Brian Miller: Yes, there’s always a lag. And sometimes we might sign a flip and it starts next quarter and then we see that uplift then. Other times, whether it’s because of things that the client needs to do to get internally to get ready to move, whether it’s that they need to upgrade to a current version of the software or they need to do things, they’ve got other internal priorities around their own resources that caused a delay or — there are a variety of reasons why there can be a lag of from one to multiple quarters. And sometimes it doesn’t all happen at once. So they may be flipping multiple applications with us so that they start — the uplift starts at different times. So I’d say generally, it’s not 24 months, but it could be from one to a few quarters before we see the full impact of those from the time we sign it to when we see the impact on the uplift.
Operator: Our next question comes from the line of Alex Zukin of Wolfe Research.
Alex Zukin: Maybe just the first one. I think last quarter, you talked about wanting to do about 100-plus flips in Q4. Is the right way to think about it that the dollar value of the flips was in line with your expectations, but maybe not the actual number? And then to the point earlier, did some of those get pushed into ’24 and now there is the opportunity for a higher dollar value in ’24? Just help us understand a little bit about that dynamic.
Brian Miller: Well, I’d just say when we talk about the number of flips, it’s just not that precise. I mean the timing, for example, the Idaho — signing the Idaho agreement, I think, it was almost three years in the making that we had discussions with them and planning. As Lynn was talking about, it’s very complex to move a statewide court system, a lot of planning on their part, a lot of planning on our part and how that all goes and getting comfortable with that, so what quarter that actually gets signed in. Now not all of them are that complex but there’s not that much precision around directionally whether it’s 92 or 100 or 103. So I’d say that the number was generally in line and the pace at which they’re moving is in line with our expectations.
The dollar value probably was a bit ahead of, but we expected. So there was a little bit more larger ones in there and the uplifts were a little better than we expected. But it’s really hard to be very precise from quarter-to-quarter about what we expect. But we are saying that we are on track with our long term expectation that the number of clients and the dollar volume that will migrate over the next several years as we drive towards that 75% to 85% of our customer base migrated to the cloud by 2030. But just like with new business signings, the exact quarter it falls in is a bit hard to predict, but we’re at least in line with our expectations around flips.
Alex Zukin: And then maybe just as a follow-up. There’s currently legislation out there that could reverse some of the R&D tax payments that you had to make. What would be the impact of — if that act passed on you guys, like how much and when would you see those dollars return?
Brian Miller: Yes, it’s a little hard to tell exactly. I think the bill that’s out there now that I believe is passed the house would actually not resend it, it would delay it until 2026. So the incremental taxes that we would — if that became effective, we would not have to pay in the incremental taxes, the $50 million that we’ve talked about for this year and lesser numbers going forward. It’s a little unclear exactly how and when we would sort of get back the taxes we paid in and incremental taxes we paid in, in 2023, which were $127 million, presumably, those would either offset our normal tax payments to reduce those tax payments over the next year or two or we would file for a refund, which also takes some time. So it’s hard to exactly quantify how that would be.
But clearly, we wouldn’t have those incremental payments going forward. And in some manner, we would look to recover the incremental taxes we paid in either through refunds or lower estimated payments going forward.
Operator: Our next question comes from the line of Keith Housum of Northcoast Research.
Keith Housum: In terms of the backlog, you obviously had a nice jump this quarter year-over-year. How are we thinking about the duration of that backlog? Is it holding relatively stable or is that getting longer?
Brian Miller: It’s generally stable. The part that’s expected to be recognized in the next 12 months, I think, is reasonably stable with where it’s been. The term of new SaaS deals, for example, this quarter, I think, was very similar. It was a little under four years average term. So it’s fairly consistent with what we’ve seen in recent quarters. And then, of course, the transaction contracts don’t really go into backlog. So they don’t really affect that number. But on the software side, I’d say it’s — there aren’t any meaningful changes in that duration of backlog.
