But ramps up significantly in ’25 and continues that ramp up with margin expansion all the way through the end of the contract in 2031, assuming we don’t get the two one year extensions, which if we execute, we think we would get. Brian, do you have anything more to add?
Brian Miller: Just to say, your point is good, because it isn’t a fixed SaaS fee that the transaction revenues are currently an estimate. And we think we have a pretty good idea of what volumes will be, but they may vary from that. And it will — currently in the plan for this year, we expect a few million dollars of revenues and then it ramps up to that north of $20 million starting and it will be approaching, we think, $20 million next year and then be north of $20 million beyond that as volumes increase and it becomes fully ramped. But yes, it is subject to variances and subject to seasonality as well unlike a regular SaaS contract that is a pro rata revenue recognition every quarter. This will also have seasonality and it’s around those as we do in many of our outdoor transaction revenues.
Matt VanVliet: And then maybe just one clarification around the AWS extension. As you continue to scale that business, are we still at maybe a subscale type of cost relative to the revenue running through that system? Meaning is there still more leverage that can be achieved over the next couple of years through that contract or are we at a level now where it’s kind of a pay as you go as you get more scale?
Lynn Moore: No, I think there’s still more leverage. And I think generally going forward, we make certain commitments to AWS, and we’re making those commitments based on projections. But we’re continuing, as I mentioned earlier, to further optimize our products, further reduce our versions. I think the leverage in our cloud operations still has quite a bit of room to go.
Brian Miller: And I’d point out one other thing about the California contract. As we mentioned on the call, this is a significant expansion of what is already in an existing agreement we have with California under with US eDirect, which we acquired after we acquired NIC. So there are currently annual revenues under that agreement of a little less than $3 million a year. So it’s not all incremental revenues but it’s a significant increase in the revenues as that has expanded and especially because it now includes payment processing.
Operator: Our next question comes from the line of Gabriela Borges of Goldman Sachs.
Unidentified Analyst: This is Kelly [indiscernible] on for Gabriela. Another question on the number of conversions. Conversions have been in kind of the 70 to 100 range per quarter for the past two years. How should we think about the ramp to converting maybe hundreds of customers a quarter, and are you sharing any expectations for a number of flips in 2024?
Lynn Moore: You’re right. Kelly, our flips in Q4 were actually up about 12% over Q4 last year. We’re not putting out guidance as far as I know, Brian, on specific foot deal count. There’s a lot of things that go into that. And as you look out to 2030, the goals we outlined, clearly, we will be ramping up as over time. There’s things that go into the flips and a lot of it is, we have to get our customers on more modern versions. And when I talk about our version collapse efforts that have been going on for several years but some of the strides that we’ve been making, as we continue to make strides on that, it will make — it will help accelerate the pace of flips going forward.
Brian Miller: I just would add that it’s also important, I think, to look at the size of the flips and the dollar value. So for example, this quarter with the signing the Idaho State Port deal significantly bigger than most of our typical flips. So even though that only counts as one of the 92, the dollars were pretty meaningfully different. And I think in our prepared remarks, we talked about the the size of the increase in the dollar value of the flip contracts. And so in general, I’d expect that as we go forward over the next few years that we’ll see more of our larger clients start to move, and so it has a bigger impact on that uplift on the dollar side. So obviously, each flip is not created equal and in general, we’ve got more of our large clients that are still to be migrated.
Unidentified Analyst: A quick follow-up. On that version control point, you mentioned last quarter, you had the goal kind of by the end of 2022 or early 2024 of only supporting two of the most recent versions of each product. Where are you at in kind of achieving that goal?
Lynn Moore: We’ve made a lot of progress, in particular, if you look at our enterprise ERP product, for example, I think at the end of last year, we only had about 23% of that client base on the more modern version at the end of this year, end of 202,3 that was up to 86%. We’ve made similar strides with our Enterprise Justice solution. So just generally, across the board, we’re tracking on that. I’m not sure if I remember saying at the end of 2025, I think it was more 26%. But I think we’re actually ahead of the pace that I was thinking about and discussing maybe 18 months, 24 months ago.
