or exceed its ambitious Tyler 2030 vision.

The Enduring Foundation: Powering the Public Sector's Digital Future

Tyler Technologies stands as the preeminent provider of integrated information management solutions and services to the public sector. For decades, the company has been the backbone of local and state governments, enabling mission-critical functions from property tax administration and court management to public safety and citizen engagement. This singular focus on government clients has cultivated an unparalleled depth of domain expertise, fostering sticky, long-term relationships and a resilient business model.

The public sector market, while often perceived as slow-moving, is undergoing a profound digital transformation. Governments face increasing pressure to modernize aging IT infrastructure, combat escalating cybersecurity threats, and meet rising citizen expectations for seamless digital services. Simultaneously, a changing workforce and hiring challenges are driving demand for automation and efficiency. These secular tailwinds create a stable and growing market for Tyler's solutions, underpinned by reliable funding sources like property taxes and non-discretionary user fees.

Tyler's strategic evolution, particularly over the last decade, has been pivotal in solidifying its market leadership. Historically, the company expanded through strategic acquisitions, such as Munis, which brought John Marr into the fold, eventually leading him to CEO and Board Chair. A significant shift began in the early 2020s with the acquisition of NIC in 2021, which dramatically expanded Tyler's digital government and payment processing capabilities. This period also marked a decisive pivot to a "cloud-first" strategy, culminating in 2023 when recurring SaaS revenues surpassed on-premise license and maintenance revenues. This strategic foresight, coupled with disciplined capital allocation, including debt reduction and a flexible credit facility, has positioned Tyler to capitalize on the ongoing modernization wave.

Technological Moats: Cloud-First and AI-Driven Innovation

Tyler's competitive advantage is deeply rooted in its differentiated technology and strategic approach to innovation. The company's core technology revolves around its integrated suite of public sector software solutions delivered increasingly via a Software-as-a-Service (SaaS) model. This cloud-first strategy is not merely a deployment preference; it is a foundational principle driving efficiency, scalability, and improved time-to-value for clients.

A key technological differentiator is Tyler's commitment to cloud optimization and version consolidation. The company has made significant progress in streamlining its product lines, with its enterprise ERP application now seeing over 95-97% of clients running on a single version. Similarly, its Enterprise Justice solution is north of 75% on a single version. This consolidation is a massive operational undertaking, far removed from the days of managing five to seven disparate versions. The tangible benefit is a substantial reduction in maintenance and support overhead, as it takes "a lot less people to maintain and support fixed bugs on a single version or even 2 versions than 6 or 7 versions." This directly contributes to higher gross margins and operational efficiency.

The transition to SaaS also offers quantifiable benefits for clients. When existing on-premise clients "flip" to the cloud, Tyler observes a consistent uplift of approximately 1.7x from their prior annual maintenance revenue to the new SaaS Annual Recurring Revenue (ARR). This uplift reflects the enhanced value, security, and continuous innovation delivered through the cloud model. The company anticipates the "peak of the flips" for larger customers, including multi-million dollar state-wide court and large county systems, to occur in 2027-2028, with the dollar value of these flips increasing more than the number of flips.

Tyler is also making strategic investments in Artificial Intelligence (AI), with a deliberate approach centered on three core pillars: productivity, decision-making, and service delivery. By year-end 2025, every flagship product roadmap is expected to have clear AI-driven features. This includes solutions like the AI-driven Priority Based Budgeting (acquired with ResourceX), which helps governments link financial resources to strategic priorities, and the AI-driven Resident Assistant solution, already in deployment in four states. While AI is not yet a primary sales driver, client curiosity is growing, and Tyler is leveraging its vast dataset from 13,000 clients and collaborations with leading AI vendors like Amazon (AMZN), Microsoft (MSFT), and Google (GOOGL) to develop practical, ROI-driven applications. For instance, the CSI acquisition's document redaction solution, deeply embedded with AI, offers tangible savings by automating tasks that previously required significant manual labor.

Competitive Landscape: A Differentiated Leader

Tyler Technologies operates in a competitive landscape that, while generally neutral, features a mix of specialized public sector players and broader enterprise software giants. Its competitive positioning is anchored by its deep public sector expertise, integrated solutions, and strong client relationships.

Compared to horizontal enterprise software providers like Oracle Corporation (ORCL) and SAP SE (SAP), Tyler's offerings are more specialized and tailored for the unique workflows and regulatory compliance needs of U.S. government agencies. While Oracle and SAP offer scalable cloud platforms and invest heavily in R&D, their solutions can be more generic or complex for niche public sector requirements. Tyler's focus on solutions like municipal court systems, utility billing, and property tax administration provides a qualitative edge in ease of implementation and customization, fostering stronger customer loyalty. Financially, while Oracle and SAP benefit from massive scale and potentially higher R&D budgets leading to faster innovation in some areas, Tyler's growth rates in its core segments are comparable, and its profitability margins are robust, albeit potentially lower than the largest global players.