Keith Housum: Just as a follow-up. There’s obviously been a lot of high-profile cybersecurity issues over the past year with public agencies. Have those issues been with agencies that have been primarily on-prem versus the cloud? And if it’s been on-prem, are you seeing that as perhaps 1 of the impetuses for the acceleration of the flips?
Lynn Moore: Yes, absolutely. You’re spot on on both. And some of these issues have come with obviously some existing clients of ours and it is an opportunity. The cloud is more stable, more secure. We actually have done some deals where clients who might have been resistant to the cloud have flipped, because of some sort of recent ransomware or other issue.
Operator: [Operator Instructions] Our next question comes from the line of Alexei Gogolev of JP Morgan.
Alexei Gogolev: Lynn, I recall comments from last year that roughly 20% of your customers have migrated to the cloud. Can you provide an update of that mix as you move towards that target of 75% by 2030?
Lynn Moore: Yes, I think at Investor Day, we said we were somewhere around 15%. And so obviously, we’ve made progress since then. I’d say we’re probably more around the 20% number now in terms of the — that we’ve moved. But as I said earlier, we are — each of our products has a time line and a road map for how they get to that point that converges on our entire customer base being 75% to 85% of the existing on-prem customers converted by 2030. So each product is starting from a different place with their customer base. We’ve talked about public safety just getting its first flips this past year. Other products are much further along. So everybody has their own road map that converge on that overall number by 2030. And none of those will happen exactly as planned but we have said that we are collectively on track to achieve those targets by 2030.
Operator: Our next question comes from the line of Clarke Jeffries of Piper Sandler.
Clarke Jeffries: Lynn, I wanted to go back to something you said about the California contract and the fact that there will be a drag on margins but margin expansion over multiple years. Wondering if you could help explain that. Does that mean that there will be partial volume that moves to you and then full volume over time? Is that just reflective of services implementation costs in the first year that go away and [Multiple Speakers].
Lynn Moore: Yes, let me clarify that. It’s a drag on margin in 2024. It will probably equate roughly to maybe a little bit of margin drag in ’25, but it’s just the ramp-up of revenues versus expenses. So the expenses are more front loaded to get them up and running. As Brian mentioned, we’re going from a contract that was a little under $3 million a year in revenues. I think first year, we’re expecting it to just slightly more than double that. But you look out in 2025, it goes to $20 million and we expect it to grow all the way up to close to $30 million by the end of the contract. We do expect positive OP starting next year and ramping up significantly each year over time.
Operator: Our final question comes from the line of David Unger of Wells Fargo.
David Unger: So back to the flips again, and the topic [Indiscernible] the call, if I would ask is, how should we think about license TCV as a percentage of total TCV on a normalized quarterly run rate path to both the midterm and long term target?
Brian Miller: We would expect license revenues to — well, license revenues, which are mostly recognized upfront. So we actually expect low single digit growth this year. But in terms of the mix for them to continue to decline as part of our overall mix, I don’t have that sort of broken out year-by-year or quarter-by-quarter. But we would expect that, that percentage of new business that’s now in the high 80s to continue to expand incrementally year-by-year until there’s very little license revenue left. We do have some third party licenses. We have some license sales back into existing on-prem customers. But really selling very little, only a couple of products where we really sell any licenses at all in the new business market.
Lynn Moore: And I think part of your question was around total contract value, TCV. So that will obviously vary a little bit depending on the SaaS term that we sign. You could use a rule of thumb of what a license deal and a one year maintenance that might drag on that versus sort of what we would project as a normal SaaS deal. So if the SaaS contract was probably only one or two years, it’s probably going to have a lower TCV. If it’s north of three years, we get to four years, five years, we’d have probably initial higher TCV.
Operator: We appear to be no further questions at this time. Mr. Lynn Moore, President and CEO of Tyler Technologies. I’ll turn the call back over to you.
Lynn Moore: Thanks, Lavesh, and thanks, everybody, for joining us today. If you have any further questions, please feel free to contact Brian Miller or myself. Thanks. Have a great day.
Operator: Thank you. This does conclude today’s conference call. We thank you for participating. You may now disconnect.