Operator: Our next question comes from the line of Rob Oliver from Baird.
Rob Oliver: Lynn, first question is for you. Just around public safety, it must be gratifying just to see the way the business is working after many years through the New World acquisition and now moving to cloud faster than expected. So my question is, it seems like that would be good for Tyler. I just would be curious to hear your view on any potential shift in the competitive landscape that, that might cause, meaning some of your legacy typical competitors that we know in this space, are they properly cloud enabled and conversely, are you seeing new competitors in the market in public safety as these deals shift more to cloud first? And then I had a quick follow-up for Brian.
Lynn Moore: Rob, it’s actually — it’s very interesting and to your point, gratifying to see this shift. And we’ve been anticipating it, but we just didn’t know when it was going to happen. I think we mentioned in the opening remarks, about 46% of our Q4 deals were cloud deals in public safety, that’s up from 16% in Q2. And as we look out next year, we think it’s going to cross 50% and we’re sort of planning on a little north of 50%. We’re taking an approach that now with public safety as we see the market receptiveness start to be, it’s an approach that we took generally with Tyler going back four, five years, which is, going forward, we really want to be leading to the cloud. We think the market is ready. As it relates to competitors, I’m not going to list all the different competitors in public safety.
Obviously, we’ve had a few pop up in the last couple of years that were more cloud native already. Those have been a little bit smaller competitors and they have had their own set of issues to deal with. I think that we are well positioned with our cloud strategy in public safety to take advantage of this market shift. We have new leadership at public safety. If you’ve been on our Web site, you might have seen a new division president that came on last year, came from outside of Tyler. He’s actually has led — been a part of leading companies through the cloud transition. So it’s exciting to have him there, have him up in Troy with the people and really sort of helping lead those efforts. So I like where we are, like where we sit. And to reiterate your words, it’s gratifying to see these early results.
But a lot of things I’m going to caution is a lot of things to go execute on in the future, but it is good to see this shift starting to happen in public safety.
Rob Oliver: And then Brian, just a question around the R&D expense guide for the year, implying kind of mid-teens year-over-year growth. Can you just talk about what some of the biggest drivers of that are within that R&D line?
Brian Miller: I mean, I think it continues to be a lot of development around the cloud and our optimization and efficiency efforts around optimizing our products for the cloud. There is a shift from some R&D that was previously being capitalized, especially around some of the cloud projects that will now be expensed. So a lot of it is the same people but now running through expense as opposed to being capitalized. And that’s — obviously, it doesn’t change our cash flow but it changes where it turns up on the income statement. So I think it’s important to note that we are expecting to drive margin expansion even as we have a movement away from capitalized software development and to more R&D expense.
Operator: Our next question comes from the line of Charles Strauzer of CJS Securities, Inc.
Charles Strauzer: Looking at the guidance, especially as it pertains to the quarters. Are there any abnormalities that we should take into account as we build our models out?
Brian Miller: I don’t think there’s anything unusual. What we did point out, I think we and the Street are still getting used to the seasonality of the transaction business. And I see when they were a separate public company, certainly we’re well versed in that and people who followed them more. But as that impacts Tyler and as we saw this quarter that seasonality around the transactions is pretty significant. I don’t expect that to be meaningfully different in 2024, but I think that’s the biggest thing to look out for when you look at the quarters.
Charles Strauzer: And then just more of a macro question for you, given the impact in Congress related to the spending bill. Are you seeing any changes to the sales cycle, especially in your federal business?
Lynn Moore: Charles, not really, not right now. Q1 is probably — we talked about the situation — was talking about seasonality. Q1 is probably a little bit slower time in that business as well. And right now, there’s no real change in our outlook.
Operator: Our next question comes from the line of Jonathan Ho of William Blair.
Jonathan Ho: Just one question to start out with in terms of operating leverage. Can you maybe walk through for us some of the levers that you have to pull down on for additional operating leverage and some of the moving parts there as we think about your guidance for 2024.