Against cloud-based HR and financial management specialists like Workday, Inc. (WDAY), Tyler differentiates itself through materially better integration for public-specific needs, such as tax and appraisal software, offering comprehensive workflow coverage beyond HR. Workday's agile, cloud-first approach may deliver faster processing speeds in data analytics, contributing to its strong growth rates. However, Tyler's breadth of public sector offerings and long-term partnerships provide stability and loyalty, while Workday's higher customer acquisition costs in competitive markets can be a challenge. Tyler's profitability and efficiency metrics are on par with Workday in shared segments.

Even against IT and business consulting services firms like CGI Group Inc. (GIB), Tyler stands out with its proprietary, integrated, sector-specific software. CGI's service-oriented model, while flexible, can involve longer implementation timelines compared to Tyler's more efficient software deployment. Tyler's focus on seamless, user-friendly public sector tools gives it an edge in product specialization, though CGI's diversified revenue streams might offer more robust financial health.

Tyler's competitive advantages, or "moats," include its strong brand recognition and established customer relationships within the public sector, which translate into pricing power, recurring revenue, and superior margins. Its proprietary technology, particularly its SaaS platforms, offers greater efficiency in workflow integration, differentiating it from more generic tools. Barriers to entry in this market, such as complex regulatory compliance and the need for established relationships, further defend Tyler's position.

However, Tyler's primary vulnerability lies in its dependency on public sector budgets, which could impact financial performance during severe economic downturns, although its diversified funding sources (property taxes, user fees) mitigate this risk. While Tyler is investing in AI, its innovation speed may lag competitors with significantly larger R&D budgets, though its targeted approach aims to deliver practical, impactful features.

Financial Strength and Operational Momentum

Tyler Technologies delivered a strong second quarter in 2025, reflecting robust execution against its strategic priorities. Total revenues for the three months ended June 30, 2025, increased 10.0% to $596.1 million, contributing to a 10.2% increase for the six-month period to $1.16 billion. This growth was primarily fueled by its recurring revenue streams.

Subscriptions revenue, the cornerstone of Tyler's model, surged 21.4% in Q2 2025 to $405.1 million, and 20.6% for the six months to $780.1 million. Within this, SaaS revenues grew an impressive 22.0% in the quarter to $189.6 million and 21.0% for the six months to $369.7 million. This growth was driven by the addition of 641 new SaaS clients and the conversion of 438 existing on-premises clients to SaaS since June 30, 2024. The new software contract value mix for the first half of 2025 was approximately 96% subscription-based, underscoring the successful cloud transition.

Transaction-based fees also demonstrated exceptional performance, growing 21.0% in Q2 2025 to $215.5 million and 20.0% for the six months to $410.4 million. This was primarily due to higher transaction volumes from both new and existing customers, including a $22.7 million increase in Q2 from online payments, and price increases from third-party processing partners. Q2 is seasonally the strongest quarter for transaction revenues due to peak outdoor recreation seasons and tax filing deadlines.

The company's strategic shift away from lower-margin, non-recurring revenue streams is evident. Maintenance revenue decreased 3.0% in Q2 2025 to $112.1 million, primarily due to client conversions to SaaS. Professional services revenue declined 19.0% in Q2 2025 to $58.6 million, largely due to $8.5 million in loss reserves for contracts with two state government agencies, coupled with an intentional reduction in custom development work and improved delivery efficiencies. Software licenses and royalties revenue also saw a significant decline of 31.0% in Q2 2025 to $3.7 million, reflecting the ongoing shift to SaaS.

Profitability saw notable expansion. Overall gross margin increased by 1.8 percentage points in Q2 2025 to 45.8% and by 2.7 percentage points for the six months to 46.5%. Non-GAAP operating margin expanded 200 basis points to 26.5% in Q2 2025. This improvement was driven by the favorable revenue mix shift towards higher-margin SaaS and transaction revenues, increased transaction margins, and the redeployment of resources to R&D as clients migrate to SaaS.

Operating expenses reflect strategic investments. Research and development expense significantly increased by 76.0% in Q2 2025 to $50.8 million and 69.0% for the six months to $98.7 million. This surge is primarily due to the redeployment of development resources from support activities (previously in cost of revenues) to R&D, driven by the SaaS migration and version consolidation efforts, as well as incremental investments in new product development and AI initiatives. Sales and marketing expense decreased 13.0% in Q2 2025 to $36.3 million, mainly due to increased compensation capitalized as contract acquisition costs.