Brian Miller: I’d say most of the leverage that we’re seeing in the model is coming from cloud operations and the things we’ve talked about, the impact of our — moving customers out of our data centers and into ABS and our plan to have that first data center close midyear, the benefits we’re getting from both scale and improved costs at AWS as we put our new customers there and move existing hosted customers into AWS. So those unit costs become lower. And I think the new agreement with AWS further helps that pricing and leverage that we get as we scale that business. The version consolidation expenses or benefits that Lynn mentioned as we eliminate multiple versions of software and create efficiencies around both support and development.
So those cloud operations are really the biggest things driving our margin leverage and those are the things we pointed to at Investor Day that will continue to drive that margin expansion that we expect to see over the next several years as we [Technical Difficulty] 2030 targets.
Lynn Moore: And Jon, I would just add to — I mean, we’re always looking at levers to help make us more efficient. There’s a number of internal initiatives going on where we look around and look up and see opportunities for where we can operate internally more efficiently. And there’s a number of those things that we’re actively acting on, which is, that really sounds weird, we’re progressing on.
Jonathan Ho: Just with regards to use of capital, now that your debt payments have put sort of the interest payments under 1 times EBITDA, how should we think about your plans for capital deployment going forward?
Lynn Moore: I think right now, we’re still sort of in the same place we’ve been for the last couple of years. We’re even though we will likely pay off the term debt sometime this spring, we still have that $600 million convert that’s due in a little more than two years. So my anticipation would be we will be building some cash reserves to be in a position to pay that off rather than renegotiate that at a high bank rate. But at the same time, just like we’ve done over the last couple of years, we were going to continue to do M&A, particularly where it makes sense strategically and where it’s accretive to Tyler. Last year, we did four deals. I think we spent about $75 million, $76 million in cash and stock. Over the last few years, we’ve spent several hundred million dollars of deals even as we were prioritizing debt paydown.
So we still want to prioritize being in a good position when the convertible is due, but at the same time, we’ll make smart acquisitions along the way.
Operator: Our next question comes from the line of Kirk Materne of Evercore ISI.
Kirk Materne: Lynn, can you remind us just when, say, contracts that you signed on a SaaS basis, four or five years ago start to come up for renewal. How much of that is the renewal function, an opportunity for cross-sell, upsell for you? Meaning as Munis or ERP deals or SaaS deals come up, is that an opportunity for the salespeople to start talking about additional products or solutions? Meaning we should start to get into a little bit of a renewal cycle over the next couple of years. Just wondering how that works in terms of the uplift, either on a cross or upsell basis?
Lynn Moore: Well, it certainly is another conversation point with the client. So anytime you use a conversation point, there’s opportunities for cross sell, upsell. But we’ve got installed sales teams across all of our organizations and they’re reaching out to clients whether they’re halfway through their SaaS contract or at the beginning of the SaaS contract or towards the end of it. So I don’t know that that’s a specific trigger for signify material uplift, but it’s another data point that’s a contact point with our clients.
Brian Miller: Flips provide that same opportunity. So we’re having conversations with clients about moving a product to the cloud, it gives us an opportunity to have that conversation around other products, maybe in that same suite that they might have on premises from another provider that aren’t Tyler products, and the opportunity to bring together an integrated set of solutions while they’re moving to the cloud. And I think that as we continue to accelerate the pace of those that we’ll continue to look for those opportunities for greater upsells and cross sells.
Kirk Materne: And then I guess, Brian, speaking of flips, obviously, you’re guiding maintenance revenue to come down a little bit, which makes tons of sense as you flip people from on-prem to cloud. Can you just remind us the benefits of the uplift of that change? That plays out over a couple of years, meaning you just used the Idaho example. The reason you’re not seeing sort of the SaaS revenue get all the benefit of that flip is you’re just not going to see it on the income statement until ’25. So is that the way we should think about sort of that 1.7% uplift that plays out over 24 months?