Tyler's cash flow generation remains robust. Free cash flow for Q2 2025 was $88 million, an impressive 80.9% increase year-over-year. For the six months ended June 30, 2025, net cash provided by operating activities was $154.5 million. The company ended Q2 2025 with a strong liquidity position, holding $787.4 million in cash and cash equivalents and $104.9 million in short-term investments, totaling approximately $895 million. Net leverage stood at zero. The recent passage of the "One Big Beautiful Bill Act" (OBBBA) is a significant tailwind, expected to lower cash tax payments by approximately $55 million in the second half of 2025, adding about 200 basis points to the full-year free cash flow margin. Minimal cash tax payments are anticipated in 2026.

Strategic Outlook and Growth Drivers

Tyler's outlook for 2025 and beyond is underpinned by its continued execution of the "Tyler 2030" vision. The company has revised its 2025 annual guidance, projecting total revenues between $2.33 billion and $2.36 billion, with the midpoint implying approximately 10% growth. Non-GAAP diluted EPS is expected to be between $11.20 and $11.50, and the free cash flow margin is guided to be between 25% and 27%.

Key revenue line expectations for 2025 include:

• Total subscription revenues: 17% - 19% growth.
• SaaS revenue: 21% - 23% growth.
• Transaction revenues: 14% - 16% growth (despite merchant fees being up only 7% - 9%).
• Maintenance revenue: 4% - 6% decline.
• Professional services revenue: 3% - 6% decline.
• License revenues: 16% - 18% decline.

A notable factor in the transaction revenue outlook is the wind-down of the commoditized Texas payments contract. This contract, which generated approximately $44 million in revenue in 2024 (with very low 10% gross margins), is expected to contribute only about $41 million in 2025 as services transition by early 2026. While this impacts top-line growth, its low-margin nature means its conclusion will positively impact overall company margins, aligning with Tyler's strategy to focus on higher-value, integrated payment solutions.

The acceleration of on-premise client "flips" to the cloud remains a core growth driver. Management expects the number of flips to grow around 25% year-over-year, with the dollar value increasing even more significantly as larger, multi-million dollar annual maintenance revenue streams convert. The peak of these conversions is still anticipated in 2027-2028, reinforcing a multi-year runway for SaaS growth.

Tyler's strategic M&A continues to complement its organic growth. The acquisition of MyGov, LLC in January 2025 strengthens its public administration offerings, and the recent acquisition of Emergency Networking in July 2025 expands its public safety portfolio, particularly in fire and EMS records management, an area with new compliance standards (NERIS). These tuck-in acquisitions enhance Tyler's comprehensive suite of solutions and expand its addressable market.

Leadership transitions, including Lynn Moore's nomination to succeed John Marr as Board Chair in 2026 and the appointment of Ryan O'Connor to lead payment strategy, underscore a proactive approach to governance and strategic execution. The "One Tyler" initiative, focused on creating a unified client experience and aligning sales incentives, is expected to further unlock cross-sell and upsell opportunities across its vast installed base.

Risks and Considerations

While Tyler's outlook is strong, investors should consider several factors. Although management views macroeconomic impacts as minimal, prolonged economic downturns could still influence public sector budgets, potentially affecting procurement timelines or the scope of new projects. The company has observed some sales cycle elongation due to consultant-driven processes and general macro caution, though these are not deemed material.

The shift away from perpetual licenses and maintenance to SaaS, while strategically beneficial, introduces a revenue recognition lag that can create quarterly variability in SaaS revenue growth and bookings. The wind-down of the Texas payments contract, while margin-accretive, will be a top-line headwind for transaction revenue in 2025 and 2026.

Competition, while generally stable, remains a factor. In commoditized areas like pure payment processing, price sensitivity can be high, as evidenced by the Texas contract rebid. Tyler's ability to consistently differentiate its integrated, value-added solutions will be crucial. Furthermore, while AI presents a significant opportunity, the pace of adoption in the public sector can be slower than in the private sector, and the long-term monetization pathway for AI features will need to be closely monitored.

Conclusion

Tyler Technologies is a compelling investment story, firmly rooted in its indispensable role in the public sector's ongoing digital transformation. The company's strategic pivot to a cloud-first, SaaS-centric model, coupled with its deep domain expertise and integrated solutions, has created a powerful flywheel of recurring revenue and expanding margins. Its technological leadership, particularly in cloud optimization and nascent AI integration, provides a durable competitive moat against both specialized and broad enterprise rivals.

The strong financial performance in Q2 2025, marked by robust SaaS and transaction revenue growth, significant margin expansion, and exceptional free cash flow, validates Tyler's strategic direction. With a clear roadmap for accelerating cloud migrations, disciplined investments in R&D and AI, and a focus on high-value payment solutions, Tyler is well-positioned to meet its ambitious 2025 guidance and realize its Tyler 2030 vision. While external macroeconomic factors and competitive dynamics warrant attention, Tyler's resilient business model, sticky client relationships, and commitment to operational excellence suggest a continued trajectory of growth and value creation for shareholders.